Subject: NYTimes on US taxation system (for Salil)
Date: Thu, 27 Dec 2001 22:13:09 +1300


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The New York Times

December 26, 2001

I.R.S. Offers Amnesty to Companies That Admit Tax Indiscretions

By DAVID CAY JOHNSTON

Tax shelters, many of them illegal, saved big companies at least $14.7 billion in federal income taxes last year, a senior Internal Revenue Service official said on Monday. Now all companies are being offered an amnesty in return for confessing their illegal tax avoidance.

 The 95 companies that have already confessed their tax avoidance strategies to the I.R.S. this year shorted the government an amount equal to a dollar a week for every man, woman and child in America.

But the amount of tax burden that big companies shrugged off may be much larger because the 95 companies are a slice of the 1,700 large corporations that are prime customers for tax shelter promoters.

"This may only be the tip of the iceberg," said Larry R. Langdon, the I.R.S. commissioner for midsize and large businesses. He said a survey of corporate income tax audits in October found 413 shelters that involve $16.2 billion of potential taxes.

 In a break from past practice, Mr. Langdon announced on Friday that companies that disclosed dubious tax shelters, and the promoters who sold them, by April 23 would not be charged the usual 20 percent penalty on taxes that were improperly avoided.

 "This is our Christmas present to big companies," he said. "We're going to determine who's naughty and who's nice" by waiving the 20 percent penalty for those who are nice to the I.R.S.

 Mr. Langdon said that in the first 11 months, under new regulations, companies voluntarily disclosed 72 illegal tax shelters, 41 percent more than the 51 disclosures in 2000. These shelters, prohibited by Treasury regulations, saved the 95 companies that confessed $4.4 billion in taxes in 2000. In 1999, companies admitted saving $3.7 billion through prohibited tax shelter deals.

 In addition this year, companies disclosed 200 other questionable shelters that saved an additional $9.7 billion in taxes last year. Some of those shelters ultimately may be approved in I.R.S. audits as aggressive but legal tax planning.

 Mr. Langdon said he was frustrated at the need to assign many of his auditors to ferret out dubious tax shelters, which can be easily missed in the stacks of accounting records that big companies attach to their returns. And, he said, it is unfair that some companies that are caught must pay their taxes, plus interest and the 20 percent penalty, while those that elude detection benefit from their misconduct.

 Companies that acknowledge using tax shelters would still owe any taxes that were improperly avoided, as well as interest.

Companies that disclose can pay or they can sue the I.R.S., hoping to persuade a judge that the tax savings were a byproduct of legitimate business transactions. Tax planning to reduce taxes as a byproduct of legitimate transactions is legal, while transactions done solely to reduce taxes are illegal.

Mr. Langdon said he hoped that the penalty waiver was a big enough incentive to prompt universal confession. The waiver is worth as much as $2.9 billion to the 95 companies that have already confessed to the I.R.S. Companies that do come in must identify the promoter who crafted the plan to qualify for the penalty waiver.

The I.R.S. has identified 28 tax shelter promoters so far, according to an I.R.S. document that was used for a briefing of senior Treasury tax policy officials on Dec. 18 about the corporate tax shelter problem. Seven promoters are accounting firms and seven are brokerage houses. The other 14 were not characterized.

 Tax shelter promoters are required to maintain lists of customers and to disclose those to the I.R.S. Because of the promoter disclosure provisions, companies that do not come forward face an almost certain prospect of being found out and then being forced to pay the 20 percent penalty on top of the taxes owed and the interest.

 The new I.R.S. data provide strong support for the warning by Lawrence H. Summers in February 2000, when he was Treasury secretary, that illegal corporate tax shelters were costing taxpayers at least $10 billion a year. He said illegal corporate tax avoidance "may be the most serious compliance issue threatening the American tax system today."

 In the late 1990's, the share of corporate profits reported to shareholders that was taxed by the government declined. Even after taking into account the favorable tax treatment of employee stock options, the share of profits that was taxed fell, several studies have shown, raising questions about how much of the decline was the result of illegal tax shelters.

 The new I.R.S. data provides some evidence that the use of illegal tax- avoidance techniques is common at many large corporations.

The new I.R.S. data also comes as the Bush administration is seeking to give more than $200 billion in tax breaks to corporations over three years as part of an economic stimulus package. The measure is dead for this year because of opposition by Senate Democrats to other provisions, but reducing corporate taxes is a goal of the Bush administration and has generally been accepted by both parties in the last year.

Closing tax shelters not only costs money for auditors but also for litigation, which typically continues for more than a decade and costs the government and shareholders.

 Illegal corporate tax shelters involve transactions that have no economic significance but create the appearance of legitimate expenses that can be deducted. Some of these deals involve trading stocks at prearranged prices to take advantage of differing tax rules in different countries. Another technique involves temporarily swapping ownership interests within partnerships to take advantage of accounting rules on deferring income.

Many of the techniques are so sophisticated that they can easily be disguised in the flow of billions of dollars each year through large corporations.

Copyright 2001 The New York Times Company

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