Amendments to circular 230: this two-part article analyzes additions and amendments to the circular 230 regulations adopted in 2004 and 2005. Part 1 covers rules on best practices and the definition of covered opinions.

• Author: Gardner, John C.
• Position: Part 1

EXECUTIVE SUMMARY

* A regulation on best practices for tax advisors was added to restore, promote and maintain the public's confidence.

* Circular 230's definition of a covered opinion raises several complicated issues on the significant and principal purpose of written advice.

* The May 2005 amendments increased the number and scope of exclusions from covered opinions.

**********

Amendments to the Treasury Circular 230 (1) regulations, which govern tax practice before the IRS by CPAs, attorneys, enrolled agents and enrolled actuaries, were proposed on Dec. 30, 2003. (2) They were approved in December 2004, (3) after receiving comments approved by the AICPA Tax Division's Tax Executive Committee (TEC), (4) the American Bar Association (ABA) Tax Section, other professional organizations and associations, and interested parties. The new regulations involve an aspirational call for best practices (revised Section 10.33); standards governing covered opinions (new Section 10.35); steps to ensure compliance (Section 10.36); standards governing other written advice (Section 10.37); and provisions for the creation of an advisory committee to the Office of Professional Responsibility (OPR), to review and recommend professional standards for Circular 230 (new Section 10.38).

This two-part article explores the Circular 230 amendments and identifies potential challenges for CPA tax practitioners subject to them. Additionally, it raises practical issues and makes some suggestions that will help CPAs to serve as client advocates, while still adhering to the highest professional standards. (5) Part I, below, analyzes best practices and the definitions relevant to covered opinions. Part II, in the February 2006 issue, will examine the requirements for covered opinions and other written tax advice.

Background

During the past decade, tax shelters and tax advocacy have been continually discussed in the media, in Congress and by professional organizations, such as the AICPA and ABA. (6) This attention ran parallel with the auditor independence issues addressed in the Sarbanes-Oxley Act of 2002 (SOA). (7) Companies such as Enron and a few CPA and law firms have been cited in court documents, as well as in Congressional hearings, for eroding the tax base due to their participation in tax shelters. Congress held hearings on the perceived problems of tax shelters, and introduced legislation in both houses that addressed tax shelters and the practitioner and promoter communities. Regulations dealing with potentially abusive tax shelters were thought to be the catalyst behind the long-awaited proposed modifications to Circular 230 in 2001. (8) However, the final rules, (9) adopted in July 2002, contained no changes on tax shelter opinions. The 2001 proposed changes on these opinions were withdrawn in December 2003, when the new proposal (10) was published. The Service received comments during spring 2004 and published the new final regulations on December 17 of that year. (11) Treasury issued additional clarifications on May 18, 2005,12 and the rules became enforceable on June 21, 2005.

Circular 230

Circular 230 governs tax practice before the Service by CPAs, attorneys, enrolled agents and enrolled actuaries. "Practice," as defined in Section 10.2(d), encompasses "all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer's rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service." The term "presentation" includes, but is not limited to, preparing and filing documents and communicating and corresponding with the Service, in addition to representing clients at hearings, conferences and meetings.

Circular 230 is administered by the OPR, which has the authority to impose sanctions on practitioners who violate it. According to Section 10.50, sanctions may range from a private reprimand to more serious consequences, including public censure, suspension or disbarment. Suspended or disbarred practitioners are not permitted to practice before the Service while suspended and are subject to OPR conditions designed "to promote high standards of conduct." These conditions may be imposed for a reasonable period, depending on the gravity of the violation. Disbarred practitioners are not permitted to practice before the IRS unless the OPR (after a five-year period of disbarment) is satisfied that they will not violate Circular 230 and that reinstatement is not contrary to public interest. Suspended or disbarred practitioners may also lose their licenses to practice at the state level, depending on the state's disciplinary rules. In addition, liability claims may be filed against a practitioner based on the conduct giving rise to the suspension or disbarment. Thus, due to the possibility of such sanctions, it is essential for CPAs in tax practice to be aware of the amendments and additions to Circular 230 and to take the necessary steps to ensure that they comply with them. (13)

AJCA

In addition, American Jobs Creation Act of 2004 (AJCA) Section 822, specifically established statutory authority for censure (that was already provided under Circular 230). The OPR may now impose monetary penalties on practitioners. Additionally, if the representative is acting on behalf of an employer or other entity, the Secretary may impose a monetary penalty on the employer or other entity if it knew, or reasonably should have known, of the conduct. (14) This penalty may be in addition to one imposed on the practitioner. Financial penalties may also be in lieu of, or in addition to, any suspension, censure or disbarment. According to AJCA Section 822, monetary penalties are not fixed dollar amounts, but are "not to exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty." Thus, the OPR has additional weapons in its arsenal to regulate and sanction practitioners and their firms.

Section 10.33--Best Practices

Importantly, "best practices" were added to the regulations to "restore, promote, and maintain the public's confidence"; see Exhibit 1 above for a summary of Section 10.33. Practitioners may justifiably presume that the public's confidence in tax advisors was shaken due to revelations of malfeasance among some well-known players. At one Point during the Congressional investigation into the independence of certain auditors that led to the SOA, a proposal was drafted that would have prohibited audit firms from serving as tax advisors to their publicly traded audit clients. Although the proposal failed, a failure on the part of tax advisors to "restore, promote and maintain the public's confidence" may result in it being reconsidered. Indeed, the Public Company Accounting Oversight Board (PCAOB) submitted new rules to the Securities and Exchange Commission (SEC) for approval, limiting the types of tax services that independent audit firms can provide to audit clients that are listed companies.

Exhibit 1: Section 10.33-Best practices for tax advisors (a) Tax advisors should provide clients with the highest quality representation concerning Federal tax issues by adhering to best practices in providing advice and in preparing or assisting in the preparation of a submission to the IRS. In addition to compliance with the standards of practice provided elsewhere in this part, best practices include: * Communicating clearly with the client regarding the terms of the engagement; * Establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions or representations, relating the applicable law (including potentially applicable judicial doctrines) to the relevant facts, and arriving at a conclusion supported by the law and the facts; * Advising the client regarding the import of the conclusions reached, including, for example, whether a taxpayer may avoid accuracy-related penalties if a taxpayer acts in reliance on the advice; and * Acting fairly and with integrity in practice before the IRS. (b) Tax advisors with responsibility for overseeing a firm's practice of providing advice concerning Federal tax issues or of preparing or assisting in the preparation of submissions to the IRS should take reasonable steps to ensure that the firm's procedures for all members, associates and employees are consistent with the best practices set forth above. PCAOB Rules

On July 26, 2005, the PCAOB adopted certain independence rules on services provided by auditors to their listed audit clients.

Three specific provisions indicate that certain services would impair auditor independence. Rule 3521 provides that contingent fee arrangements with listed audit clients...