Question

Discuss your considered understanding of the relationship between Code § 6664(c) and the relevant / corresponding provisions of Circular 230.

Answer 1

Regulations issued in June amend Circular 230, eliminating the unpopular covered opinion rules and replacing them with more flexible standards for providing written tax advice, which apply generally to any federal tax matter.

The regulations expand the rules regarding procedures to ensure compliance by a firm to all matters governed by Circular 230. The revised rules now also require a practitioner who is responsible for Circular 230 compliance to take steps to ensure compliance procedures are followed

Overview of Historical Developments Leading to the Revisions

It is beyond the scope of this article to address all the amending changes to Circular 230 that have been enacted over the last two decades. However, two changes are worth noting. Heightened concern about the use of tax opinion letters in abusive tax transactions led to the 2004 amendments, 2 including the addition of Section 10.35, the covered opinion rules (discussed below). Legislative expansion of the Sec. 6694 preparer penalty rules 3 necessitated amending the Sec. 6694 regulations and the corresponding provisions in Circular 230 (§10.34) that addressed preparer responsibilities. 4

At the time of the proposed changes to Circular 230, Section 10.34, many commentators expressed a desire to also revise the covered opinion rules, which had caused significant problems for practitioners. The IRS chose to defer this issue and focused on preparer responsibility guidance. The June 2014 revisions finally address the covered opinion issue, as well as some other areas not previously addressed.

Elimination of the Covered Opinion Rules

The elimination of the covered opinion rules that made up former Section 10.35 is arguably the most significant change of the June revisions. The covered opinion rules required that written tax advice on designated categories of transactions the IRS saw as potentially abusive comply with detailed requirements for the opinion's form and content. Applying the rules required a threshold determination of when tax advice was required to be delivered through a covered opinion—a determination that many practitioners found difficult to make. In the words of the preamble for the proposed revisions in September 2012, the covered opinion rules were "more rigid and cumbersome in application than generally applicable ethical standards," requiring that each covered opinion include certain information and requiring specific language in certain circumstances.

New Section 10.37 states affirmatively the principles that were generally included in old Section 10.37. To comply when providing tax advice in written communications (including those provided electronically), the practitioner must:

• Base the written advice on reasonable factual and legal assumptions, including assumptions as to future events;
• Reasonably consider all relevant facts the practitioner knows or reasonably should know;
• Use reasonable efforts to identify and ascertain the facts relevant to written advice on each federal tax matter;
• Not rely on representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) of the taxpayer or any other person if reliance on them would be unreasonable;
• Relate applicable law and authorities to facts; and
• In evaluating a federal tax matter, not take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.

· Effect on Practitioners

• Other Rules and Standards That Affect Tax Advice

· The new rules on written tax advice relax the rigid rules that applied to covered opinions, but other rules that govern tax advice continue unchanged. For instance, standards for tax return positions under Section 10.34(b) of Circular 230 are not affected. 7 Tax return preparers, including nonsigning preparers, may not sign a return or advise the client to take a position that either lacks a reasonable basis or is an unreasonable position under Sec. 6694(a)(2).

· Unreasonable positions include (1) disclosed positions without a reasonable basis; (2) undisclosed positions without substantial authority; and (3) positions relating to tax shelters and reportable tax avoidance transactions not satisfying the more-likely-than-not standard. 8 Further, both oral and written advice not satisfying these standards can subject the practitioner to discipline under Circular 230, Section 10.51.

· Also unaffected by the revisions is the practitioner's due-diligence obligation under Section 10.22 of Circular 230 and Sec. 6694, and the reasonable-cause and good-faith regulations under Sec. 6694. The revisions to Circular 230 also do not change the general maxim that tax advisers are not required to audit or verify information clients, other third parties, and advisers provide, unless there is a reason to do so. Nonetheless, recognizing situations requiring more diligence will be instrumental to satisfying the Circular 230, Section 10.37 reasonable practitioner standard. Knowing when to dig further will also be important for satisfying the new Circular 230, Section 10.35 competency standard discussed below.