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IRS Toughens Rules For Tax Shelter Advice

By Albert B. Crenshaw
Washington Post Staff Writer
Saturday, December 18, 2004; Page E02

The Internal Revenue Service yesterday toughened the rules that lawyers, accountants and other tax professionals must follow when they tell clients in writing that a tax strategy is likely to withstand a challenge from the government.

The IRS also made final a list of practices it wants tax professionals to follow, but that do not carry penalties.

The agency has been trying to stop abusive tax shelters, many offered by top accounting firms and carrying "comfort letters" from law firms that they are "more likely than not" to be found legal.

"These new standards send a strong message to tax professionals considering selling a questionable product to clients," Internal Revenue Commissioner Mark W. Everson said in a written statement. "The new provisions give us more tools to battle abusive tax avoidance transactions and to rein in practitioners who disregard their ethical obligations."

This fall Congress approved stiffer penalties for professionals who market or advise on abusive shelters or otherwise violate IRS rules, though the rules made final yesterday don't address those new agency powers. Such rules will be forthcoming, the IRS said.

Under the rules made final yesterday, practitioners must disclose any marketing arrangements or other connections they have with promoters of the strategy. They must review all the facts and applicable federal law and they must not simply assume that the strategy they are reviewing has a valid business purpose. And if, based on that review, they cannot conclude that all aspects of the strategy will withstand challenge, they must say so.

More broadly, the rules bar practitioners from giving written advice that is based on "unreasonable factual or legal assumptions," that unreasonably relies upon information from the taxpayer or someone else, that "fails to consider all relevant facts," or that "takes into account the possibility that a tax return will not be audited."

The IRS also tightened the rules covering opinions about tax-exempt municipal bonds.

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