Tax Watch: IRS targets accounting firms for shelter data

The Internal Revenue Service plans to take action against two unnamed accounting firms as part of its efforts to crack down on abusive corporate tax shelters, the agency recently confirmed.

Financial advisers are required to register tax shelters with the IRS and maintain lists of those who use them.

Putting pressure on tax-shelter promoters could be an effective way for the IRS to identify abusive tax shelters, their promoters and those who benefit, often illegally, from them.

This enforcement, the first of its kind, compels the two firms to hand over documents that disclose critical information: which corporations and individuals are invested in the tax shelters, how those vehicles are structured and, most important, whether they are properly registered.

The IRS has issued 132 summonses this year to eight accounting and law firms and investment banks. Only one summons relating to promotion of tax shelters had ever been issued before this year – and that was last year.

The current campaign seeks to enforce summonses that so far have produced disappointing results.

By taking enforcement action, the IRS is deploying a powerful legal weapon against accounting firms and could obtain the names of thousands of businesses and individuals.

“My goal here is simple,” says B. John Williams, the IRS’ chief counsel: “I want to interdict the promotion of abusive tax-avoidance transactions at the front end. To achieve this, we need to obtain and use a web of information from investors and promoters and aggressively pursue questionable transactions that we determine are improper.”

The IRS knows death and taxes

The IRS sometimes seems to be determining not just one, but both of life’s certainties.

The agency just published separately its new life expectancy tables.

“Publication 590 SUPP, Supplement to Publication 590, Individual Retirement Arrangements (IRAs),” is now available through the agency’s website at irs.gov.

The tables were originally part of the final regulations that were issued in April on required distributions from retirement plans. In general, the April rules provide for smaller annual distributions, allowing participants to keep more funds in their tax-deferred plans.

For 2002, taxpayers have the option of using the new life expectancy tables or the tables in the existing “Publication 590.”

The dog probably ate her homework

Today’s excuses are keeping pace with today’s headlines. Rep. Nita Lowey, D-N.Y., blames last year’s anthrax scare for her failure to pay property taxes on her Capitol Hill condo for more than nine months.

The District of Columbia’s Office of Tax Revenue recently listed Ms. Lowey’s name and the address of her apartment in its “annual notice of real property tax sale,” a list of residents who are delinquent in paying their 2001 property taxes.

Elizabeth Stanley, a spokeswoman for the congresswoman, says that after last fall’s anthrax scare, the condo building manager took Ms. Lowey’s name off the placard above her lobby mailbox. The Postal Service subsequently stopped delivering mail to her there, says Ms. Stanley, and Ms. Lowey never received notices that she was delinquent.

Unfortunately, not receiving a bill for the property taxes doesn’t exempt anyone from paying it, at least according to the Office of Tax Revenue. “It’s just the law,” says Virginia Daisley, spokeswoman for the office. “Everyone who owns property knows they have to pay [tax on] it at least once a year. Not checking up on it is not an excuse.”

Although last year’s anthrax scare was touched off in mid-October, Ms. Lowey’s office was unable to explain why the congresswoman did not respond to initial notices sent in August that the tax was overdue.

All the names listed in the published notice of real property tax sale were in arrears as of Oct. 1.

Work-product status isn’t automatic

The U.S. Tax Court has ruled that a defense attorney’s selection of documents doesn’t automatically transmute those documents into a protectable work product.

Jeffrey Hambarian was indicted in California for grand theft, presenting false claims, bribery, breach of fiduciary duty, receipt of stolen property and filing false state tax returns with intent to defraud.

He and his wife were also under investigation by the IRS for fraudulent understatement of income.

The IRS required the couple to provide certain documents and electronic media to the court that were used in Mr. Hambarian’s criminal case. His defense attorney in that case obtained 10,000 pages of documents from the prosecuting attorney, and converted them into portable-document-format files).

The IRS attempted to obtain the documents from the prosecuting attorney, but the attorney refused to do so without a subpoena. The couple also refused to turn over the documents, claiming they were protected by the work-products doctrine.

Tax Court Judge Joel Gerber considered whether the compilation of documents or the creation of electronic databases are protected under the attorney work-products doctrine.

The court concluded that the 10,000 pages aren’t protected even if they did reflect the prosecuting attorney’s mental impressions, because that privilege was abandoned when the prosecuting attorney turned the documents over to the defense attorney.

That distinguished the case from earlier court decisions in which the court concluded that the counsel’s selection and grouping of documents out of thousands produced in the litigation is a “work product” – and off-limits to discovery – because the identification of the documents as a group could reveal the counsel’s selection process and mental impressions.

Courts in more-recent cases have emphasized that the rule of protection applies only when the attorney’s mental impressions would be disclosed by the discovery of the selected materials.

The court in this situation noted that the conversion of paper documents into electronic form in and of itself doesn’t turn otherwise discoverable documents into work product.

Noting that the attorney in this case selected 10,000 pages of documents from a larger set, and given the volume of discoverable documents, the court refused to find that the attorney’s mental impressions could be discerned if the documents were revealed. The judge stated that the use of the work-product doctrine to protect 10,000 pages of discoverable material is excessive.

The judge noted that the couple had only generally alleged that the attorney’s mental impressions would be compromised but hadn’t explained how the selection would reveal those impressions. Noting that the couple could have made arrangements to show documents to the judge in private, the judge concluded that the work-product doctrine wasn’t applicable.

Cite: Jeffrey Hambarian, et ux., v. Commissioner, 118 T.C. No. 35

A Liberty Zone Q&A with the IRS

Workers who toil in the New York Liberty Zone now have a credible source of information for questions on taxes, credits and support.

The IRS has issued a question-and-answer guide that deals with the effect of various tax benefits that have been enacted for areas of New York City affected by the Sept. 11 terrorist attacks. Among those are the New York Liberty Zone business employee credit, qualified New York Liberty Bonds and Liberty advance-refunding bonds.

The guide, for example, discusses a change to the Work Opportunity Tax Credit. The credit now targets individuals who perform substantially all of their services in the zone or, possibly, those employees whose businesses relocated from the zone due to the physical destruction of, or damage to, the workplace on Sept. 11.

The guide, “Notice 2002-42,” also explains the qualified New York Liberty Bonds, a new type of tax-exempt bond created after the terrorist attacks. It also explains how to obtain advance refunds of certain tax-exempt bonds.