Tax Promoter Defense

Tax Promoter Defense Tax Litigation

  • Attorneys in Freeman’s tax controversy and litigation practice have been named to U.S. News and World Report’s Best Lawyers in America list, recognized by Chambers & Partners as among the leading tax and litigation attorneys in the United States, including for fraud representations, and recognized as the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas.
  • Our tax litigation attorneys include former IRS trial attorneys, former clerks to the Chief Judge of the United States Tax Court, tax law professors, dual-credentialed CPAs, and attorneys with advanced LL.M. tax degrees from the most prestigious tax programs in the nation. One-third of our attorneys are law professors at tier one law schools, teaching tax law.
  • We regularly take on the nation’s biggest litigation firm: The Department of Justice. We bring a systematic approach to tax litigation; and we are rewriting the odds in complex tax disputes, one case at a time.

Tax Promoter Defense and Litigation

Freeman tax controversy practice regularly represents clients in defending tax professional tax promoters. We vindicate, mitigate, and defend our clients against government allegations, bringing big-firm talent, think-tank intellect, and strategic insight to their corners. We are hyper focused; responsive; and battle-tested.

We combine unique litigation skills and experience with substantive tax knowledge. Our attorneys are client-focused problem solvers. They are steeped in substantive tax expertise gained from years of experience in the trenches and provide sophisticated representation and penetrating legal acumen.

Best Lawyers® and U.S. News & World Report have recognized Freeman as a “Tier 1” Tax Law firm and our tax attorneys have garnered national recognition for their tax defense work, such as:

  • The “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas
  • U.S. News – Best Lawyers® Best Lawyers in America
  • The Best Lawyers in America®, Chambers USA

In tax litigation, the right move at the right time can mean the difference between the right outcome and the wrong one. We begin thinking through the end game from day one. We sift through and evaluate the case, cultivating its thematic essence and distilling complex facts into clear and compelling narratives and defenses.

Tax Promoter Defense

Tax Code provisions not only prohibit tax evasion by taxpayers, but also penalize persons who knowingly organize or promote illegal tax shelters or who knowingly aid or abet the filing of tax return information that understates a taxpayer’s tax liability. Additional tax code provisions now require taxpayers and promoters to disclose to the IRS information about certain potentially illegal tax shelters.

The Tax Reform Act of 1986 addressed tax shelters from the 1970s and 1980s by preventing individual taxpayers from using “passive activity” losses from tax shelter investments to reduce taxes by offsetting taxable income.

The government believed that abusive tax shelters picked up again in the 1990s and in the late 1990’s, a Department of the Treasury report described a large and growing problem with abusive corporate tax shelters. In 2002, citing many ongoing efforts, Treasury published a plan to further combat tax shelters, featuring both legislative proposals and administrative actions. And in 2004, the AJCA provided updated disclosure and list-maintenance rules and updated penalty provisions. The list-maintenance rules require that material advisors keep lists of their investors and make the lists available to the Secretary of the Treasury within 20 business days of a request.

In the early 2000’s, the U.S. Senate Permanent Subcommittee on Investigations of the Committee on Governmental Affairs initiated an in-depth investigation into the development, marketing, and implementation of abusive tax shelters by professional organizations such as ac- counting firms, banks, investment advisors, and law firms. Ultimately, the Subcommittee concluded that the development and sale of potentially abusive and illegal tax shelters have become a lucrative business in the United States, and professional organizations like major accounting firms, banks, investment advisory firms, and law firms have become major developers and promoters of tax shelters.

“Tax shelter,” however, is a misleading phrase. The term ‘‘tax shelter’’ has come to be used in a variety of ways depending upon the context. Some tax shelters are specific tax benefits explicitly enacted by Congress to advance a legitimate endeavor, such as the low income housing tax credit. Tax shelters can be legitimate to the extent that they take advantage of various provisions in the tax code to lawfully avoid tax. For instance, retirement plans (e.g., 401(k)) shelter income by not subjecting certain wages to federal income taxes until the wages are distributed from the plan.

According to the IRS, a tax shelter promoter is any person who:

  • Assists in organizing an abusive tax shelter
  • Participates (directly or indirectly) in selling any interest in an abusive tax shelter
  • Expresses a qualifying false or fraudulent statement about the ability to:
    • Allow any deduction or credit
    • Exclude any income
    • Secure any other tax benefit, which the person knows is materially false or fraudulent
    • Overstates gross value

The term promoter includes a person who (1) organizes an investment plan or arrangement affecting taxes or participates in selling it and (2) makes a statement about its tax benefits.

Material advisors include promoters who earn or expect to earn at least a specified amount from any reportable transactions, such as $50,000 in gross income when a reportable transaction provides substantially all the tax benefits to individuals. To be a material advisor to a transaction, a party must provide material aid, assistance, or advice with respect to the organizing, managing, promoting, selling, implementing, insuring, or carrying out of any reportable transaction.

In recent years, the IRS has promulgated administrative guidance in an attempt strengthen the law’s definition of a tax shelter promoter and the law’s requirements for tax shelter disclosure, attempting to expand the scope of tax shelter promoters to include ‘‘persons principally responsible for organizing a tax shelter as well as persons who participate in the organization, management or sale of a tax shelter’’ and any person who is a ‘‘material advisor’’ on a tax shelter transaction.

In addition to statutory and regulatory requirements and prohibitions, federal courts have developed over the years a number of common law doctrines to identify and invalidate illegal tax shelters, including the economic substance, business purpose, substance-over-form, step transaction, and sham transaction doctrines.

IRS investigations targeting tax promoters, material advisors, and tax preparers often involve “reportable” transactions. Reportable transactions include:

  • Listed Transactions

    A transaction that is the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction and identified by notice, regulation, or another form of published guidance as a listed transaction.

  • Confidential

    Transactions offered under conditions of confidentiality.

  • Contractual Protection

    Transactions that are offered with the right to a full or partial refund of fees if the IRS does not allow the tax benefit of the transaction.

  • Loss Transactions

    Certain losses under IRC §165.

  • Transactions of Interest (TOI)

    Transactions that the IRS and the Treasury Department believe to have the potential for tax avoidance or evasion, but lack sufficient information to determine whether the transaction should be identified specifically as a tax avoidance transaction. The TOI category of reportable transactions applies to transactions entered on or after November 2, 2006.

IRS Tax Promoter investigations include:

  • Section 6694 Investigations. Making an unreasonable understatement of tax liability on a client’s return.
  • Section 6695 Investigations. Failing to prepare tax returns accurately and with the proper formalities.
  • Section 6700 Investigations. Section 6700 imposes a penalty on persons who (1) organize or assist in the organization of any entity, plan, or arrangement or (2) participate, directly or indirectly, in the sale of any interest in an entity, plan, or arrangement. For the section 6700 penalty to apply, the person must also make, furnish, or cause another person to make or furnish (1) a gross valuation overstatement (as defined therein) as to any material matter or (2) a statement with respect to any tax benefit by reason of holding an interest in the entity or participating in the plan or arrangement.
  • Return Preparer Investigations involving the Office of professional responsibility (“OPR”). Referrals to OPR are mandatory following the assessment of any IRC 6694(b) penalty, e.g., a willful attempt to understate the liability for tax. A referral to the OPR is often made when any of the following penalties or sanctions are imposed:
    • 6700 – Promoting abusive tax shelters
    • 6701 – Aiding and abetting understatement of a tax liability
    • 7407 – Injunction of a tax return preparer
    • 7408 – Injunction for specified conduct relating to tax shelters and reportable transactions
  • Return Preparer Investigations involving IRS Criminal Investigation Division (“CID”). The IRS’s CID investigates suspected criminal tax violations, such as, preparing or filing, or assisting in preparing or filing false documents, and attempts to evade assessment or payment of tax. IRS CID has responsibility to investigate violations of the Internal Revenue Code’s substantive criminal tax provisions, such as, § 7201 attempted evasion, § 7203 failure to file or pay, § 7206 subscription of false documents, § 7212(a) corrupt endeavors to obstruct or impede the administration of the Internal Revenue Code, with exceptions noted below, and § 7212(b) forcible rescue of seized property; the Bank Secrecy Act 31 U.S.C. § 5311 et seq.; and the money laundering forfeiture and criminal provisions in 18 U.S.C. §§1956 and 1957.
  • Section 6707. Section 6707 imposes a penalty on a material advisor who is required to file a return under section 6111(a) with respect to any reportable transaction, and who fails to file a timely return or who files a return with false or incomplete information with respect to the reportable transaction. The amount of the penalty for failing to timely file or filing a return with false or incomplete information with respect to any reportable transaction other than a listed transaction is $50,000. For listed transactions, the amount of the penalty is the greater of (1) $200,000, or (2) 50 percent of the gross income derived by the material advisor with respect to aid, assistance, or advice that the material advisor provides with respect to the listed transaction before the date the return is filed under section 6111. If the penalty is imposed with respect to a listed transaction and the failure or action subject to the penalty was intentional, the penalty is the greater of (1) $200,000, or (2) 75 percent of the gross income derived by the material advisor with respect to aid, assistance, or advice that the material advisor provides with respect to the listed transaction before the date the return is filed under section 6111.
  • Section 6707A. IRC 6707A provides a monetary penalty for the failure to include on any return or statement any information required to be disclosed under IRC 6011 with respect to a reportable transaction. 6707A established a penalty on any person who fails to include with any return or statement any required information on a reportable transaction. Generally, as amended by the Small Business Jobs Act of 2010, the penalty is 75 percent of the decrease in tax shown on the return resulting from the transaction, or which would have resulted if the transaction complied with federal tax laws. The maximum penalty amount is the same as the penalty amount prior to the change which is $50,000 ($10,000 for an individual), except for listed transactions for which the penalty is $200,000 ($100,000 for an individual). The section 6707A penalty imposes on material advisors who fail to disclose reportable transactions or who file false or incomplete information a $50,000 penalty, unless the failure is related to a listed transaction; if the failure is related to a listed transaction, the amount is increased to the greater of $200,000 or 50 percent (75 percent for an intentional failure or act) of the gross income from the transaction.
  • Section 6708 Investigations. Section 6708 modified the penalty for failing to maintain the required lists by making it a time-sensitive penalty instead of a per investor penalty. Thus, a material advisor required to maintain an investor list who fails to make the list available upon written request to the Secretary within 20 business days after the request will be subject to a $10,000 per day penalty.
  • Section 7408. The IRC authorizes civil actions to enjoin anyone from promoting abusive tax shelters or aiding or abetting tax liability understatements. The AJCA expanded this rule so that an injunction could be sought to enjoin a material advisor from engaging in specific conduct subject to penalty under (1) section 6707, failure to file an information return for a reportable transaction, or (2) section 6708, failure to maintain or to furnish within 20 business days of the Secretary’s written request a list of investors for a reportable transaction.
  • Other tax promoter investigations.

Our firm and attorneys maintain a reputation for integrity and vigorous representations defending taxpayers and tax professionals. Freeman attorneys have experience defending against a range of government agencies, with a particular focus on the IRS.

Well-versed in high-stakes tax and criminal tax defense, our attorneys are trial-ready and battle tested; we’re ready when you are.

Representative Matters

  • Criminal Tax

    Represented attorney in federal indictment for tax evasion.

  • Criminal Tax

    Represent client in alleged $12 million tax evasion.

  • Criminal Tax Investigation; Non-Prosecution

    Represented client in criminal tax investigation by IRS Criminal Investigation Division involving allegations of income tax evasion; “killed investigation,” obtaining agreement from IRS CID not to seek prosecution against client.

  • Criminal Tax Investigation; Non-Prosecution

    Represented client in criminal tax referral involving allegations of income tax evasion; “killed case,” obtaining declination to prosecute client from United States Attorneys Office.

  • Criminal Tax Investigation; Non-Prosecution

    Represented client in criminal tax investigation by IRS Criminal Investigation Division involving allegations of income tax evasion; “killed investigation,” obtaining agreement from IRS CID not to seek prosecution against client.

  • Criminal Investigation; Seizure; Non-Prosecution

    Represented client under federal investigation for laundering and facilitating cryptocurrency exchanges following government seizure of cash. “Killed case,” and obtained government declination to pursue criminal charges, as well as obtained return of all seized funds.

  • White-Collar Criminal Defense; Non-Prosecution.

    Represented client in grand jury investigation with respect to allegations of perjury, tax evasion, obstruction of justice, and financial kickback scheme, obtaining United States Attorneys Office’s agreement not to prosecute.

  • Criminal Tax Defense

    Represented client as criminal counsel in federal criminal case involving allegations of criminal tax evasion and conspiracy with tax preparer.

  • Appellate

    Served as lead appellate counsel in federal court of appeals, providing oral argument in federal tax case.

  • Federal Criminal Defense

    Following appointment as counsel, initiated investigation and obtained release of client from prison after uncovering wrongful investigative actions and entrapment.

  • IRS “SEP” Audit/Investigations

    Represented client in Special Enforcement Program (“SEP”) audit/investigation involving millions of dollars of alleged unreported income and several million dollars of unpaid tax and assessments; obtained deal to avoid criminal referral and avoidance of fraud penalties.

  • Criminal Tax Defense

    Represented client against criminal tax evasion charges involving allegations of the evasion of tax in excess of $1.5 million. Obtained result of no prison time.

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