New Tax Rules Give IRS Weapons Against Cheats

Tax cheats beware:  The IRS announced in October that tax rules had been expanded to widen the net in the government’s effort to catch tax evaders.

By David Semanchik, Esq.

The Internal Revenue Service is getting serious.  Really, really serious.

In October, the IRS announced major changes to tax rules that expand the net in the government’s effort to catch tax evaders.  Rules that previously required corporations to give tax disclosures now require individuals, trusts and subchapter S corporations, which have 35 of fewer shareholders, to file the same disclosures.

They will be required to report financial details of excessive losses and tax credits, as well as a breakdown of the profits or losses the companies declare.

“The net is wider,” Pam Olson, Treasury Assistant Secretary for Tax Policy, told Newsday.

The expansion of the tax rules is part of the government’s continuing effort to crackdown on tax shelters.  IRS Commissioner Charles Rossotti believes Americans hold as many as 2 million offshore bank accounts, but only 170,000 reported having such accounts.  The tax loss could be as much as $70 billion each year, according to Rossotti.

The IRS will also use recently acquired credit card records and a new statistical formula to identify Americans who may be using offshore accounts and trusts to hide money from the government.

The agency expects to nab a lot of Americans, which is why Uncle Sam has given some taxpayers until Dec. 3 to come forward.

The proposed settlement requires taxpayers to pay a significant amount of the tax due, plus interest, in exchange for the opportunity to avoid expensive litigation.  Every settlement will vary depending on the case, with the merit of each individual and situation considered.

“This effort is a way to resolve cases without months or years of costly litigation while making it clear to taxpayers who may consider participating in the abusive tax shelters in the future that they will end up in a bad deal,” Rossotti said in a statement to the press.

The settlement is something of an ultimatum for Americans who participate in one of three types of tax shelters:

• Corporate-owned life insurance, or COLI, which companies use to take out life insurance on employees, deduct the interest and then keep death benefits tax-free.
• Section 302/318, known as basis shifting, in which a company with gains uses transactions with foreign banks to create a loss on paper.
• Section 351 contingent-liability shelters, which allows companies to deduct liabilities twice through stock exchanges.

Taxpayers caught participating in one of these tax shelters will have serious consequences to pay.

New laws and rules give IRS agent’s sharper teeth, and they’re not afraid to bite.

David Semanchik a member of the American Society of IRS Problem Solvers and a New Jersey Attorney.  You can contact him at 732 240 4055 to obtain a free subscription to his newsletter titled The IRS Times & Inquirer.