In his letter to the then Ranking Member of the Committee on  Finance, then Secretary of the Treasury O’Neill addressed the actions being  taken to combat abusive shelters, referring to Treasury’s March 20, 2002,  enforcement proposals on the topic. Nature of Abusive Shelters Is Varied and Complex

Abusive shelters are complex transactions that manipulate many parts of  the tax code or regulations and are typically buried among “legitimate”  transactions reported on tax returns. Several Sources Indicate That the Scope of Abusive Shelters Is in the Tens of Billions of Dollars, Though All Are Based on Limited Data

IRS has information that suggests the scope of abusive shelters totaled tens  of billions of dollars over about a decade, but those estimates are based  on limited data. It was also aware of about 6,400  investors, including individuals and corporations that bought abusive  shelters and other aggressive tax planning products. Nevertheless, as table 2 shows, the contractor produced estimates of the  size of the problem for each year from 1993 through 1999. Although IRS documents  outline an overall strategy for combating abusive shelters, IRS has  generally not yet defined long-term performance goals for the effort and the  measures it would use to track progress in achieving those goals.However, IRS is planning to establish such goals and measures when it has  more information on the abusive shelter activities it is currently tracking. IRS Efforts Are to Deter, Detect, and Resolve

IRS focuses its efforts on deterring future marketing and sales of abusive  tax shelters and on detecting and resolving existing shelters. Resource Shifts Are Significant but IRS Faces Challenges in Addressing Abusive Shelter Workload

Using admittedly limited information, IRS used a systematic decision- making process in deciding to shift a large portion of LMSB examination  staff resources toward addressing abusive shelters. Even so, IRS faces challenges,  especially in the near term, in addressing expected increases in its shelter  workload because of the growing number of shelter cases and limited  information it has on how long it takes to conduct shelter examinations. IRS Used Systematic Planning and Budgeting Process to Determine Staffing Priorities

At an agencywide level, IRS decided staffing resource levels to be devoted  to addressing abusive shelters through a systematic planning and budgeting  process based on experience and professional judgment because IRS did  not and does not have a reliable measure of the abusive shelter problem. According to IRS’s fiscal year 2004 congressional budget  justification, LMSB planned to allocate 691 and 949 FTEs in fiscal years  2003 and 2004, respectively. Because (1) the known abusive shelter workload has increased, (2) IRS has  limited experience to judge how many resources will be needed to work  the cases for how long a period, and (3) the workload may continue to  increase, it remains uncertain whether the substantial shift of resources to  shelter work will enable IRS to examine in a timely manner the growing  workload associated with shelters. We encourage IRS to continue its efforts to obtain a better analytic  basis for determining the resources needed to address schemes and  shelters–while providing sufficient attention to other tax compliance  areas–and to develop goals and measures that it and Congress can use to  gauge IRS’s progress.
Why GAO Did This Study

Recent scandals involving corporations, company executives, and accounting, law, and investment banking firms heightened awareness of abusive tax shelters and highlighted the importance of the Department of the Treasury and the Internal Revenue Service (IRS) addressing them. During 1999, Treasury issued a report indicating that abusive shelters were a large and growing problem, involving billions of dollars of tax reductions. Treasury was concerned that abusive shelters could ultimately undermine the integrity of the voluntary compliance tax system. GAO's statement today is based on work done at the request of the Chairman and the Ranking Minority Member of the Senate Committee on Finance to examine IRS's strategy for dealing with abusive tax shelters. In reporting on abusive shelters, GAO is describing (1) their nature and scope; (2) IRS's strategy and enforcement mechanisms to combat them and the performance goals and measures IRS uses to track its major effort in that area; and (3) the decision-making process IRS used and the plans it has to devote more resources to addressing abusive shelters.

What GAO Found

By their nature, abusive tax shelters are varied, complex, and difficult to detect and measure. Abusive shelters manipulate many parts of the tax code or regulations and may involve steps to hide the transaction within a tax return. In recent years, IRS has been accumulating information about them and, although it does not have a reliable measure of the size of the abusive shelter problem, has come to believe that abusive shelters deserve substantially increased attention. IRS continues to gather more information to better define the scope of the problem and has data sources, all with their own limitations, that suggest abusive tax shelters total tens of billions of dollars of potential tax losses over about a decade. IRS's broad-based strategy for addressing abusive shelters included: (1) targeting promoters to head off the proliferation of shelters; (2) making efforts to deter, detect, and resolve abuse; (3) offering inducements to individuals and businesses to disclose their use of questionable tax practices; and (4) using performance indicators to measure outputs and some outcomes and intending to go down the path it has started and develop long-term performance goals and measures linked to those goals. Without these latter elements, Congress would find gauging IRS's progress difficult. In allocating resources to shelters, IRS used a systematic decision-making process that relied on admittedly limited information. It planned to shift significant resources in fiscal years 2003 and 2004 to address abusive shelters but faces challenges, especially in the near term, in addressing abusive shelters due to a growing workload and limited information on how long it takes to examine shelter cases. IRS's understanding of how many staff will be needed to address the problem over what period will continue to evolve as it gains a better understanding of the problem's scope.