Abusive Tax Avoidance Transactions
IRS Needs Better Data to Inform Decisions about Transactions
GAO-11-493, May 12, 2011
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Abusive tax avoidance transactions (ATAT) range from frivolous tax schemes to highly technical and abusive tax shelters marketed to taxpayers by promoters selling tax advice. ATATs threaten the U.S. tax system's integrity if honest taxpayers believe that others do not pay their fair share of taxes. GAO was asked to (1) describe what is known about trends in ATAT usage; (2) describe results of IRS's ATAT enforcement efforts; and (3) evaluate IRS's implementation of the ATAT provisions in the American Jobs Creation Act of 2004. Using criteria from the act, GAO analyzed statistics and other documents on trends and results and interviewed IRS and other tax experts.
While trend data on taxpayers' use of ATATs are limited, IRS and other experts GAO contacted agreed that a problem exists and is continually changing. One theme that emerged from GAO's discussions with these experts is that ATATs marketed by promoters to corporations and wealthy individuals have declined in recent years, although the experts had different views on the extent of the decline. They also said that ATATs have become more international in nature. Even though estimating the extent of the ATAT problem is inexact because ATATs are often hidden, the experts believed that the changing nature of ATATs warrants continuous IRS vigilance. IRS has many ATAT-related enforcement efforts--investigations, examinations, and settlement initiatives--across different divisions but has incomplete data on the results on those efforts. For example, IRS's small business division's promoter investigations help stop promotions, but IRS had incomplete information on why investigations often closed without penalties or injunctions, information that could be used to help decide the types of investigations to start. In addition, IRS recommended billions of dollars in additional taxes from examining tax returns with suspected ATATs, but IRS did not identify the part of the additional amount that was collected or that related to the ATAT issue as opposed to other issues. In addition, some ATAT results were reported inconsistently across IRS divisions. Without comprehensive or consistent information, IRS does not have the best information to decide which promoters to investigate and the number of examinations that should be done as well as to evaluate their impacts. Even though the 2004 act increased the requirements for taxpayers and promoters to disclose their use of transactions and enhanced the penalties for improper disclosure, problems existed. IRS received many disclosures of transaction use from taxpayers, but it had no assurance that its Office of Tax Shelter Analysis received all the disclosures it should have. In addition, IRS did not verify that all the disclosures it received were complete, and a new process for reviewing the completeness of disclosures and following up with taxpayers was not yet finalized. Not receiving disclosures or receiving incomplete disclosures of transactions would keep IRS from having information needed to identify the transactions that merit an examination of their appropriateness and to assess related penalties as needed. Finally, certain promoters who are required by law under threat of penalty to give their list of investors within 20 business days after IRS requested it did so. However, other promoters who are not covered by this requirement often took longer than 20 days to provide the lists without the threat of a similar penalty. IRS did not comprehensively track how quickly the lists were received. Not receiving lists on a timely basis prevents IRS from quickly working to stop promoter activity. GAO suggests that Congress consider instituting a penalty aimed at certain promoters not giving investor lists to IRS within a specified time. GAO also recommends IRS act or establish processes to (1) improve data on the results of ATAT-related investigations and examinations, (2) ensure that required disclosures are filed by taxpayers, (3) review disclosures for completeness; (4) track the time for IRS to receive investor lists; and (5) induce more promoters to provide investor lists by a specified time. In commenting on a draft of this report, IRS agreed with most recommendations but cited resource and capability constraints in tracking ATAT data and investor lists, which GAO believes can be addressed.
Status Legend:
Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
- In Process
- Open
- Closed - implemented
- Closed - not implemented
Recommendations for Executive Action
Recommendation: To monitor the timeliness of investor list receipts, the Commissioner of Internal Revenue should comprehensively track the elapsed days it takes for material advisors and non-material advisors to provide the lists to IRS.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To correct problems with its review of the completeness of disclosure forms, the Commissioner of Internal Revenue should ensure that OTSA establishes a new process to review completeness and monitor its success.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To ensure material advisor disclosure forms are filed, the Commissioner of Internal Revenue should investigate why partnerships and S corporations often did not file a form with OTSA even though they reported on their tax returns that they filed the form with IRS or had a requirement to file.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To improve IRS's next study of whether Form 8886 should be filed electronically, the Commissioner of Internal Revenue should identify how often filers already use computers to prepare these forms.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To ensure that Forms 8886 filed with tax returns are also filed with OTSA, after establishing a new indicator for paper and electronic tax returns, the Commissioner of Internal Revenue should establish a process to periodically check whether the filers met their filing obligations with Office of Tax Shelter Analysis (OTSA).
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To improve reporting on the results of examinations on ATAT issues, the Commissioner of Internal Revenue should establish a process to review the accuracy of examination data prior to its inclusion in future reports to the Joint Committee on Taxation.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To improve reporting on the results of examinations on ATAT issues, the Commissioner of Internal Revenue should separately track the tax amounts recommended, assessed, and collected between ATAT issues and non-ATAT issues.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To improve reporting on the results of examinations on ATAT issues, the Commissioner of Internal Revenue should require all divisions to supply similar, consistent results from existing data systems.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To focus resources on promoter investigations most likely to stop abuse, the Commissioner of Internal Revenue should establish a process to ensure that field office staff consistently apply the recently created reason codes for closing investigations without penalties or injunctions, and document how the results are analyzed and used in decisions on investigations to start.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendation: To induce non-material advisors to provide investor lists to IRS within a specified time, the Commissioner of Internal Revenue should take steps such as requiring IRS staff to bring a summons for an investor list to the first interview with a suspected non-material advisor, and reevaluating the idea of lowering material advisor dollar thresholds.
Agency Affected: Department of the Treasury: Internal Revenue Service
Status: Open
Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.
Recommendations for Congressional Consideration
Recommendation: Congress may wish to consider instituting a penalty on non-material advisor promoters for failing to provide investor lists to IRS within a specified time period when requested, comparable to the 20-business-day requirement for material advisors.
Agency Affected: Congress
Status: Open
Comments: When we determine what steps the Congress has taken, we will provide updated information.