Entries Tagged 'Tax shelters' ↓

Tax Notes Today for 6/7/04, at 2004 TNT 109-2, contains a summary of remarks by IRS Commissioner Mark Everson on tax shelter enforcement. While there is a good deal of bravado in the comments, the reality is probably not far behind. The tax shelter business as currently operated is probably doomed. It is too easy for the IRS to find a promoter, then find the investors. The slow regulatory changes put in place by the IRS to combat tax shelters are working. Political pressure to beat up evil tax dodgers is relentless. And the IRS officials and attorneys show clear signs of Elliot Ness Syndrome.

Companies and individuals looking to reduce their taxes? Here’s my recommendation. Bespoke tax shelter might work: it’s tailored to your situation, and there is no trail for the IRS (from the promoter) to find you. Off-the-rack tax shelter will probably fail.

Here’s an excerpt from Tax Notes Today’s story:

IRS Commissioner Mark Everson on June 4 told the Virginia Conference on Federal Taxation that the IRS son-of-BOSS settlement initiative is just the first part of a planned effort to stem abusive tax shelters and increase the accountability of tax practitioners.

Everson said once the son-of-BOSS settlement offer ends June 21, the IRS expects to have enough data to help gather the roughly 5,000 participants involved in the high-profile shelter, which is projected to have generated about $ 6 billion in tax benefits. “Now that we’re getting the names of all these folks — and we will get them all — we’ll come after you,” he said. “We’re confident of our position here. We’ll devote the audit resources we need to follow up on these transactions if people don’t come in.”

Everson said taxpayers targeted as part of the post-settlement dragnet will face a 100 percent tax concession and interest fees and will be penalized up to 40 percent for not coming forward.

“We think this is a watershed moment . . . because the IRS has typically settled these things for less than 100 cents on the dollar and has often traded away the penalties. And we’re not going to do that anymore,” Everson said. “We are taking, clearly, a tougher stance . . . because this problem has gotten out of line.”

Here’s a press release from the Franchise Tax Board. They’re putting their collective heads together with the tax authorities from other states, in an effort to close the door on income tax shelters.

There is an amnesty program that expires 15 April 2004.

The Franchise Tax Board has always been a bit more enthusiastic than other government outfits, in my experience. (Well, with the exception of the Employment Development Department–the State group that collects payroll taxes. They REALLY get a gold star for enthusiasm.) Go tell your neighbors to come clean on their tax shelter deals.

I worked on lots of exploded tax shelters left over from the 70s and 80s. The lingering financial pain — 10 and 15 years on — was terrible. I won’t go into war stories for reasons of confidentiality. But these tax shelter chickens were coming home to roost when some of my clients were retired and didn’t have the money to pay the tax.

Here’s a letter to the IRS from a life insurance agent. He’s alerting the IRS to a scheme I have come across many times. With all due respect to the author of the letter, it seems that the primary complaint is that an accounting firm is pimping the idea. (I have always come across this scheme straight from life insurance sales agents). Pot calls kettle black. Film at 11.

Nevertheless, the more important point to get out of this is to be generally wary of Really Clever Schemes. Take your sanity pills, folks. And take this guy’s advice. Look at who gets paid, and how much, when you’re on the receiving end of a sales pitch. That information alone will speak volumes.

Here’s the letter to Pamela Olson.

Ms. Pamela F. Olson
Assistant Secretary - Tax Policy
1500 Pennsylvania Avenue, Room 3120
Washington, D.C. 20220

Dear Ms. Olson,

I would like to take this opportunity to thank you for your interest in creating transparency and making certain that CPA firms are not in conflict of interest with their clients’ needs. I have been a life insurance agent for the past twenty years, and I have come across a egregious abuse of tax planning by a * * * accounting firm.

They are, in addition to preparing, auditing, and offering tax advice, actively selling life insurance in a plan (see enclosed) which has all the earmarks of a major conflict of interest and a scheme to pay very little tax on accumulated qualified accounts. Briefly, the client is advised to take their qualified money and create a “new” corporation (sometimes a sham) and then start a profit sharing plan, roll the qualified account into the profit sharing plan, and then purchase huge amounts of life insurance in this plan.

After two or three years, the client would purchase the life insurance back personally from the pension trust for the cash surrender value, which at that time is minimal. This will avoid most of the taxation on their qualified money. Then by creating a huge irrevocable life insurance trust outside their estate, they would avoid any estate taxes. Of course, the commissions being earned by this accounting firm are very large. And to this writer, seem to be a serious conflict of interest.

I hope you agree with my concerns, and take measures that will keep accounting firms focused on their role as tax preparers, advisors and auditors, and not adding the role as salesman.

I have not furnished the name of this firm. However, if you feel that it is necessary for me to provide additional information, please feel free to contact me at * * *.

Sincerely,

* * *

Attachment omitted

Here’s the pitch. You’re a business owner. You only need $200,000 per year to live on, but you make $1,000,000 per year in income.

Here’s what you do.

Step 1. Fire yourself from your business.

Step 2. Then go visit a tax shelter promoter, who will hire you through an offshore company and pay you $200,000 per year.

Step 3. But wait! Your business needs you to run it. Hmmm.

Step 4. So your business approaches the tax shelter promoter and says, “Will you let us use Jim Bob Joe’s services? We’ll pay you $1,000,000 per year!”

Step 5. It’s a deal.

So here’s what’s happened. Your U.S. business paid $1,000,000 to an offshore company in a zero tax country, and got a tax deduction for it. The offshore company paid you $200,000 of salary, on which you paid income tax.

Net result? $800,000 is offshore, tax-free. Naturally, that money is yours, not the tax shelter promoter’s. (Except for the handsome fee charged to you, of course).

The IRS says BS, and wins. Here’s the latest court ruling, below.

IMPLICATIONS OF THIS RULING:

1. There is more pain to come for the promoters of this venture. Financial pain, possibly time making new friends in the Federal prison system.

2. All of the taxpayers who bought this tax scheme are now known to the IRS, and will shortly have their own Day of Pain.

C’mon people. Don’t be gullible. Use that brain. If it’s too good to be true, it is.
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Today, the Franchise Tax Board began alerting taxpayers of the upcoming Voluntary Compliance Initiative. The Initiative allows tax shelter investors to amend their returns and eliminate abusive tax shelter items. Doing so will limit the risk of penalties. The penalties are substantial — 20% to 75% of the tax underpayment. Interest on the tax underpayment can be doubled. Amend your California returns between January 1, 2004 and April 15, 2004. Go to

Tax protesters are boringly redundant. And they always lose.

So it was fun to see a international tax variant of the tax protester theme in Tax Court. A recent unpublished opinion showed the creative lengths to which a citizen of India would go to avoid a trivial amount of U.S. income tax. She was living and working in the United States–a resident alien.

She claimed that it was unconstitutional for the U.S. to impose an income tax on her. Why? Because it would be “taxation without representation.” (She’d been hanging around the wrong websites, I guess.)

How exactly is it “taxation without representation?” Simple, she said. Look at Congress. There are no resident aliens who are members of Congress. Therefore there are none of her kind — resident aliens — representing her interests. Therefore she is being taxed but not represented in Congress.

The Tax Court judge was unfailingly polite. He noted that the Constitution requires a Member of Congress to be a citizen, and decided to uphold the Constitution.

The entire opinion follows in the extended entry.
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