Written tax advice: new Circular 230 rules apply to advice rendered after June 20, '05.

Circular 230 governs the recognition of CPAs, attorneys, enrolled agents and other persons representing taxpayers before the IRS and prescribes duties and restrictions relating to such practice. Among these duties and restrictions are "Requirements for covered opinions" contained in Sec. 10.35. (Note: all "Sec." citations refer to Circular 230 sections).

A "practitioner" who provides a covered opinion must comply with the practice standards of Sec. 10.35. A practitioner is defined to include a CPA, not under suspension or disbarment from practice before the IRS, who may practice before the IRS by filing a power of attorney with the IRS [Sec. 10.35(b)(1)]. Similar descriptions apply to attorneys as well as enrolled agents and actuaries.

Observation: Under Section 822(b) of the 2004 American Jobs Creation Act, anyone who provides a tax opinion covering federal tax issues regarding an arrangement or plan that has a significant tax avoidance purpose is deemed to be practicing before the IRS. The prior law required practitioners to have a power of attorney for Circular 230 to apply.

Covered Opinions

A covered opinion is written advice, including electronic communications, by a practitioner concerning one or more federal tax issues arising from:

* A transaction that is the same as, or substantially similar to, a transaction that, at the time the advice is rendered, the IRS has determined to be a tax avoidance transaction and identified by published guidance as a listed transaction;

* Any entity, plan or arrangement, the principal purpose of which is avoidance or evasion of any tax imposed by the Internal Revenue Code; or

* Any entity, plan or arrangement, a significant purpose of which is avoidance or evasion of any tax imposed by the IRC if the written advice is a reliance opinion; a marketed opinion; subject to confidentiality conditions; or contractual protection.

"The principal purpose" exists if it exceeds any other purpose. However, the principal purpose to avoid or evade federal tax does not exist if the purpose is to claim tax benefits consistent with the statute and Congressional purpose. But an entity, plan or arrangement may have a significant tax avoidance or evasion purpose even though it does not have the principal purpose of avoidance or evasion.

Reliance Opinions: Written advice is a reliance opinion if it concludes at a confidence level of more likely than not (a greater than 50 percent likelihood) that one or more significant federal tax issues would be resolved in the taxpayer's favor.

However, written advice is not a reliance opinion if the practitioner prominently discloses in the advice that it was not intended or written to be used, and cannot be used by the taxpayer, to avoid penalties that may be imposed on the taxpayer.

This exception does not apply to advice concerning listed transactions or dealing with the principal purpose of tax avoidance or evasion.

An item is prominently disclosed if it is readily apparent to a reader of the advice. Whether an item is readily apparent depends on facts and circumstances including, but not limited to, the taxpayer's sophistication and the advice's length.

At a minimum, to be prominently disclosed, an item must be set forth in a separate section, and not as a footnote, in a typeface the same size or larger than the typeface of any discussion of the facts or law in the advice.

Four Elements of a Covered Opinion:

A covered opinion must contain the following elements:

* Identify and consider all facts that the practitioner determines to be relevant;

* Relate the applicable law, including potentially applicable judicial doctrines, to the relevant facts;

* Evaluate significant federal tax issues; and

* The practitioner's conclusion as to the likelihood that the federal tax treatment of the transaction or matter that is the subject of the opinion is the proper treatment and the reasons for that conclusion.

Excluded Written Advice: A covered opinion does not include:

* Advice during an engagement if a practitioner is reasonably expected to provide subsequent advice to the client that satisfies the requirements of Sec. 10.35.

* Advice that concerns a qualified plan's qualification; is a state or local bond opinion; or is included in documents required to be filed with the SEC. These exceptions do not apply to advice concerning listed transactions or the principal purpose of tax avoidance or evasion.

* Generally, advice solely for a taxpayer's use after the taxpayer has filed a return reflecting the transaction's tax benefits.

* Advice provided to an employer by an employee solely to determine the employer's tax liability.

* Generally, advice that does not resolve a federal tax issue in the taxpayer's favor, unless the advice reaches a conclusion favorable to the taxpayer at any confidence level.

Other Written Advice

A practitioner who provides written advice that is not a covered opinion is subject to the requirements for other written advice in Sec. 10.37.

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By Stuart R. Josephs, CPA

Stuart R. Josephs, CPA has a San Diego-based Tax Assistance Practice (TAP) that specializes in assisting practitioners in resolving their clients' tax questions and problems. Josephs, chair of the Federal Subcommittee of CalCPA's Committee on Taxation, can be reached at [phone] or [e-mail].