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:: Accuracy - Introduction
Publication Date - August,
2004
NOTE: This guide is current
through the publication date. Since changes
may have occurred after the publication date
that would affect the accuracy of this
document, no guarantees are made concerning
the technical accuracy after the publication
date.
Chapter 1: Introduction
Coverage
This audit technique guide (“ATG”)
was developed to support the field in the
consistent development and application of
penalties when a taxpayer was involved in an
abusive tax shelter, including “technical”
tax shelters. This ATG is a Service-wide
document, discussing penalty policy and
considerations applicable to all taxpayers
involved in tax shelter transactions.
This guide is not intended to be all
inclusive. In most cases, the examiner
should refer to additional sources of
information, including listing notices and
disclosure initiatives, even if there is a
thorough discussion of the issue in this
guide. Although this ATG includes
information from existing position papers,
audit technique guides, and CPE materials
that deal with specific listed transactions
and identified transactions that have not
been listed, it is not intended to replace
these materials. The examiner should consult
the penalty handbook, related audit
technique guides, appeals settlement
guidelines, as well as subject matter
advisors, technical advisors and local Chief
Counsel Attorneys.
Overview
The consideration and assertion of
penalties in audits involving tax shelters
is vital to the Service’s efforts in
addressing the proliferation of tax
shelters. Appropriate administration of
penalties seeks to ensure fairness and
consistency in the administration of the tax
law and seeks to effectively discourage
noncompliant behavior. Examiners and
managers should not use penalties as a
bargaining point in the development or
processing of cases. See Service Penalty
Policy Statement (P–1–18) at
Exhibit 1.
Penalties should be considered and developed
simultaneously with the examination of the
tax shelter transaction, and not at the
conclusion of the audit. Proper
consideration and application of penalties
will:
-
Encourage voluntary compliance;
-
Conserve IRS resources due to early
disposition of tax shelter issues;
-
Provide clear guidance to taxpayers
and practitioners;
-
Ensure consistent and fair treatment
of the issues; and
-
Ensure that noncompliant behavior is
penalized in appropriate
circumstances.
Focus
This ATG focuses primarily on
components of the accuracy-related penalty
under IRC § 6662, the fraud penalty under
IRC § 6663 and the definitions and special
rules under IRC § 6664. Consider and
develop the following penalties, if they
apply:
-
Failure to file or to pay under IRC
§ 6651 (See IRM 20.1.2)
-
Failure to pay estimated taxes under
IRC §§ 6654 or 6655 (See IRM 20.1.3)
-
Frivolous income tax return under
IRC § 6702 (See IRM 20.1.10)
-
Failure to include tax shelter
identification number on a return
under IRC § 6707(b)(2) (See IRM
20.1.10)
In cases involving offshore arrangements,
consider and develop the following
penalties, if they apply:
-
Failure to file information returns
under IRC §§ 6038, 6038A, 6038B,
6038C or 6039F (See IRM 20.1.9)
-
Failure to file information with
respect to certain foreign trusts
under IRC § 6677 (See IRM 20.1.9)
-
Failure to file returns, etc., with
respect to foreign corporations or
foreign partnerships under IRC §
6679 (See IRM 20.1.9)
-
Failure to file report of foreign
bank and financial accounts under 31
USC § 5321(a)(5)(B)
In the most egregious cases, the examiner
should consider whether criminal penalties
might apply and the case should be referred
to Criminal Investigation for further
development of these issues. Some criminal
penalties that may apply include:
-
Attempt to evade or defeat tax under
IRC § 7201
-
Willful failure to file return,
supply information, or pay tax under
IRC § 7203
-
Fraudulent returns, statements, or
other documents under IRC § 7207
-
Failure to obey summons under IRC §
7210
Tax Shelters
A tax strategy or scheme that
shelters income from normal taxation is a
tax shelter. Depending on the facts and
legal analysis, a specific transaction or
scheme may represent either lawful tax
avoidance or unlawful tax evasion. For
purposes of IRC § 6662, tax shelter
includes, among other things, any plan or
arrangement a significant purpose of which
is the avoidance or evasion of Federal
income tax. See discussion of the IRC §
6662 definition of tax shelter, infra.
A tax transaction or scheme that shelters
income from normal taxation by taking a tax
position that is not supported by tax law or
manipulates the law in a manner that is not
consistent with the intent of the law is
considered to be an abusive tax shelter.
Abusive tax shelters take various forms.
“Schemes or scams” are some of the easiest
abusive tax shelters to detect and generally
fall under the “too good to be true”
category. These transactions are clearly
unallowable or have no existing basis in
law. Some of the schemes and scams that the
Service has detected include claim of right
(Rev. Rul. 2004-29); corporation sole (Rev.
Rul. 2004-27); home-based business (Rev. Rul.
2004-32); removal from the tax system and
chargeback debts (Rev. Rul. 2004-31);
reparations (Rev. Rul. 2004-33); Section 861
(Rev. Rul. 2004-30); Section 911 (Rev. Rul.
2004-28); zero returns (Rev. Rul. 2004-34);
and other frivolous arguments. In a news
release and on the IRS webpage, the IRS
publicizes, each year, the “dirty dozen”
warning taxpayers of 12 common scams. The
examiner should refer to this list and other
sources, including “The Truth about
Frivolous Tax Arguments,” located on the IRS
webpage, when determining whether a taxpayer
has engaged in a scheme or scam or has
advanced other frivolous tax arguments.
The term abusive tax shelter commonly refers
to a tax transaction or scheme that is
highly technical and represents a strategy
that is often marketed by an accounting or
law firm. A “technical” tax shelter is
distinguishable from a "scheme or scam" that
finds no support in either the law or the
facts. In the case of a technical tax
shelter, the promoted tax benefits from the
transaction may be supported by a strained,
technical reading of the Code, regulations
or rulings. In many cases, however, the
promoted tax benefits are not actually
available because the form of the
transaction does not reflect its substance.
In other cases, a tax avoidance strategy may
find support in a possible interpretation of
the law, although not the reading of the
Code and regulations intended by Congress or
the Secretary.
Technical tax shelters include “listed
transactions” and other potentially abusive
tax shelter transactions that have not been
listed. A “listed transaction” is a
transaction that the Service has officially
notified taxpayers by notice, regulation, or
other form of published guidance as
potentially abusive and therefore subject to
the disclosure requirements of the
regulations under IRC § 6011. A listed
transaction may include a transaction that
is the same as or substantially similar to
one of the types of transactions that the
Service has determined to be a tax avoidance
transaction and identified by notice,
regulation, or other form of published
guidance as a listed transaction for
purposes of IRC §§ 6011 and 6112.
A technical tax shelter may take many
different forms and can utilize many
different structures. A single
comprehensive definition of abusive tax
shelters is difficult to formulate.
Nevertheless, abusive technical tax shelters
may have the following characteristics:
-
Lack of meaningful economic risk of
loss or potential for gain;
-
Inconsistent financial and
accounting treatment;
-
Presence of tax-indifferent parties;
-
Complexity without a reasonable
business purpose;
-
Unnecessary steps or novel
investments;
-
Promotion or marketing of tax
benefits as a central component;
-
Confidentiality;
-
High transaction costs;
-
Risk reduction arrangements.
An abusive tax scheme is a specific tax
transaction or scheme that reduces tax
liability by taking a tax position that is
not supported by tax law or manipulates the
law in a manner inconsistent with the intent
of the law. Abusive tax transactions or
schemes may apply to either a large number
of taxpayers or a limited number of
taxpayers. These strategies and schemes may
be organized and marketed and, if so, are
often referred to as an abusive tax
shelter.
Penalty Policy: Facts and
Documentation to be Developed During the
Examination
Consideration of penalties must be
documented in all taxpayer examinations,
including those involving tax shelters. A
penalty must be developed as the audit
progresses. Only after all facts and
circumstances surrounding a penalty have
been developed can a determination be made
as to the application of appropriate
penalties.
Audit technique guidelines for proper
penalty development in LMSB and SB/SE
examinations are included below.
Large and Mid-Size Businesses (LMSB)
On December 20, 2001, the LMSB
Commissioner issued a memorandum providing
guidelines for the consideration of the
accuracy-related penalty in LMSB
examinations. See
Exhibit 2. This memorandum requires
agents to develop the accuracy-related
penalty in all cases in which there is an
underpayment of tax attributable to a listed
transaction. On July 10, 2003, the LMSB
Commissioner issued a memorandum providing
that examiners should not develop the
accuracy-related penalty in cases where the
taxpayer filed and was considered qualified
under the terms of Announcement 2002-2.
This determination should be confirmed by
the team manager, with no other approval
required. See
Exhibit 3. The July 10, 2003 memorandum
provides that, for cases not qualifying for
treatment under the Disclosure Initiative
outlined in Announcement 2002-2,
consideration of penalties remains
mandatory. See discussion of Announcement
2002-2, infra. If an underpayment of tax is
attributable to a taxpayer’s participation
in a listed transaction, the examiner must
develop the accuracy-related penalty issues
and prepare a written report supporting the
recommendation to impose or not to impose
the penalty. When an LMSB examiner
identifies a new potentially abusive tax
shelter transaction or promoter information,
the examiner must contact LMSB Field Counsel
as well as the Office of Tax Shelter
Analysis (OTSA). See also Joint LMSB-SB/SE
Memorandum dated August 21, 2003 at
Exhibit 4.
For a corporate tax shelter case involving a
listed transaction, the decision to impose
or not impose an accuracy-related penalty
must be approved by the respective Director
of Field Operations (DFO), in accordance
with LMSB Commissioner Memorandum dated
December 20, 2001. See
Exhibit 2.
Small Business/Self Employed (SB/SE)
Examiners should send promoter
information to the Lead Development Center
and contact the appropriate Technical
Advisor in Compliance Policy, Reporting
Enforcement, who is responsible for
coordinating and assisting in the
identification of the shelters. See Joint
LMSB-SB/SE Memorandum dated August 21, 2003
at
Exhibit 4.
SB/SE employees should follow existing
penalty provisions regarding managerial
approval for imposing penalties in a tax
shelter involving a listed transaction. See
Joint LMSB-SB/SE Memorandum dated August 21,
2003. Existing penalty provisions for
managerial approval of penalties are found
in the IRM at 20.1.1.2.3 (Rev. 05/29/2002).
Managerial Approval of Penalties
IRC § 6751(b) requires that all
penalties assessed after June 30, 2001, must
first be personally approved in writing by
either the immediate supervisor of the
individual making the determination or a
designated higher level official. See IRM
20.1.7.1.5(7).
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