Congress takes aim at "aggresive" tax planning.

Two proposed pieces of legislation--one a discussion draft from the staff of the Senate Finance Committee, the other a bill written by a member of the House Ways and Means Committee--reflect bipartisan congressional interest in tightening restrictions on some tax planning services accountants and other professionals offer their clients.

The bills have generated significant controversy, especially over their wide-ranging definitions of a tax shelter. The Senate Finance Committee's draft legislation defines the term "tax shelter" as "any entity, plan, arrangement or transaction if a significant purpose of such entity, plan, arrangement or transaction is the avoidance or evasion of federal income tax."

Many observers feel this definition unjustifiably reaches into the area of legitimate current practices. Similar references in the Internal Revenue Code apply to entities that are "principally," not "significantly," engaged in tax avoidance or evasion. If legislators sign such language into law, critics say, it will enable the IRS to impose burdensome and unjust reporting requirements--as well as excessive penalties--on taxpayers and their advisers.

Congress has been interested in such legislation for some time, however. The Senate Finance Committee released an initial bipartisan staff proposal in May 2000 and a revised staff draft in October 2000. It is not clear when or if a formal bill will emerge from the Senate; the current committee draft is the third iteration. The Senate Finance Committee did not endorse the current draft, which its staff--not the committee itself--prepared. But two senior members of the committee--its chairman, Sen. Max Baucus (D-Mont.), and ranking member Sen. Charles E. Grassley (R-Iowa)--presented it.

In August, both senators expressed in a joint statement their concern over, and intent to address, abusive tax shelter transactions that facilitate avoidance of legitimate individual and corporate tax obligations. They acknowledged, however, that new laws should not interfere with normal business transactions.

In the House, Rep. Lloyd Doggett (D-Texas) introduced the Abusive Tax Shelter Shutdown Act of 2001 (H.R. 2520) in July. Opponents say the Doggett bill would disrupt far more legitimate business transactions than the Senate version would. In presenting it to the House, Doggett focused on capturing what he estimated at $10 billion in tax revenue he claims is lost each year to "abusive" tax shelters. These taxes, he said, while due in any case, now are particularly necessary to help implement a patient's bill of rights and other important initiatives.

AICPA Taxation Vice-President Gerald W. Padwe acknowledges the vanishing budget surplus has orphaned many a worthy cause. But that's no reason, he counters, to levy unfair penalties and other sanctions on legitimate business transactions, taxpayers and their advisers. "Clients come to us to help them in their tax planning because they want to minimize their federal income tax, and that's perfectly legal," he said. "Under these two bills, a lot of the normal tax planning CPAs do for their clients could be characterized as tax shelters and restricted accordingly, so to that extent, we strongly oppose them."

More information on the AICPA position on these issues is available at www.aicpa.org/letters/index.htm.