TAX ME IF YOU CAN
homesheltersuncovering schemesprospects for reform

will the shelter problem return?
Some people argue that in the aftermath of Enron and other corporate scandals, companies will be less likely to use devices such as tax shelters to pump up their bottom line. Others maintain that the current lull in shelter activity is due to the current economic downturn and that the widespread use of tax shelters will flourish when the economy rebounds. Here are the views of former and current IRS officials Charles Rossotti, Larry Langdon and Mark Everson, Senators Charles Grassley (R-Iowa) and Carl Levin (D-Mich.), and former Assistant Treasury Secretary Pamela Olson.

Charles Rossotti
IRS commissioner (1997-2002)

photo of rossotti
read the full interview

What is your realistic assessment of where we are now in the problem of tax shelters?

I think we've slowed it down and we've stopped some people, but the fundamental drivers of this are still there. I mean, it's still a very profitable business for the promoters. There's still a tremendous amount of tax that can be saved. The law is still way too weak and too murky and the IRS still -- well, the IRS is doing a much better job. It's better organized and more effective. It still has limited resources.

So I think this thing is going to rebound, especially as the economy improves. It may change its form somewhat. People will have to maybe work a little harder to come up with these shelters, but it will come back. It's not gone now. It's just slowed down. I think it will come back in a serious way as the economy improves, unless some of the steps that need to be taken are taken. That means basically the Congress [is] passing the right kind of law to really deal with this, and secondly, the IRS having enough resources to cope with it.

You put a lot of the responsibility on Congress to take action. You're saying unless Congress acts to outlaw tax shelters and unless they give the IRS enough resources, we're in for more what we saw in the 1990s.

I think that's true; I don't know why it wouldn't be. Basically, it's a tremendously profitable business for the promoters. There are billions of taxes that you can save, and there's very little risk in terms of penalties right now for anybody. It's a fact. There's some risk, because people don't like to have to pay back taxes. There's always some risk in penalties. But it's just the equation is not in the right balance right now. …

Pamela Olson
Treasury assistant secretary for tax policy (2002-2004)

I think there has been a definite change in behavior. Whether it is a complete change and whether it's a change that will endure I don't know yet. I think what the IRS clearly has to do is to remain vigilant in this area. Because I think that if they let down their guard there is at least the risk that we will see a return to this kind of activity.

But I think that the firms are sufficiently concerned about the reputational damage of being in this tax shelter business. There is much less of an impetus for them to do it on a going forward basis.

Some people have said that the heads are down now because of the Enron effect. Enron gave part of corporate America a bad name and certainly part of the accounting industry a bad name. There are other people who will say, "Well, that may be so, but that'll be temporary [because] we've had a downturn in the economy." When the economy comes back, when people start making big money again they will be looking for ways to shelter their gains and the industry will come back to shelters again.

That's definitely a concern that we have and that's why I think that we have to look at whether or not we need to do something. I've described it as putting a speed limit up. Right now we don't have a speed limit in the tax law that clearly tells people that you cannot drive this fast. And I think we need to look at whether or not we need a speed limit in the tax law that will prevent the reemergence of these kinds of transactions.

And what do you mean by a speed limit?

We have, for example, looked at whether there is a way to create the same kind of a limitation on losses that was enacted in the mid-'80s to deal with the shelters from the late '70s and early '80s. Something that would deny losses in particular situations. We know from what we've seen of the shelters, there are particular kinds of things that the promoters have put together to create artificial losses. They shift income or they shift basis or they strip income. And if there are a way for us to generically describe those kinds of transactions and then to deny the losses associated with those kinds of transactions, that I think would constitute a real speed limit that people would clearly understand and we might be able to prevent the activities from re-emerging.

Charles Grassley
Senator, (R-Iowa)

Do we face another surge of tax shelters as soon as the economy goes back to booming again?

All of the evidence we have from the hearings before my committee indicates that it's just as big of a problem now as it's ever been. The point being that you would think that with the exposures from Enron and WorldCom and all those other companies that have done such illegal, unethical things, that it would slow down the tax shelter business to some extent. Every indication we've had through our hearings is that it hasn't slowed it down whatsoever.

Why not?

Big money. This industry of writing tax shelters produces big money, much bigger money than these accounting firms get from the usual auditing. That's why it's going to be very difficult to slow them down.

larry langdon
IRS commissioner, Large and Midsize Business Division (1999-2003); former tax director of Hewlett-Packard

photo of langdon
read the full interview

Do you think the problem of big corporate tax shelters and these highly promoted tax shelters for high-net-worth individuals has been licked?

I think, in large measure, it has been licked for listed corporations because of Sarbanes-Oxley. I think we still have a major challenge with wealthy individuals, small companies and private companies, because the lack of disclosure in those arenas still allows all the things we talked about with regard to promoters selling things to people and getting away with it.

Some people say that the apparent decline in corporate activity in tax shelters is really more the result of an economic lull. Companies aren't making so much money, so they don't have so much profit to shelter, and that's misleading. People say there's a decline in corporate shelter activity because of a lull, and [they assume when] the economy recovers, you're going to see a new wave of corporate shelter activity.

I don't think that, when prosperity returns to the U.S., that we're going to have the same shelter phenomenon that we dealt with in the 1990s. What I would be concerned about is a more sophisticated version of tax planning that [escapes] IRS detection. That's I would be concerned about.

Even more sophisticated than we've had?

Yes.

Why?

Because that's the nature of the tax code, which is complexity. So it's very, very important that the IRS be eternally vigilant to watch what is happening out in the promoter world, the practitioner world and the corporate world.

mark everson
IRS Commissioner (2003-present)

read the full interview

Some people say, "Well, the IRS and the Treasury have been working on this problem for five or six years. It's essentially abated. You don't find many corporations that are interested in these shelters now. The post-Enron climate, the Sarbanes-Oxley bill -- various things have happened in Washington. They're really not floating around very much anymore." Do you agree with that or do you take a different position?

I think that the climate has changed and for the good. There's been a lot of follow-up. The president's Corporate Fraud Task Force has moved aggressively on corporate governance. Congress, as you say, has moved forward with Sarbanes-Oxley, and boards of directors and professionals are certainly much more reticent to enter into some of these transactions.

That having been said, there are two points to add, though. We think that some of this promotion has gone to smaller companies now -- mid-markets -- and still remains very active with individuals.

The other thing I would indicate is we won't really know for sure until you get to a return of some more robust economic conditions. A lot of this activity was associated with the very significant run-up in equity valuations and transactions that took place in the late 1990s. We're not there now. As everybody knows, business did suffer a downturn. We're coming out of that, but some may be tempted to reinvigorate these schemes if certain conditions return.

So beware? Keep your eye out for the next economic boom?

That's our job. We've got to be vigilant through all the circumstances of different business cycles.

carl levin
Senator (D-Mich.)

photo of levin
read the full interview

On the Treasury Department, the administration tells us that they think they're making good headway, that the problem's largely behind us, that they're going after the promoters, that they've got new regulations on disclosure; yes, they'd like to see some increased penalties, but they don't want to see any major change. You buy that?

No. That's obviously an opinion which anyone who defends the status quo is going to give -- that things have changed. I don't buy it at all. And, by the way, if they really have changed, the fact that we put in some really tough penalties will not have anything other than a deterrent effect. They should support the penalties, it seems to me, [rather than] saying, "No one's violating the law anymore, so there's no reason not to have much larger penalties."

Do you think the problem's licked?

No, not at all. This problem has been going on as long as taxes have been paid, and it's going to continue to go on, by the way. This requires endless oversight. There's always going to be people out there that are going to try to avoid paying their fair share of taxes, that'll look for schemes, that'll concoct schemes, that'll peddle schemes.

 

home + introduction + gimme shelter + uncovering schemes + prospects for reform
interviews + links & readings + tapes & transcripts
press reaction + producer's chat + credits + privacy policy
FRONTLINE + wgbh + pbsi

posted february 19, 2004

FRONTLINE is a registered trademark of wgbh educational foundation.
web site copyright 1995-2014 WGBH educational foundation

 

SUPPORT PROVIDED BY

NEXT ON FRONTLINE

Prison StateApril 29th

FRONTLINE on

ShopPBS