Accounting Firm Urges Adoption of Recommendations on Circular 230 Standards

Of the many excellent comments of professional organizations with regard to Sec. 10.35, this writer believes that that those of the American College of Trust and Estate Counsel (the "College") are thoughtful, well reasoned and, above all, practical in offering specific suggestions to balance the objective of the IRS in establishing best practices and rules for written advice and the interests of the tax practitioner community in providing understandable advice to clients in a cost efficient and logical manner. The College's comments are particularly good in comparing the intended purpose of the Covered Opinions against the actual response to the rules and highlighting unanticipated problems associated with the provisions -- especially the fact that the rules and their application has clearly not improved tax professional-client communications, nor have they improved the quality of tax advice in the U.S., or met the intended goals of Treasury and the Internal Revenue Service when the regulations were promulgated.

The College's suggestions for modification and clarification will hardly open the floodgates to encourage or allow tax advisors to provide advice that enables taxpayers to insulate themselves from penalties when the advice is not based in reasonable interpretations of the law, or when the advice ignores or trivializes economic substance, or when the tax advice purports to produce tax benefits without some overriding business purpose or personal financial purpose. Preventing this type of advice was and is, after all, Treasury's obvious goal in regulating written tax advice.²

In addition, a primary objective of modifications to and clarifications of Sec. 10.35 should be to sufficiently narrow the scope of the covered opinion standards in such a way as to eliminate the need for the countless legends "to ensure compliance with Circular 230" and the like that appear on emails and other communications of tax professionals. In this regard, the legend trivializes the intended purpose of the regulations. And practically speaking, it also an absolute pain to scroll through all those email legends appended to just about anything one reads from lawyers and accountants (especially when the reader is using a Blackberry or similar device).

Consequently, let me suggest that it would be very helpful in releasing modifications or clarifications to the written advice regulations³ that the preamble to any revisions address the issue of legends, hopefully by stating that revision, modification, or clarification is intended to dramatically reduce the need to append to emails and correspondence penalty opt-out legends related to routine interpretations of Federal tax issues.

It seems safe to say that not only were the Covered Opinion provisions not well received by the community of tax professionals, but also that the responses of tax professionals was very different than what Treasury and the Internal Revenue Service anticipated. As a consequence, neither the taxpayer nor the government is well served as result of the difficulty for practitioners in dealing with the provisions. Some of theses difficulties do perhaps stem from overreaction and hyper-technical interpretations of the rules, but the damage is done, and a correction is needed.

A good starting place for attempting to "get it right"⁴ is to adopt the suggestions of the College along, of course, with giving due consideration to the thoughtful comments and suggestions of the other professional organizations of tax practitioners.

I will add one comment about the February 2006 proposed revisions to Circular 230 that relate to the processes related to disciplinary proceedings. For those who even slightly follow sport, the names Barry Bonds, Marion Jones and Floyd Landis are likely familiar to you. While many persons may hold an opinion of guilt or innocence of one or more of them specifically, any rational person must concede that these athletes' reputations have suffered enormous harm by the leveling of what to date are only accusations. Even should they be charged with a crime and found innocent, their reputations will forever be damaged. As presently constructed, CPAs, enrolled agents and attorneys might suffer similar fate with respect to their professional reputations if the disciplinary provisions of Circular 230 are promulgated as presently proposed.

While transparency in disciplinary proceedings may prove to be of benefit to the enforcement objectives of the government and may also provide a window for tax professionals to observe the nature and scope of, and consequences of misconduct, transparency must be handled in a manner that ensures that reputations are not soiled or destroyed merely by publicity. Consequently, considerable and careful thought must be given to the steps preliminary to, and the ultimate timing of, when an OPR proceeding becomes part of any public record. The process requires additional steps and safeguards before a practitioner's name is released with respect to OPR accusations.

Thus, I encourage Treasury and the Internal Revenue Service to pay particular attention to the various comments of the professional organizations of tax practitioners with the respect to refining and revising those processes.

Secondly, I do not agree with the suggested conclusion of the comment in Footnote 6 of the American College of Trust and Estate Counsel. It suggests that it might be possible to provide two opinions to a client with respect to the same matter -- one indicating that a "more likely than not" level of assurance cannot be reached and, therefore, penalty "protection" is not available, and a second letter issued that asserts that because a reasonable basis exists for the recommended tax treatment penalty "protection" is applicable.

The foundation for this suggested possibility results from a failure to timely amend the regulations under Code Section 6664 to coordinate the regulations with Circular 230, something that I believe the Treasury indicated would be forthcoming at the time it issued the December 2004 amendments to Circular 230. Thus, the confusion is arguably of Treasury's own making. Nonetheless, this writer believes that the construction of Sec. 10.35 is sufficiently clear that if advice falls within one of the six categories of covered opinion status, then either a "more likely than not opinion" must be reached or penalty protection is simply not available (subject to the specific exceptions and rules of Sec. 10.35, itself). As you are aware, I am "on record" in arguing, therefore, that a narrow definition must be used for reliance opinion "significant purpose" status or Treasury has overreached -- by effectively emasculating Sec. 6662(c) -- which it does not have the authority to do.

² In this regard, I direct your attention to the AICPA Statement on Standards for Tax Services, Statement No. 1, Interpretation 1-2, Tax Planning. This document does a very good job of setting forth appropriate standards for giving advice to clients on tax matters in a variety of situations and well could have and still an serve as a model for revising the Circular 230 written advice provisions (including Sec. 10.37).

³ Representatives of Treasury, IRS and OPR have stated that Treasury is considering various approaches to revising, modifying, or replacing the provisions, so I do not believe it presumptuous to assume that changes with respect to Sec. 10.35 with be eventually be published.

⁴ Assuming written advice rules are to remain in Circular 230 and the mandate for this seems relatively certain because Congress provided the authority and acknowledgement in the American Job Creation Act of 2004.