The Cost of Risk: Cutting a deal with the taxman

If a lawyer or accountant recently persuaded you to execute a transaction that would save you or your company big money on taxes, you might want to take another look at that deal ASAP. The Internal Revenue Service is offering taxpayers an opportunity to settle a number of transactions it considers abusive, but you must submit settlement papers to the agency by Jan. 23.

Under the initiative, the IRS has identified 21 types of abusive transactions eligible for settlement. The eligible transactions involve individuals and large and small businesses and range from complicated, risk-free offsetting currency transactions to products sold to small businesses involving health insurance plans. More specifically, the abusive transactions include a wide cluster of schemes involving funds used for employee benefits, charitable remainder trusts, offsetting foreign currency option contracts, debt straddles, lease strips and certain abusive conservation easements. All eligible transactions carry the same settlement terms except the applicable penalty level.

Under the settlement terms, individuals and companies must pay 100 percent of the taxes owed plus interest – but only a portion of the penalty IRS otherwise would seek. There is penalty relief for transactions disclosed to the IRS or where the taxpayer got a tax opinion from an independent tax adviser. Transaction costs paid by the taxpayer to do the deal, including professional and promoter fees, will be allowed.

“People entered into these deals often at the behest of lawyers and accountants peddling flaky tax products,” said IRS Commissioner Mark Everson in announcing the initiative last year. “Times have changed. The IRS has acted to shut down these deals, as has the Congress, in passing stiffer disclosure requirements and promoter penalties last fall. We’re offering taxpayers a quick, quiet and cost-effective way to put these deals behind them.”

The IRS has now identified more than 4,000 taxpayers involved in these 21 transactions and continues to uncover additional participants through tax return examinations and the agency’s promoter audit program.

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For more information on the abusive transaction settlement initiative, visit this site and search IR-2005-129.

You could take a chance, of course, that the IRS will never catch you. But is that a risk you want to take?

Is your safety worse on paper?
Suppose you had 200 trucks but the Federal Motor Carrier Safety Administration thought you only had 20. Big deal, you might think. Actually it is, because your safety record might look worse on paper than it is in reality.

Certain safety metrics – recordable accident rate, for example – are determined by dividing a total number of accidents by the number of power units or drivers in an operation. So if you operate 200 trucks but FMCSA uses 20 trucks as the divisor in SafeStat, your numbers in that category will be worse than they should be. Consequences include increased scrutiny and greater risk for drawing a compliance review.

Each registered motor carrier must update its MCS-150 every two years according to a schedule determined by the last two digits of the carrier’s DOT number. But carriers can submit new MCS-150s as often as they wish.

Despite the requirement for updates and the incentive for growing carriers to file frequently, a large number of carriers don’t keep their data up to date. In a February 2004 report, the Department of Transportation’s Office of Inspector General disclosed a lack of updated census data – such as number of power units and drivers – for 42 percent of the 643,909 active carriers. For a copy of Form MCS-150, visit this site.