The Internal Revenue Service has issued proposed regulations governing patents on tax strategies and advice as a bill works its way through Congress outlawing such patents.

The proposals would add patented transactions to the category of reportable transactions under Section 1.6011-4 of the income tax regulations. The regulations also include changes in rules relating to the disclosure of reportable transactions around those tax strategies that would affect both taxpayers and advisors.

The IRS and the Treasury Department issued a notice of proposed rulemaking in November of last year about their intention to address tax patents. The patents have become controversial because of concerns that the awarding of patents could give some tax advisors advantages in interpreting the Tax Code and might lead to lawsuits by firms that claim ownership over a particular tax strategy. The strategies can also lead to tax avoidance. The House passed a law earlier this month that would ban tax-planning patents (see House Prohibits Tax-Planning Patents).

According to the proposed regulations, the IRS and the Treasury Department are "concerned about the patenting of tax advice or tax strategies and believe that adding a new category of reportable transaction to the Section 6011 regulations for patented transactions will assist the IRS and Treasury Department in obtaining disclosures of tax avoidance transactions and in providing effective tax administration."

The regulations exclude mathematical calculations or mechanical assistance in preparing tax returns from the patented transaction category, and thus do not apply to tax prep software.

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