The IRS has issued updated final regulations on Circular 230 that significantly revise the manner in which practitioners are required to advise on federal tax matters. Circular 230 is a portion of the federal regulations that governs the conduct of individuals who practice before the IRS. Practitioners who violate Circular 230's rules of conduct are subject to disciplinary actions ranging from monetary sanctions to suspension and disbarment from practice before IRS.
This article primarily focuses on the final regulations' elimination of the covered opinion rules and the new requirements for written tax advice. Specifically, the new regulations provide practitioners with relief from Circular 230's previously onerous rules, thereby replacing them with a more workable standard of care that is based on facts and circumstances. Because the penalties for failing to meet Circular 230's requirements can be severe, practitioners must be aware of, and comply with, the updated regulations.
Covered Opinions. The most significant change under the updated regulations is the elimination of the distinction between a "covered opinion" and other written tax advice. The prior regulations provided very distinct rules depending upon which of these two categories of writing the advice was classified. In fact, the rules on covered opinions were very complex and imposed onerous due diligence requirements that might exceed a client's expectations, whereas the rules for written advice not deemed as a covered opinion were far less stringent.
Because of the stricter requirements for covered opinions, practitioners made every effort to avoid inadvertently providing covered opinions to their clients. To avoid penalties relative to covered opinions under Circular 230, practitioners would include a generic disclaimer (i.e., a "Circular 230 disclaimer") at the bottom of emails and other correspondence which provides that tax advice is not being offered to the reader. These disclaimers were often provided without narrow tailoring to the particular advice provided to the client and even where the correspondence did not involve a tax matter.
Recognizing that the covered opinion rules created onerous compliance obligations for tax practitioners while providing little benefit to taxpayers, the updated regulations provide a single, uniform set of rules governing all written advice furnished on federal tax matters.
New Rules for Written Tax Advice. The new rules governing written tax advice strive to maintain standards that require practitioners to act ethically and competently while remaining practical and flexible in view of today's practice environment. Under the updated regulations, practitioners must satisfy all six of the following requirements when rendering written advice on a federal tax matter:
- Base the written advice on reasonable factual and legal assumptions;
- Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know;
- Use reasonable efforts to identify and ascertain the facts relevant to the advice;
- Not rely on the representations of others if reliance on them would be unreasonable;
- Relate applicable law and authority to facts; and
- Not take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.
The updated regulations explain that the determination of whether a practitioner has met these requirements will be based on all facts and circumstances attendant to the matter, including those not contemplated by the written advice.
Exclusions from Written Advice. The updated regulations contain exclusions from what constitutes written advice. For example, government submissions on matters of policy (e.g., commentary submitted to the IRS in response to proposed regulations) are not considered written advice. Continuing education presentations that are provided to an audience solely for enhancing knowledge on federal tax matters are also generally excluded, unless such presentations promote or market transactions.
Reasonable Practitioner Standard. IRS will apply a reasonable practitioner standard when reviewing practitioners' compliance with the updated regulations. The updated regulations identify situations where it is unreasonable for a practitioner to rely on the representations of others (in violation of Circular 230). Specifically, it is unreasonable for a practitioner to rely on a representation if the practitioner knows or reasonably should know that a representation or assumption on which the representation is based is incorrect, incomplete or inconsistent. Also, reliance is unreasonable where the practitioner knows or reasonably should know that:
- the opinion of the other person should not be relied upon,
- the other person lacks the necessary qualifications to provide the advice, or
- the other person has a conflict of interest in violation of Circular 230.
NOTE: Practitioners should be aware that the requirement for reasonable reliance on others may create an obligation to inquire as to the advisor's qualifications and background.
In the case of written advice that the practitioner knows or has reason to know will be used by another in promoting, marketing or making recommendations to another taxpayer, IRS will give heightened emphasis to the additional risk caused by the practitioner's lack of knowledge of the taxpayer's particular circumstances.
Conclusion. The final regulations, which became effective June 12, 2014, provide welcome relief to tax practitioners and clients alike by simplifying the rules for providing clients with written advice on federal tax matters. However, due to the subjective nature of the new rules, tax advisors who furnish written advice must ensure that they can demonstrate that their advice is reasonable in light of the surrounding facts and circumstances. Nonetheless, tax practitioners no longer need to incorporate Circular 230 disclaimers into their written correspondence.