Covered opinion rules withdrawn


Finding that the rules it implemented in 2004 regarding covered opinions were not justified by the additional costs of practitioner compliance, on Sept. 14 the IRS proposed revoking them and substituting a single, basic new standard governing all written tax advice (REG-138367-06).

Under current Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), Section 10.35 provides that, to issue a covered opinion, a tax practitioner must determine the facts, relate the facts to the law, evaluate the significant federal tax issues, reach a conclusion about each one, and reach an overall conclusion about the tax treatment of the transaction. Covered opinions include those concerning listed and substantially similar transactions, transactions principally intended to avoid or evade tax, marketed opinions, and those subject to confidentiality or contractual protection.

The opinion must assess the taxpayer’s likelihood of success on the merits of each significant federal tax issue considered in the opinion. In arriving at that conclusion, the practitioner cannot take into account the possibility that the return will not be audited or that the issue will not be raised or, if raised, will be resolved through settlement.

Except for opinions issued with respect to listed transactions or transactions with the principal purpose of avoiding or evading taxes, practitioners can opt out of the requirements of Circular 230, Section 10.35, by prominently disclosing in the opinion that the advice is not intended or written to be used, and cannot be used, by the taxpayer to avoid tax penalties. Many practitioners include such language on every email and letter they send, whether or not the correspondence contains tax advice.

Proposed New Rules for Written Advice

Acknowledging that the covered opinion rules are complex and costly, interfere with client relationships, provide only minimal taxpayer protection, and afford insufficient benefits to justify the additional costs associated with compliance, the IRS has proposed revoking the covered opinion standards and substituting in their place one standard for all written advice.

Proposed Section 10.37 imposes an affirmative duty on practitioners to act reasonably. It provides that a practitioner must base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance on other advice and information, and consider all relevant facts that the practitioner knows or should know.

However, in evaluating the federal tax matter, a practitioner cannot take into consideration the low probability of audit or that an issue will not be raised on audit. But, unlike the current provisions governing covered opinions, a practitioner under the proposed provisions can take into account the possibility that an issue, if raised, will be resolved through settlement.

A practitioner would no longer have to fully describe the relevant facts and the application of the law to the facts in the written advice as now required under the covered opinion rules. Also, practitioners would no longer have to use the now-ubiquitous standard Circular 230 disclaimers.

The proposed rules also provide that a practitioner can rely on the advice of another practitioner if that advice is reasonable and the reliance is in good faith based upon all of the facts and circumstances. But a practitioner cannot rely on the advice of another practitioner when the practitioner knows that the other practitioner lacks the necessary qualifications, or that the other practitioner has a conflict of interest.

In determining whether the proposed written advice standards have been complied with, the IRS will apply a reasonableness standard, considering all the facts and circumstances. With respect to a marketed opinion or other arrangement where a significant purpose of tax avoidance or evasion exists, the IRS will use a heightened standard of review.

The effective date of the proposed written advice provisions will be when they are published as final.

The revocation of the covered opinion provisions in Circular 230 is long overdue and welcome. However, the proposal does not alter the requirement of practitioners to exercise due diligence in determining the correctness of oral or written representations made by the practitioner to the IRS or to the client. Hopefully, the proposed written advice rules will have the beneficial effect that motivated the IRS to revoke the covered opinion rules. At the very least, it would remove the indiscriminate Circular 230 disclaimers now used by practitioners on all written and electronic communications.

This column is adapted from the author’s article in the Tax Insider e-newsletter for Oct. 11, 2012. To subscribe to the Tax Insider for free, go to .

By Thomas R. Wechter, J.D., LL.M. (Tax), ( ) a partner with Duane Morris LLP in the Chicago office.


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