New Rules on Written Tax Advice and Other Revisions to Circular 230 and Their Effect on CPAs

On June 12, 2014, Treasury and the IRS issued final regulations amending Treasury Circular 230, ­Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10).1These changes will have a significant effect on many aspects of tax practice. This article discusses the technical provisions and how the revisions could affect existing tax practice procedures and the management of tax practices.

Overview of Historical Developments Leading to the Revisions

It is beyond the scope of this article to address all the amending changes to Circular 230 that have been enacted over the last two decades. However, two changes are worth noting. Heightened concern about the use of tax opinion letters in abusive tax transactions led to the 2004 amendments,2 including the addition of Section 10.35, the covered opinion rules (discussed below). Legislative expansion of the Sec. 6694 preparer penalty rules3 necessitated amending the Sec. 6694 regulations and the corresponding provisions in Circular 230 (§10.34) that addressed preparer responsibilities.4

At the time of the proposed changes to Circular 230, Section 10.34, many commentators expressed a desire to also revise the covered opinion rules, which had caused significant problems for practitioners. The IRS chose to defer this issue and focused on preparer responsibility guidance. The June 2014 revisions finally address the covered opinion issue, as well as some other areas not previously addressed.

Revisions of Rules Governing Written Advice

Tax practitioners provide tax advice to clients in a variety of communications—oral, email, text, letters, memos, and formal written opinions. As discussed below, the Circular 230 expectations about minimum standards for written tax advice sometimes left tax practitioners uncertain about how to properly comply with the rules. The 2014 revisions significantly reduce these uncertainties.

Elimination of the Covered Opinion Rules

The elimination of the covered opinion rules that made up former Section 10.35 is arguably the most significant change of the June revisions. The covered opinion rules required that written tax advice on designated categories of transactions the IRS saw as potentially abusive comply with detailed requirements for the opinion’s form and content. Applying the rules required a threshold determination of when tax advice was required to be delivered through a covered opinion—a determination that many practitioners found difficult to make. In the words of the preamble for the proposed revisions in September 2012, the covered opinion rules were “more rigid and cumbersome in application than generally applicable ethical standards,” requiring that each covered opinion include certain information and requiring specific language in certain circumstances.

Of the old covered opinion rules, the one that was perhaps most pervasively applied was the opt-out language. The opt-out rule provided that a tax adviser could elect not to follow the rigid rules for certain advice that would otherwise require a covered opinion by including in the advice a specific disclaimer that it could not be used to protect against penalties. To eliminate the risk of unintentionally violating the covered opinion rules, many law firms and accounting firms added the opt-out disclaimer as a footer or notice at the bottom of every email as a matter of course.

With the 2014 revisions, the government has conceded that the prescriptive rules of former Section 10.35 “increased the burden on practitioners and client, without necessarily increasing the quality of the tax advice that the client received,”5 and the government and most practitioners believe that the opt-out disclaimer was overused and therefore of little effect. The 2014 revision eliminated the covered opinion rules in their entirety; and with the elimination, the need for practitioners to use the Circular 230 opt-out language was also eliminated.

The revision to Circular 230 does not eliminate all of Treasury’s standards for written tax advice, however. Before it was revised, Section 10.37 contained requirements for written tax advice that did not fall within the covered opinion rules. Former Section 10.37 outlined expectations regarding assumptions, representations, support, and other factors underlying the practitioner’s advice. With the repeal of the covered opinion rules, the revised Section 10.37 now extends to all written tax advice.

New Section 10.37 states affirmatively the principles that were generally included in old Section 10.37. To comply when providing tax advice in written communications (including those provided electronically), the practitioner must:

• Base the written advice on reasonable factual and legal assumptions, including assumptions as to future events;
• Reasonably consider all relevant facts 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 on representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) of the taxpayer or any other person if reliance on them would be unreasonable;
• Relate applicable law and authorities to facts; and
• In evaluating a federal tax matter, not take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.

The former rules prohibited a practitioner from taking into account the possibility that an issue would be resolved through settlement. The new rules, however, have no such prohibition. The preamble explains that

Treasury and the IRS concluded that the former rule may have unduly restricted the ability of a practitioner to provide comprehensive written advice because the existence or nonexistence of legitimate hazards that may make settlement more or less likely may be a material issue for which the practitioner has an obligation to inform the client.

These rules replace the more prescriptive covered opinion rules. Before repeal, Section 10.35 required the practitioner to include in the opinion a recitation of the relevant facts, apply the law to those facts, and state the conclusions from applying the law to the facts. The preamble to T.D. 9668 provides that a tax adviser can now consider the scope of the engagement, the type and specificity of the advice the client seeks, and other appropriate facts and circumstances to determine the extent to which elements must be included in communications to the client. The preamble notes, however, that “Treasury and the IRS encourage practitioners to describe all relevant facts, law, analysis, and assumptions in appropriate circumstances.”

Scope of New Written Tax Advice Rules

Both the former and the new rules on written tax advice expressly apply to advice provided electronically. Thus, the rules apply to email advice and even less formal advice, such as a text message.

The new regulations apply to a “Federal tax matter,” which is defined broadly to include any matter concerning the application or interpretation of:

• A revenue provision as defined in Sec. 6110(i)(1)(B)—any existing or former internal revenue law, regulation, revenue ruling, revenue procedure, other published or unpublished guidance, or tax treaty, either in general or as applied to specific taxpayers or groups of specific taxpayers;
• Any provision of law affecting a person’s obligations under the internal revenue laws and regulations, including but not limited to the person’s liability to pay tax or obligation to file returns; or
• Any other law or regulation the IRS administers.

Reasonable Reliance on Another Adviser

New Section 10.37 includes a paragraph permitting reliance on another adviser when providing written tax advice to a client, as long as the reliance is reasonable and is grounded in good faith. The regulations provide three instances when reliance on another is not reasonable:

• The adviser knows, or reasonably should know, that the opinion of the other person should not be relied on;
• The adviser knows, or reasonably should know, that the other person is not competent or lacks the necessary qualifications to provide the advice; or
• The adviser knows, or reasonably should know, that the other person has a conflict of interest in violation of Circular 230.

The first two situations are similar to factors for reasonable reliance found in the due-diligence requirements in Section 10.22 and the preparer penalties in Regs. Secs. 1.6694-1(e)(1) and 1.6694-2(e)(5). The third point, a conflict of interest under Circular 230, is not found in either, but the importance of objectivity underlying advice is well-established. The preamble states that an adviser can rely on the advice of another person who has a conflict of interest if (1) the other person’s conflict has been properly waived by all affected clients, and (2) all concerned reasonably believe that the practitioner with the conflict can provide competent advice.6

Standard of Review

With the elimination of the covered opinion rules, there are few bright-line or objective criteria with which to judge compliance with the revised written tax advice rules. Section 10.37(c) establishes that the standard by which the government will evaluate whether a practitioner has complied with the rules is a reasonable practitioner standard, taking into account all facts and circumstances. The new regulations again point out that the scope of the engagement and the type and specificity of the advice the client seeks are all relevant factors.

Before it was amended, Section 10.37 contained a heightened standard of review where the written advice was to be used in promoting, marketing, or recommending an investment plan or arrangement, a significant purpose of which was the avoidance or evasion of tax imposed by the Code. But the elements of this heightened review were not stated. Under the revisions, this standard of review is clarified, and the government’s investigation will focus on the reasonableness of the adviser’s actions with emphasis given to the additional risk caused by the adviser’s lack of knowledge of the taxpayer’s particular circumstances.

Effect on Practitioners

Other Rules and Standards That Affect Tax Advice

The new rules on written tax advice relax the rigid rules that applied to covered opinions, but other rules that govern tax advice continue unchanged. For instance, standards for tax return positions under Section 10.34(b) of Circular 230 are not affected.7 Tax return preparers, including nonsigning preparers, may not sign a return or advise the client to take a position that either lacks a reasonable basis or is an unreasonable position under Sec. 6694(a)(2).

Unreasonable positions include (1) disclosed positions without a reasonable basis; (2) undisclosed positions without substantial authority; and (3) positions relating to tax shelters and reportable tax avoidance transactions not satisfying the more-likely-than-not standard.8 Further, both oral and written advice not satisfying these standards can subject the practitioner to discipline under Circular 230, Section 10.51.

Also unaffected by the revisions is the practitioner’s due-diligence obligation under Section 10.22 of Circular 230 and Sec. 6694, and the reasonable-cause and good-faith regulations under Sec. 6694. The revisions to Circular 230 also do not change the general maxim that tax advisers are not required to audit or verify information clients, other third parties, and advisers provide, unless there is a reason to do so. Nonetheless, recognizing situations requiring more diligence will be instrumental to satisfying the Circular 230, Section 10.37 reasonable practitioner standard. Knowing when to dig further will also be important for satisfying the new Circular 230, Section 10.35 competency standard discussed below.

If taxpayers wish to use written advice as a basis for a reasonable-cause defense under Sec. 6664, regulations establish minimum standards the advice must meet to serve that purpose. The advice must be based on “all pertinent facts and circumstances and the law as it relates to those facts and circumstances,” must not be based on “unreasonable factual or legal assumptions,” and must not “unreasonably rely on representations, statements, findings, or agreements of the taxpayer or any other person.”9 For the substantial-understatement penalty attributable to a tax shelter as defined in Sec. 6662(d)(2)(C)(ii), the opinion must also “unambiguously” state that the advice concludes that there is a “greater than 50-percent likelihood that the tax treatment of the item will be upheld if challenged.”10 These requirements for a reasonable-cause defense are unaffected by the relaxation of the Circular 230 requirements for the required form and content of written tax advice. It is questionable whether advice provided in one or two paragraphs sent via email would be sufficient to meet the minimal requirements for a reasonable-cause defense under the regulations.

All these rules and standards, along with the new Section 10.37, must be considered when determining how best to meet the client’s needs and expectations. The authors recall conversations that began with another practitioner saying, “We’re only issuing a memo,” implying that the professional obligations governing that advice are somewhat reduced. When the “memo” interprets tax law or applies tax law to facts, the memo expresses the practitioner’s opinion on the matter. The same standards and rules apply whether the advice is formally presented on letterhead with a statement of facts the client signed or is written on a tablet computer or cocktail napkin.

Discussions with clients about their intended use of the practitioner’s written work products are of critical importance. With the elimination of the covered opinion rules, it is not unreasonable for a client to think that a practitioner’s written work product is now an opinion the client can use to protect against penalties during an IRS examination and beyond. Accordingly, practitioners will need to know whether a client intends to use the written advice to establish reasonable cause and good faith (i.e., penalty protection) for reporting a transaction or tax position in a certain manner. Thus, the client engagement letter should identify the matters to be addressed and any relevant information regarding the specificity of the advice requested.

Consider Whether Limiting Language Is Appropriate

As described above, the new rules eliminated the required use of prominent disclosures. The preamble states that Treasury and the IRS expect the revisions will eliminate the use of a Circular 230 disclaimer in email and other writing.11 The preamble also makes it clear that the rules do not prohibit the use of “an appropriate statement describing any reasonable and accurate limitations of the advice rendered to the client.” Thus, it is the practitioner’s responsibility to determine what limiting language, if any, is appropriate in a document providing written advice or in a standard email footer or notice.

Whether a Circular 230 legend in the standard email footer or notice should be replaced with some other limiting language has been the subject of discussion since the revisions have been released. While providing substantive advice in email text is not necessarily a best practice, it is often difficult to avoid because clients expect prompt responses to urgent matters, and occasionally providing a separate document is practically impossible. Because emails tend to be more informal, some practitioners are replacing the legend with some other limiting or cautionary language regarding tax advice that may be included in the email. Others have removed the Circular 230 disclaimer without replacing it with anything. In deciding whether to replace the Circular 230 disclaimer in email, practitioners should consider how the email is likely to be used. Any disclaimer should balance the need to protect the practitioner from harm that could result from a client’s overreliance on the email message, with the need to avoid harming the client by prohibiting the client from relying on any advice in an email message.

Email messages, like all written tax advice, will be judged on the “reasonable practitioner” standard. This determination will be based on the particular facts and circumstances. As indicated by Karen Hawkins, the director of the Office of Professional Responsibility (OPR), during an IRS Circular 230 webinar on June 25, 2014, the new standard is not supposed to hinder email correspondence, but requires practitioners to exercise good judgment when doing so. For instance, if a practitioner receives an email asking the practitioner to confirm that brother and sister corporations can merge under state law and qualify for tax-free reorganization, a “that’s OK” reply may not pass muster under Circular 230. A more thorough response is needed.

For advice delivered in a separate document, many practitioners already include some limiting language informing the reader of the scope of the advice, that changes in facts and subsequent changes in law may adversely affect the advice provided, or other similar limitations. A practitioner may consider adding limiting language prohibiting the use or reliance on a document if the practitioner’s analysis was not completed at the time a copy of the document was provided to the client, or provide a notice that the document alone may be insufficient in itself to serve as a basis for a reasonable-cause defense against penalties.

More Transparency About Settlements

Both the AICPA’s and IRS’s professional standards require practitioners to discuss potential penalty exposure with clients, and explain how to possibly avoid penalties through disclosure.12 These standards also prohibit practitioners from advising their clients to play the “audit lottery,”13 hoping that the tax position will not get caught on audit. Further, until these most recent revisions, Circular 230 prohibited practitioners from advising clients on whether an issue would be resolved through settlement. This last restriction often put practitioners in a difficult situation, but has been eliminated in the recent revisions to Circular 230.

The prohibition on discussing potential settlement outcomes was problematic because it prevented practitioners from giving clients full, transparent advice. For instance, if a practitioner was at a “should” level of confidence (i.e., that the position has a significantly greater than 50% likelihood of being sustained on its merits, but that some uncertainty remains) on a particular issue and knew that Appeals was agreeing to at least 50% settlements for similarly situated taxpayers, the practitioner was prohibited from taking the likelihood of settlement into account when evaluating the probability that the issue would be sustained on its merits. The new Circular 230, Section 10.37, eliminates this dilemma.

The IRS and Treasury concluded this restriction was unnecessarily limiting “because the existence or nonexistence of legitimate hazards that may make settlement more or less likely may be a material issue for which the practitioner has an obligation to inform the client.” Practitioners still must be cautious when advising on potential settlement outcomes because imprecise language may be interpreted as encouraging clients to impermissibly play the audit lottery. Practitioners should also be aware that, while Circular 230 no longer prohibits discussions of settlement possibilities, regulations addressing the reasonable-cause defense against proposed penalties that is available to taxpayers prohibit any advice forming the basis of that defense from taking into account the possibility of settlement (see Regs. Sec. 1.6662-4(g)(4)(i) and Sec. 6664(d)(4)). Thus, while the possibility of settlement cannot color the practitioner’s conclusions regarding positions to be taken, it can be discussed with clients regarding actual administrative procedures involving the clients.

General Tax Practice Procedures

Several provisions in Circular 230 were revised to reflect the changing environment of tax practice and to further implement recent changes in IRS tax practice oversight. The following discussion highlights those changes.

Section 10.35, Competence

The revised Circular 230 includes a new Section 10.35 titled Competence, which states:

A practitioner must possess the necessary competence to engage in practice before the Internal Revenue Service. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged. A practitioner may become competent for the matter for which the practitioner has been engaged through various methods, such as consulting with experts in the relevant area or studying the relevant law.

While a competence standard may exist in other settings, such as standard-of-care analyses in litigation or in some professional regulatory ethics rules,14 this is the first time that Circular 230 has imposed an affirmative competence standard on covered practitioners. Section 10.51 has made incompetence and disreputable behavior conduct for which sanctions may be imposed. The focus in Section 10.51 in the past has been on bad behavior as part of an engagement or in other areas of the practitioner’s life that discredit the individual, not individual professional competence per se. As can be seen in the above passage, this new section creates an affirmative duty to be competent in engaging in practice before the IRS. This new section should be read in light of Section 10.22, Diligence as to Accuracy, and determinations under Section 10.51, Incompetence and Disreputable Conduct, under which a practitioner may be sanctioned for incompetent conduct.

The comment letters on the proposed regulations submitted by professional groups and individuals requested clarification of the competence concept and expressed concern about how OPR would interpret and enforce this concept. Some of the issues mentioned included:

• The proposed regulation contained no list of factors that would be considered in evaluating competence;
• The proposed definition failed to provide any definite standard for competence;
• The proposed standard did not address the situation where a practitioner may be competent to handle a majority of an engagement, but may wish to seek the assistance of another practitioner having specific expertise about certain issues in the engagement;
• The proposed standard did not address whether a practitioner who consults with other practitioners must possess competence to discern the competence of the consulted practitioner to opine on the subject matter at hand;
• The proposed standard did not specifically consider the complexity of tax practice and the fact that no single practitioner can be competent to handle all matters that could arise; and
• The proposed standard did not list the relevant factors that the IRS would consider to determine whether the practitioner had the requisite knowledge and skill for the particular engagement.

While the last sentence of the new section (“A practitioner may become competent . . .”) dispelled many concerns in the comment letters that the new standard would not allow practitioners to become competent by consulting with other practitioners or through research and study on the particular subject, the final version of Section 10.35 did not address the majority of these concerns. It does not list affirmative competencies that would satisfy the standard. It does not provide guidance on terms such as “necessary competence,” “appropriate level,” and “preparation necessary.” It places the burden on the practitioner. The IRS has informally indicated that the language “may become competent” suggests the relevant time for determining competency is not when the engagement is accepted but when the services are performed.

Section 10.36, Procedures to Ensure Compliance

The new Circular 230 regulations also modify Section 10.36, Procedures to Ensure Compliance, by expanding the applicability of the rule to all matters governed by Circular 230. Section 10.36 was added to Circular 230 in 2004, at the same time as the covered opinion rule.15 In its first incarnation, Section 10.36(a) required a practitioner who had “principal authority and responsibility” for overseeing a firm’s provision of tax advice on federal tax matters to take reasonable steps to ensure that the firm has adequate procedures to comply with Section 10.35 (the covered opinion rules). In 2011, the requirement to ensure compliance with Section 10.34 was added (standards with respect to returns).16 This latest revision to Section 10.36 requires procedures to ensure compliance with subparts A (rules governing authority to practice), B (duties and restrictions relating to practice before the IRS), and C (sanctions for violations) of Circular 230. In proposing this expansion of ­Section 10.36, the IRS noted the critical role of firm responsibility in ensuring high-quality advice and representation for taxpayers.17 The preamble to the proposed regulations indicated Section 10.36’s requirements should encourage firms to self-regulate, without creating excessive burden through a rigid, one-size-fits-all approach.

As issued in June 2014, Section 10.36 applies to any Circular 230 practitioner who has principal authority and responsibility for overseeing the aspects of a firm’s practice that are governed by Circular 230. Section 10.36 specifically acknowledges that more than one individual may have principal authority and responsibility in this sense, and also states that in the absence of a person the firm identifies as having the principal authority and responsibility for ­Circular 230 matters, the IRS may identify one or more Circular 230 practitioners who will be considered responsible for the Section 10.36 requirements. This statement suggests that it would be wise for Circular 230 practitioners who are members of firm management to be aware of their firm’s procedures for complying with Circular 230, especially if the person with official responsibility for those matters is not a Circular 230 practitioner.

An individual subject to Section 10.36 can be disciplined for a Section 10.36 violation only if, through willfulness, recklessness, or gross incompetence, the individual:

• Does not take reasonable steps to ensure that the firm has adequate procedures to comply with Circular 230, and one or more individuals who are members of, associated with, or employed by the firm are or have engaged in a pattern or practice of failing to comply with Circular 230 in connection with their practice with the firm;
• Does not take reasonable steps to ensure that firm procedures are properly followed, and one or more individuals who are members of, associated with, or employed by the firm are or have engaged in a pattern or practice of failing to comply with Circular 230 in connection with their practice with the firm; or
• Knows or should know that one or more individuals who are members of, associated with, or employed by the firm are or have engaged in a pattern or practice that does not comply with Circular 230 in connection with their practice with the firm, and fails to take prompt action to correct the noncompliance.

The second bullet point above is notable because the prior version of Section 10.36 required only that a firm have adequate procedures to comply with Circular 230, but this revision adds the requirement that the firm take steps to ensure the firm procedures are properly followed.

The IRS OPR director has publicly acknowledged that her office has inquired about firms’ procedures under Section 10.36.18 Hawkins said she will initiate inquiries of firms when there is public information (e.g., court cases) suggesting violations of Circular 230.

Section 10.31, Negotiation of Taxpayer Checks

Section 10.31, Negotiation of Taxpayer Checks, was updated to better reflect the current electronic environment in which practitioners and the IRS operate. The former Section 10.31 was a simple provision indicating that “a practitioner who prepares tax returns may not endorse or otherwise negotiate any check issued to a client by the government in respect of a Federal tax liability.”19 The revised Section 10.31 makes two changes. First, it clarifies that the section applies to any practitioner, not just a practitioner who prepares tax returns. Second, it expands the scope of “endorse or otherwise negotiate any check” to include “directing or accepting payment by any means, electronic or otherwise, into an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated.” In the proposed regulations, the IRS explained that this clarification was aimed at a small number of “unscrupulous preparers and practitioners” who were manipulating electronic refunds to defraud their clients and the IRS.20 The authors anticipate that this provision will affect preparers who provide financial products for their clients. In the past, the client may have been able to negotiate a refund check to compensate for these products, but this change precludes that approach and will require the taxpayer to deposit the check and pay for the financial services in separate transactions.

Section 10.82, Expedited Suspension

Section 10.82 provides the IRS with an expedited suspension procedure for tax practitioners who engage in certain stipulated egregious behavior. One area of growing concern for the IRS in recent years has been practitioners who fail to satisfy their own tax return filing obligations. Section 10.51(a)(6) indicates that willfully failing to file is incompetent and disreputable conduct. To sanction a practitioner under Section 10.51, however, OPR must follow the rules contained in subpart D, including formal proceedings, conferences, service of complaint, and so on. Before amendment, Section 10.82 did not specifically address nonfiling. The 2014 amendments have changed that. As the preamble indicates, “practitioners demonstrating this high level of disregard for the Federal tax system are unfit to represent others who are making a good faith attempt to comply with their own Federal tax obligations.”21

The revisions add specific language to Section 10.82 indicating that a practitioner will have demonstrated a pattern of “willful disreputable conduct” by:

• Failing to file annual federal tax returns, in violation of federal tax laws, for four of the five years immediately preceding the institution of a proceeding against the practitioner, and remaining noncompliant with any of the practitioner’s federal tax filing obligations at the time of the notice of suspension; or
• Failing to file federal tax returns required “more frequently than annually” for five of the seven tax years immediately preceding the institution of a proceeding against the practitioner, and remaining noncompliant with any of the practitioner’s federal tax filing obligations at the time of the notice of suspension.

The addition of this language gives OPR the ability to move faster in sanctioning practitioners. Language in this section has also changed from a “complaint” against the practitioner to a “show cause order,” and the “answer” has been changed to a “response.”

A paragraph titled “Suspension” has been added, giving the IRS the ability to suspend the practitioner immediately following:

• The expiration of the period for the practitioner to respond to the IRS’s show cause order if the practitioner does not file a response;
• A conference (as described in Section 10.82(e)) if the IRS finds at the conference that the practitioner should be suspended; or
• The practitioner’s failure to appear at the Sec. 10.82(e) conference.

It is important to note that the comments to the proposed regulations generally agreed with including nonfiling as a justification for expedited suspension. However, the comments suggested limiting the nonfiling to federal income tax returns. The IRS specifically rejected this position and used the broader language indicated above. Thus, practitioners who fail to file personal and professional practice payroll returns, personal gift tax returns, personal pension plan returns, etc., may be subject to these rules. In addition to Circular 230, AICPA Code of Professional Conduct, Rule 501, Acts Discreditable, may apply to nonfiling CPAs.

Section 10.1, Offices

The final regulations clarify that OPR has exclusive jurisdiction within the IRS for disciplining and sanctioning tax practitioners.

Section 10.3, Who May Practice, and Section 10.22, Diligence as to Accuracy

With the removal of the covered opinion rules of Section 10.35, the cross-references to that section were removed from Sections 10.3 and 10.22.

Conclusion

The 2014 revisions to Circular 230 bring both clarity and uncertainty to the regulatory environment in which tax practitioners operate. The significant changes in the area of written advice offer welcome relief from prior rules and should enable practitioners to more readily comply with the standards. With this new freedom, however, comes new responsibility for the tax practitioner to determine the format of advice that is appropriate for the scope and context of the advice being proffered. The addition of an undefined competency standard and the expanded scope of IRS oversight of a firm’s tax practice procedures could provide challenges for practitioners until further experience and guidance is developed. Practitioners would be well-advised to study these rules carefully in the context of their existing firm procedures to ensure that the risk of noncompliance is minimized.

Footnotes

¹ T.D. 9668.

² T.D. 9165.

³ Small Business and Work Opportunity Tax Act of 2007, P.L. 110-28.

⁴ REG-138637-07, finalized by T.D. 9527, effective May 31, 2011.

⁵ Preamble to T.D. 9668 at I.A.

⁶ Circular 230, §10.29, Conflicts of Interest. For additional analysis of conflicts of interest, see Horwitz, “Conflicts of Interest: IRS Rules Differ From AICPA Professional Standards,” 42 The Tax Adviser 776 (November 2011), and Mathers and Schrock, “Practical Approaches to Common Conflicts of Interest,” 45 The Tax Adviser 360 (May 2014).

⁷ The authors recognize that the scope of the IRS’s authority to regulate the preparation of tax returns under Circular 230 is unclear following Loving, 742 F.3d 1013 (D.C. Cir. 2014), and Ridgely v. Lew, No. 1:12-cv-00565 (D.D.C. 2014). However, until this issue is resolved, either through further court proceedings or legislative action, the authors would not advise relying on Loving or Ridgely to take action inconsistent with Circular 230.

⁸ AICPA Statement on Standards for Tax Services (SSTS) No. 1, ¶4, requires practitioners to follow the standards of the relevant taxing authority. Therefore, while Circular 230 standards do not apply to advice regarding state tax matters, the AICPA statements do apply to state tax advice and are not dissimilar.

⁹ Regs. Sec. 1.6664-4(c).

¹⁰ Regs. Sec. 1.6664-4(f).

¹¹ T.D. 9668.

¹² See Circular 230, §10.34(c), and AICPA SSTS No. 1, ¶6.

¹³ See Circular 230, §10.37(a)(2)(vi), and AICPA SSTS No. 1, ¶7.

¹⁴ For example, AICPA Code of Professional Conduct Rule 201, General Standards (e.g., professional competence, due professional care).

¹⁵ T.D. 9165; 69 Fed. Reg. 75839-75845 (Dec. 20, 2004).

¹⁶ T.D. 9527.

¹⁷ REG-138367-06.

¹⁸ Davis, “New Due Diligence Language Is Meant to Streamline Circular 230,” 2014 TNT 120-7 (June 23, 2014).

¹⁹ Circular 230, §10.31 (before amendment by T.D. 9668 (6/9/14)).

²⁰ REG-138367-06.

²¹ T.D. 9668.