[Congressional Record Volume 151, Number 106 (Friday, July 29, 2005)]
[Senate]
[Pages S9481-S9492]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LEVIN (for himself, Mr. Coleman, and Mr. Obama):
  S. 1565. A bill to restrict the use of abusive tax shelters and 
offshore tax havens to inappropriately avoid Federal taxation, and for 
other purposes; to the Committee on Finance.

[[Page S9482]]

  Mr. LEVIN. Mr. President, tax shelter and tax haven abuses are 
undermining the integrity of our tax system, robbing the Treasury of 
tens of billions of dollars each year, and shifting the tax burden from 
high income individuals and businesses onto the backs of middle income 
families. These abuses account for a significant portion of the more 
than $300 billion in taxes owed by individuals, businesses, and 
organizations that goes unpaid each year. As a matter of fairness, 
these abuses must be stopped. Today, I am introducing, with Senator 
Norm Coleman, a comprehensive tax reform bill called the Tax Shelter 
and Tax Haven Reform Act of 2005 that can help put an end to these 
abuses. Senator Barack Obama is also an original cosponsor.
  The Permanent Subcommittee on Investigations, on which I serve with 
Senator Coleman, has worked for years to expose and combat abusive tax 
shelters and tax havens. In the previous Congress, we introduced 
legislation confronting these twin threats to U.S. tax compliance; 
today's bill reflects not only the Subcommittee's additional 
investigative work but also innovative ideas to stop unethical tax 
advisers and tax havens from aiding and abetting U.S. tax evasion.
  Abusive tax shelters are very different from legitimate tax shelters, 
such as deducting the interest paid on your home mortgage or 
Congressionally approved tax deductions for building affordable 
housing. Abusive tax shelters are complicated transactions promoted to 
provide large tax benefits unintended by the tax code. Abusive tax 
shelters are marked by one characteristic: there is no real economic or 
business rationale other than tax avoidance. As Judge Learned Hand 
wrote in Gregory v. Helvering, they are ``entered upon for no other 
motive but to escape taxation.''
  Likewise, a tax haven is simply a country or jurisdiction that 
imposes little or no tax on income and offers non-residents the ability 
to escape taxes in their home country. The abuse of tax havens occurs 
when income is attributed to that country, even though little or no 
business activity actually occurs there. Tax havens are also 
characterized by corporate, bank, and tax secrecy laws that make it 
difficult for other countries to find out whether their citizens are 
using the tax haven to cheat on their taxes.
  Today's tax dodges are often tough to prosecute. Crimes such as 
terrorism, murder, and fraud produce instant recognition of the 
immorality involved. Abusive tax shelters and tax havens, by contrast, 
are often ``MEGOs,'' meaning ``My Eyes Glaze Over.'' Those who cook up 
these concoctions count on their complexity to escape scrutiny and 
public ire. But regardless of how complicated or eye-glazing, the 
hawking of abusive tax shelters by tax professionals like accountants, 
bankers, investment advisers, and lawyers to thousands of people like 
late-night, cut-rate T.V. bargains is scandalous and has got to stop. 
Hiding tax schemes through offshore companies and bank accounts in tax 
havens with secrecy laws also needs to be attacked with the full force 
of the law.

  Today, I would like to take a few minutes to try to cut through the 
haze of these schemes to see them for what they really are and explain 
what our bill would do to stop them. First, I will look at our 
investigation into abusive tax shelters and discuss the provisions we 
have included in this bill to combat them. Then, I will turn to tax 
haven abuses and our proposed remedies.
  For three years, the Permanent Subcommittee on Investigations has 
been conducting an investigation into the design, sale, and 
implementation of abusive tax shelters. While I initiated this 
investigation when I was Chairman of our Subcommittee in 2002, it has 
since had the support of our new Chairman, Senator Coleman.
  In November 2003, our Subcommittee held two days of hearings and 
released a report prepared by my staff that pulled back the curtain on 
how even some respected accounting firms, banks, investment advisors, 
and law firms had become the engines pushing the design and sale of 
abusive tax shelters to corporations and individuals across this 
country. In February 2005, the Subcommittee issued a report that 
provided further details on the role these professional firms played in 
the proliferation of these abusive shelters. Our Subcommittee report 
was endorsed by the full Committee on Homeland Security and 
Governmental Affairs in April.
  The Subcommittee investigation found that many abusive tax shelters 
were not dreamed up by the taxpayers who used them. Instead, most were 
devised by tax professionals, such as accountants, bankers, investment 
advisors, and lawyers, who then sold the tax shelter to clients for a 
fee. In fact, as our investigation widened, we found hordes of tax 
advisors cooking up one complex scheme after another, packaging them up 
as generic ``tax products'' with boiler-plate legal and tax opinion 
letters, and then undertaking elaborate marketing schemes to peddle 
these products to literally thousands of persons across the country. In 
return, these tax shelter promoters were getting hundreds of millions 
of dollars in fees, while diverting billions of dollars in tax revenues 
from the U.S. Treasury each year.
  For example, one shelter investigated by the Subcommittee and 
featured in the November 2003 Subcommittee hearings has since become 
part of an IRS effort to settle cases involving a set of abusive tax 
shelters known as ``Son of Boss.'' To date, more than 1,200 taxpayers 
have admitted wrongdoing and agreed to pay back taxes, interest and 
penalties totaling more than $3.7 billion. That's billions of dollars 
the IRS has collected on just one type of tax shelter, demonstrating 
both the depth of the problem and the potential for progress.
  The Tax Shelter and Tax Haven Reform Act of 2005 that we are 
introducing today contains a number of measures to curb abusive tax 
shelters. The bill strengthens the penalties on promoters of abusive 
tax shelters. It codifies and strengthens the economic substance 
doctrine, which eliminates tax benefits for transactions that have no 
real business purpose apart from avoiding taxes. The bill deters banks' 
participation in abusive tax shelter activities by requiring regulators 
to develop new examination procedures to detect and stop such 
activities. It ends outdated communication barriers between key 
enforcement agencies to allow the exchange of information relating to 
tax evasion cases.
  The bill also requires the Treasury Department to issue tougher 
standards for tax shelter opinion letters. It increases incentives for 
whistleblowers to report tax evasion to the IRS. The bill also provides 
for increased disclosure of tax shelter information to Congress. It 
simplifies and clarifies an existing prohibition on accountants being 
paid contingent fees which increase as phony tax losses increase. And 
it expresses the sense of the Senate that the IRS needs more funding to 
combat tax shelter abuses.
  Let me be more specific about these key provisions to curb abusive 
tax shelters.
  Title I of the bill strengthens two very important penalties that the 
IRS can use in its fight against the professionals who make these 
complex abusive shelters possible. A year ago, the penalty for 
promoting an abusive tax shelter, as set forth in Section 6700 of the 
tax code, was the lesser of $1,000 or 100 percent of the promoter's 
gross income derived from the prohibited activity. That meant in most 
cases the maximum fine was just $1,000.
  Many abusive tax shelters sell for $100,000 or $250,000 apiece. Our 
investigation uncovered some tax shelters that were sold for as much as 
$2 million or even $5 million apiece, as well as instances in which the 
same cookie-cutter tax opinion letter was sold to 100 or even 200 
clients. There are big bucks to be made in this business, and a $1,000 
fine is laughable.
  The Senate acknowledged that last year when it adopted the Levin-
Coleman amendment to the JOBS Act, S. 1637, raising the Section 6700 
penalty on abusive tax shelter promoters to 100 pefcent of the fees 
earned by the promoter from the abusive shelter. A 100 percent penalty 
would have ensured that the abusive tax shelter hucksters would not get 
to keep a single penny of their ill-gotten gains. That figure, however, 
was cut in half in the conference report, setting the penalty at 50 
percent of the fees earned and allowing the promoters of abusive 
shelters get to keep half of their illicit profits.
  While 50 percent is an obvious improvement over $1000, this penalty 
still

[[Page S9483]]

is inadequate and makes no sense. Why should anyone who pushes an 
illegal tax shelter that robs our Treasury of much needed revenues get 
to keep half of his ill-gotten gains? What deterrent effect is created 
by a penalty that allows promoters to keep half of their fees if 
caught, and of course, all of their fees if they are not caught? Tax 
shelter promoters ought to face a penalty that is at least as harsh as 
the penalty imposed on the person who purchased their tax product, not 
only because the promoter is usually as culpable as the taxpayer, but 
also so promoters think twice about pushing abusive tax schemes.

  Effective penalties should make sure that the peddler of an abusive 
tax shelter is deprived of every penny of profit earned from selling or 
implementing the shelter and then is fined on top of that. 
Specifically, Section 101 of this bill would increase the penalty on 
tax shelter promoters to an amount up to the greater of either 150 
percent of the promoters' gross income from the prohibited activity, or 
the amount assessed against the taxpayer--including back-taxes, 
interest and penalties.
  A second penalty provision in the bill addresses what our 
investigation found to be one of the biggest problems: the knowing 
assistance of accounting firms, law firms, banks, and others to help 
taxpayers understate their taxes. In addition to those who meet the 
definition of ``promoters'' of abusive shelters, there are professional 
firms that aid and abet the use of abusive tax shelters and enable 
taxpayers to carry out the abusive tax schemes. For example, law firms 
are often asked to write ``opinion letters'' to help taxpayers head off 
IRS questioning and fines that they might otherwise confront for using 
an abusive shelter. Currently, under Section 6701 of the tax code, 
these aiders and abettors face a maximum penalty of only $1,000, or 
$10,000 if the offender is a corporation. This penalty, too, is a joke. 
When law firms are getting $50,000 for each of these cookie-cutter 
opinion letters, it provides no deterrent whatsoever. A $1,000 fine is 
like a jaywalking ticket for robbing a bank.
  Section 102 of the bill would strengthen Section 6701 significantly, 
subjecting aiders and abettors to a maximum fine up to the greater of 
either 150 percent of the aider and abettor's gross income from the 
prohibited activity, or the amount assessed against the taxpayer for 
using the abusive shelter. This penalty would apply to all aiders and 
abettors not just tax return preparers.
  Again, the Senate has recognized the need to toughen this critical 
penalty. In last year's JOBS Act, Senator Coleman and I successfully 
increased this fine to 100 percent of the gross income derived from the 
prohibited activity. Unfortunately, the conference report completely 
omitted this change, allowing aiders and abettors to continue to profit 
without penalty from their wrongdoing.
  If further justification for toughening these penalties is needed, 
one document uncovered by our investigation shows the cold calculation 
engaged in by a tax advisor facing low fines. A senior tax professional 
at accounting giant KPMG compared possible tax shelter fees with 
possible tax shelter penalties if the firm were caught promoting an 
illegal tax shelter. This senior tax professional wrote the following: 
``[O]ur average deal would result in KPMG fees of $360,000 with a 
maximum penalty exposure of only $31,000.'' He then recommended the 
obvious: going forward with sales of the abusive tax shelter on a cost-
benefit basis.
  Title III of the bill would strengthen legal prohibitions against 
abusive tax shelters by codifying in Federal tax statutes for the first 
time what is known as the economic substance doctrine. This anti-tax 
abuse doctrine was fashioned by federal courts evaluating transactions 
that appeared to have little or no business purpose or economic 
substance apart from tax avoidance. It has become a powerful analytical 
tool used by courts to invalidate abusive tax shelters. At the same 
time, because there is no statute underlying this doctrine and the 
courts have developed and applied it differently in different judicial 
districts, the existing case law has many ambiguities and conflicting 
interpretations.
  Under the leadership of Senators Grassley and Baucus, the Chairman 
and Ranking Member of the Finance Committee, the Senate has voted on 
multiple occasions to enact this economic substance provision, but the 
House conferees have rejected it each time. Since no tax shelter 
legislation would be complete without addressing this issue, Title III 
of this comprehensive bill proposes once more to include the economic 
substance doctrine in the tax code. I hope that with continued 
pressure, it will become law in this Congress.
  The bill will also help fight abusive tax shelters that are disguised 
as complex investment opportunities and use financing or securities 
transactions provided by financial institutions. In reality, tax 
shelter schemes lack the economic risks and rewards associated with a 
true investment. These phony transactions instead often rely on the 
temporary use of significant amounts of money in low risk schemes 
mischaracterized as real investments. The financing or securities 
transactions called for by these schemes are often supplied by a bank, 
securities firm, or other financial institution.
  Currently the tax code prohibits financial institutions from 
providing products or services that aid or abet tax evasion or that 
promote or implement abusive tax shelters. The agencies that oversee 
these financial institutions on a daily basis, however, are experts in 
banking and securities law and generally lack the expertise to spot tax 
issues. Section 202 would crack down on financial institutions' illegal 
tax shelter activities by requiring federal bank regulators and the SEC 
to work with the IRS to develop examination techniques to detect such 
abusive activities and put an end to them.
  These examination techniques would be used at least every 2 years, 
preferably in combination with routine regulatory examinations, and the 
regulators would report potential violations to the IRS. The agencies 
would also be required to prepare joint reports to Congress in 2007 and 
2010 on preventing the participation of financial institutions in tax 
evasion or tax shelter activities.
  During hearings before the Permanent Subcommittee on Investigations 
on tax shelters in November 2003, IRS Commissioner Mark Everson 
testified that his agency was barred by Section 6103 of the tax code 
from communicating information to other federal agencies that would 
assist those agencies in their law enforcement duties. He pointed out 
that the IRS was barred from providing tax return information to the 
SEC, federal bank regulators, and the Public Company Accounting 
Oversight Board (PCAOB)--even, for example, when that information might 
assist the SEC in evaluating whether an abusive tax shelter resulted in 
deceptive accounting in a public company's financial statements, might 
help the Federal Reserve determine whether a bank selling tax products 
to its clients had violated the law against promoting abusive tax 
shelters, or help the PCAOB judge whether an accounting firm had 
impaired its independence by selling tax shelters to its audit clients.

  A recent example demonstrates how ill-conceived these information 
barriers are. A few months ago the IRS offered a settlement initiative 
to companies and corporate executives who participated in an abusive 
tax shelter involving the transfer of stock options to family-
controlled entities. Over a hundred corporations and executives 
responded with admissions of wrongdoing. In addition to tax violations, 
their misconduct may be linked to securities law violations and 
improprieties by corporate auditors or banks, but the IRS has informed 
the Subcommittee that it is currently barred by law from sharing the 
names of the wrongdoers with the SEC, banking regulators, or PCAOB.
  These communication barriers are outdated, inefficient, and ill-
suited to stopping the torrent of tax shelter abuses now affecting or 
being promoted by so many public companies, banks, and accounting 
firms. To address this problem, Section 203 of this bill would 
authorize the Treasury Secretary, with appropriate privacy safeguards, 
to disclose to the SEC, Federal banking agencies, and the PCAOB, upon 
request, tax return information related to abusive tax shelters, 
inappropriate tax avoidance, or tax evasion. The

[[Page S9484]]

agencies could then use this information only for law enforcement 
purposes, such as preventing accounting firms or banks from promoting 
abusive tax shelters, or detecting accounting fraud in the financial 
statements of public companies.
  Another finding of the Subcommittee investigation is that some tax 
practitioners are circumventing current State and Federal constraints 
on charging tax service fees that are dependent on the amount of 
promised tax benefits. Traditionally, accounting firms charged flat 
fees or hourly fees for their tax services. In the 1990s, however, they 
began charging ``value added'' fees based on, in the words of one 
accounting firm's manual, ``the value of the services provided, as 
opposed to the time required to perform the services.'' In addition, 
some firms began charging ``contingent fees'' that were calculated 
according to the size of the paper ``loss'' that could be produced for 
a client and used to offset the client's other taxable income--the 
greater the so-called loss, the greater the fee.
  In response, many States prohibited accounting firms from charging 
contingent fees for tax work to avoid creating incentives for these 
firms to devise ways to shelter substantial sums. The SEC and the 
American Institute of Certified Public Accountants also issued rules 
restricting contingent fees, allowing them in only limited 
circumstances. Recently, the Public Company Accounting Oversight Board 
sent the SEC for approval a similar rule prohibiting public accounting 
firms from charging contingent fees for tax services provided to the 
public companies they audit. Each of these Federal, State, and 
professional ethics rules seeks to limit the use of contingent fees 
under certain, limited circumstances.
  The Subcommittee investigation found that tax shelter fees, which are 
typically substantial and sometimes exceed $1 million, are often linked 
to the amount of a taxpayer's projected paper losses which can be used 
to shelter income from taxation. For example, in three tax shelters 
examined by the Subcommittee, documents show that the fees were equal 
to a percentage of the paper loss to be generated by the transaction. 
In one case, the fees were typically set at 7 percent of the 
transaction's generated ``tax loss'' that clients could use to reduce 
other taxable income. In other words, the greater the loss that could 
be concocted for the taxpayer or ``investor,'' the greater the profit 
for the tax promoter. Think about that--greater the loss, the greater 
the profit. How's that for turning capitalism on its head!
  In addition, evidence indicated that, in at least one instance, a tax 
advisor was willing to deliberately manipulate the way it handled 
certain tax products to circumvent contingent fee prohibitions. An 
internal document at an accounting firm related to a specific tax 
shelter, for example, identified the States that prohibited contingent 
fees. Then, rather than prohibit the tax shelter transactions in those 
States or require an alternative fee structure, the memorandum directed 
the firm's tax professionals to make sure the engagement letter was 
signed, the engagement was managed, and the bulk of services was 
performed ``in a jurisdiction that does not prohibit contingency 
fees.''
  Right now, the prohibitions on contingent fees are complex and must 
be evaluated in the context of a patchwork of Federal, State, and 
professional ethics rules. Section 201 of the bill would establish a 
single enforceable rule, applicable nationwide, that would prohibit tax 
practitioners from charging fees calculated according to a projected or 
actual amount of tax savings or paper losses.
  Past laws, such as the Whistleblower Protection Act and qui tam 
lawsuits under the False Claims Act, demonstrate that individuals with 
inside information can help expose serious misconduct that the U.S. 
government might otherwise miss. The tax arena is no different. Persons 
with inside information can help expose millions of dollars in tax 
fraud if they are willing to step forward and tell the IRS what they 
know about specific instances of misconduct.
  Under current law, potential whistleblowers with inside information 
about tax misconduct do not have an established IRS office that is 
sensitive to their concerns, provides consistent treatment, and 
oversees the calculation and payment of monetary rewards for important 
information. Section 206 of this bill, which is very similar to a 
provision developed by the Senate Finance Committee, would, among other 
measures, establish a Whistleblowers Office within the IRS, codify 
standards for the payment of monetary rewards, and exempt whistleblower 
monetary payments from the alternative minimum tax.
  Each of these measures is intended to increase incentives for persons 
to blow the whistle on tax misconduct. The one key difference between 
our bill and the Finance Committee provision is that we would continue 
to give the IRS the discretion to determine the amount of money paid to 
an individual whistleblower; our bill would not enable whistleblowers 
to appeal to a court to obtain additional sums. The fact-specific 
analysis that goes into evaluating a whistleblower's assistance and 
calculating a reward makes court review inadvisable. The existence of 
an appeal also invites litigation and necessitates the expenditure of 
taxpayer dollars--not for tax enforcement but for a court dispute. The 
new Whistleblowers Office is intended to promote the consistent, 
equitable treatment of persons who report tax misconduct, without also 
inviting expensive and time-consuming litigation.
  Section 205 of the bill would direct the Treasury Department to issue 
new standards for tax practitioners issuing opinion letters on the tax 
implications of potential tax shelters as part of Circular 230. The 
public has traditionally relied on tax opinion letters to obtain 
informed and trustworthy advice about whether a tax-motivated 
transaction meets the requirements of the law. The Permanent 
Subcommittee on Investigations has found that, in too many cases, tax 
opinion letters no longer contain disinterested and reliable tax 
advice, even when issued by supposedly reputable accounting or law 
firms.
  Instead, some tax opinion letters have become marketing tools used by 
tax shelter promoters and their allies to sell clients on their latest 
tax products. In many of these cases, financial interests and biases 
were concealed, unreasonable factual assumptions were used to justify 
dubious legal conclusions, and taxpayers were misled about the risk 
that the proposed transaction would later be designated an illegal tax 
shelter. Reforms are essential to address these abuses and restore the 
integrity of tax opinion letters.
  The Treasury Department recently adopted standards that address a 
number of the abuses affecting tax shelter opinion letters; however, 
the standards do not take all the steps needed. Our bill would require 
Treasury to issue standards addressing a wider spectrum of tax shelter 
opinion letter problems, including: preventing concealed collaboration 
among supposedly independent letter writers; avoiding conflicts of 
interest that would impair auditor independence; ensuring appropriate 
fee charges; preventing practitioners and firms from aiding and 
abetting the understatement of tax liability by clients; and banning 
the promotion of potentially abusive tax shelters. By addressing each 
of these areas, a beefed-up Circular 230 could help reduce the ongoing 
abusive practices related to tax shelter opinion letters.
  The bill would also provide for increased disclosure of tax shelter 
information to Congress. Section 204 would make it clear that companies 
providing tax return preparation services to taxpayers cannot refuse to 
comply with a Congressional document subpoena by citing Section 7216, a 
consumer protection provision that prohibits tax return preparers from 
disclosing taxpayer information to third parties. Several accounting 
and law firms raised this claim in response to document subpoenas 
issued by the Permanent Subcommittee on Investigations, contending they 
were barred by the nondisclosure provision in Section 7216 from 
producing documents related to the sale of abusive tax shelters to 
clients for a fee.
  The accounting and law firms maintained this position despite an 
analysis provided by the Senate legal counsel showing that the 
nondisclosure provision was never intended to create a privilege or to 
override a Senate subpoena, as demonstrated in federal regulations 
interpreting the provision. This

[[Page S9485]]

bill would codify the existing regulations interpreting Section 7216 
and make it clear that Congressional document subpoenas must be 
honored.
  Section 204 would also ensure Congress has access to information 
about decisions by Treasury related to an organization's tax exempt 
status. A 2003 decision by the D.C. Circuit Court of Appeals, Tax 
Analysts v. IRS, struck down certain IRS regulations and held that the 
IRS must disclose letters denying or revoking an organization's tax 
exempt status. The IRS has been reluctant to disclose such information, 
not only to the public, but also to Congress, including in response to 
requests by the Permanent Subcommittee on Investigations.
  For example, earlier this year the IRS revoked the tax exempt status 
of four credit counseling firms, and, despite the Tax Analysts case, 
claimed that it could not disclose to the Subcommittee the names of the 
four firms or the reasons for revoking their tax exemption. Our bill 
would make it clear that, upon receipt of a request from a 
Congressional committee or subcommittee, the IRS must disclose 
documents, other than a tax return, related to the agency's 
determination to grant, deny, revoke or restore an organization's 
exemption from taxation.
  Section 208 of the bill would establish that it is the sense of the 
Senate that additional funds should be appropriated for IRS 
enforcement, and that the IRS should devote proportionately more of its 
enforcement funds to combat rampant tax shelter and tax haven abuses. 
Specifically, the bill would direct increased funding toward 
enforcement efforts combating the promotion of abusive tax shelters and 
the aiding and abetting of tax evasion; the involvement of accounting, 
law and financial firms in such promotion and aiding and abetting; and 
the use of offshore financial accounts to conceal taxable income.
  Tax enforcement is an area where a relatively small increase in 
spending pays for itself many times over. If we would hire adequate 
enforcement personnel, close the tax loopholes, and put an end to tax 
dodges, tens of billions in revenues that should support this country 
would actually reach the Treasury.
  In addition to abusive tax shelters, the bill addresses the abusive 
tax havens that help taxpayers dodge their U.S. tax obligations through 
using corporate, bank, and tax secrecy laws that impede U.S. tax 
enforcement. The London-based Tax Justice Network recently estimated 
that wealthy individuals worldwide have stashed $11.5 trillion of their 
assets in tax havens. At one Subcommittee hearing in 2001, a former 
owner of an offshore bank in the Cayman Islands testified that he 
believed 100 percent of his former clients were engaged in tax evasion. 
He said that almost all were from the United States and would take 
elaborate measures to avoid IRS detection of their money transfers. He 
also expressed confidence that the government that licensed his bank 
would vigorously defend client secrecy in order to continue attracting 
business to the islands.

  Corporations are also using tax havens to reduce their U.S. tax 
liability. A GAO report I released with Senator Dorgan last year found 
that nearly two-thirds of the top 100 companies doing business with the 
United States government now have one or more subsidiaries in a tax 
haven. One company, Tyco International, had 115.
  Data released by the Commerce Department further demonstrates the 
extent of U.S. corporate use of tax havens, indicating that, as of 
2001, almost half of all foreign profits of U.S. corporations were in 
tax havens. A study released by the journal Tax Notes in September 2004 
found that American companies were able to shift $149 billion of 
profits to 18 tax haven countries in 2002, up 68 percent from $88 
billion in 1999. Estimates show that funneling these profits from the 
U.S. to tax havens deprives the U.S. Treasury of anywhere from $10 
billion to $20 billion in lost tax revenue each year.
  Here's just one simplified example of the gimmicks being used by 
corporations to transfer taxable income from the United States to tax 
havens to escape taxation. Suppose a profitable U.S. corporation 
establishes a shell corporation in a tax haven. The shell corporation 
has no office or employees, just a mailbox address. The U.S. parent 
transfers a valuable patent to the shell corporation. Then, the U.S. 
parent and all of its subsidiaries begin to pay a hefty fee to the 
shell corporation for use of the patent, shifting taxable income out of 
the United States to the shell corporation. The shell corporation 
declares a portion of the fees as profit, but pays no tax since it is a 
tax haven resident. The icing on the cake is that the shell corporation 
can then ``lend'' the income it has accumulated from the fees back to 
the U.S. companies for their use. The companies, in turn, pay 
``interest'' on the ``loans'' to the shell corporation, shifting still 
more taxable income out of the United States to the tax haven. This 
example highlights just a few of the tax haven ploys being used by some 
U.S. corporations to escape paying their fair share of taxes here at 
home.
  Sections 401 and 402 of our bill tackle the issue of tax havens by 
removing U.S. tax benefits associated with jurisdictions that fail to 
cooperate with U.S. tax enforcement efforts. Dozens of jurisdictions 
around the world have enacted corporate, bank, and tax secrecy laws 
that, in too many cases, have been used to justify failing to provide 
timely information to U.S. officials investigating tax misconduct. Some 
tax havens have refused to provide timely information about persons 
suspected of either hiding funds in the jurisdiction's offshore bank 
accounts or using offshore corporations and deceptive transactions to 
disguise their income or create phony losses to shelter their U.S. 
income from taxation.
  Section 401 of the bill would give the Treasury Secretary the 
discretion to designate such an offshore tax haven as ``uncooperative'' 
and to publish an annual list of these uncooperative tax havens. We 
intend that the Treasury Secretary will develop this list by evaluating 
the actual record of cooperation experienced by the United States in 
its dealings with specific jurisdictions around the world. While many 
offshore tax havens have signed treaties with the United States 
promising to cooperate with U.S. civil and criminal tax enforcement, 
the level of resulting cooperation varies. For example, after one 
country signed a tax treaty with the United States, the government that 
led the effort was voted out of office by treaty opponents. Treasury 
needs a way to ensure that tax treaty obligations are met and to send a 
message to jurisdictions that impede U.S. tax enforcement. This bill 
gives Treasury the tools it needs to get the cooperation it needs.
  Under Sections 401 and 402 of the bill, persons doing business in tax 
havens designated by Treasury as uncooperative would be denied U.S. tax 
benefits and incur increased disclosure requirements. First, the bill 
would disallow the tax benefits of deferral and foreign tax credits for 
income attributed to an uncooperative tax haven. Second, taxpayers 
would be required to provide greater disclosure of their activities, 
including disclosing on their returns any payment above $10,000 to a 
person or account located in a designated haven. These restrictions 
would not only deter U.S. taxpayers from doing business with 
uncooperative tax havens, they would also provide the United States 
with powerful weapons to convince tax havens to cooperate fully with 
U.S. tax enforcement efforts and help end offshore tax evasion abuses.
  Sections 403 and 404 further address offshore tax evasion. Section 
403 would toughen penalties on eligible taxpayers who did not 
participate in Treasury programs designed to encourage voluntary 
disclosure of previously unreported income placed by the taxpayer in 
offshore accounts and accessed by credit card or other financial 
arrangements. Section 404 would authorize Treasury to promulgate 
regulations to stop ongoing foreign tax credit abuses in which, among 
other schemes, taxpayers claim credit on their U.S. tax returns for 
paying foreign taxes, but then fail to report the income related to 
those foreign taxes. Under the leadership of Senators Grassley and 
Baucus, both Sections 403 and 404 passed the Senate earlier this year 
as part of the Highway Bill, H.R. 3, but were dropped in conference.
  The eyes of some people may glaze over when tax shelters and tax 
havens are discussed, but unscrupulous taxpayers and tax professionals 
see illicit

[[Page S9486]]

dollar signs. Our commitment to crack down on their tax abuses must be 
as strong as their determination to get away with ripping off America 
and American taxpayers.
  Our bill provides our government the tools to end the use of abusive 
tax shelters and uncooperative tax havens and to punish the powerful 
professionals who push them.
  It's long past time for Congress to act to end the shifting of a 
disproportionate tax burden onto the shoulders of honest Americans.
  I ask unanimous consent that a summary of the bill's provisions and 
the text of the bill be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

        Summary of Tax Shelter and Tax Haven Reform Act of 2005


              TITLE I--Strengthening Tax Shelter Penalties

  Strengthens the penalties for: promoting abusive tax shelters; and 
knowingly aiding or abetting a taxpayer in understating tax liability.


         TITLE II--Preventing Abusive Tax Shelter Transactions

     Prohibit tax service fees dependant upon specific tax savings

  Prohibits charging a fee for tax services in an amount that is 
calculated according to or dependant upon a projected or actual amount 
of tax savings or losses offsetting taxable income. Builds on 
contingent fee prohibitions in more than 20 states, AICPA rules 
applicable to accountants, SEC regulations applicable to auditors of 
publicly traded corporations, and proposed PCAOB rules for auditors. 
Based upon investigation by Permanent Subcommittee on Investigations 
showing tax practitioners are circumventing current constraints.


   Deter Financial Institution Participation in Abusive Tax Shelter 
                               Activities

  Requires Federal bank regulators and the SEC to develop examination 
techniques to detect violations by financial institutions of the 
prohibition against providing products or services that aid or abet tax 
evasion or that promote or implement abusive tax shelters. Regulators 
must use such techniques at least every 2 years in routine or special 
examinations of specific institutions and report potential violations 
to the IRS. The agencies must also prepare a joint report to Congress 
in 2007 and 2010 on preventing the participation of financial 
institutions in tax evasion or tax shelter activities.


         Increase disclosure of certain tax shelter information

  Authorizes Treasury to share certain tax return information with the 
SEC, Federal bank regulators, or PCAOB, under certain circumstances, to 
enhance tax shelter enforcement or combat financial accounting fraud. 
Clarifies Congressional subpoena authority to obtain information (but 
not a taxpayer return) from tax return preparers. Clarifies 
Congressional authority to obtain certain tax information (but not a 
taxpayer return) from Treasury related to an IRS decision to grant, 
deny, revoke, or restore an organization's tax exempt status.


  Require Tougher Tax Shelter Opinion Standards for Tax Practitioners

  Codifies and expands Treasury's authority to beef up Circular 230 
standards for tax practitioners providing ``opinion letters'' on 
specific tax shelter transactions.


               Increase Incentives for IRS Whistleblowers

  Encourages persons to blow the whistle on tax misconduct by 
establishing a Whistleblowers Office within the IRS to provide 
consistent, equitable treatment of persons bringing information to the 
IRS. Codifies standards for awarding a portion of proceeds collected 
from actions based on information they bring to the IRS's attention. 
Modeled on provision passed by the Senate in the Highway Bill. 
Estimated to raise $407 million over 10 years.
     Deny tax deduction for fines, penalties and settlements.
  Clarifies that penalties, fines and settlements paid to the 
government are not deductible. Passed by the Senate in the Highway 
Bill. Estimated to raise $200 million over 10 years.
     ``Sense of the Senate'' on IRS Enforcement Priorities
  Establishes the Sense of the Senate that additional funds should be 
appropriated for IRS enforcement, and that the IRS should devote 
proportionately more of its enforcement funds to combat: (I) the 
promotion of abusive tax shelters for corporations and high net worth 
individuals and the aiding or abetting of tax evasion, (2) the 
involvement of accounting, law and financial firms in such promotion 
and aiding or abetting, and (3) the use of offshore financial accounts 
to conceal taxable income.


                TITLE III--Requiring Economic Substance

     Strengthen the Economic Substance Doctrine
  Strengthens and codifies the economic substance doctrine to 
invalidate transactions that have no economic substance or business 
purpose apart from tax avoidance or evasion. Also increases penalties 
for understatements attributable to a transaction lacking in economic 
substance. Passed by the Senate in the Highway Bill. Estimated to raise 
$15.9 billion over 10 years.


                TITLE IV--Deterring Offshore Tax Evasion

     Deter Use of Uncooperative Tax Havens
  Deters taxpayer use of uncooperative tax havens with corporate, bank 
or tax secrecy laws, procedures, or practices that impede U.S. 
enforcement of its tax laws by: (1) requiring disclosure on taxpayer 
returns of any payment above $10,000 to accounts or persons located in 
such tax havens, and (2) ending the tax benefits of deferral and 
foreign tax credits for any income earned in such tax havens. Gives 
Treasury Secretary discretion to designate a tax haven as uncooperative 
and publish an annual list of those jurisdictions. Estimated to raise 
$87 million over 10 years.
     Strengthen Penalties for Concealing Income in Offshore 
         Accounts
  Toughens penalties on taxpayers who, despite being eligible, did not 
participate in Treasury programs to encourage voluntary disclosure of 
previously unreported income placed by the taxpayer in offshore 
accounts and accessed through credit card or other financial 
arrangements. Passed by the Senate in the Highway Bill. Estimated to 
raise $10 million over 10 years.
     Stop Schemes to get Foreign Tax Credit Without Reporting 
         Related Income
  Authorizes Treasury to promulgate regulations to address abusive 
foreign tax credit (FTC) schemes that involve the inappropriate 
separation or stripping of foreign taxes from the related foreign 
income so taxpayers get the benefit of the FTC but don't report the 
related income. The provision becomes effective for transactions 
entered into after the date of enactment. Passed by the Senate in the 
Highway Bill. Estimated to raise $16 million over 10 years.
                                  ____


                                S. 1565

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE; ETC.

       (a) Short Title.--This Act may be cited as the ``Tax 
     Shelter and Tax Haven Reform Act of 2005''.
       (b) Amendment of 1986 Code.--Except as otherwise expressly 
     provided, whenever in this Act an amendment or repeal is 
     expressed in terms of an amendment to, or repeal of, a 
     section or other provision, the reference shall be considered 
     to be made to a section or other provision of the Internal 
     Revenue Code of 1986.
       (c) Table of Contents.--The table of contents for this Act 
     is as follows:
Sec. 1. Short title; etc.

              TITLE I--STRENGTHENING TAX SHELTER PENALTIES

Sec. 101. Penalty for promoting abusive tax shelters.
Sec. 102. Penalty for aiding and abetting the understatement of tax 
              liability.

               TITLE II--PREVENTING ABUSIVE TAX SHELTERS

Sec. 201. Prohibited fee arrangement.
Sec. 202. Preventing tax shelter activities by financial institutions.
Sec. 203. Information sharing for enforcement purposes.
Sec. 204. Disclosure of information to Congress.
Sec. 205. Tax opinion standards for tax practitioners.
Sec. 206. Whistleblower reforms.
Sec. 207. Denial of deduction for certain fines, penalties, and other 
              amounts.
Sec. 208. Sense of the Senate on tax enforcement priorities.

                TITLE III--REQUIRING ECONOMIC SUBSTANCE

Sec. 301. Clarification of economic substance doctrine.
Sec. 302. Penalty for understatements attributable to transactions 
              lacking economic substance, etc.
Sec. 303. Denial of deduction for interest on underpayments 
              attributable to noneconomic substance transactions.

[[Page S9487]]

              TITLE IV--DETERRING UNCOOPERATIVE TAX HAVENS

Sec. 401. Disclosing payments to persons in uncooperative tax havens.
Sec. 402. Deterring uncooperative tax havens by restricting allowable 
              tax benefits.
Sec. 403. Doubling of certain penalties, fines, and interest on 
              underpayments related to certain offshore financial 
              arrangements.
Sec. 404. Treasury regulations on foreign tax credit.

              TITLE I--STRENGTHENING TAX SHELTER PENALTIES

     SEC. 101. PENALTY FOR PROMOTING ABUSIVE TAX SHELTERS.

       (a) Penalty for Promoting Abusive Tax Shelters.--Section 
     6700 (relating to promoting abusive tax shelters, etc.) is 
     amended--
       (1) by redesignating subsections (b) and (c) as subsections 
     (d) and (e), respectively,
       (2) by striking ``a penalty'' and all that follows through 
     the period in the first sentence of subsection (a) and 
     inserting ``a penalty determined under subsection (b)'', and
       (3) by inserting after subsection (a) the following new 
     subsections:
       ``(b) Amount of Penalty; Calculation of Penalty; Liability 
     for Penalty.--
       ``(1) Amount of penalty.--The amount of the penalty imposed 
     by subsection (a) shall not exceed the greater of--
       ``(A) 150 percent of the gross income derived (or to be 
     derived) from such activity by the person or persons subject 
     to such penalty, and
       ``(B) if readily subject to calculation, the total amount 
     of underpayment by the taxpayer (including penalties, 
     interest, and taxes) in connection with such activity.
       ``(2) Calculation of penalty.--The penalty amount 
     determined under paragraph (1) shall be calculated with 
     respect to each instance of an activity described in 
     subsection (a), each instance in which income was derived by 
     the person or persons subject to such penalty, and each 
     person who participated in such an activity.
       ``(3) Liability for penalty.--If more than 1 person is 
     liable under subsection (a) with respect to such activity, 
     all such persons shall be jointly and severally liable for 
     the penalty under such subsection.
       ``(c) Penalty Not Deductible.--The payment of any penalty 
     imposed under this section or the payment of any amount to 
     settle or avoid the imposition of such penalty shall not be 
     considered an ordinary and necessary expense in carrying on a 
     trade or business for purposes of this title and shall not be 
     deductible by the person who is subject to such penalty or 
     who makes such payment.''.
       (b) Conforming Amendment.--Section 6700(a) is amended by 
     striking the last sentence.
       (c) Effective Date.--The amendments made by this section 
     shall apply to activities after the date of the enactment of 
     this Act.

     SEC. 102. PENALTY FOR AIDING AND ABETTING THE UNDERSTATEMENT 
                   OF TAX LIABILITY.

       (a) In General.--Section 6701(a) (relating to imposition of 
     penalty) is amended--
       (1) by inserting ``the tax liability or'' after ``respect 
     to,'' in paragraph (1),
       (2) by inserting ``aid, assistance, procurement, or advice 
     with respect to such'' before ``portion'' both places it 
     appears in paragraphs (2) and (3), and
       (3) by inserting ``instance of aid, assistance, 
     procurement, or advice or each such'' before ``document'' in 
     the matter following paragraph (3).
       (b) Amount of Penalty.--Subsection (b) of section 6701 
     (relating to penalties for aiding and abetting understatement 
     of tax liability) is amended to read as follows:
       ``(b) Amount of Penalty; Calculation of Penalty; Liability 
     for Penalty.--
       ``(1) Amount of penalty.--The amount of the penalty imposed 
     by subsection (a) shall not exceed the greater of--
       ``(A) 150 percent of the gross income derived (or to be 
     derived) from such aid, assistance, procurement, or advice 
     provided by the person or persons subject to such penalty, 
     and
       ``(i) if readily subject to calculation, the total amount 
     of underpayment by the taxpayer (including penalties, 
     interest, and taxes) in connection with the understatement of 
     the liability for tax.
       ``(2) Calculation of penalty.--The penalty amount 
     determined under paragraph (1) shall be calculated with 
     respect to each instance of aid, assistance, procurement, or 
     advice described in subsection (a), each instance in which 
     income was derived by the person or persons subject to such 
     penalty, and each person who made such an understatement of 
     the liability for tax.
       ``(3) Liability for penalty.--If more than 1 person is 
     liable under subsection (a) with respect to providing such 
     aid, assistance, procurement, or advice, all such persons 
     shall be jointly and severally liable for the penalty under 
     such subsection.''.
       (c) Penalty Not Deductible.--Section 6701 is amended by 
     adding at the end the following new subsection:
       ``(g) Penalty Not Deductible.--The payment of any penalty 
     imposed under this section or the payment of any amount to 
     settle or avoid the imposition of such penalty shall not be 
     considered an ordinary and necessary expense in carrying on a 
     trade or business for purposes of this title and shall not be 
     deductible by the person who is subject to such penalty or 
     who makes such payment.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to activities after the date of the enactment of 
     this Act.

               TITLE II--PREVENTING ABUSIVE TAX SHELTERS

     SEC. 201. PROHIBITED FEE ARRANGEMENT.

       (a) In General.--Section 6701, as amended by this Act, is 
     amended--
       (1) by redesignating subsections (f) and (g) as subsections 
     (g) and (h), respectively,
       (2) by striking ``subsection (a).'' in paragraphs (2) and 
     (3) of subsection (g) (as redesignated by paragraph (1)) and 
     inserting ``subsection (a) or (f).'', and
       (3) by inserting after subsection (e) the following new 
     subsection:
       ``(f) Prohibited Fee Arrangement.--
       ``(1) In general.--Any person who makes an agreement for, 
     charges, or collects a fee which is for services provided in 
     connection with the internal revenue laws, and the amount of 
     which is calculated according to, or is dependent upon, a 
     projected or actual amount of--
       ``(A) tax savings or benefits, or
       ``(B) losses which can be used to offset other taxable 
     income,
     shall pay a penalty with respect to each such fee activity in 
     the amount determined under subsection (b).
       ``(2) Rules.--The Secretary may issue rules to carry out 
     the purposes of this subsection and may provide exceptions 
     for fee arrangements that are in the public interest.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to fee agreements, charges, and collections made 
     after the date of the enactment of this Act.

     SEC. 202. PREVENTING TAX SHELTER ACTIVITIES BY FINANCIAL 
                   INSTITUTIONS.

       (a) Examinations.--
       (1) Development of examination techniques.--Each of the 
     Federal banking agencies and the Commission shall, in 
     consultation with the Internal Revenue Service, develop 
     examination techniques to detect potential violations of 
     section 6700 or 6701 of the Internal Revenue Code of 1986, by 
     depository institutions, brokers, dealers, and investment 
     advisers, as appropriate.
       (2) Frequency.--Not less frequently than once in each 2-
     year period, each of the Federal banking agencies and the 
     Commission shall implement the examination techniques 
     developed under paragraph (1) with respect to each of the 
     depository institutions, brokers, dealers, or investment 
     advisers subject to their enforcement authority. Such 
     examination shall, to the extent possible, be combined with 
     any examination by such agency otherwise required or 
     authorized by Federal law.
       (b) Report to Internal Revenue Service.--In any case in 
     which an examination conducted under this section with 
     respect to a financial institution or other entity reveals a 
     potential violation, such agency shall promptly notify the 
     Internal Revenue Service of such potential violation for 
     investigation and enforcement by the Internal Revenue Service 
     in accordance with applicable provisions of law.
       (c) Report to Congress.--The Federal banking agencies and 
     the Commission shall submit a joint written report to 
     Congress in 2007 and 2010 on their progress in preventing 
     violations of sections 6700 and 6701 of the Internal Revenue 
     Code of 1986, by depository institutions, brokers, dealers, 
     and investment advisers, as appropriate.
       (d) Definitions.--For purposes of this section--
       (1) the terms ``broker'', ``dealer'', and ``investment 
     adviser'' have the same meanings as in section 3 of the 
     Securities Exchange Act of 1934 (15 U.S.C. 78c);
       (2) the term ``Commission'' means the Securities and 
     Exchange Commission;
       (3) the term ``depository institution'' has the same 
     meaning as in section 3(c) of the Federal Deposit Insurance 
     Act (12 U.S.C. 1813(c));
       (4) the term ``Federal banking agencies'' has the same 
     meaning as in section 3(q) of the Federal Deposit Insurance 
     Act (12 U.S.C. 1813(q)); and
       (5) the term ``Secretary'' means the Secretary of the 
     Treasury.

     SEC. 203. INFORMATION SHARING FOR ENFORCEMENT PURPOSES.

       (a) Promotion of Prohibited Tax Shelters or Tax Avoidance 
     Schemes.--Section 6103(h) (relating to disclosure to certain 
     Federal officers and employees for purposes of tax 
     administration, etc.) is amended by adding at the end the 
     following new paragraph:
       ``(7) Disclosure of returns and return information related 
     to promotion of prohibited tax shelters or tax avoidance 
     schemes.--
       ``(A) Written request.--Upon receipt by the Secretary of a 
     written request which meets the requirements of subparagraph 
     (B) from the head of the United States Securities and 
     Exchange Commission, an appropriate Federal banking agency as 
     defined under section 1813(q) of title 12, United States 
     Code, or the Public Company Accounting Oversight Board, a 
     return or return information shall be disclosed to such 
     requestor's officers and employees who are personally and 
     directly engaged in an investigation, examination, or 
     proceeding by such requestor to evaluate, determine, 
     penalize, or deter conduct by a financial institution, 
     issuer, or public accounting firm, or associated person, in 
     connection with a potential or actual violation of section 
     6700 (promotion of abusive tax shelters), 6701 (aiding and 
     abetting understatement of tax liability), or

[[Page S9488]]

     activities related to promoting or facilitating inappropriate 
     tax avoidance or tax evasion. Such disclosure shall be solely 
     for use by such officers and employees in such investigation, 
     examination, or proceeding.
       ``(B) Requirements.--A request meets the requirements of 
     this subparagraph if it sets forth--
       ``(i) the nature of the investigation, examination, or 
     proceeding,
       ``(ii) the statutory authority under which such 
     investigation, examination, or proceeding is being conducted,
       ``(iii) the name or names of the financial institution, 
     issuer, or public accounting firm to which such return 
     information relates,
       ``(iv) the taxable period or periods to which such return 
     information relates, and
       ``(v) the specific reason or reasons why such disclosure 
     is, or may be, relevant to such investigation, examination or 
     proceeding.
       ``(C) Financial institution.--For the purposes of this 
     paragraph, the term `financial institution' means a 
     depository institution, foreign bank, insured institution, 
     industrial loan company, broker, dealer, investment company, 
     investment advisor, or other entity subject to regulation or 
     oversight by the United States Securities and Exchange 
     Commission or an appropriate Federal banking agency.''.
       (b) Financial and Accounting Fraud Investigations.--Section 
     6103(i) (relating to disclosure to Federal officers or 
     employees for administration of Federal laws not relating to 
     tax administration) is amended by adding at the end the 
     following new paragraph:
       ``(9) Disclosure of returns and return information for use 
     in financial and accounting fraud investigations.--
       ``(A) Written request.--Upon receipt by the Secretary of a 
     written request which meets the requirements of subparagraph 
     (B) from the head of the United States Securities and 
     Exchange Commission or the Public Company Accounting 
     Oversight Board, a return or return information shall be 
     disclosed to such requestor's officers and employees who are 
     personally and directly engaged in an investigation, 
     examination, or proceeding by such requester to evaluate the 
     accuracy of a financial statement or report or to determine 
     whether to require a restatement, penalize, or deter conduct 
     by an issuer, investment company, or public accounting firm, 
     or associated person, in connection with a potential or 
     actual violation of auditing standards or prohibitions 
     against false or misleading statements or omissions in 
     financial statements or reports. Such disclosure shall be 
     solely for use by such officers and employees in such 
     investigation, examination, or proceeding.
       ``(B) Requirements.--A request meets the requirements of 
     this subparagraph if it sets forth--
       ``(i) the nature of the investigation, examination, or 
     proceeding,
       ``(ii) the statutory authority under which such 
     investigation, examination, or proceeding is being conducted,
       ``(iii) the name or names of the issuer, investment 
     company, or public accounting firm to which such return 
     information relates,
       ``(iv) the taxable period or periods to which such return 
     information relates, and
       ``(v) the specific reason or reasons why such disclosure 
     is, or may be, relevant to such investigation, examination or 
     proceeding.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to disclosures and to information and document 
     requests made after the date of the enactment of this Act.

     SEC. 204. DISCLOSURE OF INFORMATION TO CONGRESS.

       (a) Disclosure by Tax Return Preparer.--
       (1) In general.--Subparagraph (B) of section 7216(b)(1) 
     (relating to disclosures) is amended to read as follows:
       ``(B) pursuant to any 1 of the following documents, if 
     clearly identified:
       ``(i) The order of any Federal, State, or local court of 
     record.
       ``(ii) A subpoena issued by a Federal or State grand jury.
       ``(iii) An administrative order, summons, or subpoena which 
     is issued in the performance of its duties by--

       ``(I) any Federal agency, including Congress or any 
     committee or subcommittee thereof, or
       ``(II) any State agency, body, or commission charged under 
     the laws of the State or a political subdivision of the State 
     with the licensing, registration, or regulation of tax return 
     preparers.''.

       (2) Effective date.--The amendment made by this subsection 
     shall apply to disclosures made after the date of the 
     enactment of this Act pursuant to any document in effect on 
     or after such date.
       (b) Disclosure by Secretary.--Paragraph (2) of section 
     6104(a) (relating to inspection of applications for tax 
     exemption or notice of status) is amended to read as follows:
       ``(2) Inspection by congress.--
       ``(A) In general.--Upon receipt of a written request from a 
     committee or subcommittee of Congress, copies of documents 
     related to a determination by the Secretary to grant, deny, 
     revoke, or restore an organization's exemption from taxation 
     under section 501 shall be provided to such committee or 
     subcommittee, including any application, notice of status, or 
     supporting information provided by such organization to the 
     Internal Revenue Service; any letter, analysis, or other 
     document produced by or for the Internal Revenue Service 
     evaluating, determining, explaining, or relating to the tax 
     exempt status of such organization (other than returns, 
     unless such returns are available to the public under this 
     section or section 6103 or 6110); and any communication 
     between the Internal Revenue Service and any other party 
     relating to the tax exempt status of such organization.
       ``(B) Additional information.--Section 6103(f) shall apply 
     with respect to--
       ``(i) the application for exemption of any organization 
     described in subsection (c) or (d) of section 501 which is 
     exempt from taxation under section 501(a) for any taxable 
     year and any application referred to in subparagraph (B) of 
     subsection (a)(1) of this section, and
       ``(ii) any other papers which are in the possession of the 
     Secretary and which relate to such application,
     as if such papers constituted returns.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to disclosures and to information and document 
     requests made after the date of the enactment of this Act.

     SEC. 205. TAX OPINION STANDARDS FOR TAX PRACTITIONERS.

       Section 330(d) of title 31, United States Code, is amended 
     to read as follows:
       ``(d) The Secretary of the Treasury shall impose standards 
     applicable to the rendering of written advice with respect to 
     any listed transaction or any entity, plan, arrangement, or 
     other transaction which has a potential for tax avoidance or 
     evasion. Such standards shall address, but not be limited to, 
     the following issues:
       ``(1) Independence of the practitioner issuing such written 
     advice from persons promoting, marketing, or recommending the 
     subject of the advice.
       ``(2) Collaboration among practitioners, or between a 
     practitioner and other party, which could result in such 
     collaborating parties having a joint financial interest in 
     the subject of the advice.
       ``(3) Avoidance of conflicts of interest which would impair 
     auditor independence.
       ``(4) For written advice issued by a firm, standards for 
     reviewing the advice and ensuring the consensus support of 
     the firm for positions taken.
       ``(5) Reliance on reasonable factual representations by the 
     taxpayer and other parties.
       ``(6) Appropriateness of the fees charged by the 
     practitioner for the written advice.
       ``(7) Preventing practitioners and firms from aiding or 
     abetting the understatement of tax liability by clients.
       ``(8) Banning the promotion of potentially abusive or 
     illegal tax shelters.''.

     SEC. 206. WHISTLEBLOWER REFORMS.

       (a) In General.--Section 7623 (relating to expenses of 
     detection of underpayments and fraud, etc.) is amended--
       (1) by striking ``The Secretary'' and inserting ``(a) in 
     general.--The Secretary'',
       (2) by striking ``and'' at the end of paragraph (1) and 
     inserting ``or'',
       (3) by striking ``(other than interest)'', and
       (4) by adding at the end the following new subsections:
       ``(b) Awards to Whistleblowers.--
       ``(1) In general.--If the Secretary proceeds with any 
     administrative or judicial action described in subsection (a) 
     based on information brought to the Secretary's attention by 
     an individual, such individual shall, subject to paragraph 
     (2), receive as an award at least 15 percent but not more 
     than 30 percent of the collected proceeds (including 
     penalties, interest, additions to tax, and additional 
     amounts) resulting from the action (including any related 
     actions) or from any settlement in response to such action. 
     The determination of the amount of such award by the 
     Whistleblower Office shall depend upon the extent to which 
     the individual substantially contributed to such action, and 
     shall be determined at the sole discretion of the 
     Whistleblower Office.
       ``(2) Award in case of less substantial contribution.--
       ``(A) In general.--In the event the action described in 
     paragraph (1) is one which the Whistleblower Office 
     determines to be based principally on disclosures of specific 
     allegations (other than information provided by the 
     individual described in paragraph (1)) resulting from a 
     judicial or administrative hearing, from a governmental 
     report, hearing, audit, or investigation, or from the news 
     media, the Whistleblower Office may award such sums as it 
     considers appropriate, but in no case more than 10 percent of 
     the collected proceeds (including penalties, interest, 
     additions to tax, and additional amounts) resulting from the 
     action (including any related actions) or from any settlement 
     in response to such action, taking into account the 
     significance of the individual's information and the role of 
     such individual and any legal representative of such 
     individual in contributing to such action.
       ``(B) Nonapplication of paragraph where individual is 
     original source of information.--Subparagraph (A) shall not 
     apply if the information resulting in the initiation of the 
     action described in paragraph (1) was originally provided by 
     the individual described in paragraph (1).
       ``(3) Application of this subsection.--This subsection 
     shall apply with respect to any action--
       ``(A) against any taxpayer, but in the case of any 
     individual, only if such individual's gross income exceeds 
     $200,000 for any taxable year subject to such action, and

[[Page S9489]]

       ``(B) if the tax, penalties, interest, additions to tax, 
     and additional amounts in dispute exceed $20,000.
       ``(4) Additional rules.--
       ``(A) No contract necessary.--No contract with the Internal 
     Revenue Service is necessary for any individual to receive an 
     award under this subsection.
       ``(B) Representation.--Any individual described in 
     paragraph (1) or (2) may be represented by counsel.
       ``(C) Award not subject to individual alternative minimum 
     tax.--No award received under this subsection shall be 
     included in gross income for purposes of determining 
     alternative minimum taxable income.
       ``(c) Whistleblower Office.--
       ``(1) In general.--There is established in the Internal 
     Revenue Service an office to be known as the `Whistleblower 
     Office' which--
       ``(A) shall analyze information received from any 
     individual described in subsection (b) and either investigate 
     the matter itself or assign it to the appropriate Internal 
     Revenue Service office,
       ``(B) shall monitor any action taken with respect to such 
     matter,
       ``(C) shall inform such individual that it has accepted the 
     individual's information for further review,
       ``(D) may require such individual and any legal 
     representative of such individual to not disclose any 
     information so provided,
       ``(E) may ask for additional assistance from such 
     individual or any legal representative of such individual, 
     and
       ``(F) shall determine the amount to be awarded to such 
     individual under subsection (b).
       ``(2) Funding for office.--From the amounts available for 
     expenditure under subsection (a), the Whistleblower Office 
     shall be credited with an amount equal to the awards made 
     under subsection (b). These funds shall be used to maintain 
     the Whistleblower Office and also to reimburse other Internal 
     Revenue Service offices for related costs, such as costs of 
     investigation and collection.
       ``(3) Request for assistance.--
       ``(A) In general.--Any assistance requested under paragraph 
     (1)(E) shall be under the direction and control of the 
     Whistleblower Office or the office assigned to investigate 
     the matter under subparagraph (A). To the extent the 
     disclosure of any returns or return information to the 
     individual or legal representative is required for the 
     performance of such assistance, such disclosure shall be 
     pursuant to a contract entered into between the Secretary and 
     the recipients of such disclosure subject to section 6103(n).
       ``(B) Funding of assistance.--From the funds made available 
     to the Whistleblower Office under paragraph (2), the 
     Whistleblower Office may reimburse the costs incurred by any 
     legal representative in providing assistance described in 
     subparagraph (A).''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to information provided on or after the date of 
     the enactment of this Act.

     SEC. 207. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, 
                   AND OTHER AMOUNTS.

       (a) In General.--Subsection (f) of section 162 (relating to 
     trade or business expenses) is amended to read as follows:
       ``(f) Fines, Penalties, and Other Amounts.--
       ``(1) In general.--Except as provided in paragraph (2), no 
     deduction otherwise allowable shall be allowed under this 
     chapter for any amount paid or incurred (whether by suit, 
     agreement, or otherwise) to, or at the direction of, a 
     government or entity described in paragraph (4) in relation 
     to the violation of any law or the investigation or inquiry 
     by such government or entity into the potential violation of 
     any law.
       ``(2) Exception for amounts constituting restitution.--
     Paragraph (1) shall not apply to any amount which--
       ``(A) the taxpayer establishes constitutes restitution 
     (including remediation of property) for damage or harm caused 
     by or which may be caused by the violation of any law or the 
     potential violation of any law, and
       ``(B) is identified as restitution in the court order or 
     settlement agreement.
     Identification pursuant to subparagraph (B) alone shall not 
     satisfy the requirement under subparagraph (A). This 
     paragraph shall not apply to any amount paid or incurred as 
     reimbursement to the government or entity for the costs of 
     any investigation or litigation.
       ``(3) Exception for amounts paid or incurred as the result 
     of certain court orders.--Paragraph (1) shall not apply to 
     any amount paid or incurred by order of a court in a suit in 
     which no government or entity described in paragraph (4) is a 
     party.
       ``(4) Certain nongovernmental regulatory entities.--An 
     entity is described in this paragraph if it is--
       ``(A) a nongovernmental entity which exercises self-
     regulatory powers (including imposing sanctions) in 
     connection with a qualified board or exchange (as defined in 
     section 1256(g)(7)), or
       ``(B) to the extent provided in regulations, a 
     nongovernmental entity which exercises self-regulatory powers 
     (including imposing sanctions) as part of performing an 
     essential governmental function.
       ``(5) Exception for taxes due.--Paragraph (1) shall not 
     apply to any amount paid or incurred as taxes due.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to amounts paid or incurred on or after the date 
     of the enactment of this Act, except that such amendment 
     shall not apply to amounts paid or incurred under any binding 
     order or agreement entered into before such date. Such 
     exception shall not apply to an order or agreement requiring 
     court approval unless the approval was obtained before such 
     date.

     SEC. 208. SENSE OF THE SENATE ON TAX ENFORCEMENT PRIORITIES.

       It is the sense of the Senate that additional funds should 
     be appropriated for Internal Revenue Service enforcement 
     efforts and that the Internal Revenue Service should devote 
     proportionately more of its enforcement funds--
       (1) to combat the promotion of abusive tax shelters for 
     corporations and high net worth individuals and the aiding 
     and abetting of tax evasion,
       (2) to stop accounting, law, and financial firms involved 
     in such promotion and aiding and abetting, and
       (3) to combat the use of offshore financial accounts to 
     conceal taxable income.

                TITLE III--REQUIRING ECONOMIC SUBSTANCE

     SEC. 301. CLARIFICATION OF ECONOMIC SUBSTANCE DOCTRINE.

       (a) In General.--Section 7701 is amended by redesignating 
     subsection (o) as subsection (p) and by inserting after 
     subsection (n) the following new subsection:
       ``(o) Clarification of Economic Substance Doctrine; Etc.--
       ``(1) General rules.--
       ``(A) In general.--In any case in which a court determines 
     that the economic substance doctrine is relevant for purposes 
     of this title to a transaction (or series of transactions), 
     such transaction (or series of transactions) shall have 
     economic substance only if the requirements of this paragraph 
     are met.
       ``(B) Definition of economic substance.--For purposes of 
     subparagraph (A)--
       ``(i) In general.--A transaction has economic substance 
     only if--

       ``(I) the transaction changes in a meaningful way (apart 
     from Federal tax effects) the taxpayer's economic position, 
     and
       ``(II) the taxpayer has a substantial nontax purpose for 
     entering into such transaction and the transaction is a 
     reasonable means of accomplishing such purpose.

     In applying subclause (II), a purpose of achieving a 
     financial accounting benefit shall not be taken into account 
     in determining whether a transaction has a substantial nontax 
     purpose if the origin of such financial accounting benefit is 
     a reduction of income tax.
       ``(ii) Special rule where taxpayer relies on profit 
     potential.--A transaction shall not be treated as having 
     economic substance by reason of having a potential for profit 
     unless--

       ``(I) the present value of the reasonably expected pre-tax 
     profit from the transaction is substantial in relation to the 
     present value of the expected net tax benefits that would be 
     allowed if the transaction were respected, and
       ``(II) the reasonably expected pre-tax profit from the 
     transaction exceeds a risk-free rate of return.

       ``(C) Treatment of fees and foreign taxes.--Fees and other 
     transaction expenses and foreign taxes shall be taken into 
     account as expenses in determining pre-tax profit under 
     subparagraph (B)(ii).
       ``(2) Special rules for transactions with tax-indifferent 
     parties.--
       ``(A) Special rules for financing transactions.--The form 
     of a transaction which is in substance the borrowing of money 
     or the acquisition of financial capital directly or 
     indirectly from a tax-indifferent party shall not be 
     respected if the present value of the deductions to be 
     claimed with respect to the transaction is substantially in 
     excess of the present value of the anticipated economic 
     returns of the person lending the money or providing the 
     financial capital. A public offering shall be treated as a 
     borrowing, or an acquisition of financial capital, from a 
     tax-indifferent party if it is reasonably expected that at 
     least 50 percent of the offering will be placed with tax-
     indifferent parties.
       ``(B) Artificial income shifting and basis adjustments.--
     The form of a transaction with a tax-indifferent party shall 
     not be respected if--
       ``(i) it results in an allocation of income or gain to the 
     tax-indifferent party in excess of such party's economic 
     income or gain, or
       ``(ii) it results in a basis adjustment or shifting of 
     basis on account of overstating the income or gain of the 
     tax-indifferent party.
       ``(3) Definitions and special rules.--For purposes of this 
     subsection--
       ``(A) Economic substance doctrine.--The term `economic 
     substance doctrine' means the common law doctrine under which 
     tax benefits under subtitle A with respect to a transaction 
     are not allowable if the transaction does not have economic 
     substance or lacks a business purpose.
       ``(B) Tax-indifferent party.--The term `tax-indifferent 
     party' means any person or entity not subject to tax imposed 
     by subtitle A. A person shall be treated as a tax-indifferent 
     party with respect to a transaction if the items taken into 
     account with respect to the transaction have no substantial 
     impact on such person's liability under subtitle A.
       ``(C) Exception for personal transactions of individuals.--
     In the case of an individual, this subsection shall apply 
     only to transactions entered into in connection

[[Page S9490]]

     with a trade or business or an activity engaged in for the 
     production of income.
       ``(D) Treatment of lessors.--In applying paragraph 
     (1)(B)(ii) to the lessor of tangible property subject to a 
     lease--
       ``(i) the expected net tax benefits with respect to the 
     leased property shall not include the benefits of--

       ``(I) depreciation,
       ``(II) any tax credit, or
       ``(III) any other deduction as provided in guidance by the 
     Secretary, and

       ``(ii) subclause (II) of paragraph (1)(B)(ii) shall be 
     disregarded in determining whether any of such benefits are 
     allowable.
       ``(4) Other common law doctrines not affected.--Except as 
     specifically provided in this subsection, the provisions of 
     this subsection shall not be construed as altering or 
     supplanting any other rule of law, and the requirements of 
     this subsection shall be construed as being in addition to 
     any such other rule of law.
       ``(5) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this subsection. Such regulations may include 
     exemptions from the application of this subsection.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to transactions entered into after the date of 
     the enactment of this Act.

     SEC. 302. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO 
                   TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

       (a) In General.--Subchapter A of chapter 68 is amended by 
     inserting after section 6662A the following new section:

     ``SEC. 6662B. PENALTY FOR UNDERSTATEMENTS ATTRIBUTABLE TO 
                   TRANSACTIONS LACKING ECONOMIC SUBSTANCE, ETC.

       ``(a) Imposition of Penalty.--If a taxpayer has an 
     noneconomic substance transaction understatement for any 
     taxable year, there shall be added to the tax an amount equal 
     to 40 percent of the amount of such understatement.
       ``(b) Reduction of Penalty for Disclosed Transactions.--
     Subsection (a) shall be applied by substituting `20 percent' 
     for `40 percent' with respect to the portion of any 
     noneconomic substance transaction understatement with respect 
     to which the relevant facts affecting the tax treatment of 
     the item are adequately disclosed in the return or a 
     statement attached to the return.
       ``(c) Noneconomic Substance Transaction Understatement.--
     For purposes of this section--
       ``(1) In general.--The term `noneconomic substance 
     transaction understatement' means any amount which would be 
     an understatement under section 6662A(b)(1) if section 6662A 
     were applied by taking into account items attributable to 
     noneconomic substance transactions rather than items to which 
     section 6662A would apply without regard to this paragraph.
       ``(2) Noneconomic substance transaction.--The term 
     `noneconomic substance transaction' means any transaction 
     if--
       ``(A) there is a lack of economic substance (within the 
     meaning of section 7701(o)(1)) for the transaction giving 
     rise to the claimed benefit or the transaction was not 
     respected under section 7701(o)(2), or
       ``(B) the transaction fails to meet the requirements of any 
     similar rule of law.
       ``(d) Rules Applicable to Compromise of Penalty.--
       ``(1) In general.--If the 1st letter of proposed deficiency 
     which allows the taxpayer an opportunity for administrative 
     review in the Internal Revenue Service Office of Appeals has 
     been sent with respect to a penalty to which this section 
     applies, only the Commissioner of Internal Revenue may 
     compromise all or any portion of such penalty.
       ``(2) Applicable rules.--The rules of paragraphs (2) and 
     (3) of section 6707A(d) shall apply for purposes of paragraph 
     (1).
       ``(e) Coordination With Other Penalties.--Except as 
     otherwise provided in this part, the penalty imposed by this 
     section shall be in addition to any other penalty imposed by 
     this title.
       ``(f) Cross References.--

``(1) For coordination of penalty with understatements under section 
  6662 and other special rules, see section 6662A(e)...................
``(2) For reporting of penalty imposed under this section to the 
  Securities and Exchange Commission, see section 6707A(e).''..........
       (b) Coordination With Other Understatements and 
     Penalties.--
       (1) The second sentence of section 6662(d)(2)(A) is amended 
     by inserting ``and without regard to items with respect to 
     which a penalty is imposed by section 6662B'' before the 
     period at the end.
       (2) Subsection (e) of section 6662A is amended--
       (A) in paragraph (1), by inserting ``and noneconomic 
     substance transaction understatements'' after ``reportable 
     transaction understatements'' both places it appears,
       (B) in paragraph (2)(A), by inserting ``and a noneconomic 
     substance transaction understatement'' after ``reportable 
     transaction understatement'',
       (C) in paragraph (2)(B), by inserting ``6662B or'' before 
     ``6663'',
       (D) in paragraph (2)(C)(i), by inserting ``or section 
     6662B'' before the period at the end,
       (E) in paragraph (2)(C)(ii), by inserting ``and section 
     6662B'' after ``This section'',
       (F) in paragraph (3), by inserting ``or noneconomic 
     substance transaction understatement'' after ``reportable 
     transaction understatement'', and
       (G) by adding at the end the following new paragraph:
       ``(4) Noneconomic substance transaction understatement.--
     For purposes of this subsection, the term `noneconomic 
     substance transaction understatement' has the meaning given 
     such term by section 6662B(c).''.
       (3) Subsection (e) of section 6707A is amended--
       (A) by striking ``or'' at the end of subparagraph (B), and
       (B) by striking subparagraph (C) and inserting the 
     following new subparagraphs:
       ``(C) is required to pay a penalty under section 6662B with 
     respect to any noneconomic substance transaction, or
       ``(D) is required to pay a penalty under section 6662(h) 
     with respect to any transaction and would (but for section 
     6662A(e)(2)(C)) have been subject to penalty under section 
     6662A at a rate prescribed under section 6662A(c) or under 
     section 6662B,''.
       (c) Clerical Amendment.--The table of sections for part II 
     of subchapter A of chapter 68 is amended by inserting after 
     the item relating to section 6662A the following new item:

``Sec. 6662B. Penalty for understatements attributable to transactions 
              lacking economic substance, etc.''.
       (d) Effective Date.--The amendments made by this section 
     shall apply to transactions entered into after the date of 
     the enactment of this Act.

     SEC. 303. DENIAL OF DEDUCTION FOR INTEREST ON UNDERPAYMENTS 
                   ATTRIBUTABLE TO NONECONOMIC SUBSTANCE 
                   TRANSACTIONS.

       (a) In General.--Section 163(m) (relating to interest on 
     unpaid taxes attributable to nondisclosed reportable 
     transactions) is amended--
       (1) by striking ``attributable'' and all that follows and 
     inserting the following: ``attributable to--
       ``(1) the portion of any reportable transaction 
     understatement (as defined in section 6662A(b)) with respect 
     to which the requirement of section 6664(d)(2)(A) is not met, 
     or
       ``(2) any noneconomic substance transaction understatement 
     (as defined in section 6662B(c)).'', and
       (2) by inserting ``and noneconomic substance transactions'' 
     after ``transactions''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to transactions after the date of the enactment 
     of this Act in taxable years ending after such date.

              TITLE IV--DETERRING UNCOOPERATIVE TAX HAVENS

     SEC. 401. DISCLOSING PAYMENTS TO PERSONS IN UNCOOPERATIVE TAX 
                   HAVENS.

       (a) In General.--Subpart A of part III of subchapter A of 
     chapter 61 is amended by inserting after section 6038C the 
     following new section:

     ``SEC. 6038D. DETERRING UNCOOPERATIVE TAX HAVENS THROUGH 
                   LISTING AND REPORTING REQUIREMENTS.

       ``(a) In General.--Each United States person who transfers 
     money or other property directly or indirectly to any 
     uncooperative tax haven, to any financial institution 
     licensed by or operating in any uncooperative tax haven, or 
     to any person who is a resident of any uncooperative tax 
     haven shall furnish to the Secretary, at such time and in 
     such manner as the Secretary shall by regulation prescribe, 
     such information with respect to such transfer as the 
     Secretary may require.
       ``(b) Exceptions.--Subsection (a) shall not apply to a 
     transfer by a United States person if the amount of money 
     (and the fair market value of property) transferred is less 
     than $10,000. Related transfers shall be treated as 1 
     transfer for purposes of this subsection.
       ``(c) Uncooperative Tax Haven.--For purposes of this 
     section--
       ``(1) In general.--The term `uncooperative tax haven' means 
     any foreign jurisdiction which is identified on a list 
     maintained by the Secretary under paragraph (2) as being a 
     jurisdiction--
       ``(A) which imposes no or nominal taxation either generally 
     or on specified classes of income, and
       ``(B) has corporate, business, bank, or tax secrecy or 
     confidentiality rules and practices, or has ineffective 
     information exchange practices which, in the judgment of the 
     Secretary, effectively limit or restrict the ability of the 
     United States to obtain information relevant to the 
     enforcement of this title.
       ``(2) Maintenance of list.--Not later than November 1 of 
     each calendar year, the Secretary shall issue a list of 
     foreign jurisdictions which the Secretary determines qualify 
     as uncooperative tax havens under paragraph (1).
       ``(3) Ineffective information exchange practices.--For 
     purposes of paragraph (1), a jurisdiction shall be deemed to 
     have ineffective information exchange practices if the 
     Secretary determines that during any taxable year ending in 
     the 12-month period preceding the issuance of the list under 
     paragraph (2)--
       ``(A) the exchange of information between the United States 
     and such jurisdiction was inadequate to prevent evasion or 
     avoidance of United States income tax by United States 
     persons or to enable the United States effectively to enforce 
     this title, or
       ``(B) such jurisdiction was identified by an 
     intergovernmental group or organization of

[[Page S9491]]

     which the United States is a member as uncooperative with 
     international tax enforcement or information exchange and the 
     United States concurs in the determination.
       ``(d) Penalty for Failure to File Information.--If a United 
     States person fails to furnish the information required by 
     subsection (a) with respect to any transfer within the time 
     prescribed therefor (including extensions), such United 
     States person shall pay (upon notice and demand by the 
     Secretary and in the same manner as tax) an amount equal to 
     20 percent of the amount of such transfer.
       ``(e) Simplified Reporting.--The Secretary may by 
     regulations provide for simplified reporting under this 
     section for United States persons making large volumes of 
     similar payments.
       ``(f) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this section.''.
       (b) Clerical Amendment.--The table of sections for such 
     subpart A is amended by inserting after the item relating to 
     section 6038C the following new item:

``Sec. 6038D. Deterring uncooperative tax havens through listing and 
              reporting requirements.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to transfers after the date which is 180 days 
     after the date of the enactment of this Act.

     SEC. 402. DETERRING UNCOOPERATIVE TAX HAVENS BY RESTRICTING 
                   ALLOWABLE TAX BENEFITS.

       (a) Limitation on Deferral.--
       (1) In general.--Subsection (a) of section 952 (defining 
     subpart F income) is amended by striking ``and'' at the end 
     of paragraph (4), by striking the period at the end of 
     paragraph (5) and inserting ``, and'', and by inserting after 
     paragraph (5) the following new paragraph:
       ``(6) an amount equal to the applicable fraction (as 
     defined in subsection (e)) of the income of such corporation 
     other than income which--
       ``(A) is attributable to earnings and profits of the 
     foreign corporation included in the gross income of a United 
     States person under section 951 (other than by reason of this 
     paragraph or paragraph (3)(A)(i)), or
       ``(B) is described in subsection (b).''.
       (2) Applicable fraction.--Section 952 is amended by adding 
     at the end the following new subsection:
       ``(e) Identified Tax Haven Income Which Is Subpart F 
     Income.--
       ``(1) In general.--For purposes of subsection (a)(6), the 
     term `applicable fraction' means the fraction--
       ``(A) the numerator of which is the aggregate identified 
     tax haven income for the taxable year, and
       ``(B) the denominator of which is the aggregate income for 
     the taxable year which is from sources outside the United 
     States.
       ``(2) Identified tax haven income.--For purposes of 
     paragraph (1), the term `identified tax haven income' means 
     income for the taxable year which is attributable to a 
     foreign jurisdiction for any period during which such 
     jurisdiction has been identified as an uncooperative tax 
     haven under section 6038D(c).
       ``(3) Regulations.--The Secretary shall prescribe 
     regulations similar to the regulations issued under section 
     999(c) to carry out the purposes of this subsection.''.
       (b) Denial of Foreign Tax Credit.--Section 901 (relating to 
     taxes of foreign countries and of possessions of United 
     States) is amended by redesignating subsection (m) as 
     subsection (n) and by inserting after subsection (l) the 
     following new subsection:
       ``(m) Reduction of Foreign Tax Credit, Etc., for Identified 
     Tax Haven Income.--
       ``(1) In general.--Notwithstanding any other provision of 
     this part--
       ``(A) no credit shall be allowed under subsection (a) for 
     any income, war profits, or excess profits taxes paid or 
     accrued (or deemed paid under section 902 or 960) to any 
     foreign jurisdiction if such taxes are with respect to income 
     attributable to a period during which such jurisdiction has 
     been identified as an uncooperative tax haven under section 
     6038D(c), and
       ``(B) subsections (a), (b), (c), and (d) of section 904 and 
     sections 902 and 960 shall be applied separately with respect 
     to all income of a taxpayer attributable to periods described 
     in subparagraph (A) with respect to all such jurisdictions.
       ``(2) Taxes allowed as a deduction, etc.--Sections 275 and 
     78 shall not apply to any tax which is not allowable as a 
     credit under subsection (a) by reason of this subsection.
       ``(3) Regulations.--The Secretary shall prescribe such 
     regulations as may be necessary or appropriate to carry out 
     the purposes of this subsection, including regulations which 
     treat income paid through 1 or more entities as derived from 
     a foreign jurisdiction to which this subsection applies if 
     such income was, without regard to such entities, derived 
     from such jurisdiction.''.
       (c) Effective Date.--The amendments made by this section 
     shall apply to taxable years beginning after the date of the 
     enactment of this Act.

     SEC. 403. DOUBLING OF CERTAIN PENALTIES, FINES, AND INTEREST 
                   ON UNDERPAYMENTS RELATED TO CERTAIN OFFSHORE 
                   FINANCIAL ARRANGEMENTS.

       (a) Determination of Penalty.--
       (1) In general.--Notwithstanding any other provision of 
     law, in the case of an applicable taxpayer--
       (A) the determination as to whether any interest or 
     applicable penalty is to be imposed with respect to any 
     arrangement described in paragraph (2), or to any 
     underpayment of Federal income tax attributable to items 
     arising in connection with any such arrangement, shall be 
     made without regard to the rules of subsections (b), (c), and 
     (d) of section 6664 of the Internal Revenue Code of 1986, and
       (B) if any such interest or applicable penalty is imposed, 
     the amount of such interest or penalty shall be equal to 
     twice that determined without regard to this section.
       (2) Applicable taxpayer.--For purposes of this subsection--
       (A) In general.--The term ``applicable taxpayer'' means a 
     taxpayer which--
       (i) has underreported its United States income tax 
     liability with respect to any item which directly or 
     indirectly involves--

       (I) any financial arrangement which in any manner relies on 
     the use of an offshore payment mechanism (including credit, 
     debit, or charge cards) issued by a bank or other entity in a 
     foreign jurisdiction, or
       (II) any offshore financial arrangement (including any 
     arrangement with foreign banks, financial institutions, 
     corporations, partnerships, trusts, or other entities), and

       (ii) has not signed a closing agreement pursuant to the 
     Voluntary Offshore Compliance Initiative established by the 
     Department of the Treasury under Revenue Procedure 2003-11 or 
     voluntarily disclosed its participation in such arrangement 
     by notifying the Internal Revenue Service of such arrangement 
     prior to the issue being raised by the Internal Revenue 
     Service during an examination.
       (B) Authority to waive.--The Secretary of the Treasury or 
     the Secretary's delegate may waive the application of 
     paragraph (1) for any taxpayer if the Secretary or the 
     Secretary's delegate determines that--
       (i) the use of such offshore payment mechanism or financial 
     arrangement was incidental to the transaction,
       (ii) in the case of a trade or business, such use took 
     place in the ordinary course of the trade or business of the 
     taxpayer, and
       (iii) such waiver would serve the public interest.
       (C) Issues raised.--For purposes of subparagraph (A)(ii), 
     an item shall be treated as an issue raised during an 
     examination if the individual examining the return--
       (i) communicates to the taxpayer knowledge about the 
     specific item, or
       (ii) has made a request to the taxpayer for information and 
     the taxpayer could not make a complete response to that 
     request without giving the examiner knowledge of the specific 
     item.
       (b) Definitions and Rules.--For purposes of this section--
       (1) Applicable penalty.--The term ``applicable penalty'' 
     means any penalty, addition to tax, or fine imposed under 
     chapter 68 of the Internal Revenue Code of 1986.
       (2) Fees and expenses.--The Secretary of the Treasury may 
     retain and use an amount not in excess of 25 percent of all 
     additional interest, penalties, additions to tax, and fines 
     collected under this section to be used for enforcement and 
     collection activities of the Internal Revenue Service. The 
     Secretary shall keep adequate records regarding amounts so 
     retained and used. The amount credited as paid by any 
     taxpayer shall be determined without regard to this 
     paragraph.
       (c) Report by Secretary.--The Secretary shall each year 
     conduct a study and report to Congress on the implementation 
     of this section during the preceding year, including 
     statistics on the number of taxpayers affected by such 
     implementation and the amount of interest and applicable 
     penalties asserted, waived, and assessed during such 
     preceding year.
       (d) Effective Date.--The provisions of this section shall 
     apply to interest, penalties, additions to tax, and fines 
     with respect to any taxable year if, as of the date of the 
     enactment of this Act, the assessment of any tax, penalty, or 
     interest with respect to such taxable year is not prevented 
     by the operation of any law or rule of law.

     SEC. 404. TREASURY REGULATIONS ON FOREIGN TAX CREDIT.

       (a) In General.--Section 901 (relating to taxes of foreign 
     countries and of possessions of United States), as amended by 
     section 402, is amended by redesignating subsection (n) as 
     subsection (o) and by inserting after subsection (m) the 
     following new subsection:
       ``(n) Regulations.--The Secretary may prescribe regulations 
     disallowing a credit under subsection (a) for all or a 
     portion of any foreign tax, or allocating a foreign tax among 
     2 or more persons, in cases where the foreign tax is imposed 
     on any person in respect of income of another person or in 
     other cases involving the inappropriate separation of the 
     foreign tax from the related foreign income.''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to transactions entered into after the date of 
     the enactment of this Act.

  Mr. COLEMAN. Mr. President, today I rise to join Senator Levin in 
introducing the Tax Shelter and Tax Haven Reform Act of 2005. This bill 
addresses abusive tax shelters and offshore tax havens which allow tax 
evaders to avoid paying their fair share. These abuses increase the 
amount of taxes for everyone else. By increasing the penalty for these 
shelters, this legislation

[[Page S9492]]

will do much to ensure that the public trust in our tax laws is 
restored.
  Two years ago, as Chairman of the Permanent Subcommittee on 
Investigations, I held Subcommittee hearings on abusive tax shelters. 
It became clear to the Subcommittee that some tax avoidance schemes are 
clearly abusive. These abusive shelters relied on sham transactions 
with no financial or economic utility other than to manufacture tax 
benefits.
  Abusive tax shelters hurt the American people. For example, a recent 
IRS study estimates the Nation's ``tax gap''--the difference between 
the amount of taxes owed and the amount collected was $353 billion in 
2001. The study also found that over 80 percent of the ``tax gap'' is 
due to taxpayers underreporting their taxes. This means that honest 
taxpayers are forced to pay more to make up for those taxpayers who 
dodge Uncle Sam.
  The use of abusive tax shelters exploded during the high-flying 
1990s, when many firms were awash in cash and were more concerned with 
generating fees than remaining compliant with the code. The lure of 
millions of dollars in fees clearly played a role in the decision on 
the part of tax professionals to drive a Brinks truck through any 
purported tax loophole.
  Abusive tax shelters require accountants and financial advisors who 
develop and structure transactions to take advantage of loopholes in 
the tax code. Lawyers provide cookie cutter tax opinions deeming the 
transactions to be legal. Bankers provide loans with little or no 
credit risk, yet the amount of the loan creates a multi-million dollar 
tax loss.
  This became a game. Reputable professionals were able to earn huge 
profits by providing services that offered a ``veneer of legitimacy'' 
to the transactions. The parties involved were careful to hide the 
transactions from IRS detection by failing to register and failing to 
provide lists of clients who used the transactions to the IRS.
  It was clear to the Subcommittee that the promoters of these tax 
shelters failed to register transactions with the IRS partly because 
the penalties for failing to register were so low compared to the 
expected profits. In other words, the risk-benefit ratio was entirely 
lopsided in the favor of the promoters. This bill will end this 
advantage and will strengthen the enforcement tools that are at Uncle 
Sam's disposal.
  Current law provides for penalties that amount to 50 percent of the 
gains of those who market, plan, implement and sell sham tax shelters 
to individuals and corporations. However, I agree with my esteemed 
colleague, Senator Levin, that even stronger penalties are needed. The 
provision to substantially increase penalties to the promoters and 
aiders and abettors who manufacture and implement these sham 
transactions so that they must give back more than just half of their 
ill-gotten gains is vital to restoring the integrity of our tax laws 
and deterring future tax avoidance.
  This is not a victimless crime. It is not the government that loses 
the money. It is working moms and dads who bear the brunt of lost 
revenue so that a handful of lawyers, accountants, investment advisors, 
bankers and their clients can manipulate legitimate business practices 
to make a profit.
  We need to give honest, hard working Americans a better deal--by 
cracking down on those who choose not to pay their fair share of taxes. 
This bill is a step in the right direction.
  Mr. OBAMA. Mr. President, I rise today to speak about the ``Tax 
Shelter and Tax Haven Reform Act of 2005,'' of which I am a cosponsor. 
This bill seeks to improve the fairness of our tax system by deterring 
the use of tax avoidance strategies with no economic justification 
other than to reduce tax liability and shirk responsibility.
  Abusive tax shelters and tax havens cost this country tens of 
billions of dollars each year and may be the largest single source of 
the $300 billion tax gap between what is owed and what is collected by 
the U.S. Treasury. The investigation by my colleagues on the Senate 
Permanent Subcommittee on Investigations found that more than half of 
all federal contractors may have subsidiaries in tax havens and that 
almost half of all foreign profits of U.S. corporations in a recent 
year were in tax havens. My esteemed colleagues also heard testimony 
that between 1-2 million individual taxpayers may be hiding funds in 
offshore tax havens. Many of these tax havens refuse to cooperate with 
U.S. tax enforcement officials.
  This is not a political issue of how low or high taxes ought to be. 
This is a basic issue of fairness and integrity. Corporate and 
individual taxpayers alike must have confidence that those who 
disregard the law will be identified and adequately punished. Those who 
enforce the law need the tools and resources to do so. We cannot 
reasonably expect an American business to subject itself to a 
competitive disadvantage by following the law while watching its 
competitors defy the law without repercussion.
  This bill cracks down on those individuals and businesses that 
establish virtual residences in tax havens abroad while taking unfair 
advantage of the very real advantages of actual residence here in the 
United States.
  This bill clarifies that the sole purpose of a transaction cannot 
legitimately be to evade tax liability.
  This bill increases the penalties for those who profit by 
manipulating and exploiting our tax laws, resulting in higher rates and 
greater complexity for the rest of us.
  My mother taught me that there is no such thing as a free lunch--
someone always has to pay. And when one of us shirks our duty to pay, 
the burden gets shifted to others, in this case to ordinary taxpayers 
and working Americans without access to sophisticated tax preparers or 
corporate loopholes.
  This bill strengthens our ability to stop shifting the tax burden to 
working families. The money saved by this bill, for example, can reduce 
the burden on American children of unnecessary budget deficits being 
financed by rising debt to foreign nations.
  The money saved by this bill can also be used to protect children in 
low income families from unfair tax increases caused by inequities in 
the child tax credit. In fact, this fall, I intend to introduce 
legislation to ensure that the child tax credit is not reduced solely 
because a family's income fails to keep pace with inflation. With less 
than half of the savings generated by this bill, we can shield more 
than four million children from the annual tax increase their families 
face as a result of stagnant wages and inflation under current law.
  All of us should pay our fair share of American taxes. There is no 
excuse for benefiting from the laws and services, institutions and 
economic structure of our nation while evading your responsibility to 
do your part for this country. I believe it is our job to keep the 
system fair, and that's what this bill seeks to do.
  I commend Senator Levin and Senator Coleman for their leadership on 
this important issue. I am proud to be a cosponsor of this bill and 
urge my colleagues to support it.
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