The Internal Revenue Service Appeals Division has tightened the guidelines under which it will settle cases with taxpayers that participated in certain abusive transactions, the agency advised this week.

Under the new guidelines, the IRS will not settle unless taxpayers concede 100 percent of the claimed losses or deductions, reduced by only the amount of transaction costs up to 10 percent of the claimed losses or deductions. Taxpayers also must concede 50 percent of the accuracy-related penalty at issue. If both the 40 percent gross valuation misstatement penalty and the 20 percent substantial understatement penalty were asserted, then the settlement will apply to the gross valuation misstatement penalty, the IRS said.

The move follows a number of wins by the IRS in court cases involving abusive tax transactions. In late August, the IRS won the Long Term Capital Holdings case, which validated its position on penalties.

The IRS's chief counsel, Donald Korb, said that the move 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."

"Modifying our settlement guidelines was appropriate in light of Long Term Capital Holdings," said David Robison, chief of Appeals. "The court's careful analysis was a compelling reason to incorporate the case in our assessment of the litigating hazards for these cases."

Last month, the IRS Appeals Division and the Large and Mid-Size Business Division began notifying taxpayers involved in three abusive transactions that the settlement terms available to resolve these transactions had changed. The IRS said that certain taxpayers who reported losses and deductions from lease strips, inflated-basis assets derived from lease strips, and in intermediary transactions are being notified that the Appeals position has tightened.

IRS Commissioner Mark W. Everson said that the agency will "continue to ratchet up the pressure on those entering into abusive transactions," adding, "Both Congress and the courts are supporting us in this effort."

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