March 12, 2004

SUMMARY OF S. 2210

TAX SHELTER AND TAX HAVEN REFORM ACT

(Introduced by Senator Carl Levin and Senator Norm Coleman)

Title I – Strengthen Tax Shelter Penalties.

Title II – Prevent Abusive Tax Shelters.

Title III – Require Economic Substance.

Title IV – Deter Uncooperative Tax Havens.

TAX SHELTER AND TAX HAVEN REFORM ACT

TITLE I – Strengthening Tax Shelter Penalties

Sections 101-109

•  Strengthens the penalties for (see chart on last page of this summary):

  • Extends statute of limitations for undisclosed tax shelters (§107), and expands the IRS' ability to seek injunctions against tax shelter promoters and material advisors (§108). Modeled after provisions in the Grassley/Baucus legislation that has passed the Senate three times.

    • TITLE II – Preventing Abusive Tax Shelter Transactions

    Section 201 – Authorize Censure, Civil Fines, and Tax Shelter Opinion Standards for Tax Practitioners
  • Authorizes Treasury to censure or impose civil fines on tax practitioners (such as accountants and attorneys) who violate specified standards of practice in Circular 230, for persons representing clients before the IRS. Modeled after provision in the Grassley/Baucus legislation that has passed the Senate three times.
  • Directs Treasury to issue Circular 230 standards for tax practitioners providing “opinion letters” on specific tax shelter transactions. Requires standards to address: (1) indepen-dence of letter writer from tax shelter promoters, (2) collaboration among letter writers resulting in joint financial interests, (3) avoidance of conflicts of interest that would impair auditor independence, (4) review and approval by a firm of opinion letters issued in the name of the firm, (5) reasonable reliance on factual representations, and (6) the appropriateness of fee charges. Expands upon standards recently proposed by Treasury.

    • Section 202 – Expand tax shelter exception to tax practitioner privilege

  • Expands existing tax shelter exception to the confidentiality privilege for communica-tions between a federally authorized tax practitioner and taxpayer, so that the exception applies to communications not only about corporate tax shelters, but other tax shelters as well. Modeled after provision in the Grassley/Baucus legislation that has passed the Senate three times.

    • Sections 203-204 – Increase disclosure of certain tax shelter information

  • Authorizes Treasury to share certain tax return information with the SEC, federal bank regulators, or PCAOB, under certain circumstances, to enhance tax shelter enforcement or combat financial accounting fraud. (§203)
  • Clarifies that Congress has the same subpoena authority as federal, state, and local authorities to obtain information from tax return preparers. Expands Congress' authority to obtain certain tax information (but not a taxpayer return) from Treasury related to an IRS decision to grant, deny, revoke, or restore an organization's tax exempt status. (§204)

    • Section 205 – Prohibit tax service fees contingent on specific tax savings

  • Prohibits charging a fee for tax services in an amount contingent upon the actual or projected achievement of a specified amount of tax savings or income loss to offset taxable income. Builds on existing contingent fee prohibitions in more than 20 states, AICPA rules applicable to accountants, and SEC regulations applicable to auditors of publicly traded corporations. Based upon investigation by Permanent Subcommittee on Investigations showing tax practitioners are circumventing current constraints.

    Section 206 – “Sense of the Senate” on IRS Enforcement Priorities

  • Establishes the Sense of the Senate that additional funds should be appropriated for IRS enforcement, and that the IRS should devote proportionately more of its enforcement funds to combat: (1) the promotion of abusive tax shelters for corporations and high net worth individuals and the aiding or abetting of tax evasion, (2) the involvement of accounting, law and financial firms in such promotion and aiding or abetting, and (3) the use of offshore financial accounts to conceal taxable income.

    • TITLE III – Requiring Economic Substance

    Sections 301-303 – Strengthen the Economic Substance Doctrine
  • Strengthens and codifies the economic substance doctrine to invalidate transactions that have no economic substance or business purpose apart from tax avoidance or evasion. Also increases penalties for understatements and eliminates deductibility of interest on unpaid taxes when the penalties or interest are attributable to a transaction lacking in economic substance. Modeled after provisions in the Grassley/Baucus legislation that has passed the Senate three times. E stimated to raise $13.7 billion over ten years.

    • TITLE IV – Deterring Uncooperative Tax Havens

    Section 401-402 – Deter Uncooperative Tax Havens

  • Deters taxpayer use of uncooperative tax havens with corporate, bank or tax secrecy laws, procedures, or practices that impede U.S. enforcement of its tax laws by: (1) requiring disclosure on taxpayer returns of any payments above $10,000 to accounts or persons located in such tax havens (§401), and (2) ending tax benefits for any income earned in such tax havens (§402). Gives Treasury Secretary discretion to designate a tax haven as uncooperative and publish an annual list of those jurisdictions.
    • Comparison of Title I Penalty Provisions
    Strengthen Tax Shelter Penalties
    Violation Penalty
    Current Law Provisions in JOBS Act Provisions in Tax Shelter and Tax Haven Reform Act

    Promotion of abusive tax shelters.

    IRC § 6700

    Lesser of $1,000 or 100% of the promoter's gross income derived from the prohibited activity.

    50% of the promoters' gross income from the activity.

    ( §415)

    Not to exceed the greater of:

    i) 150% of the promoters' gross income from the prohibited activity, or

    ii) amount assessed against the taxpayer for using abusive shelter (including backtaxes, penalties and interest).

    (§101)

    Knowingly aiding and abetting understatement of tax liability.

    IRC § 6701

    Maximum of $1,000 ($10,000 for a corporation).

    Penalty applies only to tax return preparer.

    No provision included.

    Not to exceed the greater of:

    i) 150% of the aider/abettor's gross income from the prohibited activity, or

    ii) amount assessed against the taxpayer for the understatement (including backtaxes, penalties and interest).

    Penalty applies to all aiders/abettors, not just preparers.

    (§102)

    Failure to timely register with IRS a shelter or provision of false or incomplete information with respect to it.

    IRC § 6707(a)

    Non-confidential shelter : Greater of $500 or 1% of the amount invested.

    Confidential shelter : Greater of $10,000 or 50% of the promoters' fees (75% if violation is intentional).

    $50,000. No distinction between confidential and non-confidential.

    However, if relates to a tax shelter previously identified by the IRS, no less than $200,000 but not greater than 50% of the promoter's income from the shelter (75% if violation is intentional).

    Material advisors must also register.

    (§408)

    $50,000 to $100,000. No distinction between confidential and non-confidential.

    However, if relates to a tax shelter previously identified by the IRS, no less than $200,000 but not greater than 100% of the promoter's income from the shelter (150% if violation is intentional).

    Material advisors must also register.

    (§103)

    Failure by taxpayer to include with return the required information regarding a potentially abusive shelter.

    IRC § 6707(b)(2)

    $250 per failure to include tax shelter ID number. (There are additional penalties on the taxpayer that relate to understatement or underpayment.)

    Significantly broadens disclosure requirements.

    $50,000, but $100,000 if failure relates to a tax shelter previously identified by the IRS. Doubled amounts if the taxpayer is a large entity or high net worth individual.

    (§402)

    Similar disclosure requirements as JOBS Act.

    $50,000, but $100,000 if failure relates to a tax shelter previously identified by the IRS. Doubled amounts if intentional.

    (§105)

    Failure to maintain list of participants in potentially abusive tax shelters.

    IRC § 6708

    $50 per name, with a maximum penalty per year of $100,000.

    $10,000 per day after the person has failed for 20 days to provide a list to the IRS after the agency requested it.

    (§409)

    Same as JOBS Act, plus if an incomplete list is given to the IRS, $100 per omitted investor per day.

    (§104)

    Failure to report interests in foreign financial accounts.

    31 USC § 5321

    Maximum of $100,000, but failure must be willful for any penalty to be assessed.

    Maximum of $5,000, but if willful, up to $100,000.

    (§412)

    Maximum of $10,000, but if willful, minimum of $5,000 and up to 50% of the funds in the account over which the taxpayer has control.

    (§109)