IRS Proposes New Rules for Covered Opinions and Tax Advice

The Internal Revenue Service has proposed new regulations governing practice before the agency, including written tax advice and "covered opinions" by practitioners.

In REG-138367-06, the proposed regulations modify the standards governing written advice and update certain provisions.  This document also provides notice of a public hearing on the proposed regulations and withdraws the notice of proposed rulemaking published on December 20, 2004, setting forth standards for state or local bond opinions.

The proposed regulations amend Circular 230 by eliminating the complex rules governing covered opinions in Section 10.35 of the Tax Code.  In addition, the proposed regulations expand the requirements for written advice under Section 10.37 and withdraw the proposed amendments to Section 10.39 of the regulations governing requirements for State or local bond opinions. The proposed regulations also broaden the scope of the procedures to ensure compliance under Section 10.36 by requiring that a practitioner with principal authority for overseeing a firm’s federal tax practice take reasonable steps to ensure the firm has adequate procedures in place for purposes of complying with Circular 230. 

The proposed regulations clarify that practitioners must exercise competence when engaged in practice before the IRS and that the prohibition on a practitioner endorsing or otherwise negotiating any check issued to a taxpayer with respect to a federal tax liability applies to government payments made by any means, electronic or otherwise. The proposed regulations also expand the categories of violations subject to the expedited proceedings in Section 10.82 to include failures to comply with a practitioner’s personal tax filing obligations that demonstrate a pattern of willful disreputable conduct.  The proposed regulations also clarify the Office of Professional Responsibility’s scope of responsibility. 

“Public awareness of the standards for written tax advice and the accountability of practitioners offering tax advice have increased since Treasury and the IRS published final regulations on covered opinions,” said the IRS. “This increased awareness and accountability is having a positive effect on our federal tax system. Years of practical experience, however, have shown that the covered opinion rules in current Section 10.35 have produced some unintended consequences and should be reconsidered. }Reconsideration of the covered opinion rules is appropriate in light of continued practitioner dissatisfaction due to the difficulty and cost of compliance with the rules.  Practitioners have consistently voiced their concern over the current rules since their promulgation in 2004.”

The IRS noted that practitioners overwhelmingly believe that the rules are overbroad, difficult to apply, and do not necessarily produce higher quality tax advice. “Many practitioners have stated that the rules unduly interfere with their client relationships and are not an ethical standard that everyone, including clients, can comprehend easily,” said the document. “Some practitioners have also opined that these rules may reduce, rather than enhance, tax compliance due to the perception that a covered opinion takes more time to produce and is more expensive for the client than other tax advice. In this same regard, it has been suggested that the rules increase the likelihood that practitioners will provide oral advice to their clients when written advice is more appropriate because current Section 10.35 does not govern oral advice.”

Another concern that the government has heard from practitioners relates to the unrestrained use of disclaimers on nearly every practitioner communication regardless of whether the communication contains tax advice.  “Practitioners have stated that this practice discourages compliance with the ethical requirements because some practitioners have concluded that, if they include a disclaimer, they are free to disregard the standards in current Section 10.35 regarding written tax advice,” said the IRS. “The disclaimers also lead to confusion for clients because clients often do not understand why the disclaimer is present and its consequences. In addition, practitioners have complained that the disclaimer’s widespread overuse causes clients to ignore the disclaimers altogether, and may render their use in some circumstances irrelevant.”  

While practitioners have informed the IRS that they support sensible regulation of written tax advice, they have expressed little support for the rules in their current form and the IRS SAID it has received numerous requests to revise the rules. “After years of experience with these rules, the government and practitioners agree that the covered opinion rules are often burdensome and provide only minimal taxpayer protection,” said the IRS. “Overall, the benefit is insufficient to justify the additional costs associated with practitioner compliance with the covered opinion rules.  After careful consideration, including consideration of the public’s experience with and comments on these rules, Treasury and the IRS have concluded that the written advice standards should be revised.”

The proposed regulations will streamline the existing rules for written tax advice by removing the current Section 10.35 and applying one standard for all written tax advice under a proposed Section 10.37. The proposed Section 10.37 provides that the practitioner must base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance, and consider all relevant facts that the practitioner knows or should know.  The proposed removal of Section 10.35 will eliminate the requirement that practitioners fully describe the relevant facts (including the factual and legal assumptions relied upon) and the application of the law to the facts in the written advice itself, and the use of Circular 230 disclaimers in documents and transmissions, including e-mails.

Other provisions, including Sections 10.31, 10.36, and 10.82, are also being updated at this time to reflect the current practice environment, the IRS noted.  In addition, a general competence standard is being proposed in the new Section 10.35. “The proposed regulations also clarify that the Office of Professional Responsibility has exclusive responsibility for matters related to practitioner discipline, including disciplinary proceedings and sanctions,” said the IRS.

Comments on the proposed regulations must be received by Nov. 16, 2012. There will also be a public hearing scheduled for Dec. 7, 2012 at 10 a.m., in the auditorium of the Internal Revenue Service building at 1111 Constitution Avenue, NW, Washington, DC 20224. Outlines of topics to be discussed at the must be received by Nov. 16, 2012.

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