	Background

If ATATs are highly technical and organized or marketed, they are often  referred to as abusive tax shelters. Tax shelters can be legitimate to the extent that they take advantage of  various provisions in the tax code to lawfully avoid tax. IRS Has Limited Trend Data on the Extent of Abusive Transactions, but Many Tax Experts Said That the Ever- Changing Nature of ATATs Requires Constant Vigilance

IRS has limited trend data on the size of the ATAT problem in terms of the  number of abusive promoters and taxpayers investing in the promotions. Estimating the extent of ATATs is at best an inexact process because  ATATs are often hidden. A theme we heard from the experts is that the mass  marketing of ATATs has declined in recent years, although the experts had  different views on the extent of the decline. This advice was sold to clients such as  wealthy individuals and corporations. IRS officials also said  that ATATs seemed more international than before, with promoters  changing the countries and mechanics of their promotions. Investigations of Promoters Stopped Some Abuse, but IRS Has Incomplete Information on Why Many Investigations Were Closed without Penalties or Injunctions

For fiscal years 2006 through 2010, about 100 SB/SE promoter  investigations annually resulted in injunctions for promoters to stop what  they were doing and/or penalties for what they did, as table 1 shows. IRS Examined Thousands of Tax Returns Involving Suspected ATATs and Recommended Billions of Dollars in Additional Taxes, but the Impact Is Unclear

The impact of examinations on the ATAT problem is uncertain. Further, isolating the impact on ATATs of  settlement initiatives from the impacts of examinations and promoter  investigations is difficult to do, especially when IRS does not have an IRS- wide system for tracking and comparing the results from its enforcement  efforts. OTSA Did Not Verify That It Received All Required Disclosures or That They Were Complete

			OTSA Did Not Verify That It Received All Disclosures from Taxpayers

According to OTSA officials, OTSA did not confirm that it always received  its copy of the required Form 8886 from taxpayers disclosing a reportable  transaction. However,  IRS knows that a problem exists because, according to IRS officials, IRS  examiners of tax returns have identified some taxpayers who filed their  Form 8886 with their tax return but failed to send it to OTSA. If OTSA does  not receive disclosures, it cannot identify transactions that merit  examination for appropriateness as well as possible penalties. Taxpayers could be burdened by having to keep  records longer. In addition, IRS has generally been successful in obtaining required  disclosures and investor lists from material advisors. Promoters who do  not meet the statutory definition to be a material advisor face no  requirements to provide IRS with their list of investors within 20 business  days after IRS requested a list or no penalties for failing to do so. 2. 3. 5. In describing actions on the recommendations with which IRS had  agreements, the Deputy Commissioner stated that IRS would do the  following:    update the Internal Revenue Manual’s handling of reason codes for  surveying or discontinuing investigations and evaluate whether any of  the reason data collected warrant changing how investigations are  selected;  ensure that IRS uses the same databases and methodologies (such as  across IRS divisions) for public reporting on the examination results of  ATAT issues; develop criteria for consistently using IRS examination result data and  a consistent methodology for validating the data before they are  released (such as to the Joint Committee on Taxation);  establish a new indicator and a process to regularly review whether  filers met their disclosure obligations with OTSA;  improve its next study of whether Form 8886 should be filed  electronically by identifying how many Form 8886 filers use computers  to prepare the form;  test mismatches of partnership and S corporation information with  OTSA information to identify potentially unfiled forms; and  formalize procedures to identify, evaluate, and follow up on  incomplete disclosures. IRS partially agreed with our recommendation on two options for inducing  non-material advisors to provide investor lists within a specified time. Although IRS agreed that tracking these  amounts by issue (rather than by case as is currently done) might provide  valuable information for management, it cited resource and capability  constraints in doing the tracking. Results of IRS’s Implementation of the Abusive Tax Avoidance Transaction (ATAT) Disclosure and Sanction Provisions Enacted in the American Jobs Creation Act of 2004 (AJCA)

To evaluate the results of IRS’s implementation of the AJCA, we selected  those sections of the act for which IRS had data on the disclosures and  penalties. Criteria we used to evaluate the AJCA’s results included whether  (1) OTSA received all the reportable transaction and material advisor  forms it should have, (2) submitted reportable transaction disclosure  forms met OTSA’s standard for completeness, (3) IRS received investor  lists from material advisors within 20 business days of the time requested,  and (4) the AJCA’s introduction of new penalties and penalty amounts  increased the annual number and aggregate dollar amount of ATAT  penalties assessed.
Why GAO Did This Study

Abusive tax avoidance transactions (ATAT) range from frivolous tax schemes to highly technical and abusive tax shelters marketed to taxpayers by promoters selling tax advice. ATATs threaten the U.S. tax system's integrity if honest taxpayers believe that others do not pay their fair share of taxes. GAO was asked to (1) describe what is known about trends in ATAT usage; (2) describe results of IRS's ATAT enforcement efforts; and (3) evaluate IRS's implementation of the ATAT provisions in the American Jobs Creation Act of 2004. Using criteria from the act, GAO analyzed statistics and other documents on trends and results and interviewed IRS and other tax experts.

What GAO Found

While trend data on taxpayers' use of ATATs are limited, IRS and other experts GAO contacted agreed that a problem exists and is continually changing. One theme that emerged from GAO's discussions with these experts is that ATATs marketed by promoters to corporations and wealthy individuals have declined in recent years, although the experts had different views on the extent of the decline. They also said that ATATs have become more international in nature. Even though estimating the extent of the ATAT problem is inexact because ATATs are often hidden, the experts believed that the changing nature of ATATs warrants continuous IRS vigilance. IRS has many ATAT-related enforcement efforts--investigations, examinations, and settlement initiatives--across different divisions but has incomplete data on the results on those efforts. For example, IRS's small business division's promoter investigations help stop promotions, but IRS had incomplete information on why investigations often closed without penalties or injunctions, information that could be used to help decide the types of investigations to start. In addition, IRS recommended billions of dollars in additional taxes from examining tax returns with suspected ATATs, but IRS did not identify the part of the additional amount that was collected or that related to the ATAT issue as opposed to other issues. In addition, some ATAT results were reported inconsistently across IRS divisions. Without comprehensive or consistent information, IRS does not have the best information to decide which promoters to investigate and the number of examinations that should be done as well as to evaluate their impacts. Even though the 2004 act increased the requirements for taxpayers and promoters to disclose their use of transactions and enhanced the penalties for improper disclosure, problems existed. IRS received many disclosures of transaction use from taxpayers, but it had no assurance that its Office of Tax Shelter Analysis received all the disclosures it should have. In addition, IRS did not verify that all the disclosures it received were complete, and a new process for reviewing the completeness of disclosures and following up with taxpayers was not yet finalized. Not receiving disclosures or receiving incomplete disclosures of transactions would keep IRS from having information needed to identify the transactions that merit an examination of their appropriateness and to assess related penalties as needed. Finally, certain promoters who are required by law under threat of penalty to give their list of investors within 20 business days after IRS requested it did so. However, other promoters who are not covered by this requirement often took longer than 20 days to provide the lists without the threat of a similar penalty. IRS did not comprehensively track how quickly the lists were received. Not receiving lists on a timely basis prevents IRS from quickly working to stop promoter activity. GAO suggests that Congress consider instituting a penalty aimed at certain promoters not giving investor lists to IRS within a specified time. GAO also recommends IRS act or establish processes to (1) improve data on the results of ATAT-related investigations and examinations, (2) ensure that required disclosures are filed by taxpayers, (3) review disclosures for completeness; (4) track the time for IRS to receive investor lists; and (5) induce more promoters to provide investor lists by a specified time. In commenting on a draft of this report, IRS agreed with most recommendations but cited resource and capability constraints in tracking ATAT data and investor lists, which GAO believes can be addressed.