How tough is enough? OPR set to enforce stricter rules

The decline in ethics that took place over the 1990s hurt not only the taxpayers who took positions they shouldn't have taken, but it also hurt responsible tax practitioners, who saw their business taken away by the more aggressive practices, according to Internal Revenue Service Commissioner Mark W. Everson.

"I started my job as an auditor with Arthur Andersen in the mid-1970s," Everson said. "And it was pretty clear what the standard was in any accounting firm or law firm at that time - it was to make sure that your clients adhere to professional standards and follow the law. Unfortunately, over time, this model has changed to risk management and value creation, and I think that has caused some problems for both the legal and the accounting professions."

"Something like 1.2 million tax practitioners help individuals and corporations comply with the complex code that we have," Everson told a recent panel at the IRS-sponsored Tax Talk Today. "So, they are an essential element of what the IRS does. Tax practitioners should call it right down the middle. We rely on tax practitioners to help people pay no more than what they owe, but what they owe."

The Office of Professional Responsibility replaced the former Director of Practice organization within the service in January 2003. Its mission is to administer the laws for the practice of attorneys, CPAs, enrolled agents, enrolled actuaries and appraisers before the agency, as set forth in Treasury Department Circular 230.

"The Director of Practice was really a backwater in the IRS," said Everson. "It just wasn't very large, it wasn't doing the kinds of work it ought to be. It was chasing down tax practitioners who weren't paying their own employment tax. We've strengthened that office, we've doubled it in size."

"Congress has also stepped in and given us new tools," he continued. "The Jobs Act that was passed and signed into law by the president in late 2004 puts in clear new standards and penalties for people who don't comply with IRS standards in the law."

Larry L. Gray, managing partner of Rolla, Mo.-based Alfermann Gray & Co., agreed.

"When it was called the Director of Practice, it was kind of there and everyone knew it was there, but it didn't have the resources or personnel to have a bite. In the past couple of years, the OPR has come to the forefront because of a change in attitude - I just hope the pendulum hasn't swung too far the other way," he said.

Gray singled out the new Circular 230 rules on covered opinions as particularly worrisome for tax practitioners.

Practitioners who provide covered opinions are required to comply with extensive standards of practice in Circular 230. Covered opinions are defined as written advice, including electronic communications, concerning listed transactions, transactions the principal purpose of which is the avoidance or evasion of any tax, and a number of advice-based transactions.

"That's what has CPAs concern concerned right now," he said. "The real issue is what is a covered opinion. If I respond to a client's e-mail with a recommendation, is that a 'covered' opinion?"

It may be, according to Cono Namorato, director of the OPR. "If you are giving written tax advice to a client, to a taxpayer, involving a significant tax issue, and you want to confer a penalty protection on that particular taxpayer, you must put the disclosure in that writing to get out of Section 10.35." (Section 10.35 of Circular 230 deals with covered opinions, and is more stringent than Section 10.37, which governs other written opinions.)

"Section 10.37 does not require all the bells and whistles of 10.35, and more importantly it has that very important facts and circumstances test language in there," said Namorato. "So that when we are deciding whether or not there has been a violation of Section 10.37, one of the things we're going to pay an awful lot of attention to is what are the facts and circumstances that gave rise to this? Was this some practitioner responding off the cuff to an e-mail, a one-line e-mail he received from a client? If so, I doubt very seriously that's going to rise to the level of a Circular 230 violation."

Nevertheless, it may be necessary to include disclaimer language in all communications that contain tax advice, according to some observers.

"Best practice would be that I should have in place a procedure that I attach a disclosure, and explain that to the client," said Gray.

"I don't want to get too defensive here, but these rules were drafted to address some real serious abuses that were occurring by major law firms and accounting firms during the 1990s," said Namorato. "And in order to address that problem, we had to come out with a rule that was somewhat stringent. It will impose an additional burden on the rest of us, on the scrupulous practitioners, but we didn't see any other means and method of attacking this problem."

There are several due diligence standards in Circular 230, explained Namorato.

"One is a very general due diligence about providing advice, whether oral or written, that's been in Circular 230 for a long time," he said. "Then we have a more specific standard, the standard for taking positions on a tax return. If you were relying in good faith on advice provided by a firm and there's not something on its face that causes you to have a concern about that, then you've met your due diligence obligation under the return preparation standards of Circular 230."

"But if that credit that they're claiming is one that's shown up on the IRS's Dirty Dozen list of abusive schemes and scams," he continued, "then you need to be exercising a little more diligence, and perhaps you don't take that position on the return, and don't recommend that position to your client."

The new rules impose some burden on tax practitioners, observed Ronald M. Wiener, a tax attorney and partner in the Philadelphia office of Wolf, Block, Schorr and Solis-Cohen LLP. "Education will be necessary for both practitioners and our clients, because when clients get one of these disclaimers they're going to call and say, 'What's this about?'"

"But, as that rolls out over a period of time, the hope is that people will understand what it's about. In those routine situations, clients will see the legend [disclaimer] on the writing, they'll accept it, and we'll be able to do business as usual," he added.

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