Treasury And Internal Revenue Service Issue New Final Regulations On The Rendering Of Written Tax Advice: The 'Banners' On E-Mail Disclaiming Reliance On Tax Advice May Soon Disappear

Author:Mr Jerald August
Profession:Fox Rothschild LLP
 
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On June 9, 2014, the Service and the Treasury, under Section 330 of title 31 of the United States Code, authorizes the Secretary of the Treasury to regulate the practice of representatives of persons before the Treasury Department (Treasury). The Secretary has published regulations governing practice before the Internal Revenue Service in 31 CFR part 10 which regulations are reprinted as Treasury Department Circular No. 230 (Circular 230).

The policy goal of the Treasury and Internal Revenue Service in regulating the tax profession is that individuals, such as lawyers, accountants, tax return preparers and appraisers, and in some instances their firms, i.e., subject to Circular 230 must meet minimum standards of professional conduct in their representation of clients before the Internal Revenue Service including the issuance of written tax advice. Those found to be in violation of such standards are subject to disciplinary action, including suspension or disbarment. This frequently can result in fines or penalties as well as referrals to state licensing agencies or bar associations for appropriate review.

The regulations (Circular 230) were amended on December 20, 2004 (effective for written advice issued after June 6, 2005), and further amended in proposed regulations issued in September, 2012. This week's issuance of final regulations pertains in substantial part to revision of the rules pertaining to the issuance of written tax advice. The 2004 revisions, which ushered in the "covered" opinion rules, set forth a set of detailed regulations in issuing written opinions. The 2004 regulations were made in response to various tax shelters and tax products that were marketed in the late 1990s and early 2000s which the Service and Treasury regarded as "abusive". Many of these strategies were accompanied by a written tax opinion obtained from a individual employed or a partner in a professional service organization which opinion had the intended purpose of protecting the client from penalties in the event of a successful challenge by the Service against the transaction in issue.

The arcane and involved set of rules under §10.35 on covered opinions were met with a fair degree of skepticism as well as confusion. Many firms and practitioners placed carefully worded banners on their e-mail to disclaim reliance for penalty protection purposes in opting out of the detailed factual and document requirements for covered opinion provided an "opt out" strategy was available.

On September 17, 2012, Treasury and the IRS published in the Federal Register (77 FR 57055) a notice of proposed rulemaking (REG-138367-06) proposing to amend Circular 230 by revising the rules governing written tax advice and other related provisions of Circular 230. Previously proposed amendments to the regulations regarding state or local bond opinions also were withdrawn.

The 2012 proposed regulations sought to eliminate the complex rules applicable to covered opinions in § 10.35 and to expand the requirements for written advice under § 10.37. The proposed regulations also recommended expansion of the procedures to ensure compliance under § 10.36 beyond the opinion writing and tax return preparation context to all matters within the scope of Circular 230. The proposed regulations further sought to clarify that practitioners must possess the adequate degree of knowledge and competence when engaged in the practice of representing persons before the IRS. Additionally, the proposed regulations expanded the categories of violations subject to the expedited proceedings in § 10.82 to include failures to comply with a practitioner's personal tax filing obligations that demonstrate a pattern of willful disreputable conduct and clarified the Office of Professional Responsibility's scope of responsibility.

FINAL REGULATIONS, TREASURY DECISION 9668

Consistent with the recommendations set forth in the 2012 proposed regulations, the final regulations replace the "covered opinion" rules for written tax advice with a more flexible approach which dispenses the widespread use of banners warning that the recipient of the communication containing tax advice may not rely upon the written communication to avoid the imposition of penalties. With the final regulations, there is one provision or standard in place for all written tax advice. Under §10.37 (of Circular 230), a practitioner must base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance, and consider all relevant facts the practitioner knows or should know. Accordingly, an individual rendering written tax advise must use reasonable efforts to identify and ascertain the facts relevant to written advice on a federal tax matter.

Another change made under the final regulations is the removal of the prior requirement that practitioners fully describe the relevant facts and the application of the law to the facts in the written advice itself. The final regulations further eliminate the use of Circular 230 disclaimers in documents and transmissions, including e-mail. Further, the final regulations, under §10.37(d), define a "federal tax matter" as any matter concerning the application or interpretation of (1) a revenue provision as defined in § 6110(i)(1)(B) of the tax code; (2) any provision of law affecting 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 Internal Revenue Service.

The prior rule mandating that a practitioner not advise a client based on the likelihood of an audit or that in the event of an audit whether a particular tax issue(s) will be identified by the Service has been retained. The final regulations, however, eliminate the rule which prohibited a practitioner from taking into account the possibility that an issue will be resolved through settlement if raised by the Service when giving written advice evaluating a federal tax matter.

SECTION 10.36 REFORMS ON FIRM MANAGERS OVERSEEING CIRCULAR 230 COMPLIANCE

The final regulations create new responsibilities for firm managers overseeing Circular 230 compliance. Accordingly, firm management with principal authority and responsibility for overseeing a firm's practice governed by Circular 230 are held to be responsible for establishing procedures to ensure compliance with all provisions of Circular 230 and not just the provisions on tax advice and tax return preparation. The final regulations clarify that firm managers not only must ensure that the firm has adequate procedures in place but also must ensure that those procedures are properly followed.

The final regulations extend the expedited disciplinary...

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