Office of Promoter Investigations: IRS to Curtail Abusive Transactions

Office of Promoter Investigations

Office of Promoter Investigations is Newest IRS Weapon

IRS Office of Promoter Investigations to Curtail Abusive Transactions: In recent years, the Internal Revenue Service has significantly increased scrutiny of matters involving promoters. The idea of the promoter, is that the promoter goes on the hunt to try to find US Persons who may invest in tax schemes which may not be considered legal or proper by the IRS. Sometimes these will involve Form 8886 Reportable Transactions — but sometimes these transactions are not listed as reportable yet, because they have not fully shown up on the IRS radar. Let’s take a brief look at the Office of Promoter Investigations.

Office of Promoter Investigations

As provided by the IRS:

• • • WASHINGTON — As part of the continued focus on compliance issues, the Internal Revenue Service announced today the establishment of the IRS Office of Promoter Investigations. The new office will further expand on the efforts of the Promoter Investigations Coordinator that began last summer.

    • “By establishing the Office of Promoter Investigations, we are continuing our increased focus on promoters of abusive tax avoidance transactions, which we have demonstrated over the last year,” said IRS Commissioner Chuck Rettig. “This office will coordinate efforts across multiple business divisions to address abusive syndicated conservation easements and abusive micro-captive insurance arrangements, as well as other transactions.”

Indian Tribes Exploitation on the Rise

In particular, there has been a significant uptick of abusive schemes involving promoters and Indian Tribes. the reason behind this increase, is that there is a certain level of sovereign immunity that tribal governments enjoy — and promoters and other US Taxpayers may try to take advantage of this — one example was the billion dollar loan scam recently documented on American Greed.

As  provided by the IRS:

• • • Indian tribes represent one of the fastest growing segments of our nation’s economy, with an annual increase in employment of over 20% in recent years. They also have very unique issues arising from treaties, and inherent sovereign rights applicable only to tribes. The growth in tribal economies, the fact that tribes are not subject to federal income tax, and the self-governance rights of tribes, has made them an area where unscrupulous individuals can gain a foothold for illegal and/or unethical activities that include tax schemes.

    • Many schemes occur without the direct knowledge of the tribe, and/or without an understanding of the consequences by the tribe. They are a major concern for both the Service and Tribal governments who are struggling to protect their sovereignty and fledging enterprises, and maintain the support of Congress and the general public. These concerns are magnified by increasing attempts by promoters to use the tax and legal status of tribes to shelter transactions from taxation and oversight.

    • Many of the identified schemes cross jurisdictional boundaries and involve issues regulated by multiple entities – states, federal agencies, and even other IRS operating divisions. They require a coordinated approach that promotes consistency and communication. These emerging issues create a need on the part of the office of Indian Tribal Governments (ITG) to address these issues, but we rely heavily on assistance from tribes and the public in helping to identify them.

    • Information about potentially abusive schemes or abuses involving Indian Tribal Government entities can be directly forwarded to the office of Indian Tribal Governments via e-mail.

    • Submissions to the above email or U.S. postal address do not qualify as Whistleblower Claims. To find out additional information on submitting a Whistleblower Claim, see the Whistleblower Office Home.

    • Do not use this email or postal address to report non-tribal individuals or companies you suspect or know isn’t complying with the tax laws or has failed to pay the tax that they owe, please refer to Reporting Suspected Tax Fraud for more information on reporting these individuals or companies.

IRM 4.32: Overview of Abusive Transactions (AT) Program

Internal Revenue Manual 4.32 provides an overview of the process:

1. 1. The IRS is committed to pursuing investigations of AT promoters to stop the widespread use of abusive promotions that erode the voluntary tax compliance system and result in substantial tax revenue loss. These investigations are designated as priority work. The IRS combats AT promotions by the following:

      • Seeking timely civil injunctions.

      • Asserting civil penalties against promoters and return preparers.

      • Providing published guidance on various promotions.

      • Conducting client examinations.

      • Criminally prosecuting promoters, preparers, or clients.

   2. The term “promoter” as used throughout this IRM chapter unless specifically noted, includes promoters, material advisors as defined under IRC 6111, and tax return preparers.

   3. The term “client” as used in this IRM chapter includes all persons who participated in a promotion, purchased a product or service from a promoter, had an interest in a promotion, or received any material aid, assistance, or advice with respect to the promotion. Client includes investors and advisees. Client also includes all persons who paid to have a tax return or tax form prepared or sought tax advice from any individual or firm offering such service or services.

IRM 4.32.2.3

Abusive Transactions Defined

1. 1. Abusive transactions include the organization or sale of any plan or arrangement promoting false or fraudulent tax statements or gross valuation misstatements, aiding or assisting in the preparation or presentation of a return or other document to obtain tax benefits not allowed by law, and actions to impede the proper administration of the Internal Revenue Code (IRC). This general definition includes both tax shelters as defined in various sections of the IRC and other types of abusive tax promotions.

   2. IRC 6662(d)(2)(C) broadly defines a “tax shelter” as a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, if a significant purpose of such partnership, entity, plan, or arrangement is the avoidance or evasion of federal income tax.

   3. AT promotions include, but are not limited to, programs that rely on the following:

      • False statements about the allowance of tax benefits to clients that are contrary to clearly established law.

      • Intentional manipulation or misapplication of IRC sections to improperly claim tax benefits.

      • Sham arrangements having no economic significance or business purpose other than the avoidance or evasion of tax.

      • Gross valuation misstatements that ascribe a value to an asset or service that is at least twice the correct value and result in a tax reduction.

      • Noncompliance with disclosure requirements of IRC 6111, Disclosure of Reportable Transactions.

      • Noncompliance by material advisors with the list maintenance requirements of IRC 6112, Material Advisors of Reportable Transactions Must Keep Lists of Advisees Etc.

      • Attempts to impede the proper administration of tax laws.

      • Gross overstatement of withholding or refundable credits to obtain false refunds.

   4. There are many tools available to the IRS to address the promotion of and the participation in an AT activity, including:

      • Seek injunctive relief under IRC 7402, Jurisdiction of District Courts; IRC 7407, Action to Enjoin Tax Return Preparers; and/or IRC 7408, Actions to Enjoin Specified Conduct Related to Tax Shelters and Reportable Transactions.

      • Assessment of civil penalties against promoters under IRC 6700, Promoting Abusive Tax Shelters, Etc.; IRC 6701, Penalties for Aiding and Abetting Understatement of Tax Liability;IRC 6707, Failure to Furnish Information Regarding Reportable Transactions; IRC 6708, Failure to Maintain Lists of Advisees with Respect to Reportable Transactions;IRC 6694, Understatement of Taxpayer’s Liability by Tax Return Preparer;IRC 6695, Other Assessable Penalties with Respect to the Preparation of Tax Returns for Other Persons.

      • Criminal prosecution of individuals who organize; promote; sell; or assist in the organization, promotion, or sale of an AT activity; and, potentially, clients in the activity.

      • Examinations of individuals involved in promotions (i.e., promoters, preparers, clients, etc.).

      • Assessment of civil penalties against clients including IRC 6707A, Penalty for Failure to Include Reportable Transaction Information With Return, and IRC 6662A, Imposition of Accuracy-Related Penalty on Understatements with Respect to Reportable Transactions.

      • Office of Professional Responsibility sanctions for those clients, promoters, or preparers who are practitioners defined in § 10.3 of Circular 230, Regulations Governing Practice Before the Internal Revenue Service, or otherwise subject to Circular 230.

      • Revocation of electronic filing privileges.

   5. Successful resolution of promoter investigations and client examinations require the combined actions of Collection, Counsel, Criminal Investigation (CI), LB&I, SB/SE, TE/GE, W&I, and the Tax Division of the Department of Justice (DOJ). See IRM 4.32.3, Coordination and Roles of Cross Functional Units, for additional information.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure. 

Contact our firm today for assistance.