4.32.1 Process Guide for Combating Abusive Tax Avoidance Transactions

Manual Transmittal

February 09, 2018

Purpose

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

Material Changes

(1) Changes have been made to correctly reflect cross-BOD process and to eliminate references to Issue Management Teams throughout.

Prior Reference New Reference Description of Change
IRM 4.32.1.1 IRM 4.32.1.1 Re-purposed section for Program Scope and Objectives. It was Introduction in the prior revision.
IRM 4.32.1.1 IRM 4.32.1.2 Moved Introduction from IRM 4.32.1.1 in the prior revision and shifted the sections throughout in order to include the Program Scope and Objectives.
IRM 4.32.1.3.2 IRM 4.32.1.4.2 Removed references to IMTs.
IRM 4.32.1.3.4 IRM 4.32.1.4.4 Removed references to IMTs.
IRM 4.32.1.3.5 IRM 4.32.1.4.5 Updated content to reflect TE/GE’s current structure for emerging issues.
IRM 4.32.1.4. N/A Deleted IRM 4.32.1.4. Issue Management Team (IMT) due to obsolete information
IRM 4.32.1.5 N/A Deleted IRM 4.32.1.5 Activities of the Issue Management Team and all paragraphs underneath from prior revision due to obsolete guidance.
Exhibit 4.32.1-1 Exhibit 4.32.1-1 Removed some terms that are no longer used.
Exhibit 4.32.1-6 N/A Removed exhibit due to obsolete information

Effect on Other Documents

IRM 4.32.1, dated 06-05-2014, is superseded.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, Wage and Investment (W&I) and Large Business and International (LB&I) employees who are examining abusive transactions.

Effective Date

(02-09-2018)


Lori Caskey
Director, Exam Quality and Technical Support SE:S:E:HQ:EQ&TS
Small Business/Self-Employed

Program Scope and Objectives

  1. Purpose: 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.

  2. Audience: These procedures apply to examiners of abusive transactions in SB/SE, LB&I, TEGE, and W&I.

  3. Policy Owner: The Director, Exam Quality and Technical Support, which is under Director, Headquarters Exam.

  4. IRM Owner: The abusive transactions group within Exam Quality and Technical Support.

  5. Contact Information: To recommend changes or make any other suggestions related to this IRM section, see IRM 1.11.6.6, Providing Feedback About and IRM Section - Outside of Clearance.

Background

  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.

Authority

  1. SB/SE Delegation Order 4.60, Functions Related to Potential Promoters/Tax Shelters Cases, delegates the authorization of investigations of promoters to the SB/SE LDC Program Manager.

Responsibilities

  1. The Director, Headquarters Examination, is the executive responsible for providing policy and guidance for field employees and ensuring consistent application of policy, procedures and tax law to effect tax administration while protecting taxpayer’s rights. See IRM 1.1.16.3.5 Headquarters Examination, for additional information.

  2. The Director, Exam Quality and Technical Support, reports to the Director, Headquarters Examination, and is responsible for delivery of policy and guidance that impacts the field examination process.

  3. All examiners and their managers working abusive transactions should familiarize themselves with the information contained in this IRM.

Terms

  1. A list of terms are given in Exhibit 4.32.1-1 Glossary of Terms.

Acronyms

  1. The following table lists commonly used acronyms and their definitions used throughout this IRM:

    Acronym Definition
    TA Technical Advisor
    AT Abusive Transactions
    BOD Business Operating Division
    CCDM Chief Counsel’s Directive Manual
    CIP Compliance Initiative Project and also Coordinated Issue Paper
    CP&C Compliance Planning & Classification
    IMT Issue Management Team
    IRC Internal Revenue Code
    LDC Lead Development Center
    LILO Lease-In Lease-Out
    LB&I Large Business & International
    OTP Office of Tax Policy
    OTSA Office of Tax Shelter Analysis
    PSI Pass-throughs and Special Industries
    SB/SE Small Business / Self-Employed
    SCS ESC Service-wide Compliance Strategy Executive Steering Committee
    SPA Senior Program
    TE/GE Tax Exempt / Government Entities
    TOI Transaction of Interest

Related Resources

  1. The following table lists the primary sources of guidance for the AT examiners.

    IRM Section Title
    IRM 4.32.2 The Abusive Transactions (AT) Process
    IRM 4.32.3 Coordination and Roles of Cross-Functional Units
    IRM 4.32.4 IRC 6707A Penalty for Failure to Include Reportable Transaction Information with Return
    IRM 5.20 Abusive Tax Avoidance Transactions
    IRM 20.1.6 Preparer, Promoter, Material Advisor Penalties

Introduction

  1. 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.

  2. 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.

  3. 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 needing a coordinated response

  4. This committee is jointly chaired by the Assistant Deputy Commissioner, Compliance Integration, Large Business and International (LB&I) and the Director, Exam Quality and Technical Support, 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.

  5. Members of the SCS ESC will include:

    • Assistant Deputy Commissioner, Compliance Integration, LB&I Division

    • Director, Exam Quality and Technical Support, SB/SE Division

    • Director, Compliance Planning and Classification, TEGE Division

    • Representatives 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.

Guiding Principles

  1. The guiding principles that should be followed throughout the process of identifying and developing issues related to coordinated 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 specific issue, these efforts may need to include representatives from various operating divisions, Criminal Investigation, and multiple components of Counsel and Treasury.

  4. In the case of a transaction or promotion affecting only one operating division, the operating division may determine 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 in the form of a 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

    • IRM 1.2.43.23 Delegation Order 4-25, Settlement Offers, Closing Agreements, and Settlement Agreements Under Section 6224(c) in Cases with Technical Advisor (TA) or Senior Program Analyst (SPA) Program Issues, and Appeals Technical Guidance Program (Compliance Coordinated and Appeals Coordinated) Issues.

Emerging Issues

  1. This section details information relating to emerging issues.

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 (Pass-throughs 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 26 CFR 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. Confidential informants and whistle-blowers.

    8. Associate Chief Counsel and Division Counsel offices.

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

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

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

    12. Other federal or governmental sources.

    13. Congress.

  3. Each operating division, working with its respective Division Counsel, will review information on potential emerging issues and decide whether to raise specific 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—Compliance Planning & Classification, Issue Identification

    • SB/SE—Abusive Transactions

    • 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 TEGE’s Compliance Planning and Classification, 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.

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 division’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), AT 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, 26 CFR 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 26 CFR 1.6011-4, Counsel or the task force may request the appropriate operating division (by working through the division contact identified in IRM 4.32.1.4.1, 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 26 CFR 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).

  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 approach is needed.

  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.

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.

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 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 of other operating divisions.

TE/GE Emerging Issues

  1. The Compliance Planning and Classification (CP&C) within TEGE receives all emerging issues. The issues go through a vetting process. If the emerging issue warrants further analysis it is developed by the Issue ID function. Additional information can be found on the TE/GE website.

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.

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 26 CFR 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 who is responsible for the oversight of a particular issue.
Frivolous Tax Promotion/Scam A transaction/promotion that is clearly not allowable 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).
Listed Transaction A transaction is a reportable transaction subject to disclosure pursuant to 26 CFR 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 (Pass-throughs 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 26 CFR 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 26 CFR 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 26 CFR 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 26 CFR 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 26 CFR 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.

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 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.

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 26 CFR 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 (other than a transaction of interest) is entered into on or after 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, or transactions of interest entered into on or after November 2, 2006, 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.

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, carry-overs, 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.

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?