Today, the IRS is issuing a notice proposing major modifications to Circular 230.
The three proposals that will most likely significantly impact law firms and accounting firms would:
(1) eliminate section 10.35 (the rules relating to covered opinions, which rules were the impetus for the Circular 230 legend that appears on much written work product)
(2) expand the requirements for written advice under section 10.37, which requirements would apply to all written advice and
(3) require that "the practitioner with principal authority for overseeing a firm's federal tax practice take reasonable steps to ensure the firm has adequate procedures in place for purposes of complying with Circular 230."
Other proposed changes include the addition of a general competence standard and clarification that the "Office of Professional Responsibility has exclusive responsibility for matters related to practitioner discipline."
The changes relating to written advice reflect practitioner concerns expressed since the implementation of these rules and are explicitly consistent with Executive Order 13563 which requires the removal or modification of regulations that are "outmoded, ineffective, insufficient or too burdensome." Intended to complement the best practices and due diligence requirements set forth in sections 10.33 and 10.22 respectively, proposed section 10.37 "requires, among other things, that the practitioner base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance, and consider all relevant facts and circumstances that the practitioner knows or should know."
The proposed regulations also include an affirmative obligation to determine relevant facts. Further, the proposed regulations impose a heightened level of scrutiny with regard to whether a practitioner has met the requirements of section 10.37 "when the practitioner knows or has reason to know that the written advice will be used in promoting, marketing, or recommending an investment plan or arrangement a significant purpose of which is the avoidance or evasion of any tax imposed by the Internal Revenue Code." The basic standard of review of compliance would be a reasonableness standard, which would take into account all facts and circumstances.
The Notice also imposes obligations on firm management to ensure compliance with all of Circular 230, not just tax return preparation practice. The Notice indicates: "Firm responsibility is a critical factor in ensuring high quality advice and representation for Taxpayers. Accordingly, Treasury and the IRS conclude that firm management with principal authority and responsibility for overseeing a firm's practice governed by Circular 230 should be responsible for establishing procedures to ensure compliance with all provisions of Circular 230."
The changes proposed by this Notice should be beneficial for all stakeholders: taxpayers, practitioners and the IRS.
Read the notice.
For more information about these proposed changes, please contact Diana L. Erbsen.