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chronology
A historical overview of the U.S. government's attempts to crack down on abusive tax shelters

1984

Congress enacts comprehensive tax shelter reform

Congress passes the Deficit Reduction Act of 1984, which requires tax shelter promoters to register with the IRS before offering their products to the public. The promoters must maintain a list of all investors in each shelter and make the list available to IRS within 10 days. Shelters are defined as investments that deliver at least $2 in tax savings for each $1 invested in the shelter.

1986

Tax Reform Act of 1986 passed

Included in the Tax Reform Act is a proposal that targets individuals who are taking advantage of abusive tax shelters. The IRS later suspects the 1986 law caused a flow of tax shelter promoters and practitioners -- armed with a glut of specialist knowledge -- to target their activities toward corporations.

1991

A change in accounting rules helps tax shelter promoters

Accountants are now allowed to charge performance-based fees, like investment bankers, as opposed to an hourly rate. This rule change is suspected of having spurred accountants to develop tax shelter products that could be marketed to multiple clients.

1997

Congress redefines shelters

In an amendment to the Deficit Reduction Act of 1984, Congress redefines shelters as transactions where a "significant purpose" is to avoid or evade taxes, where arrangements are offered to potential participants confidentially, and where aggregate promoter fees exceed $100,000. The act requires tax shelter promoters to register their products with the IRS before they are used.

April 29, 1998

OECD releases report on tax havens

The Organization for Economic Co-operation and Development (OECD) releases its report, "Harmful Tax Competition: An Emerging Global Issue," which cites key factors in identifying tax havens, including: no or nominal taxation, a lack of effective exchange of information, an absence of any substantial activities, and a lack of transparency in legislative, legal, or administrative operations. The report grows out of a May 1996 request from OECD ministers in which they called upon the organization to "develop measures to counter the distorting effects of harmful tax competition on investment and financing decision and the consequences for national tax bases."

Summer 1998

Congress cuts IRS budget after hearings

After hearings in which the Senate Finance Committee questions the management and operations of the IRS and investigates the agency's handling of taxpayers, President Bill Clinton signs into law the Internal Revenue Service Restructuring and Reform Act of 1998, which creates a largely private-sector oversight board for the IRS, severely limits the powers of its examination and collection division, and cuts the IRS budget just as the tax shelter epidemic is taking off.

Oct. 13, 1998

Court questions transactions without economic substance

The 3rd Circuit Court of Appeals rules in AMC Partnership, Southampton-Hamilton Company, Tax Matters Partner, v. Commissioner that "Tax rules ... which do not correspond to any actual economic losses, do not constitute the type of 'bona fide' losses that are deductible under the Internal Revenue Code and regulations."

February 1999

Clinton budget proposal includes provisions targeting corporate tax shelters

The New York Times reports on Feb. 3, 1999, that Clinton's federal budget proposal limits the benefits of corporate tax shelter transactions by imposing taxes on some exporters, limiting the creation of company subsidiaries, barring the deduction of damages paid in civil lawsuits, and changing certain outdated rules on life insurance companies that led to large tax increases.

In July 1999, the Treasury Department issues a white paper, The Problem of Corporate Tax Shelters: Discussion, Analysis and Legislative Proposals, that works to refine the Clinton proposals.

March 22, 1999

Deputy Treasury Secretary Lawrence Summers speaks out against tax shelters

In a speech at the Tax Executives Institute, Summers voices his concern about the growing problem of tax shelters and suggests an excise tax be levied against promoters and lawyers involved. Summers announces the administration's desire to foster a "culture of compliance" between taxpayers and the IRS.

Dec. 27, 1999

Treasury Notice 99-59 warns of tax loss schemes

The IRS and Treasury Department release a notice entitled Tax Avoidance Using Distributions of Encumbered Property that details how corporations engage in transactions with foreign entities solely to facilitate tax deductions. Notice 99-59 states that taxpayers and their representatives should know that "the purported losses arising from such transactions are not properly allowable for federal income tax purposes."

February 2000

Summers unveils strategy to discourage corporate tax shelters

Summers, now the treasury secretary, unveils a strategy to curb abusive tax sheltering that the Treasury estimates may increase annual tax revenue by $10 billion. The joint Treasury Department/IRS campaign establishes the Office of Tax Shelter Analysis (OTSA) within the IRS Large and Mid-size Business (LMSB) Division headed by former Hewlitt-Parckard executive Larry Langdon. The OTSA is designed to serve as a clearinghouse for all information related to tax shelters.

March 6, 2000

Large insurance companies propose legislation to close Bermuda loophole

Prompted by six small U.S. insurance companies moving their headquarters to Bermuda, purportedly to dodge U.S. taxes, four larger companies -- Chubb, Hartford, Kemper, and Liberty Mutual -- ask Congress to close this tax loophole. The problem is brought to public attention in a New York Times article by David Cay Johnston, who wins the Pulitzer Prize for his work.

March 9, 2000

Senate Finance Committee holds hearings on abusive tax shelters

The Senate Finance Committee begins hearings on abusive corporate tax shelters. Lindy Paul, chief of staff for the Joint Committee on Taxation, testifies that her committee "believes that direct measurement of corporate tax shelter activity through macroeconomic data is not possible. Instead, a more instructive approach may be to analyze specific tax shelter transactions that have come to light and evaluate their effect on corporate receipts." Ken Kies of PricewaterhouseCoopers LLC again speaks out against blanket legislation limiting tax shelters, arguing that new legislation will not "curtail perceived abuses" and instead will create "an unacceptably high level of uncertainty and burdens for corporate tax officials."

June 26, 2000

OECD publishes list of foreign tax havens

A report by the OECD identifies 35 offshore financial centers as meeting its criteria for being tax havens. Six jurisdictions -- Bermuda, Cyprus, Malta, the Cayman Islands, Mauritius, and San Marino -- are removed from the list after pledging to meet the OECD's requirements for change.

On April 18, 2002, the OECD issues a revised list of six uncooperative tax havens -- Andorra, Lichtenstein, Liberia, Monaco, Marshall Islands, Nauru, and Vanuatu -- noting that 31 jurisdictions from its June 2000 list had chosen to adhere to the OECD's principles of transparency and effective exchange of information.

October 2000

ITEP study finds largest corporations paying low tax rate

The Institute on Taxation and Economic Policy (ITEP) publishes the results of its survey of the tax rates of 250 of the largest taxpayers in the country between 1996 and 1998, and reports they paid only 20.1 percent of their profits in taxes in 1998 -- far less than the 35 percent corporate tax rate. Bob McIntyre, a principal author of the new study, says 41 of these companies in the top bracket actually received $3.2 billion in tax rebates during this time. The study, however, does not say how much of the reduction in tax rates was due to illegitimate sheltering activity.

July 26, 2001

Treasury Department issues basis-shifting notice

Basis is a purchase price used to determine capital gains and losses for tax purposes. The Treasury Department issues Tax Notice 2001-45 establishing "basis shifting tax shelters," or shelters used to inflate purchase price to create an artificial loss for the taxpayer, as a listed transaction. This ruling covers such shelters as FLIP (Foreign Leveraged Investment Program) and OPIS (Offshore Portfolio Investment Strategy), two tax sheltering products issued by KPMG.

August 2001

Shelter participants offered settlement

IRS and Treasury offers a settlement program to participants in a shelter known as COLI (Corporate Owned Life Insurance) tax shelters purchased after June 20, 1986. COLI participants can settle if they give up 80 percent of the interest deductions claimed while using COLI plans. COLI participants not yet identified by the IRS will have 45 days to enter into this settlement; those who do not come forward are subject to prosecution by the Department of Justice and IRS.

Dec. 21, 2001

IRS and Treasury initiate blanket tax shelter disclosure program

The IRS announces an amnesty program to allow businesses that admit to and explain their tax-avoidance strategies to the U.S. government by April 23, 2002 to avoid a 20 percent penalty on the tax they underpaid. This amnesty leads to 621 disclosures covering 947 tax returns and $16 billion in lost revenue.

March 2002

IRS says American taxpayers using credit cards, foreign jurisdictions to evade taxes

The IRS reports widespread tax evasions by Americans, who secretly deposit money in tax havens such as the Cayman Islands and withdraw the funds using credit cards. The IRS estimates 1 to 2 million Americans may be using such accounts, although critics challenge the number as being too high.

On Jan. 12, 2003, the IRS offers a three-month amnesty to people who admit to using the offshore credit cards if those cardholders provide information about promoters who help set up the accounts. The IRS reports in February 2004 that almost 1,300 taxpayers come forward and that it recovers $170 million in lost tax revenue.

June 17, 2002

New IRS effort to uncover tax shelter schemes

The new policy, which primarily affects returns filed on or after July 1, 2002, allows the IRS to demand that companies and accountants turn over sensitive work papers that can serve as a guide to all the questionable tax strategies a company has employed. Whether or not the IRS makes this request is primarily contingent on whether the abusive transaction was initially disclosed by the taxpayer. "The policy change gets us quickly to the heart of the problem," IRS Chief Counsel B. John Williams says. "We don't have to spend months screwing around with rabbit trails."

Summer 2002

IRS pursues "summons" strategy

The IRS begins to issue summonses to shelter promoters to turn over documentation about their tax shelter products. In July, PricewaterhouseCoopers agrees to provide information and pay a substantial undisclosed payment to the IRS, although the firm does not admit wrongdoing or legal liability.

On July 2, 2003, Ernst & Young also complies with the IRS summons and pays a $15 million fine to the IRS for failure to properly register tax shelters or properly maintain lists of customers.

On July 8, the Justice Department, on behalf of the IRS, files a lawsuit against KPMG for failing to register several shelter types with the IRS. KPMG argues that the information is protected by accountant-client and attorney-client privilege. The case is still pending in federal court. In December 2003, the Justice Department says KPMG's actions "demonstrate a concerted pattern of obstruction and non-compliance, threatening the integrity of the IRS examination process."

July 11, 2002

Report identifies group of wealthy Americans using abusive tax shelter schemes

Within its lawsuit against KPMG, the IRS inadvertently publishes the names of California gubernatorial candidate Bill Simon, his late father and former Treasury Secretary William E. Simon, racecar driver Dale Earnhardt, and many other wealthy Americans as participants in KPMG shelter that uses a Cayman Islands bank to save themselves millions of dollars in taxes.

July 26, 2002

Companies using offshore tax schemes barred from doing business with U.S. government

House Democrats win a 318-110 vote on an amendment to the Homeland Security legislation that bars 10 companies that have relocated their headquarters offshore for tax reasons from doing business with the new agency. Four days later, the U.S. Senate approves a military spending bill by a 95-3 vote, which includes a similar provision.

Sept. 25, 2002

Commissioner Rossotti says IRS is losing the war on tax evasion due to limited resources

Commissioner Rossotti reports discouraging results of the IRS Oversight Board in terms of poor compliance rates with the IRS disclosure policy. Rossotti says illegal tax shelters are getting "much more difficult and time consuming for our agents to uncover. Meanwhile, the size of the IRS declined, not just relatively but in absolute terms, because of budget constraints."

Fall 2002

Treasury announces amendments, regulations on several tax shelter fronts

On Oct. 16 and 17, respectively, the Treasury announces the amendment of Treasury and IRS regulations that creates six new definitions of abusive tax shelters and issues Treasury regulations regarding basis-shifting activities.

On Oct. 17, Pamela Olson, assistant treasury secretary for tax policy, alerts the Senate Appropriations Subcommittee on Treasury and General Government to corporate inversion transactions, which involve multinational U.S. corporations switching their headquarters to low- or no-tax countries. On Nov. 12, the Treasury issues disclosure regulations on inversion transaction reporting.

On Dec. 30, the IRS and Treasury Dept. propose regulations that prohibit taxpayers from using the advice of a tax practitioner as a defense for not disclosing potentially abusive transactions to the IRS.

Jan. 1, 2003

IRS authorizes accelerated audit program

The IRS authorizes auditors to drop some traditional components of business audits and focus instead on big-ticket items such as tax shelters. IRS Commissioner Mark W. Everson declares that corporate audits, which at that time take an average of 38 months, should be completed in less than half that time. The IRS implemented this program, the Limited Issue Focused Examination (LIFE), in its Large and Mid-Size Business (LMSB) Division on Feb. 7, 2004.

Feb. 3, 2003

Bush administration proposal to collect back taxes

The administration asks for an additional $133 million to pay for private collection agents to collect back taxes which allows the IRS to heighten its focus on businesses that may be using offshore accounts and other methods to avoid taxes. The IRS and the administration project using the private collectors will help raise $1.5 billion over the next 10 years.

Feb. 11, 2003

New senior executive position within IRS

The IRS creates a new job in the Office of Chief Counsel to focus solely on potentially abusive tax shelter transactions. Washington attorney Nicholas J. DeNovio fills this position.

May 28, 2003

Bush tax cut signed into law

President Bush signs into law a $350 billion tax plan. The Washington Post reports on May 30 that the White House and Congressional Republicans are facing criticism over a failure to include proposals aimed at cracking down on tax shelters, accounting scams, and the Bermuda loophole in the tax cut.

June 23, 2003

Treasury issues new regulation to eliminate tax shelter

The Treasury says new IRS rules make clear that the Son of BOSS tax scheme can't be used to create accounting losses for tax purposes. A variation of a similar tax sheltering scheme called BOSS, the Son of BOSS is a complex transaction with several variations, one of which is marked by a taxpayer purchasing and writing economically offsetting options, creating a positive "basis" that is then transferred to a partnership. The investor then claims a tax loss on that transaction when the partnership is sold or liquidated.

August 2003

IRS loses files of tax evaders

According to a report by the Treasury inspector general, the IRS has identified nearly 1,841 businesses that are not withholding taxes or are filing frivolous returns, but only 233 of those businesses have been filed in an IRS database of offenders.

Oct. 20, 2003

Treasury releases a fact sheet on tax shelters

The paper highlights the problems, complexities and abuses of tax shelters. The Senate Finance Committee follows this action with a hearing entitled "Tax Shelters: Who's Buying, Who's Selling and What's the Government Doing About It?". IRS Commissioner Mark Everson testifies that the IRS is committed to curbing illegal activity while offering improved service to customers and protecting taxpayer rights.

Nov. 20, 2003

Senate Subcommittee on Investigations holds tax shelter hearing

The Senate Permanent Subcommittee on Investigations holds a two-day hearing on the role of accountants, lawyers and financial professionals in tax shelters. The hearing features a report by the subcommittee's minority staff that features case studies on four KPMG tax shelters -- FLIP, OPIS, BLIPS, and SC2.

Dec. 29, 2003

IRS restricts use of opinion letters

New regulations strip away the "opinion letter" defense that protects taxpayers from IRS penalties if they are using an illegal tax shelter. Opinion letters are recommendations from professional advisers as to the merits of the transaction.

Jan. 7, 2004

IRS commissioner announces plans to reshuffle workforce

The IRS announces plans to add 2,200 employees to beef up tax enforcement divisions -- including criminal investigators, revenue agents and revenue officers -- by 2005.

February 2004

Bush 2005 budget proposal allocates funding to curb abusive tax shelters

Under the Bush FY 2005 budget proposal, the Treasury Department will receive an increase of $300 million to fund investigations and seek criminal prosecution of tax fraud. The funding will support IRS efforts to expand enforcement resources to target promoters and users of abusive tax shelter products.

 

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posted february 19, 2004

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