FROM THE OFFICE OF PUBLIC AFFAIRS

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Today the Treasury Department issued proposed rules limiting the penalty defenses for transactions that taxpayers do not disclose on their returns.

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

These 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.  Under these proposed regulations, taxpayers 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.

These proposed regulations carry out two of the administrative actions announced in the Treasury Department's Enforcement Proposals for Abusive Tax Avoidance Transactions, issued on March 20, 2002.  The Treasury Department already has issued regulations that provide revised rules for identifying transactions that must be disclosed on a tax return.  These proposed changes to the penalty regulations will reinforce the disclosure rules, allowing the IRS and the Treasury Department to respond quickly to abusive transactions.

Related Documents:

• The text of the final regulations is attached.