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Regulation and Compliance > Federal Regulation > IRS

IRS Prepares To Design New Penalty Program

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The Internal Revenue Service is asking members of the public for ideas about how it should run a new system for punishing tax-exempt entities that get involved with potentially abusive tax shelters.

The IRS has put out the request for comments in Notice 2006-65, which discusses IRS plans for implementing the Tax Increase Prevention and Reconciliation Act of 2005, which applies to plan years ending after May 17.

TIPRA applies to 2 types of tax-exempt entities: “plan entities” and “non-plan entities.”

The list of plan entities includes Section 403(a) and Section 403(b) annuity plans, Section 529 tuition savings programs, Section 457(b) retirement plans, medical savings accounts, individual retirement accounts, Coverdell education savings accounts and health savings accounts.

The list of non-plan entities includes charities, voluntary employees’ beneficiary associations, insurance companies and many other organizations.

If a non-plan entity is a party to certain types of prohibited tax shelter transactions, it might have to pay an excise tax equal to 35%, officials write in the excise tax notice. The excise tax would apply either to all of the transaction profits or 75% of the transaction proceeds, whichever was higher.

If the non-plan entity had reason to know that the transaction was a prohibited tax shelter, then the excise tax would be 100%.

If a plan is a party to a prohibited tax shelter transaction, it will not have to pay the entity-level excise tax, but the manager will have to pay a $20,000 manager-level excise tax for each approval of a prohibited transaction, officials write.

“The IRS expects to issue guidance under these provisions promptly, and invites comments from the public regarding all aspects of the new excise taxes and disclosure requirements created by these provisions,” officials write.

A copy of Notice 2006-65 is on the Web at Document Link


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