Abusive Tax Shelters and Transactions

What's New:

Amended IRC Section 6707A Penalty - Interim Procedures

The Small Business Jobs Act of 2010 that was enacted on September 27, 2010 amended Internal Revenue Code (IRC) section 6707A, Penalty for Failure to Include Reportable Transaction Information with Return. The amendment is retroactive for IRC section 6707A penalties assessed after December 31, 2006. Procedures are being developed for processing the opened penalty cases and correcting the closed assessed cases impacted by the new law.

Tier I Issue Loss Importation Transaction - Directive # 1
This memorandum provides field direction and a uniform format and approach for examiners to evaluate potential compliance risk related to the Loss Importation Transaction (identified as a listed transaction in Notice 2007-57, 2007-2 C.B. 87), and to outline the issue management and oversight process. The Loss Importation Transaction is an international tax avoidance transaction that is often implemented in combination with other listed transactions such as Intermediary Transactions listed in Notice 2008-111, 2008-51 I.R.B. 1299 (which clarified Notice 2001-16, 2001-1 C.B. 730) and Son of Boss Transactions listed in Notice 2000-44, 2000-2 C.B. 255.

Disclosure of Loss Reportable Transactions

New Transaction of Interest - Subpart F Income Partnership Blocker
On December 29, 2008 IRS and Treasury identified a new transaction of interest ( Notice 2009-7) that uses a domestic partnership to prevent the inclusion of subpart F income. In this transaction a U.S. taxpayer that owns controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership takes the position that subpart F income of the lower-tier CFC or an amount determined under section 956(a) of the Internal Revenue Code (Code) related to holdings of United States property by the lower-tier CFC does not result in income inclusions under section 951(a) for the U.S. taxpayer.

Intermediary Transaction Tax Shelters
On December 1, 2008, the Internal Revenue Service released Notice 2008-111 which clarifies Notice 2001-16 that identified and described the intermediary transaction tax shelter as a listed transaction and supersedes Notice 2008-20 (2008-6 I.R.B. 406). The revised guidance defines an intermediary transaction in terms of its plan and of more objective components. Under the guidance, a transaction is treated as an intermediary transaction for a particular person only if that person engages in the transaction as pursuant to a plan (as defined in sections 2 and 4), the transaction contains the four objective components indicative of an intermediary transaction set forth in section 3; and no safe harbor exception in section 5 applies to that person. A transaction must have all four components to be the same or substantially similar to the listed transaction described in Notice 2001-16, even if the transaction is engaged in as part of a plan. The guidance specifies when a person is engaged in a transaction as part of a plan and clarifies that a transaction may be an intermediary transaction for one person and not another.

New Transaction of Interest - Potential for Avoidance of Tax Through Sale of Charitable Remainder Trust Interests
Notice 2008-99 identifies a transaction of interest in which a sale or other disposition of all interests in a charitable remainder trust (subsequent to the contribution of appreciated assets to and their reinvestment by the trust), results in the grantor or other noncharitable recipient receiving the value of that person's trust interest while claiming to recognize little or no taxable gain. Persons entering into these transactions on or after November 2, 2006, must disclose the transaction as described in section 1.6011-4. Material advisors who make a tax statement on or after November 2, 2006, with respect to transactions entered into on or after November 2, 2006, have disclosure and list maintenance obligations under sections 6111 and 6112. Persons required to disclose these transactions and/or maintain lists of advisees who fail to do so may be subject to the penalties under sections 6707A, 6707, 6708, 6662, and/or 6662A.

LILO/SILO SETTLEMENT INITIATIVE - On August 6, 2008, IRS Commissioner Douglas Shulman announced that settlements would be offered to taxpayers who participated in Lease-In/Lease-Out (LILO) and Sale-In/Sale-Out (SILO) transactions. IRS sent out letters giving taxpayers 30 days to make a decision on whether to accept the offer terms.

IRS Commissioner's Remarks 08-06-2008

LILO/SILO Initiative Frequently Asked Questions

The Internal Revenue Service is taking steps to combat abusive tax shelters and transactions. A comprehensive strategy is in place to:
Identify and deter promoters of abusive tax transactions through audits, summons enforcement and targeted litigation.
Keep the public advised by publishing guidance on transactions and shelters that are determined to be abusive.
Promote disclosure by those who market and participate in abusive transactions.
Develop and implement alternative methods for resolving abusive transactions claimed by taxpayers.

IRS Tax Shelter Hotline

IRS maintains a hotline that people can use to provide information (anonymously, if preferred) about abusive tax shelters. OTSA is primarily interested in potentially abusive transactions that may be employed by many taxpayers and could pose a significant compliance risk to the IRS.

Toll free (866) 775-7474
Fax (801) 620-5122
Email IRS Tax Shelter Hotline
Mail:
Office of Tax Shelter Analysis
Internal Revenue Service
1973 North Rulon White Blvd.
LB&I:PFTG:OTSA - M/S 4916
Ogden, Utah 84404-5402

If you suspect or know of an individual or company that is not complying with the tax laws, see reporting suspected fraud.

If you want to blow the whistle on a person(s) who failed to pay the tax that they owe, see Whistleblower Informant Awards. If the IRS uses the information provided, it can award you up to 30 percent of the additional tax, penalty and other amounts it collects.

Office of Tax Shelter Analysis

The Office of Tax Shelter Analysis (OTSA) in the LB&I Division collects and analyzes information about abusive tax shelters and transactions, and coordinates LB&I's tax shelter planning and operation.

Disclosure of Loss Reportable Transactions

Form 13976, Itemized Statement Component of Advisee List (April 2008), may be used by material advisors for the purpose of preparing and maintaining lists with respect to reportable transactions under § 6112 of the Internal Revenue Code. The Form is not required to be used under § 301.6112-1 of the Procedure and Administration Regulations, but is offered as an option for maintaining the list.

Revenue Procedure 2008-20 provides guidance relating to the obligation of material advisors to prepare and maintain lists with respect to reportable transactions under § 6112 and provides that material advisors may use the Form 13976, “Itemized Statement Component of Advisee List” (or successor form) to maintain the itemized statement component of the list.

New Tax Law Provisions Enacted to Combat Abusive Tax Shelters
The American Jobs Creation Act of 2004 (P.L. 108-357) was signed into law by the President on October 22, 2004. This new legislation contains many provisions that will affect abusive tax shelter promotions, advisors and investors.

Listed Abusive Tax Shelters and Transactions
IRS, the Office of Chief Counsel and Treasury issue formal guidance on certain tax avoidance transactions that are referred to as "listed transactions". Taxpayers are required to disclose their participation in listed transactions. To date, 34 listed transactions have been identified and addressed in formal guidance.

Notice 2009-59 updates the list of transactions that have been determined by the Internal Revenue Service to be “listed transactions” for purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and §§ 6111, 6112, 6662A, 6707, 6707A, and 6708 of the Internal Revenue Code. This notice also lists transactions that are no longer considered listed transactions.

Transactions of Interest
The new reportable transaction category Transaction of Interest (TOI) is defined as a transaction that the IRS and the Treasury Department believe is a transaction that has the potential for tax avoidance or evasion, but lack sufficient information to determine whether the transaction should be identified specifically as a tax avoidance transaction. The TOI category of reportable transactions will apply to transactions entered into on or after November 2, 2006.

Notice 2009-55 provides a list of transactions that have been identified by the Internal Revenue Service as “transactions of interest” for purposes of § 1.6011-4(b)(6) of the Income Tax Regulations and §§ 6111, 6112, 6662A, 6707, 6707A and 6708 of the Internal Revenue Code.

Regulations on Abusive Tax Shelters and Transactions
Treasury regulations require that certain tax shelters and transactions be registered and that lists of investors be maintained by parties who organize or sell interests in the shelter(s). Investors in certain shelters and transactions are required to disclose their participation on their tax returns.

Mandatory Tax Shelter Information Document Request
The Abusive Tax Shelter Mandatory Information Document Request (IDR) is required for all LB&I return examinations and extends to examination activities that originate from post-filing as well as pre-filing activities such as the Compliance Assurance Program (CAP). This policy is part of LB&I's continuing commitment to the IRS initiative addressing abusive tax shelters.

LB&I Commissioner's memorandum authorizing Mandatory IDR (11/16/2006)
Official Form 4564
Mandatory IDR Attachment (12/09/2008)

Tax Accrual Workpapers
IRS policy is to request tax accrual and other financial audit workpapers relating to the tax reserve for deferred tax liabilities, and to footnotes disclosing contingent tax liabilities appearing in audited financial statements.

Penalty Policy Relating to Abusive Transactions
An LB&I Commissioner Memorandum issued to LB&I executives, managers, and examiners provides guidance on consideration and application of penalties in an impartial, consistent and fair manner. A separate LB&I Commissioner Memorandum covers Penalty Policy in Disclosure Initiative Cases.

IRS Initiatives to Resolve and Identify Abusive Tax Shelters and Transactions

Taxpayers were afforded the opportunity to participate in a "Son-of-Boss" settlement initiative announced in May, 2004. Taxpayers who qualified for the offer paid outstanding tax, interest and applicable penalty.
IRS conducted a settlement initiative from October 2002 through March 2003 to allow taxpayers engaged in certain abusive transactions to resolve the tax consequences arising from their participation in the transactions. The transactions covered by the initiative were §302 / 318 Basis Shifting, §351 Contingent Liabilities, and Corporate Owned Life Insurance (COLI).
A prior Tax Shelter Disclosure Initiativeconducted from December 2001 to April 2002 resulted in 1,690 transaction disclosures from 1,212 taxpayers. The transactions disclosed involved $30 billion in claimed losses and deductions.
- Announcement 2002-2, Disclosure Initiative
- LB&I Commissioner Memorandum, Penalty Policy in Disclosure Initiative Cases

Other Abusive Tax Schemes
In addition to the highly complex abusive technical transactions covered on this page, IRS is combating other types of abusive tax schemes, such as offshore tax avoidance schemes. Click here for information on steps IRS is taking to combat these other schemes:

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Page Last Reviewed or Updated: 2013-01-23