IRS Finalizes Regulations on Written Tax Advice

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The Internal Revenue Service has issued final regulations that modify the standards governing written tax advice and update related provisions.

In the regulations, the IRS pointed out that individuals subject to Circular 230 requirements must meet minimum standards of conduct with respect to written tax advice, and those who do not should be subject to disciplinary action, including suspension or disbarment. In accordance with these principles, the regulations have been amended from time to time to address issues relating to tax opinions and written tax advice.

The new regulations modify the rules governing written tax advice along with some related provisions of Circular 230 to ensure that practitioners meet certain standards of conduct when serving as taxpayer representatives before the IRS. The new rules also modify the consequences of failing to meet those standards, including expedited suspension provisions.

In September 2012, the Treasury and the IRS published a notice of proposed rulemaking in the Federal Register proposing to amend Circular 230 by revising the rules governing written tax advice and related provisions, while withdrawing previously proposed amendments on state and local bond opinions.

In the regulations, the IRS and the Treasury proposed to broaden the requirement for procedures to ensure compliance beyond the opinion writing and tax preparation context by requiring that an individual who is subject to Circular 230 with principal authority for overseeing a firm’s federal tax practice take reasonable steps to ensure the firm has adequate procedures in place to comply with Circular 230.

The proposed regulations also sought to clarify that practitioners must exercise competence when engaged in the practice of representing taxpayers before the IRS and that the prohibition on a practitioner endorsing or otherwise negotiating any tax refund check issued to a taxpayer would apply to government payments made by any means, whether electronic or otherwise.

In addition, the proposed regulations expanded the categories of violations subject to expedited proceedings 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.

The IRS received 19 written comments on the proposed regulations and held a public hearing in December 2012. The final regulations contain several changes in response to the feedback, while other provisions were left intact.

Commenters overwhelmingly supported one part of the proposed regulations, which would do away with the detailed and often burdensome rules for “covered opinions.” The commenters agreed that the old rules contributed to overuse and misleading use of disclaimers on most practitioner communications, even when those communications did not constitute tax advice.

The final regulations adopt the approach taken in the proposed regulations, eliminating the old covered opinion rules under Section 10.35 of the Tax Code and instead subjecting all written tax advice to a single standard under Section 10.37.

The elimination of the collection of information requirements in the covered opinion rules in the regulations are expected to save tax practitioners both time and money, a minimum of $5,333,200, according to the IRS. The savings would come from the elimination of the provisions in the former regulations requiring practitioners to make certain disclosures in a covered opinion. The IRS estimated that about 100,000 practitioners would be required to comply with the old rules and would need an average of eight minutes each to comply, for a total burden of 13,333 hours.

Like the proposed regulations, the final Section 10.37 replaces the covered opinion rules with principles to which all practitioners must adhere when rendering written advice. Specifically, it states affirmatively the standards to which a practitioner must adhere when providing written advice on a federal tax matter.

Section 10.37 requires, among other things, that the practitioner base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance, and consider all relevant facts that the practitioner knows or reasonably should know. A practitioner must also use reasonable efforts to identify and ascertain the facts relevant to written advice on a federal tax matter.

As under the proposed regulations, the final regulations do not require that the practitioner describe in the written advice the relevant facts (including assumptions and representations), the application of the law to those facts, and the practitioner's conclusion with respect to the law and the facts. Instead, the scope of the engagement and the type and specificity of the advice sought by the client, in addition to all other appropriate facts and circumstances, will be the factors in determining the extent to which the relevant facts, application of the law to those facts, and the practitioner’s conclusion with respect to the law and the facts must be set forth in the written advice.

Also, under the new regulations, unlike the old ones, the practitioner may consider these factors in determining the scope of the written advice. Further, the determination of whether a practitioner has failed to comply with the requirements of Section 10.37 will be based on all facts and circumstances, not on whether each requirement is addressed in the written advice.

Several commenters were concerned that the proposed regulations did not include a requirement that the practitioner consider relevant legal authorities and relate that law to the relevant facts. While this requirement was not expressly stated in the proposed regulations, the Treasury and the IRS believed that it was implicit in the requirement that practitioners base the written advice on reasonable legal and factual assumptions. To further clarify, however, the final regulations add this requirement. Although the final regulations, unlike the former rules, do not impose a specific requirement for a practitioner to include in the written advice itself any particular piece of information or analysis, the Treasury and the IRS are encouraging practitioners to describe all relevant facts, law, analysis and assumptions under the appropriate circumstances.

Some commenters requested clarification that Section 10.37 will be applied on the basis of what is reasonable under the facts and circumstances. They noted that the proposed regulations did not affirmatively provide that a practitioner should reasonably consider all facts and circumstances in determining their obligations. The Treasury and the IRS agree that practitioners should consider what is reasonable under the facts and circumstances when providing written advice. Although they believe the proposed regulations accurately reflected that principle, the regulations have been clarified to more explicitly include the requirement.

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