Tax Shelter Penalties -- Other Costs of Being a Player

Practitioners tend to focus principally on civil and criminal tax penalties when trying to discourage clients (taxpayers or promoters) from aggressive tax shelter activity. For the well counseled and level headed client, these penalties are often sufficient. These penalties have sometimes not been decisive in discouraging the activity, particularly when as imagined in KPMG, the civil penalties are factored in as just a cost of doing business.

There are other discouragers, though. Jay Soled, Professor at Rutgers, has published an article on a topic that should be dear to our tax shelter and tax shelter promoter clients hearts. The article is titled, Tax Shelter Malpractice Cases and Their Implications for Tax Compliance, published at 58 Am. U. L. Rev. 267 (2009). Professor Soled makes the case that these malpractice cases serve to punish professional promoters' (lawyers, accountants, etc.) inappropriate tax shelter behavior and, as a result, discourage future inappropriate tax shelter behavior. He thus argues for more, not less, malpractice claims and suits, as a key part of the overall system to discourage this activity so clearly damaging to a civilized socity.

In the article, Professor Soled also discusses (p. 305) the new whistleblower regime offering substantial rewards that should have a discouraging effect on abusive tax shelters, because outliers will have a financial incentive to disclose to the IRS. In the latter regard, decision makers in corporations with significant tax departments need to be wary of incentivizing an employee to go to the IRS. While whistleblowers will not necessarily increase the cost to taxpayers upon whom the whistle is blown, they will increase the likelihood of being caught and, possibly, even the bottom-line cost if the whistleblowers deliver up more solid information upon which the IRS can assert the accuracy related or even civil fraud penalty.