The Gulf Opportunity Zone Act of 2005 amended section 6404(g), imposing tougher rules regarding interest on unpaid tax liabilities for those that engaged in abusive tax shelters. The new law eliminates the suspension of interest on unpaid tax liabilities for individuals who engaged in certain abusive tax avoidance transactions. But the new law also creates an incentive for certain individuals to settle with the IRS; those who settle with the IRS under its current settlement initiative do not lose the benefit of the interest suspension. The deadline to elect to participate in the settlement initiative is Jan. 23, 2006.
The law setting taxpayer liability for interest on unpaid tax liabilities has shifted in recent years. The 1998 IRS Restructuring and Reform Act suspended the accrual of interest on certain unpaid tax liabilities for individuals beginning 18 months after a return was filed. This suspension continued until the IRS notified the individual of the additional taxes owed. The American Jobs Creation Act of 2004 repealed this interest suspension for certain abusive transactions, “listed” and “undisclosed reportable” transactions, but did so only for interest accruing after Oct. 3, 2004.
The Gulf Opportunity Zone Act of 2005, signed into law Dec. 21, 2005, changes this rule for these abusive tax avoidance transactions. A participant in a “listed” or “undisclosed reportable” transaction will now be subject to the running of interest on the unpaid liability from the filing of the tax return.
The new law, however, specifically excludes individuals from this interest rule who take part in the IRS settlement initiative described in Announcement 2005-80. This carve out is designed to encourage taxpayers to correct their abusive transaction activities by coming forward, conceding the legitimacy of their transaction, and paying 100-percent of the tax.
The settlement initiative identifies 21 transactions eligible for the program. Consisting of both listed and other transactions, these transactions include a wide range of arrangements involving funds used for employee benefits, charitable remainder trusts, offsetting foreign currency option contracts, debt straddles, lease strips and certain abusive conservation easements.
To participate, taxpayers must file an election (Form 13750) with the IRS on or before January 23, 2006. There will be no extension of the filing date. Settling taxpayers must pay 100-percent of the taxes due on the transaction and, in most cases, will be required to pay a penalty as well. Taxpayers generally will be allowed to claim the transaction costs associated with the arrangements as an ordinary loss.
The IRS has indicated in its Q&As that it intends the scope of Announcement 2005-80 to be inclusive and for a transaction to qualify it need only be substantially similar to one of the 21. “Substantially similar” will be broadly construed to effectuate this purpose and similarity can be established by a transaction that is either “factually similar” or one that is based on a “similar tax strategy.” Any taxpayer who files an election will have the benefit of a strong presumption that the transaction qualifies for the announcement.