Tax shelter reporting rules are changing — again | Norton Rose Fulbright
TAX SHELTER REPORTING rules are changing — again.
The IRS requires that any deal possessing at least one of six features must be reported to the agency as a potential corporate tax shelter. Corporations participating in such transactions must report them to a special office at the IRS at the same time they file a return for the year the transaction occurred, and a form must be attached to each return on which benefits from the transaction are claimed. Lawyers, brokers and other “material advisers” must also report the deal to the IRS. Advisers are required to report within one month after the calendar quarter in which the deal closed.
The IRS keeps changing its view of what makes a deal a potential corporate tax shelter. The rules on what types of deals must be reported have undergone almost continuous revision since they were first issued in 2000.
The IRS proposed more changes in early November.
As expected, significant differences in how a transaction is reported for book and tax purposes will no longer be a factor in whether it must be reported.
However, the agency added a new place- holder to the list. The agency said it will issue periodic announcements as it spots “transactions of interest” that will have to be reported. It has not yet announced any. Retroactive reporting may be required for transactions closed after November 1 this year that are labeled “transactions of interest” in the future.
After the latest revisions, there are six features that will require a deal be reported. They are if the deal is a “listed transaction,” meaning that it appears on a list of transactions that the IRS has announced it does not believe work, the broker or adviser offering the deal insists that the structure must be kept confidential, the fees the taxpayer pays to anyone who makes an oral or written statement about the potential tax consequences from investing in the transaction are contingent on the tax benefits or subject to a full or partial refund if any of the benefits is denied, the deal is expected to throw off at least $10 million in losses that are not compensated by insurance in one year or at least $20 million in such losses in the aggregate, the deal has been identified by the IRS as a “transaction of interest,” or it is expected to generate tax credits of more than $250,000 for holding an asset for 45 days or less.
For a short time, the IRS required that all deal papers contain an explicit statement that both the structure and tax treatment of the deal are not confidential. However, such statements are no longer required in the deal documents themselves. They are only needed in engagement letters with certain advisers.
The IRS is collecting comments on the new rules. Comments are due by January 31.
Treasury official Michael Desmond suggested at an American Bar Association luncheon in late October that the government may treat transactions that use a patented tax technique as “transactions of interest.” The IRS is concerned about an upsurge in applications to the US Patent Office to patent tax strategies, and it wants to learn more about what types of strategies taxpayers are asking to have patented and how such strategies are employed.