Internal Revenue Service

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Internal Revenue Service
PREFILING TECHNICAL GUIDANCE (PFTG)
FEBRUARY, 2003
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Our Topic This Session

• IRS STRATEGIC INITIATIVE 5
• Strengthen our ability to find and eliminate
  abusive tax avoidance transactions
• David G. Harris
• Manager, Office of Tax Shelter Analysis
• Email OTSA_at_irs.gov

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IRS CONCERNS REGARDING ABUSIVE TAX AVOIDANCE
TRANSACTIONS

• Proliferation of Tax Shelters
• Treasury White Paper, July 1999
• Congressional Search for Answers
• Enforcement Litigation alone insufficient to
  solve problem

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IRS TREASURY ACTION TO CURB TAX SHELTERS

• Treasury Proposed Legislation
• Treasury issued new regulations
• IRC 6011, 6111(d), 6112
• IRS expedited issuance of Notices
• LMSB elevated tax shelters to Strategic
  Initiative - ( 5)

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ELEMENTS OFSTRATEGIC INITIATIVE 5

• Establish an Office of Tax Shelter Analysis
• Maximize efforts to identify tax shelters through
  Office of Strategy Research
• Ensure safeguards to distinguish legitimate tax
  planning from tax shelter activities.

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ELEMENTS OFSTRATEGIC INITIATIVE 5 - Contd

• Develop a process to quickly formulate a Service
  position
• Communicate Service position as quickly and
  widely as possible
• Identify and take action against promoters
• Ensure Coordination

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ELEMENTS OFSTRATEGIC INITIATIVE 5 - Contd

• Improve communication with Counsel and Appeals
• Build strategic alliances
• Corporate Non-Corporate
• Treasury Federal Agencies
• Practitioner Community

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ELEMENTS OFSTRATEGIC INITIATIVE 5 - Concluded

• Develop quality training for technical
  managerial personnel
• Establish communication process to encourage and
  facilitate exchange of tax shelter information
  both externally and internally
• Encourage voluntary disclosure.
• Appoint Lead Executives for significant tax
  avoidance issues.

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THE OFFICE OF TAX SHELTER ANALYSIS (OTSA)

• OTSA created in February 2000
• Identified as the mechanism to implement
  Strategic Initiative
• Part of LMSB, within PFTG
• Operates across Division Lines

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OFFICE OF TAX SHELTER ANALYSIS -contd

• Coordination responsibility for all IRS tax
  shelter activities.
• Oversight responsibility for
• Registration
• Disclosure
• Field Survey
• Hotline

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OFFICE OF TAX SHELTER ANALYSIS - Contd

• Coordination Interface with Counsel Treasury
• Coordination of, and Participation in 6700
  Committee
• Provide Support for Tax Shelter Committee

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RECENT TAX SHELTER INITIATIVES

• Tax Shelter Promoter Program - 6700
• Published Guidance
• Disclosure Initiative - Ann. 2002-2
• Tax Accrual Workpapers - Ann. 2002-63
• Mandatory IDR and summonses

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RECENT TAX SHELTER INITIATIVES - Contd

• Penalties
• Settlement Initiative
• Contingent Liability
• Basis Shifting Transaction
• COLI

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TAX SHELTER PROMOTER PROGRAM

• IRC 6700 Committee Established
• Aggressively seek information from tax shelter
  promoters, including identities of investors
• Deter future promotion of abusive tax shelters

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TAX SHELTER PROMOTER PROGRAM

• IRS has served 192 summonses to compel production
  of documents.
• 76 of these summonses have been referred to
  Department of Justice for enforcement.
• One Lead Executive in charge of all promoter
  examinations.

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PUBLISHED GUIDANCE

• Identified 23 Listed Transactions
• 16 listed transactions in Notice 2001-51
• 7 listed transactions in Notices 2002-21,
  2002-35, 2002-50, 2002-65, 2002-70 and Rev. Rul.
  2002-46 2003-6.
• Will continue to aggressively find and list
  transactions

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DISCLOSURE INITIATIVE ANNOUNCEMENT 2002-2

• Announcement 2002-2 allowed taxpayers to disclose
  participation in tax shelters and items that
  resulted in underpayment of tax
• Initiative ended on April 23, 2002
• Those that disclosed would get waiver of
  accuracy-related penalties under Section 6662

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DISCLOSURE INITIATIVE ANNOUNCEMENT 2002-2

• The Disclosure Initiative was highly successful
• OTSA received 1,664 disclosures from 1,206
  taxpayers, disclosing tens of billion in losses
  and deductions
• Disclosures included listed and non-listed
  transactions
• New promoters and issues identified

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TAX ACCRUAL WORKPAPERS (TAW) ANNOUNCEMENT 2002-63

• Announcement 2002-63 revises policy on requests
  for tax accrual workpapers for
• Listed transactions on returns filed on or after
  July 1, 2002
• Undisclosed listed transactions on returns filed
  before July 1, 2002
• Existing policy continues for other unusual
  circumstances

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TAX ACCRUAL WORKPAPERS (TAW)ANNOUNCEMENT 2002-63

• Listed transactions (After July 1, 2002)
• Request for TAWs routinely limited to the listed
  transaction, if disclosed
• We would request TAWs for entire return, if
• Listed transaction was not disclosed
• Multiple listed transactions (discretionary)
• Financial accounting irregularities
  (discrectionary)
• DFO Approval Required

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RECENT TAX SHELTER INITIATIVES - Contd

• 351 Contingent Liability
• Features a rate or range settlement with option
  for binding arbitration.
• Eligibility
• 90 day window
• Must meet basic application criteria
• No fraud
• Case not designated for litigation.

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RECENT TAX SHELTER INITIATIVES - Contd

• 302/318 Basis Shifting
• 60 day window to enter process.
• Gain or loss on actual sale reported, without
  regard to claimed basis shift.
• Taxpayer concedes 80 of direct and indirect
  fees.
• Taxpayer concedes 80 of claimed basis shift and
  loss.

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RECENT TAX SHELTER INITIATIVES - Contd

• COLI
• 45 days to request and agree that issue be
  considered by Appeals.
• No Appeals settlement of COLI issues after 45
  days.
• IRS will litigate cases not settled.

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MANDATORY IDR AND SUMMONSES

• LMSB institutes Mandatory IDR
• Requests information on listed transactions
• Required in all LMSB corporate examinations
• LMSB will summon documents and testimony as
  necessary

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LMSB PENALTY POLICY

• Examiner must develop penalty in all tax shelter
  cases
• If the examiner concludes that penalty should, or
  should not, be imposed
• The DFO will review and approve the decision to
  assert or not assert the penalty

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TAX SHELTER COMMUNICATIONS

• OTSA maintains a website under LMSB, Tax Shelters
  that includes
• Tax Shelter Tech Advisors Contact List
• Audit Technique Guide
• Listed Transactions
• Tax Accrual Workpapers
• Mandatory IDR
• Resolution Processes, etc.

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Tax Shelter Hotline- How to Contact-

• TELEPHONE [phone]
• [phone] -Toll Free
• FAX [phone]
• EMAIL irs.tax.shelter.hotline_at_irs.gov
• MAIL ADDRESS
• Internal Revenue Service
• 1111 Constitution Ave., N.W.
• Office of Tax Shelter Analysis LMPFTOTSA
• The Mint Building M3-320
• Washington, D.C. 20224

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ABUSIVE TAX AVOIDANCE TRANSACTIONS
THE END