Collateral Consequences of Engaging in Tax Avoidance Transactions

By Andrew W. Singer, Esq. *

...

Due to a growing tax shelter industry and tax advisors aggressively selling problematic schemes that promise to reduce the tax liability of the wealthy individuals and major corporations that utilize them, Congress has responded with the current penalty and disclosure regime. New grounds for the imposition of penalties have been added and the penalties themselves have been increased. The financial sanctions for understating income tax liability have also been supplemented by novel disclosure requirements (each with its own separate set of penalties) intended to inform the IRS more promptly of transactions (including but not limited to securities transactions) considered of dubious validity for tax purposes. Additionally, there are collateral tax consequences of entering tax shelter transactions, such as the loss of confidentiality for communications between tax advisor and client, and an extension of the statute of limitations with respect to tax shelter items that fail to meet disclosure requirements.

[1] No Statute of Limitations on Undisclosed Listed Transactions

In general, the Internal Revenue Service has three years from the date the taxpayer files a return to assess any additional tax with respect to that return. [IRC § 6501(a).] If however, a taxpayer fails to disclose a listed transaction in a manner consistent with the requirements of IRC section 6011 and the disclosure regulations thereunder (Treas Reg Section 1.6011-4), the three-year statute of limitations will not prevent the IRS from assessing additional taxes, (including interest and penalties) with respect to that transaction...

[2] Loss of Tax Practitioner Communication Privilege in Tax Shelter Transactions

In accordance with IRC Section 7525(a), as a general rule, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney. A federally authorized tax practitioner includes "any individual who is authorized under Federal law to practice before the Internal Revenue Service... [See IRC § 7525(a)(3)(A).]

IRC § 7525(b) provides, however, that the privilege does not apply to any "written communication" between a federally authorized tax practitioner and (A) any person, (B) any director, officer, employee, agent or representative of the person, or (C) any other person holding a capital or profits interest in the person, if the written communication is made "in connection with the promotion of the direct or indirect participation of the person in any tax shelter" as defined in IRC § 6662(d)(2)(C)(ii)...

[3] Listed Transactions as Exception to IRS Policy of Restraint in Seeking Tax Accrual Workpapers

The IRS has the right to inspect the tax accrual workpapers of publicly held companies. [See United States v. Arthur Young & Co., 465 U.S. 805 (U.S. 1984); United States v. Textron Inc., 577 F.3d 21 (1st Cir. R.I. 2009).] Such workpapers are generally prepared by the company's tax department and reviewed by its auditors to support the reserve for contingent tax liabilities on the company's balance sheet. The workpapers provide a resource for the IRS by "pinpoint[ing] the 'soft spots' on a corporation's tax return by highlighting those areas in which the corporate taxpayer has taken a position that may, at some later date, require the payment of additional taxes" and providing "an item-by-item analysis of the corporation's potential exposure to additional liability." [United States v. Textron Inc., 577 F.3d 21 (1st Cir. R.I. 2009), quoting from United States v. Arthur Young & Co., 465 U.S. 805 (U.S. 1984).]...

...

LEXIS users can view the complete commentary HERE. Additional fees may apply. (Approx. 10 pages)

...

RELATED LINKS: For more information on Tax Shelter Transactions: Penalties and Disclosure Requirements, see:

• 2.22 Taxation of Securities Transactions § 22.syn

Andrew W. Singer is a retired partner of the Washington DC firm of Covington & Burling. Mr. Singer specializes in all areas involving federal and state taxation and has extensive experience in international taxation which includes representation of the Commonwealth of Puerto Rico and the Marshall Islands in negotiating tax agreements with the US and participation in competent authority negotiations under US tax treaties. Mr. Singer served as Chairman for the Committee on Court Procedure, American Bar Association and as Chairman for the Committee on Taxation, District of Columbia Bar Association; lectured at American University, Washington College of Law, Washington, DC and George Washington University, National Law Center, Washington, DC; and has published articles in various tax journals, including articles on income taxation of bankrupt companies and individuals, litigation in US Claims Court, District Courts and Tax Court.

Taxation of Securities Transactions is also available in print at the LexisNexis® Store.

...

Discover the features and benefits of LexisNexis® Tax Center

For quality Tax & Accounting research resources, visit the LexisNexis® Store