Saturday, November 25, 2006
Yoram Keinan (Ernst & Young, Washington, D.C.) has published Playing the Audit Lottery: The Role of Penalties in the U.S. Tax Law in the Aftermath of Long Term Capital Holdings v. United States, 3 Berkeley Bus. L.J. 381 (2006). Here is part of the Introduction:
This Article focuses on business entities and assumes that business entities decide whether to enter into a tax-motivated transaction based solely on quantitative economic considerations. It is unquestionable that the primary purpose behind the enactment of the various accuracy-related penalty provisions in the Internal Revenue Code was to deter taxpayers from "playing the audit lottery." As of today, the various penalty provisions have only partially achieved their stated goals. In 1999, the Treasury and the Joint Committee on Taxation issued lengthy reports pertaining to the problem of tax shelters. While the Joint Committee and Treasury focused on increasing the rates of penalties as a means to reduce tax-motivated transactions, in recent years, the pendulum has shifted to disclosure rules (mainly, the reportable transactions rules).
This Article discusses these two measures as well as various others taken by Congress and the Treasury in recent years to crack down on tax-motivated transactions. By using cost-benefit analysis, I will evaluate the effectiveness of these measures and show that in order to reduce the taxpayer's incentive to play the audit lottery, Congress must focus on increasing the likelihood that the taxpayer will face audit and detection rather than the penalty rate