The Department of Treasury recently issued T.D. 9668, which contains final regulations that eliminate the much criticized covered opinion rules of Treasury Circular 230 (“Circ. 230”) section 10.35. The regulations are effective June 12, 2014.
The IRS issued the covered opinion rules in 2005. The rules were intended to curtail the practice of tax professionals promoting and rendering written opinions on tax shelters. Despite the regulatory intent, the broad and complex wording of the regulations applied to even routine written client communications.
Under the prior rules, tax practitioners needed to determine whether written client communications, including emails, constituted covered opinions. Circ. 230 defined a covered opinion as written advice concerning a federal tax issue arising from (1) a listed transaction; (2) a plan or arrangement, the principal purpose of which is tax avoidance or evasion; or (3) a plan or arrangement that has a significant tax avoidance purpose if the advice is a reliance opinion, a marketed opinion or an opinion subject to contractual protection. A reliance opinion was broadly defined as an opinion concluding, to a standard of more likely than not, that at least one federal tax issue would be resolved in favor of the client. Written advice was not treated as a reliance opinion, and therefore not as a covered opinion, if the practitioner disclosed that the advice was not intended to be used and may not be used by the taxpayer for the purpose of avoiding penalties. This exception has resulted in the ubiquity of Circ. 230 disclaimers in emails from tax attorneys and accountants.
In providing covered opinions, practitioners had to comply with several requirements, such as providing a conclusion regarding the “likelihood that the taxpayer will prevail on the merits with respect to each significant Federal tax issue” and disclosing compensation agreements between the practitioner and tax shelter promoters.
The new regulations, which finalize proposed regulations issued in 2012, eliminate the covered opinion rules and impose a single standard for written advice now found in section 10.37. Now, instead of first determining whether a written communication constitutes a covered opinion and then ensuring that the covered opinion complies with complex standards, practitioners are bound to a single set of rules for all written advice. Specifically, practitioners must now comply with the following requirements in giving written advice:
- -base the written advice on reasonable factual and legal assumptions;
- -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 on representations of the taxpayer or any other person if reliance on them would be unreasonable;
- -relate applicable law and authorities to facts; and
- -not, in evaluating a federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.
Treasury estimates that the elimination of the covered opinion rules and the adoption of a single standard, largely focused on the reasonableness of the practitioner’s advice, will save tax practitioners a minimum of $5,333,200 in compliance costs, and these costs need no longer be passed on to clients. With the reduced cost of compliance, Treasury’s change is welcome news to practitioners and taxpayers. We will also be quite happy with the shorter emails that will result from this revision.