Finance Committee to Review Tax Code Penalties, Including Corporate Tax Shelter Proposals
WASHINGTON -- Senate Finance Committee Chairman William V. Roth, Jr. today announced that the Senate Finance Committee will hold hearings on tax code penalties, including corporate tax shelter proposals, after completion of tax penalty and interest studies by the Treasury Department and the Joint Committee on Taxation.
The Internal Revenue Service Restructuring and Reform Act of 1998 ("the IRS Reform Act") required the Department of Treasury and the Joint Committee on Taxation to each conduct a separate study reviewing the administration and implementation by the Internal Revenue Service ("IRS") of the interest and penalty provisions of the Internal Revenue Code of 1986. The law also requires the study to include any legislative and administrative recommendations deemed appropriate to simplify penalty or interest administration and reduce taxpayer burden. These studies must be submitted to the House Ways and Means Committee and the Senate Finance Committee by July 22, 1999. It is expected that these studies will be completed in a timely fashion.
"The Treasury White Paper and the two independent studies by the Joint Committee staff and the Treasury Department will assist the Congress in analyzing and reforming present law penalty and interest provisions," Roth stated. "I look forward to receiving public comment on the recommendations made by the Treasury and the Joint Committee staff for addressing corporate tax shelters."
The purpose of tax code penalties is to promote voluntary compliance with tax code requirements and to discourage tax avoidance and evasion. Concerns have been raised that in some instances present law penalties may be overly broad. For example, law abiding taxpayers who are trying to comply with our complex tax laws may be buried under a mountain of pyramiding penalties and interest with no hope of ever paying off their tax liability. However, in other instances penalties may not be sufficient to provide a deterrent to undesired behavior.
In recent years, the Finance Committee has addressed tax shelter transactions on a case by case basis as the staff has become aware of these transactions. The Finance Committee has included measures directed at corporate owned life insurance ("COLI"), liquidating REITs, "Morris Trust" transactions, and section 357© corporate transactions.
In the interim, on February 1, 1999, the Administration included in its FY2000 Budget various proposals to curtail the use of corporate tax shelters. The Administration's proposals recommended changes to substantive provisions of the tax code as well as changes to disclosure requirements and penalty provisions. Many of the Administration proposals were submitted as concepts with details to be forthcoming. After several months, on July 1, 1999, the Department of the Treasury released a more detailed 167 page concept paper, entitled "The Problem of Corporate Tax Shelters" (the "Treasury White Paper") in lieu of a more comprehensive study on penalties and interest as required by the IRS Reform Act. This concept paper analyzes the various issues relating to the specific issue of corporate tax shelters and suggests various modifications to the Administration's original budget proposals.
The Administration's conceptual proposals on corporate tax shelters have generated many thoughtful comments from various professional organizations on how to stem the use of corporate tax shelters. It is clear from submissions and testimony before the Finance Committee that corporate tax shelters present significant and complex issues for legislation and enforcement. Corporate tax shelters should be curtailed without affecting legitimate business transactions. Any legislation on corporate tax shelters should be carefully considered with adequate opportunity for public input. The recent Treasury White Paper suggests significant revisions to the Administration's original proposals. There is inadequate time to discuss and receive public comment on the Administration's conceptual proposals or on recommendations to be made by the staff of the Joint Committee on Taxation in the forthcoming penalty and interest study, before the time specified in the Budget Resolution for the two tax writing Committees to complete action on tax reconciliation legislation.
The Finance Committee hearings will focus on the penalty and interest studies prepared by the Department of the Treasury and the staff of the Joint Committee on Taxation, the Treasury White Paper, and the efforts of the Internal Revenue Service to police corporate tax shelter activity through enforcement activities, such as corporate tax shelter registrations, examinations, application of the present law corporate tax shelter penalties, litigation, and issue coordination by the National Office.
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