Starting in 2011 or later, the IRS will be requiring businesses to volunteer more information about their tax avoidance practices and transactions. I use the word “volunteer” loosely. Currently, businesses and even savvy individual taxpayers do all that is possible to reduce the amount of tax owed to the government, even to the point at which the practices, although not illegal, may be flagged for scrutiny by the IRS.
The new regulations would force businesses to list their questionable transactions and calculate how much additional tax they would owe if the IRS were to disallow their practices.
Here are more details from The New York Times:
Corporations routinely use sophisticated tax transactions to lower their federal tax bills by billions of dollars. While the new rule will provide the I.R.S. a glimpse into aggressive shelters, it will also allow the agency to study whether companies are correctly computing tax benefits.
The rule covers transactions for which companies have not established tax reserves under Fin 48 rules because they think they would win any legal skirmishes with the I.R.S. in tax court. And it covers transactions that have not traditionally been the focus of I.R.S. legal actions.
Companies that fail to report this information on an annual basis could be required to pay penalties. This seems to ensure that someone at every corporation will perform a cost-benefit analysis to determine whether it’s better to pay a penalty or risk being required to pay the estimated additional tax reported.
The fact that this would be necessary is just another indication that the income tax system needs to be drastically overhauled. I still haven’t read about a replacement plan that I like — not the flat tax, “fair” tax, nor a value-added tax. A better system might involve lower overall rates with fewer deductions. With so much political disagreement, I expect there will never be a major shift in tax policy.
I.R.S. Moves to Uncover Dubious Use of Shelters, Lynnley Browning, New York Times, January 26, 2010
Published or updated January 27, 2010.