The IRS amended the Circular 230 regulations in June, 2014. The main changes are the elimination of the “covered opinion” rules and the written disclosure requirement, as well as the expansion of requirements that apply to all forms of written tax advice.
Further, the definition of a “Federal tax matter” has been broadened to include the application or interpretation of any law impacting a person’s obligations under the internal revenue laws.
As a result of these changes, the IRS does not require the use of the standard “Tax Matters Disclosure” typically included on email communications and written tax advice, and such disclosure may not per se be legally effective in protecting against liability. However, an appropriate written disclaimer may be helpful in describing reasonable and accurate limitations with respect to tax advice.
Additionally, it is particularly important to specify and limit the scope of tax work to be performed in engagement letters, including the type and specificity of advice sought by the client.
Summary of Key Aspects of Final Circular 230 Regulations
No Requirement of Written Disclaimer (§10.37)
a. The former Circular 230 regulations (§10.35) required that a written disclosure be included with tax advice to avoid classification as a covered opinion.
b. The new regulations do not include the detailed rules concerning covered opinions and do not include the disclosure provisions contained in the prior regulations.
c. The IRS has recognized that the covered opinion rules contributed to overuse of disclaimers and expects that the new regulations will eliminate the use of the Circular 230 disclaimer in email and other writings. The new regulations do not prohibit the use of an appropriate statement describing any reasonable and accurate limitations of the advice rendered to the client. See T.D. 9668 at I., A and B (1) (June 9, 2014).
2. All Written Advice Subject to the Same Standard (§10.37(a))
a. Unlike the prior regulations, the new regulations (i) do not require that the practitioner describe in the written advice all relevant facts, legal analysis and conclusions with respect to the facts and law; (ii) provide that the practitioner may consider the type of specificity of advice sought by the client, along with other factors, to determine the scope of the written advice; and (iii) provide that the determination of whether or not the standards for written advice are met is based on the facts and circumstances, including whether it was appropriate to describe all relevant facts, legal analysis and conclusions, and not whether each requirement is addressed in the written advice. See T.D. 9668 at I., B (1).
b. The new standards provide that the practitioner must:
(1) Base written advice on reasonable factual and legal assumptions (including assumptions as to future events);
(2) Reasonably consider all relevant facts and circumstances that the practitioner knows or should know;
(3) Use reasonable efforts to identify and ascertain certain facts relevant to written advice on each “Federal tax matter” (defined below);
(4) Not rely on representations or agreements of the taxpayer or any other person if reliance on them would be unreasonable. Reliance is unreasonable if the practitioner knows or reasonably should know a representation is incorrect, incomplete or inconsistent;
(5) Relate applicable law and authorities to facts; and
(6) Not take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.
c. Written advice excludes continuing education presentations provided to an audience solely for the purpose of enhancing practitioners’ professional knowledge on Federal tax matters and government submissions on matters of general policy (e.g., comments on proposed regulations).
3. Reliance on Others (§10.37(b))
a. A practitioner may rely on the advice of others so long as the advice is reasonable and reliance is in good faith.
b. Reliance is not reasonable when the practitioner knows or reasonably should know that (i) the opinion of the other person should not be relied upon, (ii) the other person is not competent or qualified, or (iii) the other person has a conflict of interest.
4. Standard of Review for Compliance with Written Advice Standards (§10.37(c))
a. The “reasonable practitioner standard” will be applied considering all facts and circumstances, including the scope of engagement and type and specificity of advice sought by the client, with an emphasis given to the additional risk caused by the practitioner’s lack of knowledge of the taxpayer’s particular circumstances when the practitioners knows or has reason to know that an opinion may be used or referred by a person in the promoting of a plan to avoid or evade tax.
5. Federal Tax Matter
a. The prior regulations defined a “Federal tax issue” more narrowly than the new regulations define a “Federal tax matter” (cf. §10.35(b)(3) of the old regulations with § 10.37(d) of the new regulations).
b. A “Federal tax matter” is any matter concerning the application or interpretation of (i) a revenue provision (inclusive of the IRC, regulations, IRS rulings and guidance, and tax treaties); (ii) any law impacting a person’s obligations under the internal revenue laws; and (iii) any other law or regulations administered by the IRS.
6. Procedures to ensure compliance (§10.36(a))
Any individual subject to Circular 230 having principal authority or responsibility for overseeing a firm’s tax practice must take reasonable steps to ensure the firm has adequate compliance procedures in place.