To determine the extent or magnitude of the abusive tax scheme issue, we obtained and reviewed estimates from IRS’s SB/SE division for the identified abusive tax scheme categories—Frivolous Returns, Frivolous Refunds, Abusive Domestic Trusts, and Offshore Schemes. Four Categories of Abusive Tax Schemes

Abusive tax schemes, which are generally used by individuals, fall into four major categories. According to IRS’s fiscal year 2003-2004 Small Business and Self-Employed (SB/SE) Division Strategic Assessment Report, abusive tax schemes represent a rapidly growing risk to the tax base. IRS estimates the potential revenue loss from these schemes to be in the tens of billions of dollars annually. Despite the difficulties in accurately estimating the significance of abusive tax schemes, IRS provided us with estimates in four major scheme areas— Frivolous Returns, Frivolous Refunds, Abusive Domestic Trusts, and Offshore Schemes. Furthermore, IRS has created an organization that initially will focus on developing leads and cases related to abusive scheme promoters and that will monitor abusive promoter web sites. IRS believes that flow-through entities such as trusts and partnerships are increasingly being used in abusive tax schemes. In some cases, IRS’s coordination is on an informal basis, as it is with the FTC and the SEC, and involves the sharing of certain information and detection techniques. IRS officials participate in various federal agency working groups, including a multiagency task force to share information, skills, and procedures for combating fraud on the Internet; an IRS and DOJ working group created to examine the use of civil injunctions against abusive promoters currently under criminal investigation; and a money-laundering- experts working group. Appendix: Comments from the Internal Revenue Service
What GAO Found

The Internal Revenue Service (IRS) characterizes an abusive tax scheme as any plan or arrangement created and used to obtain tax benefits not allowable by law. According to IRS, abusive tax schemes fall into four categories: frivolous returns, frivolous refunds, abusive domestic trusts, and offshore schemes. IRS estimates the potential revenue loss from abusive tax schemes to be in the tens of billions of dollars annually. Developing accurate estimates is difficult because of the limited numbers of cases examined and investigated. IRS identifies and examines abusive tax scheme promoters and participants through its Small Business and Self-Employed Division and Criminal Investigation. In fiscal year 2000, IRS created a program that focuses on false and frivolous schemes. IRS has also created new offices that focus exclusively on abusive tax schemes that use legal structures like domestic and offshore trusts and partnerships. IRS coordinates with federal agencies to identify, monitor, and prosecute promoters and participants in abusive tax schemes. These activities range from sharing information and detection techniques with agencies such as the Securities and Exchange Commission and the Federal Trade Commission to assisting in the prosecution of fraud related cases with the Department of Justice. IRS participates in work groups that share information, skills, and procedures. These work groups discuss procedures for combating fraud on the Internet and the use of civil injunctions against promoters of abusive tax schemes.