Proposed Regs Would Overhaul Circular 230 Written Opinion Requirements

The IRS has released proposed changes to Circular 230 regulations that would significantly change requirements for written tax advice by eliminating the concept of the “covered opinion.” Currently, tax practitioners must comply with detailed and complex requirements for written opinions that constitute covered opinions, including reliance opinions and marketed opinions. The IRS has noted that a good deal of practitioner time is spent in trying to ascertain whether an opinion will fall within the definition of “covered opinion.” Further, the IRS has noted that, in order to avoid falling under the reliance opinion classification, many practitioners have come to utilize a Circular 230 disclaimer–generally attached to all communications like e-mails regardless of whether the communication actually contains tax advice–and that such disclaimers can lead to client confusion. Overall, the IRS has concluded that the benefit is insufficient to justify the additional costs associated with practitioner compliance with the covered opinion rules.

Under the proposed regulations, practitioners would need to base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance, and consider all relevant facts that the practitioner knows or should know. Additionally, the practitioner cannot take into account the likelihood of audit. Unlike the current regulations on covered opinions, the proposed regulations would no longer always require the practitioner to describe in the written advice the relevant facts (including assumptions and representations), the application of the law to those facts, and the practitioner’s conclusion with respect to the law and the facts. Rather, the extent that these elements must be set out in the written advice would be determined by the scope of the engagement and the type and specificity of the advice sought, as well as all other facts and circumstances.

The IRS would continue to apply a heightened standard of review to determine whether a practitioner has satisfied the written advice standards when the practitioner knows or has reason to know that the written advice will be used in promoting, marketing, or recommending an investment plan or arrangement, a significant purpose of which is the avoidance or evasion of any tax imposed by the Code.