IRS Takes Aim at Tax ‘Opinion Letters’

Tax-shelter opinion letters won't protect corporate taxpayers from government penalties.
Stephen TaubDecember 9, 2004

The Internal Revenue Service and the U.S. Treasury department have declared war on the widely used “opinion letters” in their bid to clean up abusive tax shelters.

The two agencies soon plan to trot out Circular 230, containing revised standards that will include detailed requirements for tax opinions issued by attorneys and accountants, according to the Wall
Street Journal.
Written by lawyers and accountants, the opinion letters are typically used to assure investors that a transaction is legitimate, the paper pointed out.

The revised standards are expected to require tax advisers to warn clients explicitly what protections, if any, a tax opinion letter offers, said the report. The IRS and Treasury want shelter users to know that despite receiving these written opinions, they will not be able to shift blame for using sham shelters to their advisors — nor would companies be protected from huge penalties if the IRS deems the shelters to be invalid.

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Lawyers reportedly believe that the value of the opinion letters is overstated, mainly because they are filled with ambiguities and don’t address all the details of the transaction involved. Indeed, reputable tax advisers urge users to obtain independent evaluations from qualified tax experts who have no financial stake in the proposed transactions, said the Journal.

The government agencies also warned against promoters who insist upon complete confidentiality before disclosing details of a shelter idea. The Treasury has been concerned that some practitioners might be providing opinions based on unrealistic factual assumptions or without considering important legal doctrines, David Hariton, a partner at Sullivan & Cromwell, told the paper. He also asserted that “taxpayers might be misled into thinking that such opinions protect them against the assertion of IRS penalties.”