Washington (Jan. 2, 2003) -- New proposed rules will limit the penalty defenses for transactions that taxpayers fail to disclose on their returns.

"We are raising the stakes for taxpayers who fail to disclose potentially abusive transactions to the IRS," said Treasury Assistant Secretary for Tax Policy Pam Olson. "Taxpayers who choose to hide their transactions from the IRS will lose their ability to rely on a tax opinion as a penalty defense."

According to Olson, the regulatory change is necessary because too many tax advisors have counseled clients against disclosing their transactions with the expectation that the advisors' opinions will allow the clients to avoid penalties. "With this change and the regulatory changes aimed at increasing disclosure to the IRS, we believe we will alter taxpayers' risk/reward calculations and reduce the use of inappropriate tax avoidance transactions," Olson added.

The proposed regulations prohibit taxpayers from relying upon an opinion or advice from a tax practitioner as a defense to the accuracy-related penalty for potentially abusive transactions that are not disclosed. They also will not be allowed to rely upon a tax opinion as a penalty defense if they fail to disclose transactions that are based on a position that a regulation is invalid.

-- Electronic Accountant Newswire staff

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