Thursday, November 10, 2022
Joshua D. Blank (UC-Irvine; Google Scholar) & Ari D. Glogower (Northwestern; Google Scholar), The Trouble with Targeting Tax Shelters, 74 Admin. L. Rev. 69 (2022) (reviewed by Michelle Layser (San Diego; Google Scholar) here):
Abusive tax shelters—complex transactions that produce tax benefits that Congress never intended, but that may resemble legitimate business deals—frequently escape IRS detection. For the past 20 years, the federal government has attempted to bolster the IRS’s ability to detect these transactions by requiring taxpayers and their advisors to disclose “reportable transactions” to the IRS Office of Tax Shelter Analysis. While mandatory disclosure rules can serve valuable tax enforcement functions, including deterrence of abusive tax planning, they are also subject to significant limitations, especially when applied against high-income and wealthy taxpayers who have access to sophisticated legal counsel. In July 2021, the U.S. Supreme Court introduced an additional potential obstacle as a result of its decision in CIC Services, LLC v. Internal Revenue Service—the reportable transaction rules may now be subject to preemptive administrative law challenges without being barred by the Anti-Injunction Act.
This Article argues that in the wake of CIC Services, policymakers should look beyond simply reforming the IRS’s process of issuing tax shelter notices to avoid potential administrative law challenges. Instead, they should reconsider more generally the government’s primary reliance on “activity-based rules” to combat abusive tax planning. This Article brings new perspective to the challenges of targeting tax shelters and explains how they result from the government’s activity-based approach.
In contrast to this activity-based approach, the Article describes how the government should also incorporate an “actor-based” approach to combatting abusive tax planning, which would adjust the tax compliance rules based on the economic circumstances of the taxpayers, rather than solely as a result of their activities. High-income and wealthy taxpayers could be subject to adjusted tax compliance rules, such as higher tax penalties, longer statutes of limitation, narrower penalty defenses, or additional information reporting obligations. This actor-based approach offers specific advantages following the decision in CIC Services, and can be coordinated with the current reportable transaction rules to provide a more robust and comprehensive approach to combatting abusive tax planning.