WRITTEN ADVICE from accounting firms is becoming harder to protect from disclosure to the IRS.

The IRS said in June that it will routinely demand any company that invested in a “listed transaction” to turn over all audit workpapers its accounting firm prepared in connection with deferred tax reserves and the footnotes in its financial statements about possible future tax liabilities. A “listed transaction” is a transaction that the US government has put the public on notice it believes does not work. There are currently 16 such transactions.

The new policy also applies to transactions that are “substantially similar” to listed transactions.

The IRS said that if the company disclosed the transaction — as required under US tax shelter registration rules — then the agency will limit its demand to the audit workpapers that discuss the particular transaction. However, if the company failed to disclose the transaction or invested in more than one such deal, then the government will demand all audit workpapers. The new policy applies to tax returns filed on or after July 1, 2002. It is found in Announcement 2002-63.

Meanwhile, B. John Williams, the IRS chief counsel, asserted in June that tax advice from accounting firms cannot be kept from the IRS if the advice is from the same firm that does the company’s audit. Williams said the audit firm already has a duty to disclose to the public the propriety of the company’s financial statements. These have embedded in them assumptions about the company’s tax positions.

The US government has issued 148 summonses to eight accounting firms and three other entities seeking customer lists, opinion letters and other documents. It filed suit on July 9 in federal court against two accounting firms — KPMG and BDO Seidman — seeking information about tax schemes the two firms have marketed since 1998 and 1995, respectively.

Keith Martin