Tax Shelters Cost U.S. More Than DollarsDec 6, 2003 | AP The "tax products" as the shelters are euphemistically named by the companies that peddle them have names like BLIPS and FLIP and OPIS.
They're mind-bogglingly intricate, but their aim is clear: to produce phony paper losses or charitable deductions that let the wealthiest corporations and individuals cut their tax rates to the bone. Meantime, the accountants, law firms and investment bankers who collude to market these shelters take a nice chunk of the tax savings.
"SELL, SELL, SELL," urged an internal e-mail at accounting firm KPMG, subject of a report by the Senate permanent subcommittee on investigations minority staff. And so they did: The Senate report found that KPMG made more than $124 million in total fees on four tax shelters, three of which the Internal Revenue Service has determined to be potentially abusive of the tax laws or illegal, and one of which remains under review. Those who purchased the KPMG shelters were able to claim $5.8 billion in losses.
While the extent of the tax shelter problem is difficult to gauge, the best estimates put the annual cost to the Treasury at more than $10 billion. That doesn't include the accompanying revenue losses to states, or the corrosive effect on a tax system that depends on voluntary compliance.
The latest round of hearings conducted by Sens. Carl Levin, D-Mich., and Norm Coleman, R-Minn. underscores the need for new laws and regulations to crack down on such abuses, and, equally as important, extra resources for the IRS to go after them.
The penalty for promoting an abusive tax shelter needs to be dramatically increased from the current and laughable $1,000.
Some of the leading tax firms may emphasis on the "may" be cleaning up their acts, but other operations will fill the void as long as the business remains so lucrative and the risk so low. Accounting firms can't be permitted to continue to promote these questionable products to the very companies whose books they audit or to their officials. And it's time for both the accounting and legal professions to end what IRS Commissioner Mark Everson has described as the "erosion in professional ethics" that has accompanied indeed enabled the boom in tax shelters.
The most disgusting practice is the sale of "opinion letters" attesting to the likely legality of the sheltering scheme. Law firms, enlisted by the accounting companies to back up their schemes, charge $50,000 a pop for these mass-produced letters which purchasers then use to shield themselves from liability in the unlikely event their shelter is challenged.
Which raises the issue of resources. Providing extra money to crack down on tax shelters is a government cost that can pay for itself, though it doesn't show up that way on the budget scorecard. The IRS has stepped up its activities against shelters, but its enforcement budget has dwindled: Between 1996 and 2002, the number of IRS employees who perform audits, collect revenue and conduct criminal investigations fell by almost one-third.
Taxpayers have a right to polite, accurate service from the IRS. They also have a right to expect that all taxpayers rich and poor alike are paying their fair share.