The agency's notice cited "frivolous" legal arguments that some tax experts have used to seek tax refunds. The IRS said using such arguments could trigger civil and criminal penalties.

"This really does cut the legs out from under a lot of the positions people were taking," said Martin Nissenbaum, a national director for Ernst & Young in New York. "If you amended returns on that basis, you may be subject to penalties."

The Internal Revenue Service's notice could dash the hopes of Silicon Valley workers who exercised stock options during boom times and held onto the stock as it plummeted in price. That left some people with tax bills that dwarfed the value of the crashing stock. After April 15, workers who exercised options in 2000 will lose their right to amend their returns and establish a legal claim that could reduce their ultimate tax debt.

The IRS said it has received "dozens" of tax returns making claims that draw on five legal positions that it considers "highly questionable, and in most cases, meritless." For example, the agency said it intends to challenge claims that:

-- The tax should be based on the stock's price when the option is granted, rather than when the stock is actually purchased at a higher price.

-- Investors who took out margin loans from stockbrokers and pledged their stock to secure the loan can claim an ordinary loss rather than a capital loss in some cases.

-- A stock's value can be discounted if company rules forbid a worker from selling during certain conditions or so-called blackout windows.

The IRS notice casts doubt over a central argument in a U.S. Tax Court case that stock optionees have been following with intense interest. In January, Nield Montgomery of Las Vegas won the right to prevent the IRS from seizing his home while he disputes the $2.8 million alternative minimum tax bill for exercising options that he couldn't sell.

Montgomery and his attorneys now contend the IRS owes him a $500,000 refund because his employment contract prevented him from selling his stock immediately after his start-up went public in 1998.

"All this guy did was get the tax court to say, 'OK, IRS, stop collection action while we at least deliberate on this,'" said Michael C. Gray, a San Jose certified public accountant. "Meanwhile, I think he will have a tough case to argue."

Montgomery's lawyers at Badgley Mullins Law Group in Seattle and Isaacson Law Firm in Bellevue, Wash., did not return phone calls Friday.

But other tax experts took heart in what the IRS didn't address in its notice. For instance, Luis Ramirez, a partner with the Campbell tax firm Perisho, Tombor, Loomis & Ramirez, said one of his clients is challenging the IRS stance that deductions for losses are limited under alternative minimum tax rules.

"They're closing the door" on some legal positions, Ramirez said. "But I think there is still hope for valid positions steeped in tax law that I think are viable and potentially could bring some AMT reform."

-- Mark Schwanhausser