The IRS has finalized the new Circular 230 regulations pertaining to written tax opinions. In a nutshell, the regulations eliminate the separate regulation scheme of covered opinions vs. non-covered opinions, and instead include one standard for written advice. A welcome result from this for clients (and tax practitioners themselves) is  the elimination of the old disclaimer that typically has been attached to every email since the covered opinion rules were put into place–adding length and making it more difficult to get to the gist of the message!

Why were the rules changed? Treasury and the IRS revisited the Circular 230 regulations because of concern that the application of the covered opinion rules increased the compliance burden on practitioners and clients, without necessarily increasing the quality of tax advice. The former regulations, for example, required practitioners to make certain disclosures in marketed opinions, limited scope opinions and opinions coming in at a confidence level that was less than “more likely than not” (different types of covered opinions). Practitioners often spent much time determining whether a covered opinion had to be provided, or if one of the exceptions applied. There also was concern that the complexity and cost that accompanied this regime discouraged clients from obtaining, and practitioners from giving, written advice.

What is the new standard for written advice? Section 10.37 requires a practitioner providing written advice (including electronic advice) on a federal tax matter to comply with the following:

• Base the written advice on reasonable factual and legal assumptions (including assumptions as to future events);
• Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know;
• Use reasonable efforts to identify and ascertain the facts relevant to written advice on each federal tax matter;
• Not rely upon representations, statements, findings, or agreements of the taxpayer or any person if reliance on them would be unreasonable;
• Relate applicable law and authorities to facts; and
• Not take into account the possibility that a return will not be audited or that a matter will not be raised on audit.

In determining whether a practitioner giving written advice has complied with the above requirements, the IRS will apply a reasonable practitioner standard, considering all facts and circumstances including the scope of the engagement and the type and specificity of the advice sought by the client. Unlike the old regulations, the new 10.37 does not expressly require the practitioner to describe in the written opinion the relevant facts, the application of law to those facts, and the practitioner’s conclusion with respect to the law and facts. Instead, the scope of an engagement may mean that is appropriate not to set out all facts, or fully apply the law to facts. However, the IRS encourages practitioners to describe all relevant facts, law, analysis and assumptions in appropriate circumstances.

What is considered a federal tax matter? The definition is broad and essentially includes any matter concerning the application or interpretation of (i) a revenue provision as defined in section 6110(i)(1)(B) of the Internal Revenue Code (e.g., statutes, regulation, revenue rulings and procedures, tax treaties); (ii) any provisions of law impacting a person’s obligation to pay tax or file returns; or (iii) any other law or regulation administered by the IRS.

When will the regulations be effective? The regulations will be effective Thursday, June 12, when they are scheduled to be published in the Federal Register.

Why can the disclaimer be omitted? One exception from the definition of covered opinion under the old rules was for written advice that included a disclaimer stating the advice is not intended to be used for the purpose of avoiding tax penalties, and that the advice cannot be used (absent written consent) to promote, market or recommend any entity, investment plan or arrangement to any taxpayer other than the recipient of the advice.  Such disclaimers are a familiar sight to practitioners and their clients, as they often are at the end of every email (regardless of whether there is any tax advice within that email). Because the new rules eliminate the concept of covered opinion altogether, the disclaimer as it is used now is unnecessary. Of course, a practitioner still may want to provide some sort of limitation to tax advice, depending on the scope of the engagement, but this likely will be a more reasoned, case-by-case decision rather than a uniform statement attached to all communications.

For questions on nonprofit-related matters, contact us at kschauble@leafferlaw.com or bseidel@leafferlaw.com.