SC Lawyer, May 2005, #5. IRS Circular 230 and the practical impact of recent amendments upon the practice of law.

Authorby John R. Chase and Clay M. Grayson

South Carolina Lawyer


SC Lawyer, May 2005, #5.

IRS Circular 230 and the practical impact of recent amendments upon the practice of law

South Carolina Lawyer May 2005

IRS Circular 230 and the practical impact of recent amendments upon the practice of lawby John R. Chase and Clay M. GraysonOn December 20, 2004, the Internal Revenue Service issued final regulations amending Circular 230 (31 CFR part 10) which will become effective on June 20, 2005. Circular 230 governs the practice of attorneys, accountants, enrolled agents and actuaries before the IRS. Issued partly in reaction to recent corporate scandals involving Enron, Worldcom, Arthur Andersen and others, the new Circular 230 regulations mark an attempt by the IRS to tighten the ethical standards applicable to tax practitioners. However, the breadth of these new rules have the potential of reaching all law firms. Rendering any written opinion even touching on a federal tax issue, such as suggesting an S-election or the establishment of a college savings plan, will require that a practitioner comply with a host of disclosure requirements as well as standards of best practice. Failure to do so may result in suspension or disbarment before the IRS for not just the practitioner himself but also his firm, not to mention increased malpractice-claim exposure. The recent move on the part of South Carolina regulators to disbar 14 individuals from the accounting firm KPMG, First Union Bank and the former law firm of Brown & Wood for issuing advice in support of two illegal tax shelters to South Carolina residents is an explicit warning against the dangers of rendering advice in the gray, and the not so gray, areas of taxation.

This article describes the changes to Circular 230 including the updated standards of best practice, firm oversight recommendations, binding standards for covered opinions and other written advice, ethical concerns, enforcement and potential sanctions. Taken literally, the new Circular 230 regulations place tax practitioners in a tenuous position of traversing a tightrope between the duties to the client and the ethical obligation in practicing before the IRS. A false step will place the practitioner in peril. Some practitioners have noted that these final regulations bring tax practice to the point where the complexity of practice has exceeded the complexity of the internal revenue code itself. To illustrate, we will examine a number of transactional and estate planning issues that present ethical concerns for the practitioner and require Circular 230 compliance.

Overview of Circular 230 revisions

The latest version of Circular 230 is the culmination of the Treasury Department's efforts at regulating those who appear before the IRS. For most of its history, the primary focus of Circular 230 was on tax shelter opinions. As the Treasury and the IRS began to revise and broaden Circular 230 four years ago, their initial approach was to expand what constitutes a tax shelter; however, many practitioners and organizations such as the National Association of Bond Lawyers, the Tax Executives Institute and the National Association of Tax Practitioners responded with fears that such an approach would unfairly ensnare practitioners engaged in rendering legitimate advice, not to mention disrupt the municipal bond marketplace and drive up many transactional costs from bond issuance to corporate reorganizations to basic estate planning. While the final regulations are a departure from the tax shelter approach, many practitioners continue to have fears regarding their application. The latest regulations address two broad areas: (1) nonbinding standards of best practice before the IRS, coupled with mandatory provisions for firms and organizations to establish and enforce oversight policies and procedures to promote compliance, and (2) mandatory standards for the issuance of written opinions touching on federal tax questions.

Standards of best practice

The "best practices" portion of Circular 230 supplements other ethical standards applicable to practitioners. Given their nonbinding nature, they might be viewed as the least onerous of Circular 230's provisions; however, they will no doubt raise the bar of conduct expectations for tax professionals and potentially others. Circular 230's "best practices" for tax advisors in representing clients before the IRS include:

  1. The advisor should communicate clearly with the client regarding the terms of his engagement.

    1. The advisor should determine the client's expected purpose for and use of the advice he is requested to render.

    2. The advisor should have a clear understanding with the client of the form and scope of the...

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