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Highlights

Abusive tax avoidance transactions (ATAT) range from frivolous tax schemes to highly technical and abusive tax shelters marketed to taxpayers by promoters selling tax advice. ATATs threaten the U.S. tax system's integrity if honest taxpayers believe that others do not pay their fair share of taxes. GAO was asked to (1) describe what is known about trends in ATAT usage; (2) describe results of IRS's ATAT enforcement efforts; and (3) evaluate IRS's implementation of the ATAT provisions in the American Jobs Creation Act of 2004. Using criteria from the act, GAO analyzed statistics and other documents on trends and results and interviewed IRS and other tax experts.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Congress Congress may wish to consider instituting a penalty on non-material advisor promoters for failing to provide investor lists to IRS within a specified time period when requested, comparable to the 20-business-day requirement for material advisors.
Open

Recommendation status is Open.

As of February 2020, we have not identified legislative action in the 114th or 115th Congress or any enacted legislation since 2011 amending section 6111 (disclosure of reportable transactions including the definition of a material advisor), section 6112 (requirement to keep lists of investors) or section 6708 (imposing the penalty for failure to maintain and provide lists to IRS).
Internal Revenue Service To focus resources on promoter investigations most likely to stop abuse, the Commissioner of Internal Revenue should establish a process to ensure that field office staff consistently apply the recently created reason codes for closing investigations without penalties or injunctions, and document how the results are analyzed and used in decisions on investigations to start.
Closed - Implemented

Recommendation status is Closed - Implemented.

IRS updated its Internal Revenue Manual in December 2011 to require using disposal codes to indicate why promoter investigations are surveyed or discontinued. It also used the codes to evaluate leads sent to the field. Although it found no specific weaknesses this time, it plans to do this analysis annually.
Internal Revenue Service To improve reporting on the results of examinations on ATAT issues, the Commissioner of Internal Revenue should require all divisions to supply similar, consistent results from existing data systems.
Closed - Implemented

Recommendation status is Closed - Implemented.

IRS provided GAO with May 2, 2012 "official desk procedures" designed to ensure data consistency. Among other things, these procedures require divisions to describe how they will compile information before they actually compile it. If divisions differ in their approaches, the Office of Tax Shelter Analysis will help them reconcile issues and agree on one approach for compiling the information. More consistent information will help IRS provide reliable information to the Congress and determine how many examinations it should do and what their impacts are.
Internal Revenue Service To improve reporting on the results of examinations on ATAT issues, the Commissioner of Internal Revenue should separately track the tax amounts recommended, assessed, and collected between ATAT issues and non-ATAT issues.
Open

Recommendation status is Open.

As of December 2019, IRS did not plan on taking any further actions to track examination results for ATAT versus non-ATAT issues, as GAO recommended in May 2011. In July 2012, IRS told GAO that although it agreed with GAO's May 2011 recommendation, resource and capability constraints preclude it from capturing information in this way. GAO maintains that tracking examination results for ATAT versus non-ATAT issues would provide IRS management with the data needed to make informed judgments about program effectiveness and resource allocations. IRS has taken steps to check whether taxpayers file all required ATAT-related disclosure obligations. In February 2013, IRS implemented a new indicator and matching process to regularly review whether taxpayers are meeting their ATAT-related filing obligations. Additionally, IRS developed a procedure to evaluate the completeness of ATAT-related disclosure forms and follow up on incomplete forms as necessary and updated the Internal Revenue Manual to reflect these changes. Developing and implementing these new processes and procedures will provide IRS with additional information for determining whether the disclosures are made as required and are complete.
Internal Revenue Service To improve reporting on the results of examinations on ATAT issues, the Commissioner of Internal Revenue should establish a process to review the accuracy of examination data prior to its inclusion in future reports to the Joint Committee on Taxation.
Closed - Implemented

Recommendation status is Closed - Implemented.

IRS provided GAO with May 2, 2012, "official desk procedures" designed to ensure data reporting accuracy. Among other things, the procedures specify that when possible, IRS will compile report data from its Enforcement Revenue Information Service database as reconciled and corrected by the Office of Servicewide Penalties. The procedures also make each division responsible for internally vetting its data's accuracy. More accurate data will help IRS provide reliable information to the Congress and best determine how many examinations it should do and what their impacts are.
Internal Revenue Service To ensure that Forms 8886 filed with tax returns are also filed with OTSA, after establishing a new indicator for paper and electronic tax returns, the Commissioner of Internal Revenue should establish a process to periodically check whether the filers met their filing obligations with Office of Tax Shelter Analysis (OTSA).
Closed - Implemented

Recommendation status is Closed - Implemented.

In February 2013, IRS implemented a new indicator and a matching process to regularly review whether filers meet their filing obligations with OTSA.
Internal Revenue Service To improve IRS's next study of whether Form 8886 should be filed electronically, the Commissioner of Internal Revenue should identify how often filers already use computers to prepare these forms.
Closed - Implemented

Recommendation status is Closed - Implemented.

IRS's next study reported that taxpayers used a computer to prepare 98 percent of the paper forms that taxpayers filed in 2011 and that OTSA scanned or transcribed into a database.
Internal Revenue Service To ensure material advisor disclosure forms are filed, the Commissioner of Internal Revenue should investigate why partnerships and S corporations often did not file a form with OTSA even though they reported on their tax returns that they filed the form with IRS or had a requirement to file.
Closed - Implemented

Recommendation status is Closed - Implemented.

IRS conducted the same test using the same data source as GAO did, but used information from more recent (2010) tax return filings. It found a significant drop in mismatched tax returns. However, because some taxpayers still did not file a form even though they indicated that they did file or should have filed, IRS followed up with a sample of them. It found that the taxpayers incorrectly indicated that they filed or should have filed. Nevertheless, it established a process to look for mismatches in the future and follow up with taxpayers that seemed to be material advisers.
Internal Revenue Service To correct problems with its review of the completeness of disclosure forms, the Commissioner of Internal Revenue should ensure that OTSA establishes a new process to review completeness and monitor its success.
Closed - Implemented

Recommendation status is Closed - Implemented.

IRS developed a procedure to evaluate the completeness of disclosure forms and follow up on incomplete forms as necessary, and it updated the Internal Revenue Manual to reflect these changes.
Internal Revenue Service To monitor the timeliness of investor list receipts, the Commissioner of Internal Revenue should comprehensively track the elapsed days it takes for material advisors and non-material advisors to provide the lists to IRS.
Closed - Not Implemented

Recommendation status is Closed - Not Implemented.

IRS believes that resource and capability constraints to systematically capturing this information may outweigh the benefits of having it.
Internal Revenue Service To induce non-material advisors to provide investor lists to IRS within a specified time, the Commissioner of Internal Revenue should take steps such as requiring IRS staff to bring a summons for an investor list to the first interview with a suspected non-material advisor, and reevaluating the idea of lowering material advisor dollar thresholds.
Closed - Implemented

Recommendation status is Closed - Implemented.

For the first part of the recommendation, IRS took steps such as GAO had recommended by updating the Internal Revenue Manual to suggest that an IRS agent consider preparing a summons to use at an initial meeting with a suspected non-material advisor. For the second part, in line with the GAO recommendation, IRS gathered input from field officials and drafted a memo saying that no one thought lowering the material advisor dollar threshold would be helpful.

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