Treasury Rules Crack Down on Tax Shelters

The use of abusive tax shelters by corporations and high-income people appears to be waning in the U.S., Treasury Department officials said as they announced rules requiring tax-avoidance deals be reported to the government.

B. John Williams, the Internal Revenue Service’s top lawyer, cited “strong anecdotal evidence that the investments are dropping off.” He and Pamela Olson, Treasury’s top tax official, attributed the decline to disclosure requirements in earlier, temporary regulations, a partial amnesty and a crackdown on promoters of tax avoidance deals.

“There’s less activity out there now than there has been in the past,” Olson said.

The amount of money lost by the federal government to abusive tax shelters each year has been estimated at $10 billion.

The final rules made minor changes to the temporary regulations, maintaining six categories of transactions that must be reported to the IRS. One of them is whenever confidentiality is a condition of the marketing of tax shelter strategies.

Tax shelters are specialized investment strategies or tax avoidance techniques that corporations and people use to lower taxes. Some are illegal; others stretch the boundaries of tax law.

Most tax shelters were devised by accounting firms such as PricewaterhouseCoopers and investment banks such as Merrill Lynch & Co. The deals often involved offshore schemes or dubious investments designed to generate artificial losses that could be deducted against legitimate income.

Williams said the IRS is conducting more than 20 audits of shelter promoters and has issued more than 200 summonses. He said the final regulations would cast a “wider net.”

Legislative proposals impose a $200,000 penalty when a company or an investor fails to inform either the IRS or the Treasury about a tax shelter that’s on the department’s list of shelters. Other penalties for use of a tax shelter can reach as high as 40% of tax illegally avoided.