Abusive Tax Shelters and Transactions
The Missouri Department of Revenue has entered into agreements with the Internal Revenue Service (IRS) and other state tax departments to fight against abusive tax shelter schemes. These agreements allow the Missouri Department of Revenue to work closely with the IRS and other states to share information and coordinate efforts to crack down on the use of abusive tax shelters. Some benefits of these agreements include:
- Avoiding duplicate audits of the same taxpayer.
- Maximizing federal and state resources by working together, including the development of legal arguments and strategies.
- Allowing consistent treatment of taxpayers' transactions.
- Sharing more information about tax schemes.
- Sharing leads, tax returns, and other audit information early in the audit cycle.
- Coordinating training, marketing efforts, and educational materials.
What is an abusive tax shelter? Abusive tax shelters are transactions promoted for the promise of tax benefits with no meaningful change in a taxpayer’s income or assets. These transactions typically have no economic purpose other than reducing taxes with predictable tax losses or tax consequences. Abusive tax schemes may involve the use of multiple layers of domestic and foreign pass-through entities such as Trusts, Partnerships, S-Corporations, and Limited Liability Companies.
Abusive tax schemes became increasingly popular in the 1990’s among individuals and businesses with one-time large capital gains for reasons such as:
- The penalties associated with participating in abusive tax schemes were too small to have a deterrent affect.
- Promoters increased the marketing of abusive tax schemes as legally defensible ways to minimize tax burdens.
- There was no efficient disclosure and reporting system for abusive tax schemes.
The IRS is taking steps to combat abusive tax shelters and transactions. One of these steps is to keep the public advised by publishing transactions and shelters that are determined to be abusive. The IRS has a list of certain tax avoidance transactions that are considered abusive. Taxpayers are required to disclose their participation in these “listed transactions.”
The IRS is also conducting promoter examinations to determine whether a promoter has complied with regulations requiring identification of potentially abusive tax avoidance transactions by registering such transactions and maintaining and providing investor lists to the IRS upon request. Promoters can be liable for penalties for failure to comply with the registration and list maintenance requirements.
The Missouri Department of Revenue is encouraging anyone involved with abusive tax shelters and transactions at any level to come forward as soon as possible and amend their past tax returns. Forms can be obtained here. Anyone with questions, or who wishes to report a suspected illegal tax shelter scheme, or come forward to correct a prior filing that involved an abusive tax shelter, can call the Missouri Department of Revenue at (573) 522-3620, e-mail at [email protected], or write the Missouri Department of Revenue, P.O. Box 3900, Jefferson City, MO 65105-3900.