To curtail the practice of professionals writing letters to support questionable tax-motivated transactions, the United States Treasury issued new professional responsibility rules, which took effect June 21, 2005. These rules significantly affect how attorneys and other tax professionals communicate with clients.
The scope of the new rules is extremely broad. The rules apply whenever attorneys and other tax professionals provide written advice about a transaction with a material degree of tax motivation. Effective June 21, 2005, taxpayers can rely on such advice for protection from Internal Revenue Service penalties only if the advice is provided in the form of a ʺcovered opinion,ʺ which must comply with complex requirements. Covered opinions are written advice on federal tax issues arising from transactions similar to IRS-listed tax-avoidance transactions, focusing on scenarios such as partnerships and arrangements intended to evade federal tax obligations. For instance, attorneys and other tax professionals must use great detail and thoroughness in making factual and legal assumptions underlying the transaction or arrangement, including assumptions about future events and financial projections. Section 10.36 of Circular 230 outlines the responsibilities of practitioners overseeing tax advice compliance, emphasizing the need for adequate procedures to handle federal tax matters responsibly. Generally, this could be an unnecessary and time-consuming undertaking. Disciplinary measures for tax practitioners also highlight the importance of adhering to federal tax obligations, with specific IRS regulations imposing expedited suspension procedures for those who demonstrate a pattern of willful neglect regarding their tax return filing obligations.
An alternative to providing advice in the form of a covered opinion is to include a disclaimer that states that the taxpayer cannot rely on the opinion for protection from tax penalties. Such disclaimer must be included whether or not there is an actual risk of penalties being imposed on the taxpayer. Our firm is mindful of our clientsʹ need to control their legal expenses. Consequently, rather than have all of our communications satisfy the requirements of a covered opinion, which could result in unnecessary expense to our clients, our firm is adding a disclaimer, in the following or similar language, to many letters, memoranda, faxes, and e‐mails that we send to our clients:
IRS CIRCULAR 230 DISCLOSURE: To comply with requirements imposed by the Department of the Treasury, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written by the practitioner to be used and that it cannot be used by any taxpayer, for (i) avoiding penalties that may be imposed on the taxpayer, and (ii) supporting the promotion or marketing of any transactions or matters addressed herein. Using a disclaimer does not change the high degree of care and attention we devote to our tax advice. Moreover, including the disclaimer does not indicate that penalties could be imposed on the transaction at issue, but rather merely indicates that the advice we have provided you in such communication does not preclude the IRS from asserting penalties. Finally, please be assured that using such a disclaimer to avoid unnecessary legal expenses is similar to the approach adopted by most other tax practitioners.
If you have questions about the new U.S. Treasury rules, please do not hesitate to contact Cameron A. Metcalf and Metcalf & Company.
Overview of Circular 230 and Regulations Governing Practice
Circular 230 is a publication issued by the United States Treasury and the Internal Revenue Service (IRS) that governs practice before the IRS. It establishes the rules and guidelines for tax practitioners when advising clients. The regulations governing practice are designed to protect the Department and the public from persons unfit to practice before the IRS. Circular 230 applies to all tax practitioners, including attorneys, certified public accountants (CPAs), and enrolled agents. These regulations ensure that tax practitioners adhere to high standards of integrity and professionalism, thereby safeguarding the interests of taxpayers and maintaining the credibility of the tax system.
Written Tax Advice Requirements
Written tax advice is a critical aspect of tax practice, and Circular 230 sets forth specific requirements for providing such advice. Tax practitioners must ensure that their written tax advice is accurate, complete, and compliant with the regulations. The requirements for written tax advice include providing a proper factual and legal basis for the advice, considering all relevant facts and law, and not relying on unreasonable factual or legal assumptions. Additionally, tax practitioners must disclose any tax advice in their communications, including attachments, and inform clients that the advice is not intended to avoid tax-related penalties or promote, market, or recommend tax matters. This ensures that clients are fully informed about the limitations and intended use of the tax advice they receive.
Prohibited Actions and Ethical Violations
Circular 230 contains rules of conduct that prohibit specific actions and ethical violations. Tax practitioners must not engage in contingent fee arrangements between taxpayers and their representatives or engage in other types of misconduct listed in Section 10.51 of Circular 230. Additionally, tax practitioners must not provide written tax advice based on unreasonable factual or legal assumptions or unreasonably rely on the client’s or others’ representations. Tax practitioners violating these rules may be penalized, including monetary fines and potential suspension from practice before the IRS. Tax practitioners must understand and comply with these rules to maintain their professional responsibility and avoid ethical violations. Adhering to these standards helps ensure the integrity of the tax profession and protects the interests of the public and the tax system.