Vagueness, Lack of Proportionality Plague Administration's Tax Shelter Proposals, TEI Testifies to Senate Committee on Finance.

The Clinton Administration's proposals to rein in corporate tax shelters can potentially exceed the civil fraud penalty and grant too much discretion to IRS field agents, Lester D. Ezrati, president of Tax Executives Institute, told the Senate Finance Committee during his April 27 testimony in Washington, D.C. TEI testified as part of a series of hearings Congress is holding on the Administration's budget proposals. Included in those proposals are 16 provisions related to so-called corporate tax shelters.

"The Administration's proposals contain several subjective terms that currently remain undefined," Mr. Ezrati stated, "and the cumulative effect of this vagueness is a set of proposals so fraught with ambiguity that they will inhibit the ability of corporate taxpayers to conduct routine, non-abusive transactions." Mr. Ezrati also noted that, although the Institute appreciates the Treasury Department's desire to "increase the stakes" by enacting a no-fault penalty, the imposition of a strict liability penalty will ultimately breach the trust that Congress sought to create in enacting the IRS Restructuring and Reform Act.

"TEI is not among those who believe no problem exists," Mr. Ezrati said, "but care must be taken to ensure that the solutions are measured and balanced."

TEI's testimony appears in this issue of The Tax Executive, beginning on page 258.

Comments on Penalty and Interest Study

In response to requests from the Internal Revenue Service and the Joint Committee on Taxation, TEI has submitted recommendations on ways to simplify and improve the current penalty and interest provisions of the Internal Revenue Code. In comments filed on April 21, the Institute offered four principles that should drive the establishment of an effective and fair penalty regime that encourages voluntary compliance:

* Penalties should be used to punish intentional or negligent noncompliance, not inadvertent errors or omissions.

* Each penalty should be capable of being abated within the IRS subject to a reasonable cause standard.

* Penalties should encourage disclosure.

* Penalties should not be used to raise revenue.

TEI's submission also addressed the Code's interest provisions, recommending that the interest rate differential -- the difference between the interest earned on overpayments and the interest paid on underpayments -- be eliminated. Other issues raised included interest netting, computations, abatements, and Tax Court jurisdiction. TEI's...