Tcl - Circular 230 Compliance: a Guide for the Non-tax Attorney - November 2005
| Publication year | 2005 |
| Pages | 29 |
| Citation | Vol. 34 No. 11 Pg. 29 |
2005, November, Pg. 29. TCL - Circular 230 Compliance: A Guide For the Non-Tax Attorney - November 2005
November 2005
Vol. 34, No. 11 [Page 29]
by Steven M. Weiser
Steven M. Weiser, Denver, is a Member of Levin & Weiser, LLC - (303) 504-4242, sweiser@lw-law.com.
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This article is adapted from the chapter on Taxation from the forthcoming revised Colorado Attorney's Professional Liability Handbook, to be published by Colorado Bar Association Continuing Legal Education in January 2006.
Until recently, the provision of routine tax advice, and the sufficiency of such advice, was largely governed only by the Colorado Rules of Professional Conduct. As a result of the passage of the American Jobs Creation Act and amendments to Treasury Department Circular 230, tax advice is now subject to a host of new requirements that not only expose the attorney to greater liability, but also serve to greatly expand the scope of the attorney's work.
Despite the complexities of the Internal Revenue Code ("Code" or "IRC"), tax advice is often provided by lawyers who would not consider themselves experts in the area of federal taxation. Such advice frequently is limited to situations regularly encountered by lawyers during the course of their non-tax practice. For example, a litigator might advise a client concerning the taxation of a damage award received on account of personal physical injuries; a real estate lawyer may give advice concerning the tax consequences of a sale; a business advisor may recommend a particular form of entity through which a client will do business; or an estate planner may recommend the use of a credit-shelter trust to eliminate any estate tax liability.
Federal taxation permeates so many areas of the law that it often seems that many attorneys "dabble" in it over the course of their careers. This may be changing, however, due to the Treasury Department's ("Treasury") efforts to regulate the provision of tax advice through the recent revisions to Circular 230. This article is intended as a primer on Circular 230 for non-tax lawyers. It also serves as a follow-up to previously published articles.1
All lawyers who provide tax advice should familiarize themselves with Circular 230. The penalties for failing to comply with the requirements imposed on the provision of tax advice are significant, ranging from disbarment, censure, or suspension from practicing before the Internal Revenue Service ("IRS") to monetary penalties imposed on the practitioner or the practitioner's firm.
Background of Circular 230
The United States Code authorizes the Secretary of the Treasury ("Secretary") to regulate the practice of tax representatives before Treasury.2 Pursuant to this grant of authority, the Secretary has published regulations in Circular 230. These regulations have been amended from time to time to address a number of issues.
In October 2004, President George W. Bush signed the American Jobs Creation Act of 2004 ("Jobs Act").3 Among its many provisions, the Jobs Act added 31 U.S.C. § 330(d), which grants the Secretary the authority to impose standards applicable to the rendering of tax advice with respect to any entity, plan, or arrangement that the Secretary believes to have a potential for tax avoidance or evasion. The Jobs Act merely codified what the Secretary had already expressed an intention to do; that is, regulate the issuance of tax advice with regard to tax shelter transactions.4
There is little doubt that the Secretary's intent was motiva ted by the recent proliferation of abusive tax schemes. In December 2004, the Secretary adopted final regulations, establishing (1) aspirational standards of tax practice and (2) standards and requirements concerning the provision of tax advice.5 The final regulations regulating the provision of tax advice became effective on June 20, 2005.6
The Jobs Act and final regulations represent the government's latest attempt to combat and curtail the use of abusive tax shelter transactions by ensuring that taxpayers are fully informed of the state of the law and the consequences of their actions, including their ability to avoid tax penalties. The final regulations provide detailed due diligence and mandatory drafting requirements for the issuance of certain forms of written tax advice.7 These requirements have the potential to greatly increase the cost and time burden associated with the preparation of written tax advice.
The difficulty with the final regulations lies with the scope. The final regulations broadly define the types of written communications subject to the due diligence and drafting requirements. As a result, informal client communications or the provision of "routine" tax advice is likely to fall within the purview of the regulations. Many tax advisors will be seeking ways to ensure that their written tax advise satisfies one of the several exceptions to the final regulations so as not to become subject to the due diligence and drafting guidelines. Although IRS officials have publicly responded to practitioner concerns by reminding them to use "common sense" when interpreting the scope of the final regulations,8 conscientious practitioners will be hesitant to rely on statements that contradict the express language of the published regulations.
Penalty Avoidance
Taxpayers often seek professional tax advice for tax penalty protection purposes. The Code imposes a 20 percent accuracy-related penalty for negligence and substantial understatements of tax and a 20 percent to 40 percent penalty for substantial valuation misstatements, as reported on a tax return.9 However, these penalties can be avoided if, among other things, the taxpayer shows that there was a reasonable cause for the underpayment of tax or that the taxpayer acted in good faith with respect to the tax understatements.10 Reasonable cause and good faith can be exhibited by relying on the advice of a professional (unless the taxpayer has reason to know that such reliance is misplaced).11
In the past, when penalty avoidance was a concern, taxpayers often requested advice in the form of a formal tax opinion letter. For these individuals and their advisors, the final regulations and amendments adopted by the Jobs Act will have little impact as far as the scope and cost of legal work is concerned. Unfortunately, those taxpayers seeking routine advice for whom penalty protection is not a primary concern may now be forced to pay for a more extensive written analysis on a particular legal issue.
The "Covered Opinion"
The IRS struggled in its attempts to define the scope of advice that should be regulated. In proposed regulations issued in December 2003, the IRS adopted an extremely broad definition of a "tax shelter opinion" that would have included most forms of written tax advice, however formal or informal.12 Although ultimately not adopted, the proposed regulations served as the basis for the approach taken in the final regulations.
Circular 230 § 10.35(a) now states that a practitioner who provides a "covered opinion" must comply with comprehensive due diligence and drafting standards imposed by the final regulations. A "covered opinion" is any written advice (including electronic communications) provided by a practitioner concerning one or more federal tax issues arising from any of the following:
1) a transaction that is the same or is substantially similar to a "listed transaction" (a "listed transaction opinion");
2) any partnership, entity, plan, or arrangement, the "principal purpose" of which is the avoidance or evasion of federal tax (a "principal purpose opinion"); or
3) any partnership, entity, plan, or arrangement, a "significant purpose" of which is the avoidance or evasion of federal tax, if the written advice provided is also (1) a reliance opinion; (2) a marketed opinion; (3) subject to conditions of confidentiality; or (4) is subject to contractual protection (a "significant purpose opinion").13
Each category of covered opinion is described in the sections below.
Listed Transaction Opinions
From time to time, the IRS identifies transactions it believes are particularly abusive and not entitled to the favorable tax treatment claimed by the participants in these transactions. Such transactions are known as "listed transactions" and are generally identified through IRS published guidance; they also can be found through the IRS's website.14 Advice provided with respect to any listed transaction or any "substantially similar" transaction is subject to the due diligence and drafting guidelines described below.
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