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Monday, September 24, 2012

Treasury Proposes Circular 230 Changes for Covered Opinions and Written Advice

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 The Treasury Department has proposed changes to the Circular 230 rules that will significantly simplify and streamline the existing rules for written tax advice by removing current Circ. 230 §10.35 and applying one standard for all written tax advice under proposed Circ. 230 §10.37.

Proposed Circ. 230 §10.37 would replace the covered opinion rules with basic principles to which all practitioners must adhere when providing written advice on a tax matter. Thus, a practitioner must 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.” Removing current Circ. 230 §10.35 will eliminate the requirement that practitioners fully describe the relevant facts (including the factual and legal assumptions relied upon) and the application of the law to the facts in the written advice itself. Rather, the new rules provide flexibility based on the scope of the engagement and the type and specificity of the advice sought by the client, and a determination of whether a practitioner has failed to comply with the requirements of proposed §10.37 will be based on all facts and circumstances, not on whether each requirement is addressed in the written advice.

Treasury notes that under Prop. Circ. 230 §10.37(c)(2), it will continue to apply a heightened standard of review to determine whether a practitioner knows or has reason to know that the written advice will be used in connection with promoting, marketing or recommending a investment plan or arrangement a significant purpose of which is to avoid or evade tax.

The proposed rules also would allow a practitioner to take into account the possibility that an issue may be resolved through settlement if raised when providing written advice. And, the proposed rules would allow a practitioner to rely on the advice of another practitioner, but only if the reliance is reasonable and in good faith considering all the facts and circumstances.

Importantly, the proposed rules also eliminate the requirement to use Circular 230 disclaimers in documents and transmissions, including e-mails, which Treasury now views as unnecessarily confusing for clients and may lead practitioners to ignore the standards of current Circ. 230 §10.35.

In addition to other revisions to Circ. 230 §§10.31, 10.36, and 10.82 to reflect the current practice environment, a general competence standard is being proposed in new Circ. 230 §10.35. The proposed rules also extend the expedited disciplinary procedures under Circ. 230 §10.82 to proceedings against practitioners who willfully fail to comply with federal tax filing obligations, but only in somewhat limited instances of significant nonfiling.

Kenneth S. Savell, J.D., LL.M
IRS Practice and Procedure Group
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