IRS Issues Final Circular 230 Regulations Eliminating Special Rules for Covered Opinions

The IRS issued final regulations T.D. 9668 ("final regulations") governing the standards for tax practitioners issuing written tax advice, eliminating the complex rules governing "covered opinions" in Section 10.35 of Circular 230 and adopting a single standard for all written tax advice under Section 10.37 of Circular 230. Adopted as part of the IRS's attack on tax shelters in 2003, Section 10.35 of Circular 230 required practitioners who provided written tax advice on certain tax issues to either follow strict rules in rendering tax opinions that included a full description of all relevant facts and the application of law to the facts, and an analysis of all potential tax issues, or provide specific disclaimers as to taxpayers' ability to rely on the tax advice. The result was the automatic disclaimer at the end of virtually all emails and other written material to remove the written communication from the scope of a "covered opinion." The IRS determined that the burden imposed on practitioners and the resulting cost to clients was not worth the minimal benefit to taxpayers and the IRS.

The final regulations, which become effective on June 12, 2014, require written advice to (i) be based on reasonable factual and legal assumptions (including assumptions as to future events), (ii) reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know, (iii) not unreasonably rely on representations, projections or appraisals of the taxpayer or any other person and (iv) relate applicable law to facts. In evaluating whether a practitioner has complied with these requirements, the IRS will apply a reasonable practitioner standard considering all facts and circumstances, including the scope of the engagement and type and specificity of the advice sought. Where the advice will be used to promote or market a plan, a significant purpose of which is the avoidance or evasion of taxes, the IRS will apply the reasonable practitioner standard with emphasis given to the additional risk caused by the practitioner's lack of knowledge of the taxpayer's particular circumstances.

See: T.D. 9668.For more information, please contact Daniel Mulcahy or Mark Howe.