The Government Accountability Office yesterday released Financial Derivatives: Disparate Tax Treatment and Information Gaps Create Uncertainty and Potential Abuse (GAO-11-750):

Recently, concerns have arisen about the use of certain financial derivatives to avoid or evade tax obligations. As requested, this report (1) identifies and evaluates how financial derivatives can be used to avoid or evade tax liability or achieve differing tax results in economically similar situations, (2) evaluates IRS actions to address the tax effects of investments in financial derivatives through guidance, and (3) evaluates IRS actions to identify financial derivative products and trends through information from other agencies. GAO reviewed research and IRS documents and interviewed IRS and Treasury officials and other experts. GAO analyzed the completion of financial derivative projects on the agencies’ Priority Guidance Plans (PGP) from 1996 to 2010.

GAO recommends that (1) Treasury determine whether alternatives to the current approach to taxing financial derivatives would promote consistent treatment of economically similar positions and be beneficial, that (2) Treasury and IRS provide more public information on the status of PGP projects, including those related to financial derivatives, and that (3) IRS strengthen information-sharing partnerships with relevant agencies.