TAX SHELTERS are starting to worry the Bush administration.
Bush Treasury officials have insisted in the past that Congress should allow more time for new regulations requiring corporations to report tax shelters to the IRS to work before trying to legislate.
One potentially worrisome development is that only 95 companies reported tax shelters to the government last year, despite stiffer new reporting requirements. The voluntary disclosures flagged 272 transactions, but 100 of them were “plain vanilla” equipment lease financings that lease advisers have been encouraging taxpayers to report, possibly in the hope of burying the government in paperwork. Treasury officials also said some companies sent their disclosures to IRS service centers rather than the special office in Washington set up to monitor tax shelter activity. They suspect bad faith may have been involved in at least some of these filings.
The government is now trying a carrot and stick approach.
The IRS announced on December 21 that it would waive accuracy-related penalties to anyone who voluntarily discloses by April 23 a tax shelter or other questionable item that he took on his return. What the IRS really wants is the name of the “promoter” so that it can go after the customer list. Controversy has arisen because the IRS wants all documents and memos related to a transaction from anyone taking advantage of the limited amnesty. Turning over some of them may breach confidentiality agreements.
The government also sent 28 letters to tax shelter promoters in late December whom it suspects failed to report transactions. The promoters include seven accounting firms and seven investment banks. Formal summonses are expected to follow.
Meanwhile, the government lost three high-profile tax shelter cases in the past few months on appeal that it had won in the lower courts, raising more concerns.
The Senate Finance Committee will probably vote out tax shelter legislation this year. The committee released two drafts of an anti-shelter bill in the last Congress. Committee staff say no more advance drafts will be circulated.
It is possible that the publicity given to Enron’s tax planning may have more of a dampening effect on tax shelters than anything Congress might do. Many corporate tax directors say they have not seen any change in their approaches to tax planning or that of outside advisers who are pitching ideas — at least for now.