Penalties on Tax Shelter Promoters

Prior to the AJCA, a $1,000 penalty was imposed on any person who organized, assisted in the organization of, or participated in the sale of any interest in a partnership or other entity, any investment plan or arrangement, or other plan or arrangement, and made or provided a qualifying false or fraudulent statement or a gross valuation overstatement. A penalty on a gross valuation overstatement could be waived if there had been a reasonable basis for the valuation and it was made in good faith.

New Law

AJCA Section 818 modifies Sec. 6700s penalty amount to 50% of the gross income the person derives from the activity for which the penalty is imposed. The penalty applies to any activity that involves a statement on the tax benefits of participating in a plan or arrangement if the person knows or has reason to know that the statement is false or fraudulent. The new penalty rate does not apply to gross valuation overstatements.

Effective Date

The new penalty rate is effective for activities after Oct. 22, 2004.

From Paul Manning, Washington, DC