IRS Tightens Settlement Guidelines In Abusive Transactions Cases

by Leroy Baker, Tax-News.com, New York

22 October 2004

The Appeals Division of the Internal Revenue Service has reassessed and tightened the settlement guidelines under which it will accept offers to settle cases with taxpayers who participated in certain abusive transactions, officials announced on Wednesday.

Last month, the IRS Appeals Division and the Large and Mid-Size Business Division began sending letters to taxpayers involved in lease strips, inflated-basis assets derived from lease strips, and intermediary transactions, notifying them that the settlement terms available to resolve these transactions have been tightened.

Under the new guidelines, the IRS will not settle unless taxpayers concede 100% of the claimed losses or deductions, reduced by only the amount of transaction costs up to 10% of the claimed losses or deductions.

Furthermore, taxpayers must concede 50% of the accuracy-related penalty at issue. If both the 40% gross valuation misstatement penalty and the 20% substantial understatement penalty were asserted, then the settlement will apply to the gross valuation misstatement penalty.

"As we have been doing for some time, we continue to ratchet up the pressure on those entering into abusive transactions," stated IRS Commissioner Mark W. Everson. "Both Congress and the courts are supporting us in this effort."

IRS Chief Counsel Donald Korb added: "Notifying taxpayers of the change in the settlement guidelines is another example of the nimbleness of the IRS. This action shows that the longer a taxpayer delays in settling, the greater the risk that we will tighten our settlement ranges in response to favorable litigation."

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