4.32.1  Process Guide for Combating Abusive Tax Avoidance Transactions

Manual Transmittal

June 05, 2014

Note:All future releases of this IRM will be electronic only.

Purpose

(1) This transmits revised IRM 4.32.1, Abusive Transactions, Process Guide for Combating Abusive Tax Avoidance Transactions.

Scope

This section provides general procedures and guidance on the development and resolution of abusive tax transactions from a service-wide perspective.

Material Changes

(1) Minor editorial changes have been made to correctly reflect cross-BOD process and to update the work group location for SB/SE Emerging Issues from the Lead Development Center to Abusive Transactions Group 1 in IRM 4.32.1.2 (4) and IRM 4.32.1.3.1 (4).

Effect on Other Documents

IRM 4.32.1, dated 07-31-2012, is superseded.

Audience

This section provides guidance for Small Business and Self-Employed (SB/SE) Examination area office employees, Tax Exempt and Governmental Entities (TE/GE) employees, and Large Business and International (LB&I) employees.

Effective Date

(06-05-2014)


Nancy E. Hauth
Director, Abusive Transactions and Technical Issues SE:S:E:ATTI
Small Business/Self-Employed

4.32.1.1  (07-31-2012)
Introduction

  1. This IRM provides assistance to employees who are identifying and/or examining tax transactions and tax promotions that are either abusive or potentially abusive. It also serves to promote effective communication and coordination, consistent treatment, and efficient processing.

  2. The Service continues to identify new types of tax transactions or promotions that are either abusive or potentially abusive requiring different levels of coordination and varying strategies. This IRM outlines operating standards for both the highly complex and technical abusive transactions and those abusive transactions that are considered scams or promotions based on the erroneous application of tax law or clearly frivolous arguments.

  3. Before a recommendation for addressing abusive or potentially abusive tax transactions or promotions can be developed that is consistent with sound tax administration objectives, it is critical that the scope of the issue, transaction variations, potential case inventory, and the appropriate legal arguments are identified and explored. Because of their possible complexity and monetary significance, proper coordination of tax transactions or promotions that are either abusive or potentially abusive is vital to effective tax administration. Compliance personnel in one or more business operating divisions (BODs), Counsel, and other functions as appropriate, should be involved in coordinating efforts around each issue identified.

  4. There are a variety of abusive transactions and promotions ranging from the highly complex transactions to the basic scams or promotions, both of which can affect either a large number of taxpayers or only a few taxpayers. To fully understand a specific transaction or promotion and to develop an effective response, it is essential that service-wide communication and coordination be clear and consistent.

  5. The Service-wide Compliance Strategy (SCS) Executive Steering Committee (ESC) is charged, in part, with serving as the forum to develop a unified cross-divisional approach to compliance strategies needing collaboration, including:

    • Cross-divisional technical issues

    • Emerging issues

    • Service-wide operational procedures

    • Abusive tax avoidance transactions

  6. This committee is jointly chaired by the Director, Pre-filing and Technical Guidance, Large Business and International (LB&I) and the Director, Abusive Transactions and Technical Issues, Small Business/Self-Employed (SB/SE). The SCS ESC reports to the Enforcement Committee and provides briefings and updates to the Enforcement Committee as needed. The IRS created the Enforcement Committee to guide the development and implementation of service-wide enforcement strategies. The Enforcement Committee is chaired by the Deputy Commissioner of Services and Enforcement.

  7. Members of the SCS ESC will include:

    • Director, Pre-filing and Technical Guidance, LB&I Division

    • Director, Abusive Transactions and Technical Issues, SB/SE Division

    • Director, Employee Plans, Tax Exempt and Government Entities (TE/GE) Division

    • Representative from the Office of Chief Counsel

    Ad hoc and consulting members will be identified as needed to facilitate data gathering and analysis, address legal issues, and consult on use of enforcement tools and alternative treatments.

4.32.1.2  (06-05-2014)
Guiding Principles

  1. The guiding principles that should be followed throughout the process of identifying and developing issues related to abusive transactions and promotions are as follows:

    • Understand the transaction

    • Get the right people involved at the right time

    • Respect each function’s role in the administrative process

    • Develop a service-wide strategy to address the abusive transaction or promotion

  2. Understanding the transaction or promotion is critical to the development of a successful strategy for addressing all tax transactions or promotions that are either abusive or potentially abusive. Service-wide, the IRS should completely understand the transaction or promotion and its variations. It is vital that individual transactions be reviewed so that the legal positions can be properly assessed based on the facts of an actual case rather than relying solely on the facts provided as part of a legal opinion or a promoter offering. Each transaction or promotion must meet a minimum standard of factual development to ensure proper application of legal theories and to ensure design of appropriate case strategies.

  3. It is critical to get the participation of all relevant parties for both gathering information about an identified transaction or promotion and developing strategies for addressing the abusive transactions or promotion. Depending on the particular issue, these efforts may need to include representatives from various operating divisions, Criminal Investigation, and multiple components of Counsel and Treasury.

  4. If, in the case of a transaction or promotion affecting only one operating division, the operating division determines that a strategic division-wide compliance approach is required or if the SCS ESC determines that an issue warrants a strategic service-wide compliance approach, an IMT, or other form of cross-Business Operating Division (BOD) team will be formed to discuss and develop a division or service-wide strategy for addressing the issue. These teams should consider a wide range of available options for combating the abusive transaction or promotion including:

    • Published Guidance

    • Audit Techniques Guides

    • Audit Resource Guides

    • Litigation Designation

    • Fast Track Process

    • Specific Resolution Strategy including Collection Strategy

    • Legislative Resolution

    • Public or Private Settlement Offers

    • Education and Marketing

    • Delegation Order 4-25, Settlement Offers, Closing Agreements, and Settlement Agreements Under Section 6224(c) in Cases with Technical Advisor (TA) Program Issues, and Appeals Technical Guidance Program (Compliance Coordinated and Appeals Coordinated) Issues

    • Other options as determined by the IMT or cross-BOD team

4.32.1.3  (07-31-2012)
Emerging Issues

  1. This section details information relating to emerging issues.

4.32.1.3.1  (06-05-2014)
Initial Identification and Development

  1. Emerging issues (potentially abusive transactions) are generally identified, consolidated, and elevated as necessary within each IRS operating division (LB&I, SB/SE, and TE/GE). When an operating division determines that an emerging issue warrants review and consideration for treatment as a listed transaction or as a transaction of interest (TOI), the emerging issue is brought to the office of the Associate Chief Counsel (Passthroughs and Special Industries), Branch 3 (PSI Tax Shelter Branch).

  2. Information about emerging issues is received from various sources, including but not limited to:

    1. The LB&I Office of Tax Shelter Analysis (OTSA)—disclosures filed under Treas. Reg. 1.6011-4, material advisor disclosures filed under IRC 6011, and the tax shelter hotline.

    2. The SB/SE Lead Development Center (SB/SE LDC).

    3. Material advisor and promoter investigations with respect to penalties under IRC 6700, IRC 6701, IRC 6707, IRC 6708 and requests for investor information from material advisors under IRC 6112.

    4. Taxpayer/investor examinations.

    5. Field information from examiners (e.g., surveys).

    6. Research functions.

    7. Issue Management Teams.

    8. Confidential informants and whistle-blowers.

    9. Associate Chief Counsel and Division Counsel offices.

    10. Media (e.g., newspaper articles).

    11. Information from taxpayers, practitioners, and special interest groups.

    12. Department of Treasury, Office of Tax Policy (Treasury OTP).

    13. Other federal or governmental sources.

    14. Congress.

  3. Each operating division, working with its respective Division Counsel, will review information on potential emerging issues and decide whether to raise particular issues with the PSI Tax Shelter Branch. In deciding whether to raise a potential emerging issue with the PSI Tax Shelter Branch, consideration is given to the potential impact the issue may have from an Examination or Division Counsel perspective, such as the number of identified cases, the dollars at issue, the nature of the transaction, the nature and extent of the potential abuse, and the ease with which the transaction can be duplicated or marketed.

  4. Each operating division has an office or group identified for handling potential emerging issues within its jurisdiction and is the primary contact with the PSI Tax Shelter Branch on emerging issues. All field referrals should be routed to one of these primary contacts. These offices and groups are as follows:

    • TE/GE—Office of Senior Technical Advisor

    • SB/SE—Abusive Transactions Group 1 (ATTI)

    • LB&I—Office of Tax Shelter Analysis

  5. Representatives from TE/GE, SB/SE, and LB&I meet on a regular basis to discuss and share emerging issues that have been identified. This group, known as the Emerging Issue Compliance Subgroup and comprised of representatives from TE/GE's office of the Senior Technical Advisor, SB/SE's Abusive Transactions and Technical Issues and LB&I's office of Tax Shelter Analysis, can assist in identifying if the issue is present in divisions other than one to which it was initially raised. The group can also assist in considering the various aspects of the issue unique to each division. This helps to ensure that issues are coordinated even before any decision is made on whether to raise the issue to the PSI Tax Shelter Branch.

4.32.1.3.2  (07-31-2012)
Office of Chief Counsel Review of Emerging Issues

  1. Generally, when an operating division decides to elevate an emerging issue for Chief Counsel review, the emerging issue is referred to the operating divisions's respective Division Counsel on an ad hoc basis. At the request of an operating division or Division Counsel, a meeting may be held to discuss emerging issues that may be or have been referred to Counsel for review. The emerging issue meeting will include representatives from LB&I, TE/GE, SB/SE, and their respective Division Counsels.

  2. After receiving information on an emerging issue, the Division Counsel's office will review the information related to each issue or transaction and coordinate with the appropriate Associate Chief Counsel office(s) and the PSI Tax Shelter Branch to determine whether to recommend identifying the emerging issue as a listed transaction or as a transaction of interest (TOI). If appropriate, the Division Counsel will recommend to the SCS ESC that it form a task force to consider the legal and factual issues presented by the transaction and determine if the tax result claimed by the promoters or taxpayers is consistent with the applicable law and regulations. If formed, the task force will be a working group that examines the issues and develops the additional information necessary to determine whether the transaction should be identified as a listed transaction or a TOI. The task force will generally start as a small group and expand as necessary. Normally, the task force will include representative(s) from Associate Chief Counsel offices(s), Senior Program Analysts (SPAs), ATTI Program Manager(s) or other operating division personnel, and Division Counsel(s).

  3. An essential part of evaluating an emerging issue is to develop transactional information. Consequently, Division Counsel and Associate Chief Counsel may request additional information from those operating divisions with the ability to provide or obtain additional information about the transaction. Additional information from internal sources such as taxpayer or promoter examinations, Treas. Reg. 1.6011-4 disclosures, or material advisor disclosures under IRC 6111 may be requested. In certain cases, additional information from external sources such as taxpayers or promoters may be requested. In the case of a promoter not under examination, if a conclusion is made that a transaction is likely to be a reportable transaction under Treas. Reg. 1.6011-4, Counsel or the task force may request the appropriate operating division (by working through the division contact identified in IRM 4.32.1.3.1, Initial Identification and Development seek lists of investors required to be maintained on the transaction by material advisors under IRC 6112.

  4. After evaluating the emerging issue, Division Counsel's office will develop a course of action that represents the office of Chief Counsel's recommendation for the emerging issue. These recommendations may include, but are not limited to, one or more of the following options:

    1. Identifying the transaction as a listed transaction, issue a notice (or other guidance) alerting the public that the transaction is being scrutinized by the IRS.

    2. Issuing other guidance such as a revenue ruling that states the IRS's position on the issue.

    3. Recommending a change to a statute or regulation (if this option is selected, the appropriate Associate Chief Counsel office(s) will work directly with Treasury OTP concerning any changes recommended).

    4. Pursuing viable issues on a case specific basis because the issues are inherently factual.

    5. Identifying the transaction as a TOI under Treas. Reg. 1.6011-4(b)(6) if Chief Counsel believes that it does not have enough information regarding the transaction to determine that the transaction is abusive. Identifying a transaction as a TOI makes it a reportable transaction and allows the IRS both to put the public on notice that is aware of the transaction and to collect additional information about the transaction.

    6. Suggesting that the transaction should no longer be pursued.

  5. The Division Counsel (or delegate) will present the recommended course of action to the SCS ESC, and will identify the office in Chief Counsel that will be responsible for carrying out the recommendation if it involves published guidance. The Counsel office with subject matter jurisdiction will be the Chief Counsel office responsible for developing any guidance. If a decision is made to identify the transaction as a listed transaction or a TOI, this Associate Chief Counsel Office will coordinate with the PSI Tax Shelter Branch on issues related to the disclosure requirements.

  6. While Division Counsel is considering the legal strategy for an emerging issue and determining if the transaction should be listed or identified as a TOI, representatives from the affected operating divisions will continue to identify and work inventory and assess the extent of cross-divisional impact. Many abusive tax avoidance transactions or promotions involve a significant number of taxpayers under the jurisdiction of more than one operating division, thus necessitating ongoing coordination among the operating divisions to ensure consistency of taxpayer treatment. In some cases the emerging issue under consideration involves primarily taxpayers in only one operating division. Accordingly, that operating division will be responsible for coordination and most decision-making efforts. However, the decision making process should always include input from other operating divisions (as appropriate) and Counsel (division and associate offices, as appropriate). The operating division responsible for handling an issue may form an IMT (as described later in this IRM) to oversee the issue or use existing administrative processes.

  7. If the identified transaction is abusive and widespread, the issue should be referred to the SCS ESC to determine if a service-wide strategic response or a cross-divisional IMT is needed. See IRM 4.32.1.4, Issue Management Team (IMT), for further discussion of IMTs.

  8. If the SCS ESC decides that the issue does not warrant a service-wide strategic response at this time, the issue can be further developed and resubmitted to the SCS ESC, handled through the normal field processes, or handled with the assistance of a division IMT.

4.32.1.3.3  (07-31-2012)
Coordination of Listed Transactions

  1. As emerging issues in the tax shelter area are developed, they may result in a notice or other published guidance being issued officially identifying the transaction as a listed transaction. When this occurs, the listed transaction will be treated as a coordinated issue as of the date the listing notice is issued.

  2. A memorandum will be issued by the responsible Division Commissioner to affected operating units. The memorandum will contain the name of the Executive Issue Owner, the issue specialist to contact, a copy of the listing notice, and the related plain meaning statement.

  3. If the listed transaction surfaces during an examination, it must be raised as an issue following the guidance position. Examiners should contact the issue specialist and provide the name of the taxpayer, taxable period(s) involved, type of listed transaction, the name of the promoter, if known, the name and telephone number of the Group Manager and, if applicable, the name and telephone number of the Team Coordinator. The initial contact may be via e-mail (utilizing secure messaging), fax or telephone.

  4. Examiners should consult with the issue specialist and Counsel on the development of the issue. Examiners must secure the concurrence of the issue specialist if their examination deviates from any mandated specific examination techniques proposed for the issue development or their proposal for adjustment deviates from any stated legal position. Examiners must also consult with and secure the concurrence of the issue specialist and Counsel before proposing any resolution other than full concession of the issue by the taxpayer. No proposals can be made without the concurrence of the Executive Issue Owner.

  5. After the initial published guidance is released, the responsible Division and Chief Counsel staff will meet to discuss the need to further develop the issue. Discussion will include whether there is a need for Counsel to provide a thorough legal analysis of the issue or other guidance. If additional guidance is needed, an issue team should initiate work on an abbreviated coordinated issue paper (CIP). An Associate Chief Counsel office will be assigned primary responsibility for preparing the legal analysis portion of the paper. That Associate Chief Counsel office will work with the issue team on the analysis and coordinate with other Associate offices as necessary. The issue team should regularly coordinate with Chief Counsel staff during the development of the CIP.

  6. When the draft CIP is ready for clearance, expedited 30-day clearance procedures will be used. Associate Chief Counsel should coordinate with the issue team during the review process. See Chief Counsel Notice CC-2004-027.

4.32.1.3.4  (07-31-2012)
SB/SE Emerging Issues

  1. If an examiner identifies a new or unique abusive promotion or transaction during an examination, the case will be discussed with the Group Manager. The appropriate Policy or Abusive Transaction and Technical Issues SPA will be consulted and consideration will be given to the materiality, scope, and estimated impact of the issue. If the promotion or transaction appears to be an emerging issue, the examiner will get assistance from the SPA to obtain all available information about the transaction, including identification of the promoter. The SPA will make appropriate contacts to coordinate and gather institutional knowledge of the transaction with other IRS functions and operating divisions.

  2. If cases involving an emerging issue will be worked in field operations, the SPA will size the issue and determine if the examiner should work the cases with assistance or if an IMT should be formed. If the SPA determines the issue is appropriate to recommend formation of an SB/SE IMT, the procedures described in IRM 4.32.1.4, Issue Management Team (IMT), will be followed. If it is determined that the issue will require cross-divisional coordination without formation of an IMT, a recommendation will be made to address the issue at the Service's Cross-Divisional Emerging Issues Council. Additional information can be found on the MySB/SE website.

4.32.1.3.5  (07-31-2012)
TE/GE Emerging Issues

  1. TE/GE has implemented a process to submit emerging issues for further consideration. The process includes completing Form 5666, TE/GE Referral Information Report, used by all functions that is submitted through the TE/GE website to the separate functions. Each function will have a vetting process and if an emerging issue warrants further analysis, it will be sent to the appropriate classification unit or committee for development. Additional information can be found on the TE/GE website then link to the individual function through the "Function-specific information" for further details.

  2. If the emerging issue involves a potential bond promoter, Tax Exempt Bonds through its IRC 6700 Committee, will determine what appropriate actions will be taken. The other TE/GE functions will follow the procedures outlined in IRM 4.32.3. Coordination and Roles of Cross-Functional Units, regarding potential promoter investigations and forward the information to the SB/SE LDC for further analysis.

4.32.1.3.6  (07-31-2012)
LB&I Emerging Issues

  1. LB&I examiners should refer to IRM 4.51.2.3, LMSB Emerging Issues, for further guidance regarding emerging issue procedures.

4.32.1.4  (07-31-2012)
Issue Management Team (IMT)

  1. Recommendations to establish an IMT are presented to the SCS ESC for approval. A briefing to the SCS ESC should include relevant data and facts sufficient to allow for understanding of the potential risk and harm to the government represented by the abusive issue. This would include, but is not limited to:

    • Promoter activity

    • Open and closed examination case activity

    • Promoter investigations activity

    • Congressional reports

    • Articles and references from external media sources

    • Information from other governmental agencies

    • Other sources as appropriate

    The briefing should also include a discussion of the current or anticipated IRS legal position, as well as an initial assessment of resources and difficulty level of relying on enforcement (audits) to address the abuse. The recommendation should also include a proposed IMT charter, draft team action plan, and recommendation for team members based on business operation division, function, and skill set.

  2. Once the SCS ESC approves the development of a strategic service-wide response to a specific abusive tax transaction, or a division approves the development of a strategic division-wide response, an Executive Issue Owner will be identified and an IMT will be established. The purpose of the group would be to gather information and develop a division or service-wide strategy to address the transaction. The mission of an IMT is to create high-powered, small teams that are integrated with Counsel, other operating divisions and appropriate functions. The teams will play a key role in developing issue resolution which may include guidance for the field, creating alternative resolution strategies, monitoring field participant and promoters inventories, and coordinating with collection, case closing, and campus activities.

4.32.1.4.1  (07-31-2012)
Membership in the Issue Management Team

  1. Initially, the core team would be comprised of the following members:

    • Executive Issue Owner
      The Executive Issue Owner will generally be from the operating division with the most interest in the issue identified and may represent IRS with external stakeholders and coalition groups. It is important that this Executive Issue Owner consider the interests of all internal and external stakeholders in the work of the team. The Executive Issue Owner will be responsible for maintaining the momentum of the team and, in collaboration with the team, establishing additional sub-teams, as well as establishing and managing milestones. The Executive Issue Owner will come from the operating division determined to be the lead for the issue or from multiple operating divisions if a clear lead Division is not identified.

    • Team Leader
      The IMT Team Leader will be responsible for guiding the team through its expected life cycle. The Team Leader is typically a Senior Manager from the ATTI Program. The duties of the Team Leader cover all aspects of team management including development of a team charter, team action plan, coordination of meetings, recommendations for adding team members, development of reports and briefings, and coordinating communication with stakeholders. The Team Leader is also expected to be a key contributor to the development of the team's resolution strategy approved by the Executive Issue Owner for recommendation to the SCS ESC. The Team Leader will be responsible for resolving conflicts within the team and developing recommendations to overcome internal or external challenges that hinder development of an issue resolution plan.

    • Technical Specialist (TS), Senior Program Analyst (SPA), or equivalent from Compliance
      The TS or SPA assists in the identification of the inventory, has knowledge of the factual scenarios for the issue and the legal arguments raised by taxpayers and their representatives, assesses proposed resolutions in terms of administration and application, provides communication links to the field and to the working group, drafts (with Counsel) CIP, and works with Counsel to identify potential cases to designate for litigation.

    • Representative from the Division Counsel Office
      Division Counsel personnel assist in the identification of the inventory and provide expertise related to the factual scenarios of the issue, the legal issues raised by taxpayers, and the appropriate application of legal positions. Division Counsel also provides communication links to field operations, and participates in the drafting of any CIP, Audit Technique Guide (ATG), proposed published guidance or proposed resolution document. In addition, Division Counsel works with the operating division to assist in the identification of potential cases for litigation designation.

    • Field Representative
      This position is generally filled by a Territory Manager or Group Manager from the most impacted BOD, though the IMT can appoint someone else, such as an Analyst to the position. The Field Representative will provide information on examinations either completed or in-process and will act as liaison to the effectiveness and ability to implement possible resolution strategies under consideration by the IMT. The Field Representative will also work with field personnel to help determine the need for guidance, tool kits, training, or other forms of field assistance.

  2. Other (non-core) members that may be included on the team at any point as needed include:

    • Representative from lead division's field office or from field offices of other operating divisions depending on the level of technical/operational support needed for example, (e.g., Technical Services).

    • Representative from Criminal Investigation either as a point of contact or as a full member depending on the issue or stage of case development.

    • Representative from Chief Counsel when their office is actively involved in developing the legal analysis or any published guidance for the issue.

    • Representative(s) from Associate Chief Counsel depending on the transaction and proposed strategies. Representatives may be needed from various Associate Offices having subject matter expertise and/or procedural expertise such as summonses and closing agreements. The subject matter experts selected as working group members will vary with each issue; however, careful consideration should be given to ensure that all appropriate offices are represented. Generally, the subject matter expert should be a full time member of the working group; however, in some circumstances a subject matter expert may participate as a consultant in a limited area only.

    • Representative from Collection.

    • Representative from Communication, Liaison and Disclosure.

    • Other specialists when necessary.

4.32.1.5  (07-31-2012)
Activities of the Issue Management Team

  1. Activities of the IMT are generally broken into four main phases:

    • Information gathering

    • Analysis

    • Development of an issue resolution strategy

    • Plans to ramp-down the team

  2. Each cross-divisional IMT is required to report to the SCS ESC periodically. The first briefing report should be scheduled between 15 and 45 days following the team's initial meeting to report on team composition, recommended action plan, potential hindrances to progress, and possible resolution strategies under consideration. After the initial briefing, the team will report to the SCS ESC every 90 days or as directed by the SCS ESC until it has a resolution proposal accepted by the SCS ESC, or the team has otherwise concluded its business. See IRM 4.32.1.5.3, Development of an Issue Resolution Strategy. SCS ESC briefings may continue beyond this date if deemed appropriate to review progress through the implementation phase of an approved resolution strategy. Otherwise, the team is expected to submit a plan and recommendations to the SCS ESC on ramping the team down.

4.32.1.5.1  (07-31-2012)
Information Gathering

  1. In this phase, information will be secured from as many sources as deemed appropriate and necessary. The team must gather relevant information from examiners, attorneys, and representatives from the operating divisions actively working the transaction. The team will compile as much specific information as possible about the promoter, the abusive transaction, and any particular variation used by different entities. All requests for information from the IMT must be coordinated through the Field Representative. While information gathering is ongoing, Counsel will continue with development of legal arguments and the operating divisions will continue with necessary field case development.

4.32.1.5.2  (07-31-2012)
Analysis

  1. In this phase, the IMTs will work through the appropriate operating divisions to gather information on the transaction. Division Counsel, in coordination with Associate Chief Counsel, will provide a written summary of the anticipated legal arguments it would expect to advance in the event of litigation as well as any legal positions the Service intends to pursue. These legal positions will serve as the basis for providing case advice to field personnel on factual development.

  2. Once Counsel has developed a legal position, the IMT will determine if a CIP is warranted.

  3. The SPA or TS will be tasked with identification and monitoring of promoter and taxpayer inventory, supporting examinations, developing expertise on the specific transactions, identifying variations in the transactions, and making recommendations for coordination requirements. Examination support may include case visits, development of resource guides, and providing updated information to the field as the issue develops. Development of a web site specific to the issue is highly recommended. The Intranet site should be considered for issues where the participant population is either voluminous or unknown, and should include contact information, guidance, and examination aids to assist examiners assigned cases.

  4. It is essential the IMT consider alternative perspectives. Close coordination is needed with examiners working promoter investigations and taxpayer examinations, which may include assisting in development of interview questions, compiling responses, and if necessary, assisting in interviews.

  5. The IMT may make presentation of the facts of the issues in question to Appeals, but not discuss the specifics of any given case.

  6. If an abusive transaction is egregious, the SPA or TS will assist Division Counsel in identifying cases that may be appropriate to designate for litigation. As appropriate cases are identified, the SPA or TS will support development of the issue.

4.32.1.5.3  (07-31-2012)
Development of an Issue Resolution Strategy

  1. During this phase, the IMT will work on developing a strategy to address noncompliance represented by the issue. The proposed strategy must reflect overall good tax administration and consistency in approach. The resolution must reflect the hazards of litigation and advance legally supportable positions. Possible IMT recommendations may include but are not limited to:

    1. The processes already in place are sufficient for handling a particular issue (e.g., a CIP, Appeals Settlement Guidelines and application of Delegation Order 4-25, Settlement Offers, Closing Agreements, and Settlement Agreements Under Section 6224(c) in Cases With Technical Advisor (TA) Program Issues, and Appeals Technical Guidance Program (Compliance Coordinated and Appeals Coordinated) Issues, Fast Track Dispute Resolution, Early Referral, expanded Delegation Order 4-25, or Form 1254, Examination Suspense Report).

    2. The development of a global or targeted settlement initiative is appropriate. This approach allows an acceleration of Appeals' consideration of the issue, and an opportunity for those investors wishing to resolve their tax controversies to do so early in the administrative process.

    3. Published guidance is necessary to clarify the issue.

    4. The transaction is an abusive transaction and should be considered for identification as a listed transaction.

    5. More information is needed regarding the transaction as it is not clear whether the transaction is abusive; therefore, the transaction should be identified as a TOI and thus subject to disclosure as a reportable transaction.

    6. Legislative changes are needed.

    7. Communication and taxpayer outreach are needed.

    8. Any combination of recommendations.

  2. When a recommended resolution strategy is finalized, the Executive Issue Owner for the team will present their proposals to the SCS ESC. Upon acceptance, the SCS ESC will elevate the proposed resolution to the Enforcement Committee for final approval. IMTs will provide an executive summary of all resolution proposals for discussion with the SCS ESC and the Enforcement Committee as needed.

  3. IMTs should follow the guidance provided by the Enforcement Committee in developing broad resolution strategies for cases involving abusive tax avoidance transactions. This guidance is provided in the form of guiding principles found in Exhibit 4.32.1-2, Guiding Principles for Developing Investor Penalty Resolution Strategies, Identification and Development of Issues in Cases to Designate for Litigation, and Development of the Treatment and Consideration of the Transaction Costs.

4.32.1.5.4  (07-31-2012)
Resolution Process and IMT Lifecycle

  1. In the resolution process there are several items that need to be considered for development. The IMT will work with Communications, Stakeholder and Outreach as well as Privacy, Governmental Liaison and Disclosure, and Chief Counsel in preparing the following products for issuance, as appropriate:

    1. News releases

    2. Announcements

    3. Internal and external communication packages

    4. Timeliness for activities to be performed

  2. When determining the resolution strategy, the IMT should consider the following:

    1. Current status of the issue, e.g., potential harm to the government, increasing or decreasing number of identified participants.

    2. Perspective of various parties on public versus non-public resolution prior to decision being made.

    3. Clear definition of taxpayers to be included in the resolution (for example, what variations of a transaction are the same as or substantially similar to a listed transaction and who should be allowed to participate in the resolution strategy).

    4. Case closing procedures (for example through Technical Services).

    5. Reporting and data capture process for interim reporting.

    6. Linkages with other abusive transactions and impact on resolution proposal or those allowed to participate.

  3. Resolution Recommendation to the SCS ESC and ramping down the IMT:

    1. Once the IMT has finalized a resolution strategy, approval must be requested from the SCS ESC. The recommendation should include information on strategic actions necessary to implement the resolution plan and expected outcomes.

    2. Upon approval of the resolution plan by the SCS ESC, within 30 days the IMT should determine roles and responsibilities of team members and others that are necessary to complete the approved resolution strategy.

    3. Following resolution plan assignments, the IMT should review its charter to determine if it's mission has been accomplished. In determining whether objectives have been met, the team is not measuring success based on whether the issue no longer exists, but rather if the resolution plan completes charter expectations. If it has, the team should develop a plan to ramp-down the IMT. This plan should be presented to the SCS ESC for approval, and should include identification of continuing support needs and responsible parties. An IMT ramp-down document template for this presentation is included as Exhibit 4.32.1-6.

Exhibit 4.32.1-1 
Glossary of Terms

Term Definition
Abusive Tax Shelter Specific tax transaction/promotion that "shelters" income from normal taxation by taking a tax position that is not supported by tax law or manipulates the law in a way that is not consistent with the intent of the law (tax evasion). The term "Abusive Tax Shelter" is commonly used to mean an abusive tax transaction or promotion that is highly technical and represents a strategy that is often marketed by an accounting or law firm. These transactions may sometimes be referred to as "abusive promotions." When IRS identifies an abusive tax shelter as a listed transaction, that shelter is then subject to disclosure requirements pursuant to Treas. Regs. 1.6011-4. See listed transaction below in this table for a complete description. Not all abusive tax shelters are listed transactions.
Abusive Tax Avoidance Transaction/Promotion A specific tax transaction/promotion that reduces tax liability by taking a tax position that is not supported by tax law or manipulates the law in a way that is not consistent with the intent of the law (tax evasion). Abusive tax avoidance transactions/promotions may be applicable to either a large number of taxpayers or a limited number of taxpayers. These strategies may be organized and marketed and, if so, are often referred to as an abusive tax shelter. See abusive tax shelter above in this table for a further description.
Emerging Issue An issue, promotion, or device uncovered through normal examinations, media coverage, or other sources that may involve an abusive tax transaction or promotion. Such issues generally require additional investigation to determine the facts, applicable law, and scope to determine if abusive transactions/promotions exist. The investigation of emerging issues can be done by one operating division or by a cross-divisional group depending on projected taxpayer involvement and issue complexity.
Executive Issue Owner The executive or senior management leader of an Issue management team chartered by one of the operating divisions or the SCS ESC.
Frivolous Tax Promotion/Scam A transaction/promotion that is clearly unallowable or has no existing basis in law such as the slavery reparations credit or IRC 861 arguments (taxpayer claims that their income is not taxable or that withholding is not applicable).
Issue Management Team A cross-divisional IRS team chartered by the Service-wide Compliance Strategy (SCS) Executive Steering Committee (ESC) to develop a strategic response to an emerging abusive tax transaction/promotion that involves either a highly technical transaction or a transaction/promotion with widespread applicability. This team reports to the SCS ESC.
An IMT can also be a team formed by one of the operating divisions to examine an emerging issue that does not generally involve taxpayers from other operating divisions and/or is not a complex transaction requiring a service-wide strategic response
Listed Transaction A transaction is a reportable transaction subject to disclosure pursuant to Treas. Reg. 1.6011-4(a) and (b)(1) and IRC 6111, and for which material advisor lists must be maintained pursuant to IRC 6112. A transaction is a listed transaction if it is the same as or substantially similar to a transaction the IRS has identified as a listed transaction by published guidance. A transaction is substantially similar if it is expected to obtain the same or similar types of tax consequences and is either factually similar or based on the same or similar tax strategy as that described in the published guidance. When the IRS identifies a transaction as a listed transaction, it considers the transaction to be an abusive tax avoidance transaction.
Office of the Associate Chief Counsel (Passthroughs and Special Industries), Branch 3 (PSI Tax Shelter Branch) The office within Chief Counsel that evaluates emerging issues/transactions for determining if a transaction should be identified as a "listed transaction" or a "transaction of interest" in coordination with other Chief Counsel offices that may have jurisdiction over substantive legal issues with respect to the transaction.
Reportable Transaction Reportable transactions include the following:
  1. Listed transactions

  2. Transactions offered under conditions of confidentiality

  3. Transactions subject to contractual protection

  4. Loss transactions

  5. Transactions of interest.


See Treas. Reg. 1.6011-4(b) for more information regarding the types of reportable transactions. Just because a transaction is a reportable transaction does not make that transaction an abusive tax shelter. Taxpayers must disclose their participation in reportable transactions as provided in Treas. Reg. 1.6011-4(e). If taxpayers do not disclose their participation in the reportable transaction, they will be subject to penalty pursuant to IRC 6707A (up to $50,000 for non-listed reportable transactions or $200,000 for listed transactions). In addition, material advisors must maintain and furnish lists of certain investor information with respect to reportable transactions under IRC 6112 and Treas. Reg. 301.6112-1 or be subject to penalty pursuant to IRC 6708. Per the American Jobs Creation Act of 2004 (Pub.L. No. 108-357), material advisors must disclose reportable transactions pursuant to IRC 6111 and Treas. Reg. 301.6111-3 or be subject to penalty under IRC 6707.
Service-wide Compliance Strategy (SCS) Executive Steering Committee (ESC) The executive group chartered to serve as a forum to develop cross-divisional IRS strategies for dealing with abusive transactions and promotions both internally and externally, among other issues. The SCS ESC ensures coordination of enforcement activities and resource issues to ensure a service-wide perspective in combating abusive tax avoidance transactions and promotions. The SCS ESC reports to the Enforcement Committee.
Settlement Approach/Strategy A service-wide plan for combating a specific abusive tax transaction or promotion. Options for settlement approaches or strategies include using normal processes for case resolution or developing procedures for resolving a specific issue that deviates from normal case resolution processes. Settlement approaches or strategies are generally developed by an issue management team, or operating division executive leadership. Abusive tax transaction settlement approaches or strategies that deviate from normal case resolution processes must be reviewed by the SCS ESC and approved by the Enforcement Committee.
Tax Shelter A tax strategy or promotion that "shelters" income from normal taxation. Depending on the facts and legal analysis, a specific transaction or promotion may represent either lawful tax avoidance or unlawful tax evasion. Those tax shelters resulting in tax evasion are known as abusive tax shelters. The term "tax shelter" is sometimes used to mean "abusive tax shelter" in common parlance.
Transactions of Interest (TOIs) A transaction of interest (TOI) is a reportable transaction subject to disclosure pursuant to Treas. Reg. 1.6011-4 and IRC 6111, and for which material advisors must maintain lists pursuant to IRC 6112. A transaction is a transaction of interest if it is the same as or substantially similar to one of the types of transactions that the IRS has identified by published guidance as a transaction of interest. A transaction is substantially similar to a transaction of interest if it is expected to obtain the same or similar types of tax consequences and is either factually similar or based on the same or similar tax strategy as that described in the published guidance. TOIs are transactions that the IRS is interested in gathering more information about that could potentially be abusive tax shelters.

Exhibit 4.32.1-2 
Guiding Principles for Developing Investor Penalty Resolution Strategies, Identification and Development of Issues in Cases to Designate for Litigation, and Development of the Treatment and Consideration of the Transaction Costs

This exhibit is intended for the sole use of the IMT in developing broad resolution strategies. Not for use in resolving individual taxpayer cases.

The purpose of any strategy should be to:

  • Foster effective tax administration through overall impact on compliant and non-compliant taxpayers.

  • Ensure fairness and consistency in administration of tax law.

  • Maintain ethics and integrity in decision making.

  • Consider the impact on future compliance risks of penalty settlement.

  • Focus on changing taxpayer behavior to foster voluntary compliance.

  • Address the specific transaction or promotion.

  • Tailor the strategy to address the egregiousness of the taxpayer actions/non-action.

  • Facilitate resolution early in the process.

  • Reduce associated burden on both the IRS and the taxpayer.

Exhibit 4.32.1-3 
Criteria for Development of the Penalty Resolution

(including but not limited to)

Consider the following when developing a strategy for integrating the applicable penalty provisions into the issue resolution strategy:

  1. Follow current law, policies and practices, including the code and regulations, IRM, Announcements (such as 2002-2), Circular 230, Regulations Governing Practice before the Internal Revenue Service, and IRM 1.2.20.1.1, Policy Statement 20-1 regarding penalties.

  2. Periods of limitations on assessment of tax and penalties.

  3. Differences in behavior, such as whether the taxpayer disclosed or concealed participation in the transaction, may justify different treatment of otherwise similarly situated taxpayers. See the list of behaviors and how each is treated below.

  4. Degree of technical difficulty of the transaction or promotion.

  5. Whether the transaction or promotion was marketed/promoted?

  6. Sophistication of the taxpayer and their involvement in the investment decision.

TREATMENT OF INVESTORS' POSSIBLE BEHAVIORS

1) As part of an issue resolution strategy, it is reasonable to treat investors who complied with disclosure requirements differently than those who failed to comply. Different treatment may be appropriate for those taxpayers who:

  • Disclosed under Announcement 2002-2, 2002-1 C.B. 304., which provides that a penalty can be waived if the investor complied with the Announcement.

  • Disclosed in accordance with Treas. Reg. 1.6011-4 in a timely manner on a return (including an amended return). As a general matter, a taxpayer must disclose their participation in a reportable transaction (such as a listed transaction or a transaction of interest) by attaching a Form 8886, Reportable Transaction Disclosure Statement, with its tax return for each year in which the taxpayer participated in the transaction and by sending a copy of that form to the Office of Tax Shelter Analysis (OTSA) at the same time that any disclosure statement is first filed by the taxpayer pertaining to a particular reportable transaction.

  • Newly listed transactions: If a transaction entered into before August 3, 2007, is listed after a taxpayer filed a tax return reflecting participation in a reportable transaction and before the end of the period of limitations on assessment, the taxpayer must disclose with the next return filed after the date the transaction is listed regardless of whether the taxpayer participated in the transaction in that year. For transactions entered into on or after August 3, 2007, if a transaction becomes a listed transaction or a transaction of interest (TOI) after the filing of the tax return and before the end of the period of limitations for any taxable year in which the taxpayer participated in the listed transaction or transaction of interest, the taxpayer must disclose by filing a Form 8886 with OTSA within 90 calendar days after the date on which the transaction became a listed transaction or a TOI.

  • Voluntarily disclosed non-listed transaction to Criminal Investigation under voluntary disclosure or by filing a corrected taxable amended return.

2) For investors who were required to disclose and did not comply: No waiver of the penalty would be generally proposed as part of a resolution strategy. The penalty issue would need to be developed in each case and reasonable cause addressed for penalties to which reasonable cause is a defense.

3) For investors who received fees from other investors (promoters/advisers) for activities related to the shelter: They would be excluded from any other general categories of penalty relief as part of a resolution strategy. The penalty issue would need to be developed in each case and reasonable cause addressed for penalties to which reasonable cause is a defense.

4) For investors who were not required to disclose: It may be appropriate to provide a no waiver of penalty as part of a resolution strategy. The penalty issue would need to be developed in each case and potential reasonable cause should be addressed.

5) When developing a resolution strategy, consider investor attempts to fully disclose the transaction or to conceal the transaction. Different actions on the part of the investor may warrant different penalty considerations.

Exhibit 4.32.1-4 
Criteria for Identification and Development of Issues in Cases to Designate for Litigation

(including but not limited to)

While addressing whether selected issues in cases should be considered for designation for litigation as part of an overall tax shelter strategy, the following criteria should be considered:

  1. If the shelter transaction includes a significant legal issue that affects a large number of taxpayers or has significant tax impact, consideration should be given to designation.

  2. If the shelter transaction is still generally being used or promoted, consideration should be given to designation. However, the fact that the shelter is no longer promoted or has been closed down by legislation or regulation does not mean that designation should not be considered. There may be a significant number of cases for prior years that need resolution if the legislation or regulation is prospective only. Consider, for example, the use of a resolution in the contingent liability transactions. See Rev. Proc. 2002-67, Settlement of Section 351 Contingent Liability Tax Shelter Cases.

  3. If there is a need to establish judicial precedent due to a wide divergence between IRS and taxpayer viewpoints on the law, consideration should be given to designation. Designation and a court decision would promote ultimate resolution of the issue and conserve resources for both the government and taxpayers. An example of this is lease-in, lease-out transactions ("LILOs" ) described in Rev. Rul. 2002-69.

  4. If one or more aspects of the shelter transaction continue to be significant to other tax shelter transactions and have broader impact than the immediate shelter, e.g., issues surrounding application of IRC 351, Transfer to Corporation Controlled by Transferor, defeasance, or partnership basis, consideration should be given to designation. For example, the shelter may no longer be promoted or tax benefits from the shelter transaction may no longer be claimed by the taxpayer; however, transactions with similar structures or features may continue to be promoted or subsequent shelter transactions may utilize overstated tax basis from the prior shelter.

  5. Designation may not be necessary if cases with the same or similar issue are already docketed or scheduled for trial.

  6. Designation may not be necessary if the issue under examination is being conceded by many taxpayers during examination.

If a decision is made to select issues to designate for litigation, the following factors should be considered:

a) Several cases should be considered and developed for potential designation. Often taxpayers may concede the issue or threaten to pay the tax and file a refund suit. If the taxpayer concedes the issue, the case should not be designated. A threat to pay the tax and file a refund suit should not alter the decision to designate. If a taxpayer pays the tax and files a refund suit after the case is designated, the Department of Justice will be apprised of the designation and take it into consideration when handling the case.

b) The issue in the case recommended for litigation should result in a decision that will impact the other cases with similar transactions. Thus, cases should be selected with fact patterns that are fairly representative of the cases involved in the shelter strategy.

c) Designated issues in cases must be developed and resources must be committed for their complete development. When an issue in a case is identified as a potential for designation and the development of the issue is underway, a commitment must be made to follow through on the process unless the recommendation for designation is determined to be no longer appropriate. Compliance must commit its resources to the complete development of the issues, including but not limited to:

  • Hiring of outside experts including appraisers, economists, etc.

  • Transcribed interviews for key parties.

  • Summonses of necessary taxpayer and third party documents and enforcement if necessary.

d) The process of designating an issue in a case is generally lengthy. The procedures for designating a case for litigation are set forth in the Chief Counsel's Directive Manual. See CCDM 33.3.6, Other Legal Advice; Designating a Case for Litigation. In addition, once a case is before the court, the time frame for an ultimate decision is uncertain and may be lengthy.

e) Full development of the penalty should be completed and the penalty analysis and decision made part of the case designation process. Designation of non-penalty issues in a case does not necessarily mean the penalty should be designated. The penalty must separately meet the criteria for designation.

f) The effect of the statute of limitations on case development and designation process must be considered. For example, there must be sufficient time to fully develop the case including making the recommendation and securing approval for designation.

g) The overall impact on the particular taxpayer must be considered. For example, if the taxpayer has carry backs, carryovers, or credits that eliminate or significantly reduce the tax deficiency, the case may not be a good one to designate for litigation.

h) The positions that may have been taken on the same or a similar issue for the particular taxpayer that may affect an overall view of the case must be considered, for example, whether the issue was examined and no adjustment made on a prior examination.

i) If a decision is made to designate an issue in a case, a statutory notice is issued, rather than a 30-day letter, and all unagreed issues are included in the statutory notice. If the case is petitioned to the Tax Court, some of the unagreed issues may go to Appeals.

Exhibit 4.32.1-5 
Criteria for Development of the Treatment and Consideration of the Transaction Costs

(including but not limited to)

Transaction costs may include fees to promoters and to accommodating parties, fees for document preparation, actual losses incurred that are associated with the transaction (true economic losses), fees for legal advice and for valuations or appraisals, interest expense and similar types of expenses. These transaction costs are sometimes referred to as the "out-of-pocket costs" . As a legal matter, rarely would taxpayers be entitled to out-of-pocket costs where a transaction is a sham in fact or lacks economic substance because such transactions generally do not give rise to valid deductions or losses.

While addressing whether transaction costs should be considered in any resolution the following criteria should be considered:

  1. Where the legal theory for disallowance is that the transaction was a sham in fact or sham in substance (lacks business purpose and economic substance) and did not give rise to valid deductions or losses, there is a strong indication that transaction costs should not be allowed.

  2. Where the legal theory is based on a technical argument, there is an indication that transaction costs may be allowed.

  3. Where the only legal theory is based on a technical argument, there is a strong indication that transaction costs may be allowed.

  4. Where a specific transaction cost was attributable to a separate economically substantive element that was not the centerpiece of the underlying sham transaction (for example, an interest deduction that was related to a loan that was part of the transaction), there is an indication that the costs associated with the loan may be allowed.

  5. Consider disallowing transaction costs that are an integral part of the purported benefits of the transaction. For example, if the taxpayer generates interest deductions by entering into an abusive repurchase agreement that results in payment of more interest than interest received, the payments made by the taxpayer should not be permitted as an allowable deduction because the payments constitute the principal tax benefits of the transaction. See, e.g. United States v. Wexler, 31 F. 3d 117 (3rd Cir. 1994).

  6. Whether the transaction costs cannot be readily determined and, therefore, allowance will result in disparate treatment among taxpayers, disallowing the costs should be considered.

  7. Whether the transaction costs are paid to an external party for the majority of the investors or whether the transaction was developed by the taxpayer and the transaction costs were not paid to external parties should be considered, taking into account equitable treatment of taxpayers and the resources required to develop the amount of the transaction costs.

  8. Whether all transaction costs or only specific transaction costs should be allowed or not allowed, should be considered.

  9. How the transactions costs would be allowed should be considered. For example, should the costs (or a portion or specific costs) be part of a basis determination?

Exhibit 4.32.1-6 
Recommendation to Ramp-Down Abusive Transaction Issue Management Team

Issue Management Team  
Executive Issue Owner/HQ Designee  
Date of Charter or Inception of IMT  
Date of this Submission  
   
 
Narrative in Support of IMT Ramp-Down:
 
 
 
 
IMT Charter or Team Objectives – List separately Address Each Charter Item or Objective  
     
     
     
     
     
     
     
Discuss the Status of Legal Position  
   
 
 
 
Discuss Compliance Effort and Results Under This IMT  
   
 
 
 
 
Returns Examined (period reporting)    
Returns Changed    
Returns No Changed    
# Promoters Investigated    
# Promoter Injunctions    
Penalties Assessed    
Collection Information    
   
Operating Divisions Impacted by this Issue: List    
 
 
 
   
Describe the Process in Place to Continue to Identify Participants to this Transaction  
   
 
 
Who is Designated to Continue to Provide Support for this Issue?    
Describe the Disposition or Resolution of the Issue  
   
 
 
 
Describe the Communication Strategy Associated with this Team  
   
 
 
Include any other Information Relevant to this Issue and Issue Management Team  
   
 
 
 

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