Circular 230: Case Study

Circular 230 contains the ethical rules that detail a tax professional’s duties and obligations while practicing before the IRS; it essentially consists of the guidelines for tax practice. In June of 2014, the IRS finalized and implemented new regulations that made sweeping changes to several sections of Circular 230. Most of these changes had been in consideration since 2012 and were needed to do away with rules that were simply too difficult to apply and did not help produce higher-quality tax services. I will focus on why the revisions to Circular 230 were necessary, what was changed, the effectiveness of the changes, and how wording in the new sections makes the regulations more comparable to those found in other ethical codes that govern

tax professionals.
Prior to these latest changes, Section 10.35 included complex rules for practitioners in regards to covered opinions. A covered opinion is defined – in short – as written advice on a federal tax issue arising from a tax-avoidance transaction. The extensive requirements when providing these written opinions burdened practitioners. They also required considerable effort to even determine whether or not advice rendered was subject to the covered opinion rules.

The IRS found that the rules for covered opinions served no useful purpose and had no substantive effect in many cases. Tax practitioners would opt out of the rules for covered opinions by simply placing a disclaimer at the bottom of most emails and other written tax advice. The use of – what came to be known as – the Circular 230 disclaimer became very ubiquitous as practitioners attached it to anything and everything. The boilerplate language used in the disclaimer was merely a way to protect individuals, and the firms that employed them, from possible subsequent legal penalties. Slapping a disclaimer on the bottom of every correspondence ultimately achieved no purpose but to undermine the value of disclaimer in the first place. The new regulations replace the covered opinion rules with one standard for written advice under Section 10.37. In place of the frustrating requirements for covered opinions, the IRS has implemented a subjective, reason-based standard for all written advice. What the new regulation states is that a practitioner may give written advice concerning Federal tax matters as long as they satisfy the new requirements. Among other things, the practitioner must: base written

advice on reasonable factual and legal assumptions; reasonably consider all relevant facts and circumstances; use reasonable effort to identify and ascertain relevant facts; not rely on unreasonable representations, statements, findings, or agreements; relate applicable law and authorities to facts; and, not take into account the possibility that a tax return will not be audited (Title 31(A)-§10.37(a)(2)). The revised Section 10.37 also states that practitioners may rely on the advice of others if the advice was reasonable and the reliance is in good faith, considering all facts and circumstances. For all intents and purposes, under the revision, the practitioner will now be treated as being covered by Circular 230 after they have submitted a form granting them power of attorney.
The new regulation for written tax advice under Section 10.37 of Circular 230 has made it comparable to that of the American Institute of Certified Public Accountant’s Statements on Standards for Tax Services.

Statement 7, which deals with the form and content of advice to taxpayers, sets forth that a member should use professional judgment to ensure that tax advice reflects professional competence. Therefore, the two ethical guidelines for written advice are both subjective in nature. They rely heavily upon professional judgment rather than a single stringent form, and take into account the individual circumstances of each situation when dealing with tax advice. What this implies for tax professionals is that a quick reply to a tax question (e.g. an e-mail correspondence with a client) will not be – and cannot be – held to the same standards as a formal opinion that a practitioner may make (e.g. a position they make in writing for use by a client in tax court). What this should accomplish is to end the “cover your ass” mentality. With the new regulations, it is no longer necessary to have a Circular 230 disclaimer; in fact, the Office of Professional Responsibility has issued cease and desist letters for any tax practitioners continuing to use disclaimers referencing Circular 230. However, what this has not stopped is practitioners replacing the Circular 230 disclaimer with a broader one. This is still a concern as the unrestrained use of disclaimers on nearly every

communication regardless of whether it contains tax advice can severely diminish the likelihood that these statements provide any value at all in the event of a claim or lawsuit. With these changes the IRS will now apply a “reasonable practitioner standard” when it reviews for compliance of Section 10.37. In light of this it is important that tax practitioners maintain a high quality for tax practice and be able to demonstrate that their advice is reasonable.
In the place of the requirement for covered opinions the revised regulations have reformed Section 10.35 into a brief guideline for practitioner competence. What it states is that a practitioner must possess the necessary competence to engage in practice before the IRS. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged (Title 31(A)- §10.35(a)). The new competency rule is similar to Article V of the AICPAs Code of Professional Conduct which provides that members should be diligent in discharging responsibilities to clients, employers and the public. Diligence is the responsibility to render services promptly and carefully, to be thorough, and to observe applicable technical and ethical standards (AICPA). A practitioner may become competent or diligent by consulting with experts or studying the relevant law.
The latest change in regulations to Circular 230 also created a revised Section 10.36 which provides procedures to ensure compliance with Circular 230. It now states that practitioners in a position of authority must do more than simply ensure their own compliance with the regulations. Tax practitioners in a supervising position must now ensure that all individuals they supervise comply with the regulations. Additionally, practitioners with principal authority must take reasonable steps that their firm as a whole complies with Circular 230. A practitioner in either of these positions that through willfulness, recklessness or gross incompetence does not take reasonable steps to ensure the compliance of those in their charge will be subject to disciplinary action. What this essentially means is that managers have a duty to make sure their employees have the required knowledge and skills to perform services with competence and diligence.