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Circular 230 changes: suitability to practice, quality control among proposed revisions.

In mid-September. the Treasury released proposed revisions to Circular 230 regulations governing conduct of tax practitioners before the IRS (REG-138367-06, 2012-40 MB 426).

The proposals address a number of areas that generally may be categorized as enhanced "suitability to practice" matters, i.e. a specific requirement of "competency" and a virtual mandate that practitioners, firms and firm tax leadership initiate and document quality control processes and procedures within a practice of any size (proposed secs. 10.35, 10.22 and 10.36), and including a specific prohibition of tax practitioner's receipt of a taxpayer's refund by any means--including electronic payment (proposed Sec. 10.31).

In addition, significant Circular 230 changes are proposed that govern written tax advice provided to clients--and others--who might rely on the advice.

The Covered Opinion provisions of Sec. 10.35 in Circular 230 will be repealed and the other written advice provisions of Sec. 10.37 revised and expanded to address the entirety of standards for written advice to clients. This will eliminate a need for the branding of an emails that inform clients, friend and family that they may not rely upon any aspect of an email communication for protection from penalties assessed under the Internal Revenue Code.

The proposals also provide for expedited suspension or disbarment procedures where practitioners are repeatedly noncompliant with their own tax filing obligations [proposed Sec. 10.82(b)(5)]. Essentially, based on an order to show cause, the IRS can promptly proceed to suspend tax practitioners when they have not timely filed a return and have been similarly noncompliant for at least four of the five years preceding the initiation of the expedited procedures process.

Finally, proposed Circular 230, Sec. 10.2 provides that the IRS Office of Professional Responsibility has "exclusive responsibility for discipline" of practitioners. This clarifies the sole authority of the Office of Planning and Research to engage in actual discipline of practitioners and should end the concerns of some tax practitioners that the Return Preparer Office might share jurisdiction with OPR concerning disciplinary authority.

Written Advice

A primary focus of the attorney-CPA practitioner community has been on the proposals to remove the oft-criticized written advice requirements for "penalty protection" tax advice with regard to certain categories of transactions defined in the rules--the Covered Opinion provisions of Circular 230, Sec. 10.35.

To establish new required standards For written advice following removal of the Covered Opinion provisions, Sec. 10.37 (currently Other Written Advice and to become, simply, Requirements for Written Advice) of Circular 230 is revised and expanded. Unlike the detailed, rules-based approach for covered opinions, the new provision is basically a principles-based approach.

Heightened scrutiny is required when tax advisers are aware their advice will be referred to by a person (other than the adviser or member of the adviser's firm) in the promotion, marketing or recommending of a partnership or other entity, investment plan or arrangement that has as a significant purpose in the avoidance or evasion of any tax imposed by the Internal Revenue Code.

This is essentially what is described as a "marketed opinion" under the current Covered Opinion provisions. The specific language is also virtually identical to those transactions labeled "reliance opinions" under the Covered Opinion regime and very similar to the definition of a "tax shelter" in Code Sec. 6662(d)(2)(C)(ii).

However, aside from this reference and with regard to advice that serves another's marketing effort, the proposals do not extend those provisions to capture the type of tax advice that created the troublesome "reliance opinion" definition and attendant fears that non-tax shelter advice would be converted to tax shelter advice for purposes of Circular 230 discipline.

Generally, the scope of engagement, type and specific advice sought .and all other appropriate facts and circumstances--are factors in determining the extent that facts, applicable law and the conclusion must be presented in the advice. All of these factors may be considered in determining the scope of the written advice, unlike the requirements of the to-be repealed Sec. 10.35, which mandated specific steps and procedures for written advice with respect to specifically described types of tax advice with he undefined "reliance" opinion wreaking special havoc on the determination whether the advice was subject to the Covered Opinion rules or was subject to the less stringent structure and requirements for other written advice.

Moreover whether I practitioner has complied with the requirements is based on all the facts and circumstances. not on whether each requirement under 10.37 is addressed in the advice i.e. an overriding "due professional care" approach.)

The basic elements for written advice require the practitioner to:

* Base the advice on reasonable factual and legal assumptions.

* Reasonably consider all relevant facts that the practitioner knows or should know.

* Use reasonable efforts to identify and ascertain the facts relevant to written advice on each federal tax matter.

* Not rely upon representations. Statements, findings or agreements (including projections. financial forecasts or appraisals or the taxpayer or any other persons.

* Not, in evaluating a federal tax matter, take into account the possibility that a tax return will not be audited or that the matter will not be raised on audit. Note, however, that die practitioner may take into account the possibility that a matter addressed in the advice, if raised by the IRS, will be resolved through settlement. previous written advice standards prohibited such considerations and the IRS concluded that it might unduly restrict the comprehensive written advice because it might restrict the practitioner from properly informing a client of legitimate hazards.

Additionally, practitioners may not rely upon representations, statements, findings or agreements if they know or should know that one or more representations or assumptions on which any representation is based are incorrect or incomplete. Clearly, this restriction in alone would have provided plenty or authority for OPR to engage in practitioner discipline with regard in the tax shelter Opinions or the late 1990s and early 2000s when coupled with the due diligence duties of Circular 230 many, if not all of which, relied upon client representations that opinion writer knew or should have known were incorrect.

Also, when relying on others in providing tax advice, a practitioner:

* May only rely ii. the reliance is reasonable and in good faith.

* Specifically may not rely when the relying practitioner knows the opinion should be revised upon; or when the other practitioner providing the advice is not competent or qualified to provide the advice, or has a conflict of interest.

Quality Control: A Mandate

The proposed regulations contain several revisions and additions to Circular 230 that, combined, will mandate documented tax practice quality processes and procedures For tax firms of all sizes.

The rules are intended to be sufficiently flexible to allow firms to implement quality control practices specific to the size, nature and scope of a particular firm's federal tax practice. In reality, of course, those quality controls will govern the entirety of a firm's tax practice.

Specific Competency Requirement

New Sec. 10.33 of Circular 230 simply provides a broad requirement that a practitioner must be competent to professionally perform the specific services that he or she has agreed to undertake for a client.

Practitioner Due Diligence Requirement when Relying on Others

Sec. 10.22 requires a Circular 230 practitioner to be diligent as to accuracy in all IRS dealings---including submission of documents, oral and written communications, and filing of returns, claims and amended returns.

That provision has been expanded to provide that a practitioner may not rely upon the work product of another person unless the practitioner uses reasonable care in engaging, supervising, training and evaluating the person--taking into account the relationship between the practitioner and the person.

This is in addition to specific requirements addressing reliance on another tax practitioner contained in Sec. 10.3.1 pertaining to Standards with Respect to lax Returns, Documents, Affidavits, and Other Papery (this includes the necessary confidence threshold and disclosure requirements for advising on tax positions) and (proposed revised) Sec. 10.37 pertaining to written advice. Each of those sections contain their own reliance requirements.

Expanded and Revised Supervisory Responsibility Requirements

Sec. 10.36 was initially promulgated in December 2004 in conjunction with the Covered Opinion writ ten advice rules (now proposed to be repealed). It required that persons with principal authority and responsibility For oversight of a firm's practice of providing advice on tax matters must take reasonable steps to ensure that appropriate procedures exist For all members, associates and employees of a firm to comply with those written advice provisions.

The 2011 changes to Circular 230 added similar responsibilities For those with principal authority for a firm's practice of preparing returns, amended returns, claims For refund and other documents to submit to the IRS.

Sec. 10.36 is revised to provide that persons with principal authority over a firm's practice governed by Circular 230--including the provision of advice on federal tax matters and the preparation of returns, amended returns, claims of refund and other documents for submission to the IRS must take reasonable steps to ensure their firm has adequate procedures .for all members, associates and employees for purposes of Circular 230 compliance (as applicable). The practitioner with principal responsibility is also required to take prompt action to correct noncompliance where the practitioner knows or should know that one or more members, associates or employees of the firm have engaged in a pattern of noncompliance with Circular 230.

The supervisory responsibility standard requires a finding of willfulness, recklessness or gross incompetence in determining if a violation exists, and also requires an absence of reasonable steps taken by those responsible for the tax practice where there is a pattern or noncompliance with Circular 230 by persons associated with the firm. However, without documented policies and procedures, it's difficult imagine how one would assert that they in Fact exist, let, alone demonstrate that efforts were made to ensure compliance.

Given these developments, firms and tax professionals are advised to visit--with renewed seriousness--their policies and practices regarding the firm's compliance with Circular 230 requirements.

Kip Dellinger, CPA is a senior tax partner at Cooper, Moss, Resnick, Klein & Co., LLP. You can reach him at
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Title Annotation:regulatoryupdate
Author:Dellinger, Kip
Publication:California CPA
Date:Jan 1, 2013
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