Circular 230 contains the ethical rules that govern practice before the IRS. On June 9, 2014 the IRS issued new regulations that make significant changes to Circular 230 and should reduce costs of practitioner compliance. The regulations had been anticipated since being issued in proposed form on September 17, 2012. As expected the final regulations eliminated the Covered Opinion rules in Section 10.35, and replaced the rule with one standard for all written tax advice under Section 10.37. The Covered Opinion provisions contained burdensome requirements for written tax advice, which went into effect in 2005. These rules apply only to practice before the IRS and do not change or replace other ethical or legal standards applicable to individuals subject to Circular 230.
Revised Section 10.35
The Covered Opinion provisions were contained in Section 10.35. Covered Opinions included written advice concerning:
- A listed transaction;
- A transaction with the principal purpose of tax avoidance or evasion; or
- A transaction with a significant purpose of tax avoidance or evasion, if the advice is a reliance opinion, marketed opinion, subject to conditions of confidentiality, or subject to a contractual protection.
Section 10.35 provided that, to issue a covered opinion, a tax practitioner must determine the facts, relate the facts to the law, evaluate the significant federal tax issues, reach a conclusion about each one, and reach an overall conclusion about the tax treatment of the transaction. Covered Opinions include those concerning listed and substantially similar transactions, transactions principally intended to avoid or evade tax, marketed opinions, and those subject to confidentiality or contractual protection. The covered opinion must also assess the taxpayer’s likelihood of success on the merits of each significant federal tax issue considered in the opinion. In arriving at that conclusion, the practitioner could not take into account the possibility that the return will not be audited or that the issue will not be raised or, if raised, will be resolved through settlement.
Except for opinions issued with respect to listed transactions or transactions with the principal purpose of avoiding or evading taxes, practitioners could opt out of the requirements of Section 10.35, by prominently disclosing in the opinion that the advice was not intended or written to be used, and cannot be used, by the taxpayer to avoid tax penalties.
These rules have been deleted and the final regulations have created a new Section 10.35. Section 10.35 now addresses a practitioner's competence. Specifically, under the new rule 10.35, 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 the preparation necessary for the matter at issue. A practitioner may become competent by consulting with experts or studying the relevant law.
Revised Section 10.37
Even though the Covered Opinion provisions will no longer apply to written tax advice, a practitioner's advice cannot be based upon unreasonable assumptions about the facts or the law, or unreasonably rely on representations, statements, findings or agreements. Under the new Section 10.37 in the final regulations, practitioners must make reasonable efforts to ascertain and consider all relevant facts that the practitioner knows or reasonably should know, make reasonable factual and legal assumptions, and exercise reasonable reliance. The practitioner must consider all relevant legal authorities and relate the law to the facts. Moreover, the practitioner, when evaluating a tax matter, may not take into account the likelihood of an audit or settlement. When the IRS evaluates a practitioner's advice, the IRS will apply a "reasonableness" standard.
A significant change made in Section 10.37 is the addition of a definition of certain things that do not constitute “written advice.” Written advice was not defined in the proposed or final rules, but the final rules clarify that government submissions on a client’s behalf and continuing education presentations are not written advice under the rules.
The final version of Section 10.37 provides that the practitioner need not 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 about the law and the facts. Instead, the scope of the engagement and the type and specificity of the advice the client seeks, together with all other appropriate facts and circumstances, are used to determine the extent to which relevant facts, the application of the law to those facts, and the practitioner’s conclusion about the law and the facts must be set forth in the written advice. This is a flexible standard, dependent on the facts and circumstances of the engagement. The determination whether a practitioner has failed to comply with Section 10.37 will be based on all facts and circumstances, not on whether each requirement is addressed in the written advice.
A heightened standard of care applies when the practitioner knows or should know that the written advice will be used to promote, market or recommend a course of action that has a significant purpose of avoiding or evading tax. When evaluating a practitioner's advice, the IRS will apply a reasonableness standard which considers all facts and circumstances and places an emphasis on the additional risk associated with a practitioner's lack of knowledge of a taxpayer's particular circumstances.
In addition, a practitioner may rely on the advice of another person if, in light of the facts and circumstances, such reliance is reasonable and made in good faith. Reliance is not reasonable when the practitioner knows or reasonably should know that (1) the opinion of the other person should not be relied upon; (2) the other person is not competent or lacks the necessary qualifications to provide the advice; or (3) the other person has a conflict of interest in violation of Circular 230.
The IRS also stated in the preamble to the regulations that it expects that the current practice by most practitioners of inserting a Circular 230 disclaimer at the conclusion of every email or other writing, whether the disclaimer is necessary or appropriate, will be discontinued because new Section 10.37 does not include the covered opinion disclosure provisions that were in former Section 10.35.
Revised Section 10.36
Practitioners in a position of authority must do more than ensure their own compliance with Circular 230. Practitioners must ensure that all individuals they supervise comply with Circular 230 as it pertains to the preparation of returns or other documents submitted to the IRS. Practitioners must take reasonable steps to ensure that the firm complies with Circular 230.
Under 10.36 a practitioner responsible for implementation of Circular 230 compliance procedures will be subject to disciplinary action if:
- The practitioner through willfulness, recklessness or gross incompetence does not take reasonable steps to ensure the firm has in effect and follows adequate procedures so as to comply with Circular 230, and one or more individuals who are members of, associated with or employed by the firm engage in a pattern or practice in connection with their practice with the firm, of failing to comply with Circular 230; or
- The practitioner knows or should know that one or more individuals who are members of, associated with or employed by the firm engage in a pattern or practice, in connection with their practice with firm, that does not comply with Circular 230, and the practitioner, through willfulness, recklessness or gross incompetence fails to take prompt action to correct the noncompliance.
Accordingly, the combination of revised Sections 10.35 and 10.36 require that supervising practitioners have a duty to ensure that their subordinates have the requisite knowledge and skill, and that they appropriately exercise that knowledge and skill in practice before the IRS.
Revised Section 10.82
Under Section 10.82, the IRS may expedite a practitioner's suspension to practice before the IRS for "willful disreputable conduct." Under the final regulations, this phrase now includes the failure to comply with one's own personal tax filing obligations. Note that the new rule pertains to filing tax returns, not payment of tax.
These final regulations apply to written tax advice provided on or after June 12, 2014, the date published as final in the Federal Register. The changes to Circular 230, in particular Rule 10.35, are long overdue and welcome news to tax practitioners. Under the new rules tax practitioners who issue written tax advice must make sure that they are able to demonstrate that their advice is reasonable, and the advice cannot be based upon unreasonable assumptions about the facts or the law.