Sens. Norm Coleman (R-Minn) and Carl Levin (D-Wis), respectively the chairman and ranking Democrat on the Senate Permanent Subcommittee on Investigations, on Feb. 10 issued ten recommendations for dealing with what they described as "abusive and illegal tax shelters."

The recommendations were summarized by Senator Levin on his website as follows:

1. Enforcement Focus. The Internal Revenue Service and the Department of Justice should continue enforcement efforts aimed at stopping accounting firms and law firms from aiding and abetting tax evasion, promoting potentially abusive or illegal tax shelters, and violating federal tax shelter regulations, and should impose substantial penalties on wrongdoers to punish and deter such misconduct. 

2. Promoter Penalties. Congress should enact legislation to increase the civil penalties on aiders and abettors of tax evasion and promoters of potentially abusive or illegal tax shelters, to ensure that they disgorge not only all illicit proceeds from such activities, but also pay a substantial monetary fine to punish and deter such misconduct. 

3. IRS Appropriations. Congress should appropriate additional funds to enable the IRS to hire more enforcement personnel and increase enforcement activities to stop the promotion of potentially abusive and illegal tax shelters by lawyers, accountants, and other financial professionals. 

4. Economic Substance Doctrine. Congress should enact legislation to clarify and strengthen the economic substance doctrine and to strengthen civil penalties on transactions with no economic substance or business purpose apart from their alleged tax benefits. 

5. Interagency Cooperation. Congress should enact legislation authorizing the IRS to disclose relevant tax shelter information to other federal agencies, such as the Public Company Accounting Oversight Board, federal bank regulators, and the Securities and Exchange Commission (SEC), to strengthen their efforts to stop the entities they oversee from aiding or abetting tax evasion or promoting potentially abusive or illegal tax shelters. 

6. Accountant Rules. The Public Company Accounting Oversight Board should strengthen and finalize proposed rules restricting certain accounting firms from providing aggressive tax services to their audit clients, charging companies a contingent fee for providing tax services, and using aggressive marketing efforts to promote generic tax products to potential clients. 

7. Bank Oversight. Federal bank regulators, in consultation with the IRS, should review tax shelter activities at major banks, and clarify and strengthen rules preventing banks from aiding or abetting tax evasion by third parties or promoting potentially abusive or illegal tax shelters. 

8. Securities Firm Oversight. The SEC, in consultation with the IRS, should review tax shelter activities at investment advisory and securities firms it oversees, and clarify and strengthen rules preventing such firms from aiding or abetting tax evasion by third parties or promoting potentially abusive or illegal tax shelters. 

9. Tax Opinion Letters. The IRS should further strengthen federal tax practitioner rules issued under Circular 230 regarding the issuance of tax opinion letters to ensure that such practitioners, including law firms and accounting firms, have written procedures for issuing tax opinions, resolving internal disputes over legal issues addressed in such opinions, and preventing practitioners or their firms from aiding or abetting tax evasion by clients or promoting potentially abusive or illegal tax shelters. 

10. Charitable Organizations. The IRS should review tax shelter activities at charitable organizations, and clarify and strengthen rules preventing such organizations from aiding or abetting tax evasion by third parties or promoting potentially abusive or illegal tax shelters.

—Donald H. Harrison