A new interim regulation issued by the Internal Revenue Service could trip up investors who buy into tax shelters at the end of the year, and then file for an immediate refund.
Now, in a recent address before the Federal Tax Division of the American Institute of Certified Public Accountants, IRS commissioner Roscoe L. Egger Jr. said, the days of "quickie refunds" automatically generated by the IRS are over for taxpayers getting into abusive tax shelters.
Egger explained that an individual investor or partner in a partnership claiming a loss or a credit until now has been able to file easily for a "quickie refund" using Form 1045, which carries any remaining loss back for up to three years. Refunds were usually paid by IRS within 90 days.
In a change from the current IRS practice of paying out the refund and only then subjecting the recipient to audit, the agency's service centers will now analyze the merits of shelter deductions as returns are processed -- before the refund checks are sent.
The same process will apply to Forms 1040 and 1040X.
Decisions will involve assessments of whether the claims involve either "a gross valuation overstatement, or a false . . . [or] fraudulent statement with respect to the tax benefits," the new interim final rules say.
Egger promised that "judgments by the reviewing centers will not be made on a cursory basis."
One group that could attract the attention of the IRS as a result of the new rules is the renewable-energy investment community.
Although the new regulations are directed at abusive tax shelters, and energy credits are specifically included in the tax code, the valuations of systems at the levels listed in some prospectuses have already come under scrutiny by tax investigators in California.
While dozens of proper third-party service contracts have been sold in California due to the state's complementary tax code, a number of deals -- such as two-panel hot water systems selling for tens of thousands of dollars -- are more than a little suspect.
However, Ed Blum of Merrill Lynch White Weld Capital Markets Group in Washington, said that he does not think the new rules will prove burdensome.
As far as the new rules are concerned, Blum said, there is no indication from his investors that they make their decisions at the last minute and then seek refunds.
Blum noted that Merrill Lynch tells its investors to register the tax shelter claim as required.
"We put them all out on the assumption that they all will be audited," he said, noting that the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982 says that the partner is responsible for legal matters.
"Virtually everything is audited and all have passed. We are so conservative about what we sell that [we don't worry]," he said.