IRS and Treasury Department issue new rules regarding tax shelters

The Treasury Department and the IRS, in further continuing their war on tax shelters, are soon to announce revised ethical standards for tax advisers, lawyers and accountants.

The intention for these new standards is to discourage people from designing and selling shelters whose function are to avoid paying taxes. Officials of the IRS will be focusing on tax professionals because it's from them that individual and business taxpayers (and the wealthy), hear shelters in the first place.

The new rules take aim at "opinion letters", a tool widely used in selling complex tax shelters. These letters, which are drafted by lawyers and accountants, are used in assuring investors that a transaction is legitimate. A number of investors make the wrong assumption that an opinion letter will protect them against financial penalties should the IRS decide to go after a tax shelter. The theory is that, should a shelter be ruled as invalid, the investor may argue that he acted in good faith because the transaction had been approved by a professional.

A numbe of Lawyers are saying that a great many opinion letters are worthless because of their ambiguities and because they fail to address every detail of the transaction involved. Well known tax advisers have been urging people to obtain independent evaluations from qualified tax experts having no financial stake in the transaction. A carefully crafted legal opinion from a reputable tax adviser can be useful in protecting investors from IRS penalties. These new rules are aimed at clarifying which kinds of opinion letters work and which don't.

A spokesperson with a well-known investment firm has stated: "The Treasury has been concerned that some practitioners may be providing opinions based on unrealistic factual assumptions or without considering important legal doctrines, and taxpayers might be misled into thinking that such opinions protect them against the assertion of IRS penalties."

Know officially known as "Circular 230," these revised standards include exact requirements for tax opinions issued by attorneys and accountants. In addition, it's expected they will require tax advisers to warn their clients explicitly what protections a tax opinion offers. The date of this document's release is not known.

These new standards arrive just as the IRS is gaining broader powers in combatting abusive tax shelters. A new law enacted earlier this year gives the IRS stronger weapons to use against tax-shelter designers and promoters who now possibly are facing monetary penalties. And if that individual is acting for an employer, the Treasury can impose a monetary penalty on the employer or others if they "knew, or reasonably should have known, of the conduct." These penalties can be on top or in place of suspension, disbarment or censure.

The revisions are also expected to include significant modifications to the version of Circular 230 proposed a year ago for public comment. Some tax professionals complained those standards were too broad in certain areas.

The government has gone to court to challenge shelters, but has had mixed results. Last year, it won a federal district court case that involved a hedge fund. However, recently, it lost a few shelter-related cases, thus sparking speculation that in the coming New Year Congress may step in with new legislation designed to provide broad anti-abuse rules.

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