Circular 230

1. Circular 230 Circular 230 Disclaimer Any tax advice contained in the body of this presentation was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

2. Background and Context • Do we need the cover page “disclaimer?” • Familiarity with all of Circular 230 • Complexity • History • Obvious ethical issues • Statements on Standards for Tax Services (SSTSs)

3. General Information • US Treasury Regulation – 31 CFR Part 10 • Regulates practice before the IRS of CPAs, Attorneys, Enrolled Agents, Enrolled Actuaries, and others • Sanctions: suspension or disbarment from practice before the IRS; public censure; fines • States may have similar standards

4. Administration • Administered by the IRS Office of Professional Responsibility (OPR) (Previously Director of Practice) • OPR works with the Office of Tax Shelter Analysis • Very limited appeal rights

5. Definitions • “Certified Public Accountant” - “Any person who is duly qualified to practice as a Certified Public Accountant in any state, territory, or possession of the [US], including a commonwealth, or the District of Columbia. ” (Section 10.2(b))

6. Definitions • “Practice before the [IRS]” - “All matters connected with a presentation to the [IRS] or any of its officers or employees relating to a taxpayer's rights, privileges, or liabilities under laws or regulations administered by the [IRS]. Such presentations include, but are not limited to, preparing and filing documents, corresponding and communicating with the [IRS], and representing a client at conferences, hearings, and meetings.” (Section 10.2(d))

7. Who May Practice (§10.3) • Attorney, CPA, Enrolled Agent, or Enrolled Actuary not currently under suspension or disbarment from practice before the IRS • Filing with the IRS a written declaration of qualification, and authority to represent the party • Applies to CPAs in both public practice and industry (SSTSs Also)

8. Furnishing Information(§10.20) • Prompt submission of records or information • Privileged records/information • Prompt notification when unavailable • Source of conflict with agents

9. Knowledge of Client’s Omission (§10.21) • Non-compliance with rule or law • Error or omission • Prompt notification of problem • Notification must include consequences • Exercise professional judgment • See also SSTS Nos. 6 and 7

10. Question In 2003, taxpayer treated its exchange of stock for an installment note as a tax-free reorganization Sec. 368(a)(1)(A) statutory merger. In preparing the 2004 tax return, Alice, a CPA, looked at the 2003 return, which did not show evidence of an issue, but she did not review any underlying documentation. Does she have an ethical problem?

11. Diligence as to Accuracy (§10.22) • Exercising general due diligence in preparing or approving tax returns and other documents • Applies to oral or written representations to Treasury or client • Reliance on others: reasonable care including nature of relationships • See also §10.34(c) and SSTS No. 3

12. Question Pam, a CPA, was engaged to prepare a new client’s personal income tax returns. As part of the information provided to Pam was a Form 1099-R (Distributions from Pensions, Annuities, etc.) showing a substantial taxable distribution. The client indicated to Pam that the 1099 was incorrect and the distribution was NOT taxable. What should Pam do?

13. Prompt Disposition of Pending Matters (§10.23) • A Practitioner may not unreasonably delay the prompt disposition of any matter pending before the IRS • Source of conflict with agents

14. Question George, a CPA, canceled five conferences with Revenue Agent Donald within five months. In each case, on the day of the conference, before normal business hours, George left a telephone message on Revenue Agent Donald’s answering machine stating that he had to cancel due to “scheduling problems” or “prior commitments.” What are the Circular 230 issues?

15. Return of Client’s Records (§10.28) • Promptly returning client records • Disputes over fees • Check applicable state laws • Source of many client inquiries • See also AICPA Rule 501-1

16. Best Practices for Tax Advisors (§10.33) • Applies to providing advice and the preparation of a submission to IRS • Clear client communications • Importance of conclusions • Acting fairly and with integrity • Procedures to ensure best practices for tax advisors • Effective after 6/20/05

17. Key “Best Practice” Steps • Establishing the facts • Determining relevancy • Evaluating reasonableness of assumptions or representations • Relating applicable law to relevant facts • Arriving at conclusion supported by law and facts

18. Comments on “Best Practices” • IRS has indicated §10.33 is “aspirational” and applies to any oral or written advice • Similar to SSTS Interpretation No. 1-2, “Tax Planning” • Reasonable steps are expected • Factors in determining malpractice? • Relevant to the exposure of Proposed SSTS No. 9, Quality Control

19. Practical Considerations • Checklists • Engagement Letters (inc. responsibilities between practitioner and client staff) • Procedures concerning retention and acceptance of clients, work assignments, and technical matters • Written memo of facts where oral advice is given (see also SSTS No. 8) • CPE and self-assessment

20. Question Under relevant tax law, the tax consequences of a leasing transaction depend on whether the property to be leased is reasonably expected to have a residual value of 15 percent of its value at the beginning of the lease. The client has made the estimate of the residual value. Can the member rely on the client’s estimate in tax planning for the client?

21. Tax Return Position Standards (§10.34) • Standards for advising with respect to tax return positions and for preparing or signing returns • Realistic possibility of success • Not frivolous with disclosure • Advising clients on potential penalties

22. Definitions • RPOS: “Realistic possibility of being sustained on its merits if a reasonable and well informed analysis of the law and the facts by a person knowledgeable in the tax law would lead such a person to conclude that the position has approximately a [1/3], or greater, likelihood of being sustained on its merits” • Frivolous: “patently improper”

23. Question A statute is passed requiring the capitalization of certain expenditures. Your client believes, and you concur, that to comply fully, the client will need to acquire new computer hardware and software to implement a number of new accounting procedures. You and the client agree that the costs of full compliance will be significantly greater than the resulting increase in the tax due under the new provision. As a result of these considerations, your client makes no effort to comply and wants you to prepare and sign the return on which the new requirement is ignored. Can you sign the tax return?

24. Question The facts are the same as the previous question except that the client made a good-faith effort to comply with the law by calculating an estimate of expenditures to be capitalized under the new provision. Can you sign the tax return?

25. Key Considerations • Appropriate authority: Reg. Sec. 1.6662-4(d)(3)(iii) may be taken into account for purposes of this analysis • Audit lottery • State rules • See also SSTS No. 1 and Interpretations 1-1 and 1-2

26. Relying on InformationFurnished by Clients • Generally, may rely in good faith without verification • Cannot ignore implications of known information • Must make reasonable inquiries re: incorrect, inconsistent or incomplete information • Source of many OPR referrals • See also SSTS No. 3

27. Requirements forCovered Opinions (§10.35) • Targeted to apply to “tax shelters” as defined under old regulations • Principled approach vs. details • Effective after 6/20/05 • Applies to formal and informal writtenadvice, including emails, memos, faxes, and tax opinion letters • See disclaimer on presentation cover page

28. Checklist • Is the advice a covered opinion? • Does it fall within a covered opinion category? • Is there an exception? • If there is not an exception, can you “opt out” (and, if so, how)? • If the advice is a covered opinion, what are the requirements? • Substance • Form • If it is not a covered opinion, what are the requirements?

29. Covered Opinions: Definition • Any written tax advice on: • Listed transactions (including substantially similar transactions) • Transactions with “the principal purpose” to avoid or evade Federal tax • Transactions with “a significant purpose” to avoid or evade Federal tax that is ALSO: • A reliance opinion, or • A marketed opinion, or • Subject to conditions of confidentiality, or • Subject to contractual protection

30. Excluded Advice A covered opinion does not include: • Oral advice • Preliminary advice • An applicable significant purpose transaction that: • Concerns the qualification of a qualified Plan • Is a state or local bond opinion • Is included in documents required to be filed with the SEC

31. Excluded Advice (Cont.) • “Post-filing” advice • Advice provided by an employee to an employer for purposes of determining the employer’s tax liability • “Negative” advice and does not reach any conclusion as to confidence level

32. Reliance Opinions • Definition: • A significant purpose of the transaction is to avoid or evade Federal tax, and • Advice concludes that it is at Least more likely than not(MLTN) that one or More significant Federal tax issues will be resolved in the taxpayer’s favor • May opt out of covered opinion status, but standards for other written tax advice under §10.37 would apply

33. Opt Out Requirements • Prominent disclosure in the written advice • Written advice not intended to be used to avoid taxpayer penalties • Written advice cannot be used to avoid taxpayer penalties

34. Opt Out Issues • Do small firm practitioners issue covered opinions? • Should practitioners put disclaimers in all written advice including emails? • Is such a practice pointless? • Is such a practice a disservice to clients? • What are the practitioner risks?

35. Question In the earlier question concerning the capitalization of certain expenditures, you e-mail your analysis to your client recommending that the client make a good-faith effort to comply with the law by calculating an estimate of expenditures to be capitalized under the new provision. The e-mail contains the standard disclaimer language. The IRS subsequently audits the tax return and proposes both a deficiency and a section 6662 penalty. Can the client argue good faith and reasonable cause abatement of the penalty based on reliance on a tax advisor’s opinion?

36. What Must You Comply With for a Covered Opinion? • Exercise diligence as to facts, assumptions and representations • Apply law to facts • Evaluate significant Federal tax issues and reach a conclusion on each • Or state that such conclusion(s) cannot be reached • Reach overall conclusion • Or state that such conclusion cannot be reached • Provide necessary disclosures

37. Limited Scope Opinions • Definition: • A covered opinion that does not address ALL significant Federal tax issues • Requirements: • Practitioner and taxpayer agree on opinion’s scope and limited use for penalty protection • Not a listed transaction, principal purpose transaction or marketed opinion • Contains prominent limited scope disclosures

38. Prominently Disclosed • If disclosure is required, must be prominent or “readily apparent” • The notice must be in a separate section (but not in a footnote) of the correspondence • “Fine-print” notices won’t work • Typeface used must be at least the same size as the typeface used in any discussion of facts or law

39. Covered Opinions: Other Issues • Can’t take into account audit lottery • Competence to provide opinion • Knowledgeable in relevant law • May rely on others with disclosure

40. Covered Opinions:Other Disclosures • Relationships, compensation arrangements, etc. • If marketed opinion, “specific identification” and need for “independent opinion” • If limited scope opinion, must identify all issues for which practitioner assumed a favorable resolution • Failure to reach MLTN disclosures

41. Procedures to Ensure Compliance (§10.36) • Reasonable steps to ensure the firm has adequate procedures in effect for all purposes of complying with §10.35 • Individual with “authority and responsibility” • Subject to discipline for failing to comply • Effective after 6/20/05 • See also Proposed SSTS No. 9, Quality Control

42. Requirements for Other Written Advice (§10.37) Written advice that is not a covered opinion must not: • Fail to consider all relevant facts that the practitioner knows or should know • Unreasonably rely on findings, representations, statements, or agreements of taxpayer or any other person

43. Requirements for Other Written Advice (§10.37) (Cont.) Written advice that is not a covered opinion must not: • Rely on unreasonable factual or legal assumptions • Take into account the audit lottery, that the issue will not be raised on audit, or that the issue will be resolved through settlement

44. Matters Affected By §10.37 • Client letters, memos, emails, and other correspondence concerning Federal tax matters • Such matters include, i.e., personal and business income taxation and planning, estate/financial planning, and compensation/benefits planning

45. Compliance With §10.37 Factors to be considered in evaluating compliance with §10.37: • All facts and circumstances • Scope of engagement • Type and specificity of the advice sought by the client • Heightened standard of care may apply to outside use

46. Ramifications of §10.37 • Necessary to communicate heightened standard to firm members and clients • Effective after 6/20/05 • See also SSTS Interpretation 1-2, Tax Planning

47. Sanctions (§10.50) • Censure (public reprimand) • Suspension • Disbarment • Conditions may be imposed for re-instatement • JOBS Act provides for monetary penalties (individual or firm) • Automatic AICPA sanctions may follow

48. Violation of Regulations(§10.52) • Willful • Reckless or through gross incompetence • Effective after 6/20/05 • See also Proposed SSTS No. 9, Quality Control

49. AICPA Statements on Standards for Tax Services • SSTS No. 1, Tax Return Positions • Interpretation 1-1, “Realistic Possibility Standard” • Interpretation 1-2, “Tax Planning” • SSTS No. 2, Answers to Questions on Returns • SSTS No. 3, Certain Procedural Aspects of Preparing Returns

50. AICPA Statements on Standards for Tax Services (Cont.) • SSTS No. 4, Use of Estimates • SSTS No. 5, Departure From a Position Previously Concluded in an Administrative Proceeding or Court Decision • SSTS No. 6, Knowledge of Error: Return Preparation • SSTS No. 7, Knowledge of Error: Administrative Proceeding