Other Tax Issues of Interest

Tax Shelters

A tax shelter is an investment that requires substantial investment with a degree of risk. Tax shelters are required to be registered and the seller is required to maintain a list of the investors. The investors are required to report the tax shelter number on their tax return using Form 8271.

The amount of your deductions or losses from most activities is limited to the amount you have at risk.

You are considered at risk for an activity for the following amounts:

• The amount of cash you invested in the activity
• The adjusted basis of other property you contributed to the activity, and
• The amount you borrowed to invest in the activity, to the extent that you are personally liable on the loan or have pledged property not used in the activity as security.

Note: Losses and credits from tax shelters are often considered passive. Passive losses and credits can only be used to offset income from other passive activities. They cannot be deducted from other income such as wages, salaries, professional fees, or portfolio income. The limitations are computed on Form 8582, Passive Activity Loss Limitations.

Abusive Tax Shelters

Abusive Tax Shelters are marketing schemes that involve artificial transactions with little or no economic foundation. Generally, you invest money to make money. Abusive Tax Shelters offer:

• Inflated tax savings based on large write-offs and credits that are usually out of proportion to your investment.
• Little risk despite outward appearances.

Congress has enacted a series of income tax laws designed to halt the growth of abusive tax shelters.  Also, a substantial amount of penalties and interest may result if claimed tax benefits are disallowed or you fail to disclose certain information.

Employee Plans Abusive Tax Transactions

The IRS is engaged in extensive efforts to curb abusive tax shelter schemes and transactions. The Tax Exempt and Government Entities Division of the IRS, including the office of Employee Plans, participates in this IRS-wide effort by devoting substantial resources to the identification, analysis, and examination of abusive tax shelter schemes and promotions.

• Listed Transactions
  
  The IRS finalized regulations on abusive tax shelters. The regulations provide that a taxpayer must disclose certain transactions, known as "listed transactions," by filing a disclosure statement (Form 8886) with its tax return.
  
  A "listed transaction" is a transaction that is the same as, or substantially similar to, one that the IRS has determined to be a tax avoidance transaction and identified by IRS notice or other form of published guidance. The parties who participate in listed transactions may be required to disclose the transaction as required by the regulations, register the transaction with the IRS, or maintain lists of investors in the transactions and provide the list to the IRS on request.
  
  The IRS had identified the following transactions involving employee benefit plans as listed transactions:
  
  
  • S Corporation ESOP Abuses: Certain Business Structures Held to Violate Code Section 409(p)
    
    
  • S Corporation ESOP Abuse of Delayed Effective Date for Section 409(p)
    
    
  • Deductions for Excess Life Insurance in a Section 412(i) or Other Defined Benefit Plan
    
    
  • 401(k) Accelerated Deductions
    
    
  • Collectively Bargained Welfare Benefit Funds under Section 419A(f)(5)
    
    
  • Certain Trust Arrangements Seeking to Qualify for Exemption from Section 419
    
    
  • Abusive Roth IRA Transactions
    
    
• Abusive Transactions That Affect Availability of Programs under EPCRS
  A detailed explanation on how abusive transactions are affected by the new Employee Plans Compliance Resolution System eligibility requirements.
  
  
• IRS Corporate Abusive Tax Transactions Home Page
  Listed transactions, with citations of published guidance, regulations or court cases and other useful resources.
  
  
• Press Releases
  

Treasury, IRS Issue Section 409(p) Final Regulations
The Treasury Department and IRS issued final regulations under Section 409(p). That section of the tax law generally prohibits accruals or allocations under an employee stock ownership plan (ESOP) that holds stock of an S corporation where the ownership interest in the ESOP or in rights to acquire the corporation are so concentrated among 10 percent owners that they hold 50 percent or more of the interests in the corporation. The final regulations are available for review. (12/16/2006)

• Abusive Transaction Settlement Initiative
  Internal Revenue Service officials announced a broad-based, limited-in-time opportunity for taxpayers to come forward and settle an array of transactions the IRS considers abusive. (10/27/2005)

Report an Abusive Transaction Involving a Retirement Plan

Employee Plans maintains the Abusive Transaction Hotline that people can use to share information (anonymously, if preferred) about abusive tax shelters and emerging issues that may be abusive in retirement plans:

• Telephone: (410) 962-9547 (not toll-free)
• Fax: (410) 962-0132
• Email: tegeepsheltercoord@irs.gov
• Mail:
        Internal Revenue Service
        EP Tax Shelter Coordinator
        31 Hopkins Plaza, Room 1542
        Baltimore, Maryland  21201

General Questions About Retirement Plans
Technical and procedural questions about retirement plans are answered by EP Customer Account Services. Questions should be directed to (877) 829-5500 (toll-free number).

Important References

Form 8271	Investor Reporting of Tax Shelter Registration Number
Form 8275	Disclosure Statement
Form 8275-R	Regulation Disclosure Statement
Form 8582	Passive Activity Loss Limitations
Form 8886	Reportable Transaction Disclosure Statement
Publication 925	Passive Activity At-Risk Rules to the important references.
Publication 550	Investment Income and Expenses

Web Link

Abusive Tax Shelters and Transactions