IRS Ramps Up Use of Economic Substance Doctrine in Audits

An IRS official defended the agency’s growing use of the economic substance doctrine and business purpose test in tax examinations, even as practitioners say fears of the IRS applying the doctrine as a general tax avoidance rule seem to be coming true.

“We have to enforce statutes that are there. We can’t ignore the statute,” IRS Associate Chief Counsel for International Peter Blessing said at the NYU/KPMG Tax Symposium Thursday. “It’s an antidote for literalism, and we sort of like it.”

The doctrine says the IRS can disregard certain transactions if they were made solely to avoid paying taxes ...