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Treasury And IRS Adopt New Rules To Raise Standards In Tax Profession

by Leroy Baker,, New York

31 December 2003

The United States government launched its latest counter-offensive in the war against abusive tax sheltering this week after the Treasury Department and the Internal Revenue Service issued four new items of administrative guidance designed to improve disclosure rules and make maximum use of the IRS’s audit resources.

“Taken together, the actions we are announcing today represent another significant step to end the proliferation of abusive tax avoidance transactions that has undermined confidence in our tax system,” explained Treasury Assistant Secretary for Tax Policy Pam Olson, continuing: “We are proposing a set of best practices that makes clear that tax professionals should adhere to the highest ethical standards and ensure that their clients are well-advised of the law and any risks they are taking.”

The new regulations aim to raise standards amongst tax advisors who provide opinion letters supporting tax-motivated transactions.

According to the Treasury Department:

"The proposed rules set out clear and specific requirements for tax opinions provided by attorneys and accountants and expectations for those with supervisory responsibility for a professional services firm’s tax practice."

"In an effort to halt the rush to the bottom that pervaded the 1990s and restore the confidence of the public in tax professionals, the proposed changes also describe best practices for tax advisors and call on professional services firms to put in place procedures for all of the firm’s personnel that are consistent with these best practices."

"To ensure clients are well-advised, the proposed changes would obligate tax advisors to inform clients explicitly about what protections, if any, an opinion provides to the client. For example, tax advisors would have to advise clients about issues that the opinion does not address and warn the client if the opinion will not protect the client against penalties."

"The Treasury Department and the IRS are working with professional organizations to promote best practices among tax professionals through setting aspirational standards and self-regulation. The proposed changes would put in place a framework for that effort."

"The proposed changes replace changes proposed in January 2001. They reflect a careful consideration of the comments received on the January 2001 proposals and information gathered by the IRS in its audit of professional services firms’ compliance with the tax shelter rules."

"The regulations also apply to taxpayers who do not disclose that they have reported items on their tax returns that are based on the position that a Treasury regulation is invalid. Under the final regulations, for purposes of the imposition of penalties, a taxpayer’s failure to disclose an abusive tax avoidance transaction is treated as a strong indication that the taxpayer acted in bad faith with respect to any additional tax owed as a consequence of the transaction. Similarly, taxpayers who do not disclose items that are based on advice that a Treasury regulation is invalid will be deemed to have acted in bad faith with respect to any additional tax that is owed as a consequence of those items."

“We are taking the administrative steps we can under current law to create downsides for those who choose not to disclose by making it clear that failing to disclose significantly increases the likelihood of penalties being imposed,” announced Assistant Secretary Olson.

“Having the IRS hunt for an abusive transaction hidden on a tax return is a waste of IRS resources. If a taxpayer is willing to enter into a transaction, then the taxpayer should be willing to disclose that transaction on its return,” she added.

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