Congress set to raise the roof on tax shelters. (Washington Insights).

Are corporate tax shelters still a problem for the federal government? Many influential people on Capitol Hill -- and in the Administration -- seem to think so, and they have pledged to do something about it.

At a March 21 hearing of the Senate Finance Committee, Chairman Max Baucus (D-Mont.) and Ranking Republican Charles Grassley (R-Iowa) promised to introduce legislation aimed at preventing corporate inversion transactions and abusive tax avoidance transactions. Sen. Baucus expressed real concern about inversion deals, in which U.S. companies reincorporate in off-shore tax havens to avoid paying U.S. taxes.

As he put it, "[These companies] are, in effect, renouncing their U.S. citizenship to cut their taxes." While he admitted that the committee should take a hard look at the structure of U.S. international tax rules, Sen. Baucus emphasized the need to move quickly to block further inversion deals.

Both senators said they plan to move "expeditiously" on the inversion legislation, adding that companies should not rush to complete these transactions before the legislation is introduced. If they do, the senators said, they will "proceed at their own peril."

The tax shelter legislation, which has been under development by the Senate Finance Committee since 1999, is now in its third iteration. The most recent draft, released last August, includes many of the changes recommended by the Treasury Department and the general public. The newly revised bill is expected to include additional disclosure requirements, enhanced penalties for non-compliance, stricter liability for promoters and reform of the use of legal opinions. If Senator Grassley has his way, the bill will also include a "safe harbor" provision to ensure that the IRS does not overreach and that legitimate business planning is shielded from penalties.

The Administration is urging Congress to increase penalties for taxpayers and "promoters" -- typically, the tax departments in Big Five accounting firms that develop ideas for cutting corporations' tax bills, then "promote" them - that fall to comply with disclosure, registration and list-keeping requirements. Under the Treasury proposal, a corporate taxpayer could be penalized $200,000 for failure to disclose a listed transaction, regardless of whether its tax benefits are ultimately sustained on the merits. In addition, if the corporate taxpayer fails to disclose and loses on the merits, the taxpayer would face a strict liability penalty of 25 percent of its claimed tax savings.

Promoters would also face tough sledding under Treasury's legislative proposals. For example, a promoter who fails to register a listed transaction would be subject to a $200,000 fine or 50 percent of fees, whichever is greater. In addition, since Treasury wants to ensure that promoters identify taxpayers who have invested in reportable transactions, it has asked for an escalating penalty that would increase by $10,000 for each day that a promoter fails to turn over, in writing, a list of investors requested by the IRS.

Treasury's administrative initiatives would simplify and broaden the rules governing taxpayer disclosure and promoter registration and list-keeping. For example, Treasury and the IRS plan to develop a single definition of a reportable transaction for purposes of the disclosure, registration and list maintenance rules. The definition will allow the IRS to move quickly from a taxpayer's disclosure to a promoter's list of investors to other taxpayers who engaged in the reportable transaction.

What should we eventually expect to see? Undoubtedly, Treasury will implement the regulatory changes described above, and will continue to work with the Senate Finance Committee to shape a legislative proposal acceptable to the Administration. Senate observers expect the legislation to be considered on the Senate floor sometime this summer, where it should garner strong support for at least two reasons: (1) it appears to be "Enron reform" legislation; and (2) it will be identified as a revenue-raiser by the Congressional Budget Office.

While the bill will not generate substantial revenue for the government, it should produce enough to offset the extenders that were passed earlier this year. If this happens, the House Ways and Means Committee will almost certainly be forced to consider a companion bill. In short, corporate tax reform could very well happen in the 107th Congress.

Mark Prysock is FEI'S Director of Tax and Economic Policy.