None of us enjoy receiving letters from the IRS. Some might argue and claim a refund is a nice thing to receive from the IRS but those checks come from the U.S. Treasury. While often a letter from the IRS signals an audit or notice saying that you owe more money, former HP board member and Oracle executive Ray Lane received a particularly nasty surprise in the mail. The IRS claims that an investment fund he owns is an abusive tax shelter. They say he now owes $100,000,000.00
That’s a lot of zeroes.
There are dozens of abusive tax shelters in the marketplace. We are surprised by how many otherwise smart people and well known accounting firms get stuck holding or recommending these schemes. In Lane’s case, the IRS says his fund was a partnership option portfolio securities scheme or POPS for short. (This is one that even we have not seen.)
According to the IRS, the fund was set up to conceal payments to fund managers and generate losses. Those losses would be used to offset the tens of millions of dollars of gains made by Lane from stock options.
The old adage about there being no such thing as a free lunch certainly applies to abusive tax shelters. Creative accountants frequently dream up new schemes that promise above market returns or promise to “legally” offset or hide income. When you hear claims like that you certainly want to believe. After all, who wants to pay taxes.
Unfortunately, most such claims are false. Worse, the IRS considers many to be abusive tax shelters which can set you up for huge civil “listed transactions” penalties.
There is really no reason for accountants to make mistakes. The IRS publishes a list of abusive tax shelters and takes the position that simply making a few cosmetic changes to an otherwise fraudulent scheme won’t make it legal. (Recently we reported on another tax shelter case in which U.S. District Court Judge Brian Jackson said, “tax law deals in economic realities, not legal abstractions.” He also upheld an assessment of penalties because any reasonable and prudent person should have known that the tax shelter in that case was “too good to be true.”
Lane says he will appeal. He claims the fund was legitimate and denies the abusive tax shelter claims.
If you think you have invested in an abusive tax shelter, seek a second opinion from a qualified tax lawyer immediately. The IRS has established very strict reporting and penalty requirements for people found holding such a shelter. Even if the shelter passes IRS scrutiny, you could still be fined for not alerting the IRS to the shelter!
Luckily, the IRS operates on a voluntary compliance model meaning if you self report and fix the problem, penalties are usually much lower.
Our tax lawyers have dealt with a wide range of abusive tax shelters. From phony 419 and 412 “welfare benefit plans,’ to captive insurance companies, we can help with both representation before the IRS (audit defense, criminal tax defense and listed transaction penalties) and in pursuing malpractice claims against the accountant or lawyer that designed the shelter.
For more information, contact attorney Bethany Kroes at or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence. Many cases, including abusive tax shelter penalty abatement requests and appeals, can be handled for a flat fee.
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS tax services available worldwide.
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Written by Brian Mahany, Esq.