Disclosure and Civil Penalty Rules in the U.S. Legal Response to Corporate Tax Shelters

This paper, written for a European conference on tax and corporate governance, evaluates two aspects of the U.S. legal response to corporate tax shelters: the civil penalty rules and the disclosure rules. It argues that, while the disclosure rules do not impose undue burdens, their usefulness to the IRS is limited by the difficulty of steering between the twin dangers of under-disclosure (permitting taxpayers to conceal close cousins of reportable transactions) and over-disclosure (creating information overload for the IRS). Thus, expanded reporting requirements with respect to book-tax differences in income accounting are likely to prove more useful to the IRS. With respect to penalties, the paper argues that the rules' main flaw is excessive reliance on taxpayer good faith, which induces shopping around for "penalty shield" opinions from tax lawyers. To address this problem and create a better set of incentives in the "audit lottery," the paper argues for no-fault civil penalties, with penalty insurance serving to address any concerns about the proportionality of sanctions imposed on risk-averse taxpayers who may have been acting in good faith