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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Highlights
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.
Recommendations
Matter for Congressional Consideration
| Matter | Status | Comments |
|---|---|---|
| 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. | 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. | |
| 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. | The Omnibus Budget Reconciliation Act of 1989 amended IRC section 6701 by striking "who knows" and adding "who knows or has reason to believe". |
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Internal Revenue Service | 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. |
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.
|
| Internal Revenue Service | 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. |
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.
|
| Internal Revenue Service | 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. |
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.
|
| Internal Revenue Service | 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. |
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.
|
| Internal Revenue Service | 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. |
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.
|
| Internal Revenue Service | 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. |
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.
|
| Internal Revenue Service | 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. |
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.
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Administrative errorsAdministrative remediesEvaluation criteriaFines (penalties)Internal controlsLaw enforcementTax administration systemsTax evasionTax lawTax shelters