Tax Administration:

IRS' Abusive Tax Shelter Efforts Need Improvement

GGD-88-69: Published: Jul 25, 1988. Publicly Released: Jul 25, 1988.

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In response to a congressional request, GAO examined the Internal Revenue Service's (IRS) legislatively mandated efforts to curtail abusive tax shelters, focusing on the effectiveness of: (1) the tax shelter registration abusive shelter detection team programs in identifying abusive tax shelters; and (2) IRS efforts to administer penalties.

GAO found that: (1) the registration program did not provide district examination personnel with enough information to identify abusive tax shelters or to initiate investigations; (2) the detection team program did not provide district personnel with selection criteria to properly identify the types of shelter cases considered potentially subject to penalties; (3) although Congress raised the penalty to deter promotion and sale of abusive tax shelters from 10 percent to 20 percent of the gross income derived or to be derived from the shelter, promoters continued to have financial incentives for promoting abusive shelters; (4) although IRS assessed some penalties for persons who knowingly aided or abetted tax shelter abuses, it could have assessed more penalties if the law required a lesser burden of proof; (5) IRS either overlooked or incorrectly computed the penalties in 16 of 29 cases GAO reviewed in three districts; (6) IRS computational errors totalled $4.2 million in penalty underassessments; and (7) most of the errors occurred because IRS lacked penalty guidance, internal controls to ensure appropriate penalties, and procedures to detect errors and oversights and ascertain compliance with regulations.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The Omnibus Budget Reconciliation Act of 1989 amended IRC section 6701 by striking "who knows" and adding "who knows or has reason to believe".

    Matter: To reduce the financial incentive for promoting abusive tax shelters, Congress should modify IRC section 6701 to reduce the level of proof from knowingly to "knows or reasonably should have known" that the investor would understate tax liability to ensure all abusive shelters are subject to penalty for aiding and abetting.

  2. Status: Closed - Implemented

    Comments: The Omnibus Budget Reconciliation Act of 1989 amended IRC section 6700 by changing the penalty to $1000 or 100 percent of the gross income derived or to be derived if the person establishes that it is less.

    Matter: To reduce the financial incentive for promoting abusive tax shelters, Congress should modify Internal Revenue Code (IRC) section 6700 to significantly increase the penalty above the current 20 percent of gross income derived, or to be derived, by any party involved with the promotion or sale of an abusive shelter.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: IRS is relying on its fine management quality assurance system to have group managers review all closed examination cases to, among other things, verify the accuracy of penalty calculations. Therefore, no further guidelines will be issued for the low volume of identified abusive tax shelter cases.

    Recommendation: To ensure that penalties are assessed when appropriate and computed correctly, and that enjoined parties comply with the terms of the injunctions, the Commissioner of Internal Revenue should develop and implement district internal control procedures that require supervisory review of all penalties and a quality assurance review of selected penalties to ensure that appropriate penalties have been considered and accurately computed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: From additional work, IRS has restructured its program by expanding its identification teams to cover all compliance issues resulting from the act. Unless the type or volume of abusive tax shelters that surface after act implementation reverses the decline, IRS will not implement the recommendation.

    Recommendation: To ensure that penalties are assessed when appropriate and computed correctly, and that enjoined parties comply with the terms of the injunctions, the Commissioner of Internal Revenue should: (1) develop clear and complete guidance for districts so that they know when and how shelter penalties are to be computed; and (2) follow up with districts after issuance to verify that the guidance is understood and correctly applied.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Not Implemented

    Comments: From additional work, IRS has restructured its program by expanding its identification teams to cover all compliance issues resulting from the act. Unless the type or volume of abusive tax shelters that surface after act implementation reverses the decline, IRS will not implement the recommendation.

    Recommendation: To improve the efficiency and effectiveness of the abusive shelter identification programs, the Commissioner of Internal Revenue should maximize the use of computers to identify and thus reduce cases for detection team review.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Not Implemented

    Comments: From additional work, IRS has restructured its program by expanding its identification teams to cover all compliance issues resulting from the act. Unless the type or volume of abusive tax shelters that surface after act implementation reverses the decline, IRS will not implement the recommendation.

    Recommendation: To improve the efficiency and effectiveness of the abusive shelter identification programs, the Commissioner of Internal Revenue should develop and periodically update national selection criteria that can be used by IRS service center detection teams and district examination personnel to identify the tax shelter returns most likely to contain a gross overevaluation of an asset or false or fraudulent statements.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Not Implemented

    Comments: From additional work, IRS has restructured its program by expanding its identification teams to cover all compliance issues resulting from the Tax Reform Act of 1986. Unless the type or volume of abusive tax shelters that surface after act implementation reverses the decline, IRS will not implement the recommendation.

    Recommendation: To improve the efficiency and effectiveness of the abusive shelter identification programs, the Commissioner of Internal Revenue should require districts to review those documents in deciding whether to initiate an examination to determine if the shelter is subject to penalty.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Not Implemented

    Comments: IRS does not believe it is beneficial to require submission of the prospectus or offering documents as part of the registration process. Therefore, IRS is not planning to implement this recommendation. From further review, GAO determined that the registrations dropped from about 14,000 in 1985, before the Tax Reform Act, to about 3,000 in 1988, after the act.

    Recommendation: To improve the efficiency and effectiveness of the abusive shelter identification programs, the Commissioner of Internal Revenue should require organizers of registered shelters to provide the shelter prospectus and offering documents to their respective IRS district offices at the time of registration.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Not Implemented

    Comments: IRS is relying on its fine management quality assurance system to have group managers review all closed examination cases to, among other things, verify the accuracy of penalty calculations. Therefore, no further guidelines will be issued for the low volume of identified abusive tax shelter cases.

    Recommendation: To ensure that penalties are assessed when appropriate and computed correctly, and that enjoined parties comply with the terms of the injunctions, the Commissioner of Internal Revenue should develop an effective program for monitoring enjoined parties' compliance with decrees and continue exploring opportunities to computerize monitoring when developing service center return identification criteria.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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