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Final Circular 230 Regs Create a Single Set of Standards for All Written Tax Advice.
(Parker Tax Publishing June 24, 2014)

On June 12, almost two years after issuing proposed regulations, the Treasury Department issued final regulations (T.D. 9668) under Circular 230 which eliminate the complex covered opinion rules universally hated by tax practitioners. In their place, the IRS expanded the requirements previously in place for written tax advice, thus creating a single standard. Under the prior rules, a significant amount of time and money was spent in determining if advice to a client fell under the covered opinion rules. The elimination of the burden on practitioners in complying with the covered opinion rules should result in an overall decrease in the costs associated with obtaining written tax advice.

The new rules do, however, come with an increased risk for certain managers. The final regulations broaden the requirement for procedures to ensure compliance with Circular 230 by requiring that an individual with principal authority for overseeing a firm's federal tax practice take reasonable steps to ensure the firm has adequate procedures in place to comply with Circular 230. Such individuals may be subject to discipline under Circular 230 where the compliance procedures are inadequate. In the absence of a person or persons identified by the firm as having the principal authority and responsibility, the IRS may identify one or more individuals subject to these provisions.

Finally, the new rules modify other provisions in Circular 230 to ensure that practitioners meet certain standards of conduct, such as the timely filing of tax returns, and modify the consequences of failing to meet those standards.

OBSERVATION: The covered opinion rules are seen by many as the genesis of the "Circular 230 disclaimer" attached by tax practitioners to all correspondence and emails. In the opinion of many tax practitioners, the former covered opinion rules contributed to overuse, as well as misleading use, of disclaimers on most practitioner communications, even when those communications did not constitute tax advice.

Standards for Written Tax Advice

The final Circular 230 regulations modify the rules governing written tax advice to ensure that practitioners meet certain standards of conduct when serving as representatives of persons before the IRS.

General Requirements for Written Advice

According to the IRS, robust and relevant standards for written tax advice remain appropriate because of the risk for the issuance and marketing of written tax opinions to promote abusive transactions. Section 10.37 of Circular 230 replaces the covered opinion rules with principles to which all practitioners must adhere when rendering written advice. Specifically, Section 10.37 states affirmatively the standards to which a practitioner must adhere when providing written advice on a federal tax matter. Section 10.37 requires, among other things, that the practitioner base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance, and consider all relevant facts that the practitioner knows or reasonably should know. A practitioner must also use reasonable efforts to identify and ascertain the facts relevant to written advice on a federal tax matter.

Under this standard, unlike under the covered opinion standard, a practitioner is not required to describe in the written advice the relevant facts (including assumptions and representations), the application of the law to those facts, and the practitioner's conclusion with respect to the law and the facts. Rather, the scope of the engagement and the type and specificity of the advice sought by the client, in addition to all other appropriate facts and circumstances, are factors in determining the extent to which the relevant facts, application of the law to those facts, and the practitioner's conclusion with respect to the law and the facts must be set forth in the written advice. Under the new rules, the practitioner may consider these factors in determining the scope of the written advice. Further, the determination of whether a practitioner has failed to comply with the requirements for written tax advice is based on all facts and circumstances, not on whether each requirement is addressed in the written advice.

OBSERVATION: Some practitioners were concerned that the proposed regulations did not include a requirement that the practitioner consider relevant legal authorities and relate that law to the relevant facts. According to the IRS, while this requirement was not expressly stated in the proposed regulations, it was implicit in the requirement that practitioners base the written advice on reasonable legal and factual assumptions. To further clarify, however, the final regulations added this requirement to Section 10.37. Although the final regulations do not impose a specific requirement for a practitioner to include any particular piece of information or analysis in the written advice, the IRS encourages practitioners to describe all relevant facts, law, analysis, and assumptions in appropriate circumstances.

The determination of whether a practitioner complied with the written tax advice requirements of Section 10.37 is based on all facts and circumstances, including whether it was appropriate to describe all relevant facts, law, analysis, and assumptions in a particular piece of written tax advice. The regulations require that practitioners rely on reasonable factual and legal assumptions.

OBSERVATION: The IRS took issue with some practitioners stating that requiring reasonable assumptions is aimed at eliminating informal advice. According to the IRS, there is no particular correlation between the requirement to base advice on reasonable assumptions and the format of that advice. The IRS noted that many individuals currently use a Circular 230 disclaimer at the conclusion of every e-mail or other writing to remove the communication from the covered opinion rules. In many instances, these disclaimers are inserted without regard to whether the disclaimer is necessary or appropriate. These types of disclaimers are routinely inserted in any written transmission, including writings that do not contain any tax advice. The removal of the covered opinion rules eliminates the detailed provisions concerning covered opinions and disclosures in written opinions. Because the written tax advice rules do not include the disclosure provisions in the prior covered opinion rules, the IRS expects that the final regulations will eliminate the use of a Circular 230 disclaimer in e-mail and other writings. While the rules in the final regulations are intended to eliminate the need for unnecessary disclaimers, the IRS clarified that the rules do not prohibit the use of an appropriate statement describing any reasonable and accurate limitations of the advice rendered to a particular client.

Definition of Written Advice

Like the proposed regulations, the final regulations do not contain a detailed definition of "written advice." The final regulations do, however, clarify that government submissions on matters of general policy are not considered written tax advice on a federal tax matter for purposes of Section 10.37. For example, if a law firm submitted comments on proposed regulations to the IRS on a client's behalf, that submission would not be considered written advice on a federal tax matter because comments on proposed regulations are government submissions on matters of general policy.

The final regulations also clarify that continuing education presentations provided to an audience solely for the purpose of enhancing practitioners' professional knowledge on federal tax matters, such as presentations at tax professional organization meetings, are not considered written advice for purposes of Section 10.37. However, presentations marketing or promoting transactions are not considered provided solely for the purpose of enhancing practitioners' professional knowledge on federal tax matters. Including contact information on a continuing education presentation provided solely for the purpose of enhancing professional knowledge, without more, does not convert an educational presentation into an item of written tax advice governed by the final regulations. Even though continuing education presentations provided to an audience solely for the purpose of enhancing practitioners' professional knowledge on federal tax matters are not considered written advice, the IRS said that it nonetheless expects that practitioners will follow the generally applicable diligence and competence standards under Circular 230, Section 10.22 and Section 10.35 when engaged in those activities.

OBSERVATION: Formerly, the covered opinion rules governed written tax advice addressing federal tax issues. Under the prior regulations, a federal tax issue was defined as a question concerning the federal tax treatment of an item of income, gain, loss, deduction, or credit, the existence or absence of a taxable transfer of property, or the value of property for federal tax purposes. According to the IRS, because the final regulations eliminate the covered opinion rules, this definition no longer applies.

Clarification of Term "Federal Tax Matter"

The final regulations clarify the term "federal tax matter" by defining it as any matter concerning the application or interpretation of (1) a revenue provision as defined in Code Sec. 6110(i)(1)(B); (2) any provision of law impacting a person's obligations under the internal revenue laws and regulations, including but not limited to the person's liability to pay tax or obligation to file returns; or (3) any other law or regulation administered by the IRS.

Consideration of Audit Risk and Likelihood of Settlement

Like the proposed regulations, the final regulation provide that a practitioner must not, in evaluating a federal tax matter, take into account the possibility that a tax return will not be audited or that an issue will not be raised on audit.

While not incorporated into the final regulations, the IRS clarified in the preamble to the final regulations that this rule applies to oral advice as well.

Standard of Review

In evaluating whether a practitioner giving written advice on one or more federal tax matters complied with the applicable requirements, the IRS will apply a reasonable practitioner standard, considering all facts and circumstances, including, but not limited to, the scope of the engagement and the type and specificity of the advice sought by the client.

The IRS will also apply a "reasonable practitioner" standard to determine whether a practitioner knows or has reason to know that his or her written advice will be used in promoting, marketing, or recommending an investment plan or arrangement, a significant purpose of which is the avoidance or evasion of any tax imposed by the Code. In such cases, the IRS will consider all facts and circumstances, with emphasis given to the additional risk caused by the practitioner's lack of knowledge of the taxpayer's particular circumstances, when determining whether a practitioner has failed to comply with the rules.

Reliance on Professionals

The final regulations provide that a practitioner may only rely on the advice of another person if the advice was reasonable and the reliance is in good faith considering all the facts and circumstances. For this purpose, reliance is not reasonable when: (1) the practitioner knows or reasonably should know that the opinion of the other person should not be relied on; (2) the practitioner knows or reasonably should know that the other person is not competent or lacks the necessary qualifications to provide the advice; or (3) the practitioner knows or reasonably should know that the other person has a conflict of interest in violation of these rules.

Practice Tip: In the preamble to the final regulations, the IRS said it did not believe that the standard in (2) above imposes an affirmative duty on a practitioner to inquire into the skills and experience of the other person when the practitioner is already aware of the other person's background. However, practitioners should consider the skills and experience of a person when they are relying on the advice of that person. Relying on advice of another person without considering that person's expertise and qualifications to provide that advice, the IRS said, is inconsistent with the obligation of diligence required in Section 10.22 of Circular 230. Thus, a practitioner intending to rely on the advice of another person may have an obligation to inquire about that person's background if the practitioner is not familiar with the person's qualifications to render the advice on which the practitioner will be relying.

Procedures to Ensure Compliance

The final regulations expanded the procedures to ensure compliance with Circular 230 by requiring that an individual who is subject to Circular 230 and has principal authority for overseeing a firm's federal tax practice take reasonable steps to ensure the firm has adequate procedures in place to comply with Circular 230. Section 10.36 of Circular 230 requires both the existence and the implementation of adequate procedures.

Specifically, any individual subject to the provisions Circular 230 who has (or individuals who have or share) principal authority and responsibility for overseeing a firm's practice governed by Circular 230, including the provision of advice on federal tax matters and preparation of tax returns, claims for refund, or other documents for submission to the IRS, must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees for purposes of complying with Circular 230.

In the absence of a person or persons identified by the firm as having the principal authority and responsibility for overseeing a firm's practice governed by Circular 230, the IRS may identify one or more individuals responsible for such compliance.

OBSERVATION: Some practitioners suggested that (1) firm management should be subject to discipline even when there is no subordinate individual whose conduct is subject to sanction; and (2) the rules be expanded to govern contractual relationships occurring outside the firm or in-house when one party may supervise or manage the other party. The IRS determined that such authority is not necessary at this time because Section 10.36, as amended, is broad enough for the IRS to be able to determine whether firm management is taking reasonable steps to comply with Circular 230. However, the IRS left the door open to future consideration being given to broadening the rules consistent with these comments if experience shows that additional changes are necessary.

General Standard of Competence

The final regulations provide that a practitioner must possess the necessary competence to engage in practice before the IRS. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged. The rules provide that a practitioner may become competent for the matter for which the practitioner has been engaged through various methods, such as consulting with experts in the relevant area or studying the relevant law.

In the preamble to the final regulations, the IRS said that it is expected that practitioners will advise clients to obtain other counsel when the practitioner is not competent or cannot become competent to provide advice requested on a matter within the scope of Circular 230. The IRS rejected practitioner requests for examples demonstrating practitioner competence saying that competence is not a new standard or concept, and whether the required standard is met must always be based on the relevant facts and circumstances.

Electronic Negotiation of Taxpayer Refunds

Under Section 10.31 of the final regulations, a practitioner may not endorse or otherwise negotiate any check issued to a client by the government in respect of a federal tax liability, including directing or accepting payment by any means, electronic or otherwise, into an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated.

In response to practitioner concerns that the administration of a trust or estate might be impaired due to this prohibition, the IRS clarified in the preamble that this provision does not apply to an individual acting solely in the capacity of a trustee of a trust, or administrator/executor of an estate because that person is acting as the taxpayer, not as the taxpayer's representative.

Expedited Suspension Procedures

Section 10.82 of Circular 230 authorizes the immediate suspension of a practitioner who has engaged in certain conduct. The final regulations extend the expedited disciplinary procedures to disciplinary proceedings against practitioners who have willfully failed to comply with their federal tax filing obligations. As amended, Section 10.82 permits the use of expedited procedures in the limited circumstances when a tax noncompliant practitioner demonstrates a pattern of willful disreputable conduct by (1) failing to make an annual federal tax return during four of five tax years immediately before the institution of an expedited suspension proceeding, or (2) failing to make a return required more frequently than annually during five of seven tax periods immediately before the institution of an expedited suspension proceeding. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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