University of Southern California

Supplying the Tax Shelter Industry: Contingent Fee Compensation for Accountants Spurs Production

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Note by Ben Wang
From Volume 76, Number 5 (July, 2003)

The use of abusive tax shelters by major corporations has been called “‘the most serious compliance issue threatening the American tax system . . . .'” Losses to the Department of the Treasury (“Treasury”) are estimated to range anywhere from $7 billion to $30 billion per year. Meanwhile, corporate profits have risen 23.5% while their corresponding tax obligations rose by only 7.7%. Personal income taxes, on the other hand, are up 44%, which represents 79% of the total federal income tax and is estimated to increase to 85% by the year 2004. Also astounding is that the corporate tax-to-profit ratio has dropped between 1.5% and 2.9%, roughly translating into a decrease in corporate income tax receipts between $13 and $24 billion. Although the decrease in corporate tax receipts is unlikely to be attributed to a single cause, many commentators point to the growing acceptance of abusive tax shelters by large corporations as a major contributor.

The growing acceptance of abusive tax shelters by large corporations has been characterized as a “race to the bottom.” The perception that competitors are actively participating in abusive tax shelters has created an environment ripe for the promotion of tax schemes promising to zero out a corporation’s taxes. The major accounting firms are using armies of professionals to promote these schemes. Moreover, they have developed the resources, both in expertise and manpower, to capitalize on and perpetuate the perception. The role played by the Big Five in the tax shelter industry is extensive. They have created for themselves a vested interest in the proliferation of tax shelters through the use of contingency fees.

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