Abusive Tax Shelters

PATS Audit

The Tufts Law Firm can assist in conducting a PATS audit.  By a "PATS" (potentially abusive tax shelter) audit, the firm will look at any transaction to see if it is the same or substantially similar to transactions identified by the IRS as "listed transactions" or alternatively, if the transactions are any other type of "reportable transactions" or even a "transaction of interest."  The firm may also assist in reviews or render opinions as to previously filed IRS Forms 8886, or represent taxpayers in any disputes with the IRS in litigation over any PATS, application of penalties, or in the pursuit of any private letter ruling determination as to whether a transaction is or is not a "listed transaction."  

Practitioners are well advised to fully consider recent case law developments, including those that address how in order to meet the disclosure requirements under I.R.C. Section 6011, they must "substantially" comply.  To "substantially comply," practitioners need to fully consider decisions like Soni, Inc. v. Commissioner, T.C.Memo 2013-30 (1-28-2013), holding that IRS Forms 8886 must be filed at both the corporate and shareholder levels as to transactions impacting pass-through entities, and also, show that an attempt was made to also submit the Form 8886 to the OTSA.  

According to IRS instructions to the IRS Form 8886, as to previously undisclosed transactions and concerns about the statute of limitations under IRC Section 6501(c)(10):

Previously Undisclosed Listed Transactions

If you are required to disclose a listed transaction and fail to do so within the time and manner prescribed under section 6011 and the related regulations, then under section 6501(c)(10) the period to assess any tax with respect to the listed transaction will be extended beyond the normal assessment period until one year after the earlier of either:

  • The date you disclose the transaction by filing Form 8886 in the manner prescribed in Rev. Proc. 2005-26, 2005-17 I.R.B. 965, available at www.irs.gov/pub/irs-irbs/irb05-17.pdf (or subsequently published guidance), or

  • The date that a material advisor provides the information required under section 6112 in response to a request by the IRS under section 6112.

Section 6501(c)(10) is effective for tax years with respect to which the limitations period on assessment did not expire prior to October 22, 2004. Section 6501(c)(10) does not revive an assessment period that expired prior to October 22, 2004. For more information, see Rev. Proc. 2005-26.

If you are filing Form 8886 to disclose a previously undisclosed listed transaction for purposes of section 6501(c)(10), submit the form and a cover letter to the Internal Revenue Service Center where your original tax return was filed. Write across the top of page 1 of each Form 8886 the following statement: Section 6501(c)(10) Disclosure? followed by the tax year and tax return to which the disclosure statement applies. For example, if the Form 8886 relates to your Form 1040 for the 2002 tax year, you must include the following statement: Section 6501(c)(10) Disclosure; 2002 Form 1040? on the form. The cover letter must identify the tax return to which the disclosure statement relates and include the following statement signed under penalties of perjury by the taxpayer and, if applicable, the paid preparer of Form 8886: Under penalties of perjury, I declare that I have examined this reportable transaction disclosure statement and, to the best of my knowledge and belief, this reportable transaction disclosure statement is true, correct, and complete. Declaration of preparer (other than the taxpayer) is based on all information of which the preparer has any knowledge.? Separate Forms 8886 and separate cover letters must be submitted for each tax year for which you participated in the undisclosed listed transaction. You must also submit a copy of the form and cover letter simultaneously to OTSA at the OTSA address indicated on page 4. See Rev. Proc. 2005-26 for additional guidance.

On March 31, 2015, the IRS released final regulations governing the rules on undisclosed tax shelter transactions, guided by IRC Section 6501(c)(10), which provides for an extended one-year period.  Essentially, a rule of strict compliance is now in place, such that the statute of limitations will not begin to run until certain conditions are met.  For example, only information provided by a material advisor will meet the requirements.  Also, if a material advisor furnishes the IRS with information but that information does not identify the taxpayer as a person who entered into the listed transaction, then the requirements are not met.  If a material advisor sends information to the IRS, as in response to an IDR, but has not made a request for it under IRC 6112, then the clock does not start to run on this one-year extended assessment period.  See and cf. Bemont Investments, LLC v. United States (ED Tex., 5th Cir. 2012)(information provided by Deutsche Bank not in a form complying with the requirements and buried in document production did not meet the criteria for a proper disclosure, reversing district court that held that the IRS had "enough" information to act on it, but failed to do so).

For more information, practitioners and consumers are well advised to consider:

Form 8886 & Instructions:
Form 8886-T & Instructions: