The (Uncertain) Future of Corporate Tax Shelters

Corporations and their shareholders have always sought opportunities to avoid entity- and shareholder-level tax liabilities under the U.S. corporate tax system. In response to the tax shelter boom of the late 1990s, Congress adopted what can be described as an “activity-based” approach to corporate tax enforcement. The reportable transaction disclosure rules target specific corporate activities and transactions that may be abusive. Because corporate tax shelters are often difficult for the IRS to detect, US tax law mandates that taxpayers and their advisors disclose to the IRS instances in which they have participated in transactions that bear tax shelter traits. Every year, thousands of US taxpayers and their advisors mail special disclosure forms that may reveal potentially abusive tax strategies, including “listed transactions” and “transactions of interest,” to the IRS Office of Tax Shelter Analysis.Despite their potential tax enforcement benefits, the reportable transaction disclosure regime faces an uncertain future. Even though taxpayers and advisors must disclose potential tax shelters to the IRS using special forms, it is unclear whether the IRS has the resources necessary to review these disclosures and pursue audits and potential tax controversies. The IRS has also significantly curtailed its designation of tax strategies as listed transactions and transactions of interest. And in 2021, the US Supreme Court held that taxpayers and their advisors may seek pre-enforcement actions against the IRS’s notices that designate tax strategies as reportable transactions without violating the Anti-Injunction Act.In this chapter, we introduce a new approach to tax enforcement against corporate tax shelters in the United States. We argue that the reportable transaction rules face significant limitations as the government’s primary response to abusive corporate tax shelters today. As we argue, these rules are reactive in that they often apply to emerging tax avoidance schemes rather than as a means of preempting abusive corporate tax planning. In addition, these rules may fail to deliver information that the IRS can use to detect corporate tax abuse, including due to manipulation of the disclosed information by the taxpayer. Finally, the IRS is likely to face litigation hurdles in designating “listed transactions” and “transactions of interest” through preemptive taxpayer challenges under the Administrative Procedure Act. In response, we propose three policy reforms that would mandate preemptive disclosure of broader categories of information related to tax planning from corporate taxpayers, in addition to the specific information that the reportable transaction rules currently target