Dealing with Conflicts of Interest and Related Issues in 9100 Situations. Standards of Tax Practice Committee ABA Tax Section Washington, DC, May 6

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1 Dealing with Conflicts of Interest and Related Issues in 9100 Situations Standards of Tax Practice Committee ABA Tax Section Washington, DC, May 6

2 Panelists Fred F. Murray, Grant Thornton LLP, Washington, DC. (Moderator) Ashton "Hap" Trice, Branch Chief (Branch 2), Office of the Associate Chief Counsel (Procedure and Administration), Internal Revenue Service Julian Y. Kim, Latham & Watkins LLP, Washington, DC. Christopher S. Rizek, Caplin & Drysdale Chartered, Washington, DC 2

3 Agenda Background (for those who did not attend Part I) Scenario 1 Play the audit lottery? Scenario 2 No, but what do we tell the IRS? Scenario 3 You want that in writing? Scenario 4 Physician, heal thyself? Scenario 5 My affidavit? Scenario 6 Close enough to

4 Background to 9100 Relief Treas. Reg , 2 and 3 provide for extensions of time to make an election Treas. Reg (c) IRS discretion to grant a reasonable extension of time for making an election Treas. Reg Automatic extensions of time for regulatory and statutory elections Treas. Reg Non-Automatic extensions of time for regulatory elections that do not meet the requirements of Treas. Reg (often what is meant by 9100 Relief ) Specific relief for certain elections may be available (see slides/handouts for Part I) 4

5 Background to 9100 Relief 9100 Relief has three general requirements Taxpayer must satisfy at least one acted reasonably and in good faith factor Reliance on a qualified tax professional Relief sought before the IRS discovers the failure Taxpayer will be deemed to have not acted reasonably and in good faith if taxpayer: Seeks to alter a return position subject to an accuracy-related penalty Made an informed decision to not make the election Relief must not prejudice the interests of the government 9100 Relief requirements/procedures emphasize transparency Affidavits of the taxpayer, other individuals (including advisors) who know about the events leading to the failure to make the election and the discovery thereof Additional requirements for reliance on a qualified tax professional to show reasonable action and good faith 5

6 Scenario 1 Play the audit lottery? Issue: Why bother curing a missed election (particularly if a number of years have passed)? Facts: You are reviewing a return position that the taxpayer/client plans to take when it files its return next month. The position relates to a transaction that occurred three years ago and requires that the client had made a valid election with the return for the year of the transaction. You discover that the election was not made, and the client asks why this is an issue because it has filed consistent with the election having been made (i.e., no abuse) and it s only a piece of paper. 6

7 Scenario 1 Play the audit lottery? Taxpayer penalties IRC 6662(b)(1) Underpayments attributable to [n]egligence or disregard of rules or regulations IRC 6662(b)(2) Underpayments attributable to [a]ny substantial understatement of income tax IRC 6664(c)(1) Reasonable cause defense if taxpayer had reasonable cause for the underpayment and acted in good faith 7

8 Scenario 1 Play the audit lottery? IRC 6694 tax preparer penalties Penalty on tax return preparers (including nonsigning preparers) who prepare a return or claim for refund with respect to which an understatement of liability is due to an unreasonable position Requires substantial authority, reasonable basis (if disclosure), or more likely than not (for tax shelters and many reportable transactions) IRC 6694(b) enhanced penalties for willful or reckless conduct Proposed Circ (a) - Violation if through willful or reckless conduct, or gross negligence, practitioner signs or advises with respect to a return that contains a position that Lacks a reasonable basis; Is an unreasonable position (see above); or Is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of rules or regulations by the practitioner as described in section 6694(b)(2) of the Code. FIN 48 Schedule UTP 8

9 Scenario 2 No, but what do we tell the IRS? Issue: What do you do when the taxpayer is seeking 9100 Relief, but a return that will be affected by the missed election must be filed before relief is granted? Facts: Same as Scenario 1, but the taxpayer/client has decided to seek (and may already have filed for) 9100 Relief. Filing a return without the benefit of the election would significantly increase the client s tax liability. The client would much rather file as if a valid election had been timely made, in the expectation that 9100 Relief will be granted. 9

10 Scenario 2 No, but what do we tell the IRS? Are Scenarios 1 and 2 different? Guidance regarding as if returns Taxpayer penalties IRC 6662(b)(1) and (2) IRC 6664(c)(1) IRC 6694 tax preparer penalties: Substantial authority, reasonable basis (if disclosure), more likely than not ( tax shelters and many reportable transactions) Proposed Circ (a) Violation if willful or reckless conduct, or gross negligence Lacks a reasonable basis, is an unreasonable position 10

11 Scenario 3 You want that in writing? Issue: The taxpayer wants written assurance that it will get 9100 Relief for a missed election. Facts: Same as Scenario 2, but the taxpayer/client wants, in writing, assurance that it is entitled to 9100 Relief and will not be subject to a penalty for filing an as-if return if 9100 Relief is not granted. Furthermore, the client (an SEC registrant) intends to provide your opinion to its financial auditor in an effort to avoid having to set up a tax reserve. 11

12 Scenario 3 You want that in writing? Circ Requirements for covered opinions If the practitioner opts-out of the rules, the writing must state that it cannot be used for penalty protection Circ Requirements for other written advice A practitioner cannot opt-out of Both provide that written advice cannot be based on unreasonable assumptions or representations, and must consider all relevant facts 12

13 Scenario 4 Physician, heal thyself? Issue: Should an advisor represent a client seeking 9100 Relief when the advisor or the advisor s partner may have been responsible for the client s failure to make the election? Facts: Your taxpayer/client has missed an election and must seek 9100 Relief. The client asks that you represent the client in the 9100 Relief request, but you know that you or one of your partners may have been responsible, at least in part, for the client s failure to make a timely election. 13

14 Scenario 4 Physician, heal thyself? ABA Model Rule 1.7 (Conflicts of Interest: Current Clients) (a) Except as provided in paragraph (b), a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: (1) the representation of one client will be directly adverse to another client, or (2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer. (b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if: (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client; (2) the representation is not prohibited by law; (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and (4) each affected client gives informed consent, confirmed in writing. 14

15 Scenario 4 Physician, heal thyself? Circ Conflicting interests. (a) Except as provided by paragraph (b) of this section, a practitioner shall not represent a client before the Internal Revenue Service if the representation involves a conflict of interest. A conflict of interest exists if (1) The representation of one client will be directly adverse to another client; or (2) There is a significant risk that the representation of one or more clients will be materially limited by the practitioner s responsibilities to another client, a former client or a third person, or by a personal interest of the practitioner. 15

16 Scenario 4 Physician, heal thyself? Circ Conflicting interests. (b) Notwithstanding the existence of a conflict of interest under paragraph (a) of this section, the practitioner may represent a client if (1) The practitioner reasonably believes that the practitioner will be able to provide competent and diligent representation to each affected client; (2) The representation is not prohibited by law; and (3) Each affected client waives the conflict of interest and gives informed consent, confirmed in writing by each affected client, at the time the existence of the conflict of interest is known by the practitioner. The confirmation may be made within a reasonable period of time after the informed consent, but in no event later than 30 days. (c) Copies of the written consents must be retained by the practitioner for at least 36 months from the date of the conclusion of the representation of the affected clients, and the written consents must be provided to any officer or employee of the Internal Revenue Service on request. 16

17 Scenario 5 My affidavit? Issue: Are you, as the client s former advisor, required to submit an affidavit in support of a former client s request for 9100 Relief, and if so, what should it contain? Facts: You receive a call from a now-former client s new outside counsel notifying you that the former client is requesting 9100 Relief for a missed election and that the former client is required to submit your affidavit as part of the 9100 Relief request. New counsel informs you that the IRS has not yet initiated an audit of the affected returns, but that the former client intends to claim that it reasonably relied on a qualified tax professional (you) and was not informed of the need to make the election. 17

18 Scenario 5 My affidavit? Treas. Reg (e) affidavit requirements The taxpayer, or the individual who acts on behalf of the taxpayer with respect to tax matters, must submit a detailed affidavit describing the events that led to the failure to make a valid regulatory election and to the discovery of the failure. When the taxpayer relied on a qualified tax professional for advice, the taxpayer's affidavit must describe the engagement and responsibilities of the professional as well as the extent to which the taxpayer relied on the professional. The taxpayer must submit detailed affidavits from the individuals having knowledge or information about the events that led to the failure to make a valid regulatory election and to the discovery of the failure. These individuals must include the taxpayer's return preparer, any individual (including an employee of the taxpayer) who made a substantial contribution to the preparation of the return, and any accountant or attorney, knowledgeable in tax matters, who advised the taxpayer with regard to the election. An affidavit must describe the engagement and responsibilities of the individual as well as the advice that the individual provided to the taxpayer. 18

19 Scenario 5 My affidavit? Same issues as Scenario 4 if you or your partner is representing the taxpayer seeking 9100 Relief. Use of affidavit in subsequent litigation, by OPR, by local bar Circ Diligence as to accuracy Circ Violations [of Circ. 230] subject to sanction Prop. Circ (a) Tax returns ABA Model Rule 1.16(d) (Declining or Terminating Representation) (d) Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client's interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled and refunding any advance payment of fee or expense that has not been earned or incurred 19

20 Scenario 6 Close enough to 9100 Issue: What additional issues are raised by other automatic or expedited relief provisions or procedures that are similar to 9100 Relief? 9100 Relief - Taxpayer must show that it acted reasonably and in good faith This can require nothing more than requesting relief before the IRS begins an audit and establishing through affidavits that the taxpayer had not previously made an informed decision to not make the election 20

21 Scenario 6 Close enough to 9100 Other forms of relief outside of 9100 Relief Taxpayer may be required to show that the failure was due to reasonable cause (and not willful neglect) Treas. Reg (d)-1(c)(1) (dual consolidated loss) In general, the taxpayer must demonstrate that it exercised ordinary care and prudence in meeting its tax obligations but nonetheless did not comply with the prescribed duty within the prescribed time Treas. Reg (a)-8(p) (gain recognition agreement) Whether the failure was due to reasonable cause and not willful neglect will be determined by the Director after considering all the facts and circumstances 21