Clients have been confused by e-mails from their accountants to set a lunch meeting that include a warning, often highlighted in bold font and upper case letters, that the invitation could not and should not be considered tax advice and could not be relied upon to avoid penalties. This ritualistic inanity began about five years ago when the service issued new final regulations under Circular 230 relating to “Written opinions.”

Since some e-mails -- and for these purposes an e-mail is considered writing -- a practitioner or firm sent clients would include some tax opinion or advice, there would be a written reliance opinion (as that term was defined) that was required to follow certain prescriptions, unless -- and of course every practitioner made use of this safe harbor -- the e-mail contained a legended disclaimer as to the reliability of the tax advice.

The bad news: Such e-mails will continue. The good news: not much longer. The service has issued new proposed regulations that totally revamp the area of written advice and eliminate the need for these disclaimers generally. But practitioners must keep in mind the difference between proposed regulations and final regulations. Some have been led to believe they can remove the disclaimer from all of their e-mail traffic now, which is untrue. Until these regulations finalize, the old rules remain in effect, but it is believed that this will take place in the near future, so keep tuned for this and then remove the legend.

 

FIVE REQUIREMENTS

While the disclaimer has the most widespread and immediate impact on practitioners and their firms, the proposed regulations would also change the whole area of written tax advices. Currently, tax opinions covered by the regulations were determined by a complex definition that broke down further categories of opinion, and then prescribed that certain rules be followed in rendering that opinion.

Under the proposed regulations, a practitioner’s written tax opinions would need to meet the following five requirements:

1. Base the written advice on reasonable factual and legal assumptions (including assumptions as to future events);

2. Reasonably consider all relevant facts that the practitioner knows or should know;

3. Use reasonable efforts to identify and ascertain the facts relevant to written advice on each federal tax matter;

4. Not rely upon 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; and,

5. Not, in evaluating a federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.

Reliance on representations, statements, findings or agreements is unreasonable if the practitioner knows or should know that one or more representations or assumptions on which any representation is based are incorrect or incomplete.

A practitioner may only rely on the advice of another practitioner if the advice was reasonable and the reliance is in good faith considering all the facts and circumstances. Reliance is not reasonable when:

• The practitioner knows or should know that the opinion of the other practitioner should not be relied on;

• The practitioner knows or should know that the other practitioner is not competent or lacks the necessary qualifications to provide the advice; or,

• The practitioner knows or should know that the other practitioner has a conflict of interest.

In determining what the practitioner should know in any case, the Internal Revenue Service will apply a reasonableness standard that takes into account all the facts and circumstances, including the scope of the engagement and the type and specificity of the advice sought by the client.

While many of the above rules would seem to ease the burden on a practitioner, the proposed regulations will increase the responsibility of those vested with authority over a firm’s practice. Such person must take reasonable steps that the firm has adequate procedures in effect for all members, associates and employees for purposes of complying with the Circular 230 provisions relating to the giving of advice and the preparation of income tax returns, claims for refund, or submission of other documents to the service.

Such practitioners who have (or practitioners who have or share) that principal authority and, through willfulness, recklessness or gross incompetence, do not take reasonable steps to ensure adequate procedures if one or more individuals who are members of, associated with or employed by, the firm are or have, in connection with their practice with the firm, failed to comply, is subject to discipline by the service. This also applies to a practitioner who knows or should know that one or more individuals connected with the firm are or have engaged in a pattern or practice of failing to comply, if the practitioner through willfulness, recklessness or gross incompetence fails to take prompt action to correct the noncompliance. So those firms that have not already placed such procedures in place should start to develop them now so they may be implemented on or before this new directive is finalized. AT

Jack Surgent, CPA, is chief executive officer of continuing education provider Surgent McCoy CPE LLC.