Circular 230 Compliance: A Guide For the Non-Tax Attorney

Transcription

1 Reproduced by permission Colorado Bar Association, 34 The Colorado Lawyer 19 (November 2005). All rights reserved. Circular 230 Compliance: A Guide For the Non-Tax Attorney by Steven M. Weiser Until recently, the provision of routine tax advice, and the sufficiency of such advice, was largely governed only by the Colorado Rules of Professional Conduct. As a result of the passage of the American Jobs Creation Act and amendments to Treasury Department Circular 230, tax advice is now subject to a host of new requirements that not only expose the attorney to greater liability, but also serve to greatly expand the scope of the attorney s work. Despite the complexities of the Internal Revenue Code ( Code or IRC ), tax advice is often provided by lawyers who would not consider themselves experts in the area of federal taxation. Such advice frequently is limited to situations regularly encountered by lawyers during the course of their non-tax practice. For example, a litigator might advise a client concerning the taxation of a damage award received on account of personal physical injuries; a real estate lawyer may give advice concerning the tax consequences of a sale; a business advisor may recommend a particular form of entity through which a client will do business; or an estate planner may recommend the use of a credit-shelter trust to eliminate any estate tax liability. Federal taxation permeates so many areas of the law that it often seems that many attorneys dabble in it over the course of their careers. This may be changing, however, due to the Treasury Department s ( Treasury ) efforts to regulate the provision of tax advice through the recent revisions to Circular 230. This article is intended as a primer on Circular 230 for non-tax lawyers. It also serves as a followup to previously published articles. 1 All lawyers who provide tax advice should familiarize themselves with Circular 230. The penalties for failing to comply with the requirements imposed on the provision of tax advice are significant, ranging from disbarment, censure, or suspension from practicing before the Internal Revenue Service ( IRS ) to monetary penalties imposed on the practitioner or the practitioner s firm. Background of Circular 230 The United States Code authorizes the Secretary of the Treasury ( Secretary ) to regulate the practice of tax representatives before Treasury. 2 Pursuant to this grant of authority, the Secretary has published regulations in Circular 230. These regulations have been amended from time to time to address a number of issues. In October 2004, President George W. Bush signed the American Jobs Creation Act of 2004 ( Jobs Act ). 3 Among its many provisions, the Jobs Act added 31 U.S.C. 330(d), which grants the Secretary the authority to impose standards applicable to the rendering of tax advice with respect to any entity, plan, or arrangement that the Secretary believes to have a potential for tax avoidance or evasion. The Jobs Act merely codified what the Secretary had already expressed an intention to do; that is, regulate the issuance of tax advice with regard to tax shelter transactions. 4 There is little doubt that the Secretary s intent was motiva ted by the recent proliferation of abusive tax schemes. In December 2004, the Secretary adopted final regulations, establishing (1) aspirational standards of tax practice and (2) standards and requirements concerning the provision of tax advice. 5 The final regulations regulating the provision of tax advice became effective on June 20, The Jobs Act and final regulations represent the government s latest attempt to combat and curtail the use of abusive tax shelter transactions by ensuring that taxpayers are fully informed of the state of the law and the consequences of their actions, including their ability to avoid tax penalties. The final regulations provide detailed due diligence and mandatory drafting requirements for the issuance of certain forms of written tax advice. 7 These requirements have the potential to great- Steven M. Weiser, Denver, is a Member of Levin & Weiser, LLC (303) , sweiser@lw-law.com. This article is adapted from the chapter on Taxation from the forthcoming revised Colorado Attorney s Professional Liability Handbook, to be published by Colorado Bar Association Continuing Legal Education in January The Colorado Lawyer / November 2005 / Vol. 34, No. 11 / 29

2 30 Circular 230 Compliance November ly increase the cost and time burden associated with the preparation of written tax advice. The difficulty with the final regulations lies with the scope. The final regulations broadly define the types of written communications subject to the due diligence and drafting requirements. As a result, informal client communications or the provision of routine tax advice is likely to fall within the purview of the regulations. Many tax advisors will be seeking ways to ensure that their written tax advise satisfies one of the several exceptions to the final regulations so as not to become subject to the due diligence and drafting guidelines. Although IRS officials have publicly responded to practitioner concerns by reminding them to use common sense when interpreting the scope of the final regulations, 8 conscientious practitioners will be hesitant to rely on statements that contradict the express language of the published regulations. Penalty Avoidance Taxpayers often seek professional tax advice for tax penalty protection purposes. The Code imposes a 20 percent accuracy-related penalty for negligence and substantial understatements of tax and a 20 percent to 40 percent penalty for substantial valuation misstatements, as reported on a tax return. 9 However, these penalties can be avoided if, among other things, the taxpayer shows that there was a reasonable cause for the underpayment of tax or that the taxpayer acted in good faith with respect to the tax understatements. 10 Reasonable cause and good faith can be exhibited by relying on the advice of a professional (unless the taxpayer has reason to know that such reliance is misplaced). 11 In the past, when penalty avoidance was a concern, taxpayers often requested advice in the form of a formal tax opinion letter. For these individuals and their advisors, the final regulations and amendments adopted by the Jobs Act will have little impact as far as the scope and cost of legal work is concerned. Unfortunately, those taxpayers seeking routine advice for whom penalty protection is not a primary concern may now be forced to pay for a more extensive written analysis on a particular legal issue. The Covered Opinion The IRS struggled in its attempts to define the scope of advice that should be regulated. In proposed regulations issued in December 2003, the IRS adopted an extremely broad definition of a tax shelter opinion that would have included most forms of written tax advice, however formal or informal. 12 Although ultimately not adopted, the proposed regulations served as the basis for the approach taken in the final regulations. Circular (a) now states that a practitioner who provides a covered opinion must comply with comprehensive due diligence and drafting standards imposed by the final regulations. A covered opinion is any written advice (including electronic communications) provided by a practitioner concerning one or more federal tax issues arising from any of the following: 1) a transaction that is the same or is substantially similar to a listed transaction (a listed transaction opinion ); 2) any partnership, entity, plan, or arrangement, the principal purpose of which is the avoidance or evasion of federal tax (a principal purpose opinion ); or 3) any partnership, entity, plan, or arrangement, a significant purpose of which is the avoidance or evasion of federal tax, if the written advice provided is also (1) a reliance opinion; (2) a marketed opinion; (3) subject to conditions of confidentiality; or (4) is subject to contractual protection (a significant purpose opinion ). 13 Each category of covered opinion is described in the sections below. Listed Transaction Opinions From time to time, the IRS identifies transactions it believes are particularly abusive and not entitled to the favorable tax treatment claimed by the participants in these transactions. Such transactions are known as listed transactions and are generally identified through IRS published guidance; they also can be found through the IRS s website. 14 Advice provided with respect to any listed transaction or any substantially similar transaction is subject to the due diligence and drafting guidelines described below. It can be difficult to decide when a transaction is substantially similar to a listed transaction. Although the final regulations failed to define this standard, practitioners can look elsewhere for clarification. The Treasury Regulations concerning listed transactions provide that a transaction will be deemed substantially similar if it is expected to produce the same tax consequences as a listed transaction and either has similar facts or is based on a tax strategy similar to that adopted in the listed transaction. 15 Listed transactions often involve large dollar amounts and highly questionable tax strategies. If an advisor believes he or she may have encountered a listed transaction, that advisor should consult the IRS website and published guidance. Alternatively, the advisor can consult with a colleague who is well versed in the listed transaction regulations and can provide assistance. Principal Purpose Opinions When the final regulations were first published, Treasury failed to identify when a transaction has a principal purpose to avoid or evade tax. This failure was problematic because it could be argued that several legitimate tax strategies are undertaken for the principal purpose of minimizing taxes. For example, the decision to form an S corporation instead of a partnership may have occurred for the principal purpose of minimizing self-employment taxes. When the final regulations were initially published, it was unclear whether tax avoidance would equate to tax minimization. Fortunately, shortly before the final regulations were to become effective, Treasury provided some modifications. A partnership, entity, plan, or arrangement has as its principal purpose tax avoidance or evasion, if that purpose exceeds any other purpose for undertaking the transaction. 16 However, the principal purpose is not tax avoidance or evasion if the partnership, entity, plan, or arrangement claims tax benefits in a manner consistent with a statute or congressional purpose. 17 This exception is virtually identical to that contained in the Treasury Regulations for the accuracy-related penalties, which provide examples of entities, plans, or arrangements whose tax benefits are consistent with a statute or congressional intent. 18 These examples include, but are not limited to: 1) purchasing and holding tax-exempt obligations (for example, municipal bonds); 2) taking accelerated depreciation in accordance with the accelerated cost recovery system established in IRC 168; 3) establishing a qualified retirement plan; or 30 / The Colorado Lawyer / November 2005 / Vol. 34, No. 11

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4 32 Circular 230 Compliance November 4) claiming tax benefits by reason of an election to be taxed as an S corporation. 19 Other examples might include a noncustodial parent claiming a child as a dependent on a tax return pursuant to an agreement with the custodial parent (and reported on IRS Form 8332), or an individual undertaking a plan to make annual gifts of $11,000 to various persons who are exempt from the federal gift tax pursuant to IRC 2503(b). If it is determined that the written advice is not a principal purpose opinion, the lawyer still needs to determine whether the advice is a significant purpose opinion. Significant Purpose Opinions Most practitioners should familiarize themselves with significant purpose opinions. Unless the lawyer takes steps to opt out of the rules that follow or the advice is specifically excluded from these rules, routine tax advice is likely to fall into this category of covered opinion and often will be subject to the strict due diligence and drafting guidelines described below. A difficulty with this type of opinion lies in the fact that Treasury has not defined significant purpose, except to say that a transaction might have tax avoidance or evasion as a significant purpose, even if it does not have tax avoidance or evasion as its principal purpose. 20 As a result, a literal reading of the final regulations might lead the practitioner to conclude that although written advice to form an S corporation instead of a partnership is not a principal purpose opinion, it could certainly be deemed a significant purpose opinion. It is important to note that the Secretary did not include as an exception to the significant purpose opinion definition any partnership, entity, plan, or arrangement that claims tax benefits in a manner consistent with a statute and congressional purpose. This is curious because it would seem that if this exception applies where avoidance is the principal purpose for the transaction, the exception surely should apply where tax avoidance was merely a significant purpose for the transaction. It is hoped that Treasury will see the failure in this logic and extend the availability of this exception to significant purpose opinions as well. Reliance Opinions: There are four forms of significant purpose opinions, each of which constitutes a covered opinion. Because of its broad definition, the first and most important significant purpose opinion is the reliance opinion. A reliance opinion is advice that concludes at a confidence level of at least more likely than not (a greater than 50 percent likelihood) that one or more significant Federal tax issues would be resolved in the taxpayer s favor. 21 Without a proper definition of significant purpose, it is now easy to understand how routine tax advice could fall under the definition of a reliance opinion. Fortunately, Treasury gave practitioners some ways out of this predicament. Written advice, other than advice satisfying the definition of either listed transaction opinions or principal purpose opinions, will not be treated as a reliance opinion if the practitioner prominently discloses in the written advice that it was not intended or written to be used, and that it cannot be used, for purposes of avoiding tax penalties. 22 The fol- 32 / The Colorado Lawyer / November 2005 / Vol. 34, No. 11

5 2005 Circular 230 Compliance 33 lowing is a suggested form of this disclosure: U.S. TREASURY DEPT. CIRCULAR 230 NOTICE: Unless expressly indicated, any U.S. federal tax advice included in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding U.S. federal taxrelated penalties or (ii) promoting, marketing or recommending to another party any tax-related matter addressed herein. The inclusion of this disclosure allows practitioners to opt out of the due diligence and drafting guidelines adopted by the final regulations for reliance opinions. The concern among practitioners with this type of disclosure is the impact it may have on taxpayers and the potential for eroding confidence in their tax advisors and the advice provided. In order for the disclosure to be prominent, it must be readily apparent to the reader. 23 Prominence will be determined based on the facts and circumstances surrounding the advice including, but not limited to, the sophistication of the taxpayer and the length of the written advice. 24 The final regulations state that at a minimum, the disclosure should be in a separate section, not in a footnote, and in a typeface that is the same size or larger than the typeface used for any discussion of facts or law in the written advice. 25 Many law firms have decided to incorporate opt-out disclosures into most of their correspondence, including all s. These firms would prefer using these blanket disclosure procedures rather than requiring each lawyer to make a determination as to whether a particular written communication is subject to the due diligence and drafting guidelines. This occurs despite the fact that the IRS has stated its dissatisfaction with such blanket procedures. 26 Marketed Opinions: The second form of significant purpose opinion that also will constitute a covered opinion is the marketed opinion. Written advice is a marketed opinion if the lawyer knows or has reason to know that the advice will be used by another person (excluding persons associated with the lawyer s firm) in promoting, marketing, or recommending a partnership, entity, plan, or arrangement to one or more taxpayers. 27 The definition of a marketed opinion may have a greater scope than initially intended. Consider the lawyer who is assisting in the formation of a limited liability company ( LLC ). The lawyer may have provided written advice to one member of the LLC, indicating that income passes through the business entity and is only included and taxed as part of the member s income. This advice may have as a significant purpose the avoidance of tax, and is more likely than not correct. Now consider the outcome if the lawyer has reason to believe that this advice may be shared with other taxpayers contemplating membership in that LLC. This could cause the written advice to constitute a marketed opinion. The final regulations contain opt-out provisions similar to those in place for reliance opinions. Except in cases in which the advice is a listed or principal purpose opinion, the advice will not be considered a marketed opinion if the written advice discloses the following: KENNEY & KALL MEDIATION SERVICES, LLP (303) Providing Colorado attorneys with professional mediation, arbitration, and special master services since January 1, Nothing but good can result from an exchange of information and opinions between those whose circumstances and morals admit no doubt of the integrity of their views. Thomas Jefferson to Elbridge Gerry, Pat Kenney Chuck Kall The Colorado Lawyer / November 2005 / Vol. 34, No. 11 / 33

6 34 Circular 230 Compliance November 1) it is not intended or written to be used for the purpose of avoiding tax penalties; 2) the advice was written to support the promotion or marketing of the matter addressed by the advice; and 3) the taxpayer should seek advice concerning the matter from an independent tax advisor. 28 Many firms are using a disclosure similar to the one presented above in hopes that it will also satisfy the opt-out rules for marketed opinions. Where the advice would otherwise constitute a marketed opinion, the disclosure may need to be adjusted to reflect items (2) and (3) above. The prominence of the disclosure must meet the same requirements described for reliance opinions. 29 Confidential Transaction Opinions: Written advice is subject to conditions of confidentiality when limitations are placed on the advice recipient s ability to disclose the tax treatment or structure of the transaction to others, and such limitations protect the confidentiality of the lawyer s tax strategies. 30 It is irrelevant that the limitations imposed may not be legally enforceable. 31 These forms of tax advice often are used by firms marketing a particular tax strategy the firms consider proprietary information, although the proprietary claim alone may not be a limitation on the recipient s ability to disclose the information. Contract Protection Transaction Opinions: The final form of significant purpose opinion is one that offers the client a full or partial refund of fees if all or part of the intended tax consequences addressed in the advice are not realized, or if the fees paid are contingent on the realization of tax benefits from the transaction. 32 The determination of whether a fee is refundable or contingent will be based on all facts and circumstances, including the right to reimbursement of any amounts the parties have not designated as fees or any agreement to provide services without reasonable compensation. 33 Contractual protection often is a sign that the transaction on which the advice is rendered represents an abusive tax shelter. Excluded Advice Certain forms of tax advice are specifically excluded from the definition of a covered opinion. Written advice provided during the course of an engagement need not comply with the final regulations if the lawyer reasonably expects to provide subsequent advice that will otherwise satisfy the requirements of the final regulations for a covered opinion. 34 Written advice, other than advice concerning a listed transaction opinion or principal purpose opinion, also is excluded from the due diligence and drafting guidelines if the advice concerns the qualification of a qualified plan or a state or local bond opinion, or is included within documents required to be filed with the Securities and Exchange Commission. 35 Standards concerning the tax treatment of municipal bonds have been issued in proposed form and are beyond the scope of this article. 36 Advice provided for a taxpayer after the taxpayer has already filed a tax return with the IRS reflecting the benefits of a transaction also is excluded from the definition of a covered opinion. 37 This exception was added in response to practitioner concerns that advice provided in the context of an IRS examination or litigation might constitute a covered opinion. The exception does not extend to situations where the lawyer knows or has reason to know that the advice will be relied on by the taxpayer in taking a particular position on a future return (including amended returns claiming tax benefits not taken on the previously filed return). 38 Advice provided by in-house counsel also is excluded from the definition of a covered opinion. Under this exception, any advice provided by an employee to the employer solely for purposes of determining the employer s tax liability is not subject to the due diligence and drafting guidelines. 39 Finally, written advice that does not resolve a federal tax issue in the taxpayer s favor (so-called negative advice ) is not a covered opinion, unless the advice reaches a conclusion favorable to the taxpayer at any confidence level. 40 Thus, a lawyer who advises a taxpayer that the latter is not entitled to exclude an award for damages from income need not comply with the due diligence and drafting guidelines. However, advice stating that it would not be frivolous to exclude the damage award from income would never constitute excluded advice. Practitioner Due Diligence And Drafting Guidelines If the written advice will constitute a covered opinion, the lawyer is obligated to comply with several due diligence requirements. 41 During the process of providing the advice, the lawyer must use reasonable efforts to identify and ascertain relevant facts. 42 The lawyer cannot base the opinion on any unreasonable assumptions, which includes those the lawyer knows or should know are incorrect or incomplete. 43 The final regulations state that it is unreasonable to assume that a transaction has a business purpose or is profitable apart from its tax benefits. 44 The lawyer may not base the opinion on any unreasonable representations or findings of any other person, including the client. 45 The opinion must relate the facts to applicable law. 46 The lawyer may not assume the favorable resolution of any significant federal tax issue, except in the case of a limited scope opinion (see below) or to the extent the lawyer is reasonably relying on the opinion of another tax professional. 47 It also is impermissible to base an opinion on unreasonable legal assumptions, representations, or conclusions. 48 Finally, the opinion may not contain internally inconsistent analyses or opinions. 49 Although unclear, this requirement should not be interpreted as prohibiting written advice that includes two or more alternative legal analyses to resolving the federal tax issue in question. A covered opinion also must consider all significant federal tax issues, except in the case of a limited scope opinion or in a case in which the lawyer is relying on the opinion of another tax professional. 50 The opinion should provide the lawyer s conclusion as to the client s likelihood of prevailing on each issue. 51 If the lawyer is unable to reach a conclusion with respect to a particular issue, the opinion must so state. 52 The analysis of the opinion should be complete, including a description of reasons for each conclusion. 53 Such an analysis should relate the facts and applicable law to each conclusion. 54 If the lawyer is unable to reach a confidence level of more likely than not (a greater than 50 percent likelihood of success) with respect to one or more significant federal tax issues, the opinion must prominently state this, as well as that the opinion cannot be used by the taxpayer for the purpose of avoiding tax penalties. 55 In the case of a marketed opinion, the lawyer cannot provide the opinion if the more likely than not confidence level (or higher) cannot be attained for all significant federal tax issues, unless the disclosures described in the discussion of marketed opinions above (concerning penalty avoidance, marketing the transaction, and 34 / The Colorado Lawyer / November 2005 / Vol. 34, No. 11

7 2005 Circular 230 Compliance 35 seeking advice from an independent tax advisor) are included. 56 Moreover, certain assumptions should not be made in a marketed opinion. When providing the opinion, the lawyer should not assume that the taxpayer s return will not be audited, 57 or that the federal tax issue on which he or she is opining will not be raised on audit or settled. 58 Finally, the opinion should provide the lawyer s overall conclusion as to the likelihood that the federal tax treatment proposed by the opinion is proper and the reasons for such conclusion. 59 If an overall conclusion cannot be reached, the opinion must so state and must describe the reasons why. 60 In the case of a marketed opinion, the conclusion must state that the overall conclusion is, at least more likely than not, the proper tax treatment. 61 Limited Scope Opinions A lawyer may provide an opinion that considers less than all of the significant federal tax issues, as long as the client agrees to this and understands that any protection from tax penalties is limited to those tax issues addressed in the opinion. 62 Limited scope opinions may not be listed transaction, principal purpose, or marketed opinions. 63 For purposes of providing a limited scope opinion, the lawyer may make reasonable assumptions concerning the resolution of one or more federal tax issues, as long as those assumptions are stated in a separate section of the opinion. 64 Practitioner Competence The final regulations require a lawyer to be knowledgeable in all aspects of federal tax law that are relevant to the opinion being rendered. 65 However, a lawyer may rely on the opinion of another practitioner with respect to one or more significant federal tax issues, unless the lawyer knows or should know that the other practitioner s opinion is not reliable. 66 A lawyer should always disclose opinions being relied on and the conclusions reached in the other opinions. 67 The lawyer must be satisfied that the combined analysis and conclusions of all opinions, when taken as a whole, satisfy the due diligence requirements of the final regulations concerning covered opinions. 68 Additional Mandatory Disclosures The final regulations contain detailed requirements of additional disclosures not described above. For example, an opinion must prominently disclose the nature of any relationship between the lawyer and party promoting the partnership, entity, plan, or arrangement. 69 This includes any compensation arrangements or referral agreements concerning the subject of the opinion. 70 Marketed opinions must include disclosures urging a taxpayer to seek advice from an independent tax advisor, and that the opinion was written for the purpose of supporting efforts to market the transaction or matter addressed in the opinion. 71 A limited scope opinion must prominently disclose that the opinion is limited to the consideration of one or more federal tax issues. 72 It also must disclose that additional issues may exist that could affect the tax treatment of the matter addressed in the opinion, and that the opinion does not consider or provide a conclusion with respect to any additional issues not addressed in the opinion. 73 The opinion must The Colorado Lawyer / November 2005 / Vol. 34, No. 11 / 35

8 36 Circular 230 Compliance November state that the opinion was not written, and cannot be used, to avoid tax penalties with respect to federal tax issues outside the scope of the opinion. 74 As stated above, opinions that fail to reach at least a more likely than not conclusion with respect to one or more significant federal tax issues, must so state. They also must state that the opinion cannot be used to avoid tax penalties with respect to those issues. 75 Finally, in no case may a lawyer issue advice that is contrary to or inconsistent with any required disclosure. 76 Effect of Satisfactory Opinions It should be noted that compliance with the covered opinion regulations only guarantees that the lawyer has met his or her responsibilities. 77 Such compliance does not guarantee the accuracy of the conclusions being reached nor does it guarantee that the client is protected from tax penalties. 78 With respect to the latter issue, whether the client is entitled to protection from penalties will depend on whether there was a good faith reliance on the opinion (as determined under the penalty provisions of the Code and regulations thereunder). 79 Procedures to Ensure Compliance With Covered Opinion Regulations Lawyers who are responsible for overseeing a firm s practice of providing tax advice are required to take reasonable steps to ensure firm-wide compliance with the covered opinion regulations. 80 These lawyers will be subject to discipline for failing to comply with the covered opinion regulations, but only if: (1) the failure to take steps to ensure compliance amounts to willfulness, recklessness, or gross incompetence; and (2) there is a pattern of failing to comply with the covered opinion regulations within the firm. 81 These lawyers also may be subject to discipline if they know or should know that one or more persons associated with their firms have engaged in a pattern that fails to comply with the covered opinion regulations, and the responsible lawyers, through willfulness, recklessness, or gross incompetence, fail to take steps to correct the noncompliance. 82 Small firms with little or no formal tax practice might be hard-pressed to identify the lawyer with responsibility for overseeing compliance with the regulations. Regardless of firm size, it is recommended that a review of the final regulations be provided to all members of a firm, both tax and non-tax specialists alike. Large firms with established tax practices may consider taking steps to ensure that written tax advice is provided only by members of the firm s tax department. Small firms are encouraged to identify an individual with authority and responsibility for reviewing all written tax advice to ensure compliance with the final regulations. It is not necessary that this person be an expert in tax law, but should be an individual with a complete understanding of the final regulations. Some firms may even consider adopting procedures that require a compliance review of all written tax advice and that this review be performed by a person not involved in the preparation of the advice. Requirements for Other Forms of Written Advice Treasury has adopted standards that apply to written advice that is not a covered opinion. 83 In providing other forms of written tax advice (including electronic communications), a lawyer cannot base the advice on unreasonable factual or legal assumptions and cannot unreasonably rely on the representations, statements, or findings of any other person. 84 The lawyer should never base the advice on the possibility that a tax return reflecting the treatment of the tax issue on which the advice is provided will not be audited, that the issue will not be raised on audit, or that the issue will be resolved through a settlement if it is raised. 85 Finally, when providing forms of other written advice, the lawyer must consider all relevant facts that he or she knows or should know. 86 All facts and circumstances, including the scope of the engagement and the type and specificity of the advice provided, will be considered in determining whether the lawyer has complied with the above requirements. 87 A lawyer will be evaluated for compliance with these rules using a heightened standard if that lawyer provides written tax advice and knows or has reason to know that the advice will be 36 / The Colorado Lawyer / November 2005 / Vol. 34, No. 11

9 2005 Circular 230 Compliance 37 used by someone else (except those associated with his firm) to market an entity, plan, or arrangement, a significant purpose of which is the avoidance or evasion of tax. 88 Treasury has determined that the heightened standard is appropriate because of the increased risk caused by the lawyer s lack of knowledge of a taxpayer s particular circumstances. 89 Effect of Noncompliance Following passage of the Jobs Act, the IRS has the ability to censure, disbar, or suspend a tax advisor from practice before the IRS, and may impose monetary penalties for noncompliance with the final regulations. 90 The amount of the monetary penalty can be as much as 100 percent of the gross income derived from the conduct giving rise to the penalty. 91 In other words, the IRS can penalize a lawyer for an amount equal to the gross fees received from the provision of the tax advice to the client. If the advisor was working on behalf of a firm in connection with the violation of these regulations, the penalty may be imposed on the firm if the firm knew or should have known of the noncompliance. 92 Conclusion The recent amendments to Circular 230 pose significant challenges to all lawyers who provide tax advice, regardless of whether tax advice is provided on a regular or occasional basis. Lawyers may need to spend a lot of time merely trying to determine whether compliance with the covered opinion rules is necessary. Moreover, compliance with the covered opinion rules, where necessary, may present difficulties in managing client expectations and legal budgets. Firms are advised to establish procedures to ensure compliance with the final regulations, including the appointment of an individual responsible for ensuring firm-wide compliance with Circular 230. The penalties for failing to comply with the regulations concerning the provision of tax advice are simply too steep to warrant the risk of noncompliance. NOTES 1. Weiser and Cohen, Tax Shelter Transactions: New Practitioner Obligations and New Confidential Transaction Regulations, 33 The Colorado Lawyer 135 (Aug. 2004); Weiser, Update on Regulations Regarding Practice Before the Internal Revenue Service, 34 The Colorado Lawyer 83 (May 2005) U.S.C Pub. L , 118 Stat (2004) Fed. Reg. 75,186, 75, (Dec. 30, 2003) Fed. Reg. 75,839 (Dec. 20, 2004). 6. Circular (g), 10.36(b), (b), and 10.52(b). 7. The final regulations expressly state that the covered opinion rules apply to written tax advice and make no mention of oral tax advice. However, comments by IRS officials shortly after the final regulations were issued indicated that despite problems of proof, oral tax advice was covered by the final regulations as well TNT 30-5 (Feb. 15, 2005). These comments have not been followed by any official IRS pronouncements, and many practitioners are moving forward on the understanding that oral communications are not covered by the final regulations TNT 27-1 (Feb. 10, 2005). 9. IRC 6662(b). 10. IRC 6664(c); Treas. Reg (a). 11. Treas. Reg (b). 12. Prop. Reg (c)(4). 13. Circular (b)(2). A federal tax issue is defined as any question concerning the federal tax treatment of an item of income, gain, loss, deduction, or credit; the existence (or absence) of a taxable transfer of property; or the value of property. Circular (b)(3). 14. See the IRS home page at gov/businesses/corporations/article/0,,id= ,00.html or search listed abusive tax shelters on the IRS home page. 15. Treas. Reg (c)(4). 16. Circular (b)(10). 17. Id. 18. Treas. Reg (g)(2)(ii). 19. Id. 20. Circular (b)(10). 21. Circular (b)(4)(i). 22. Circular (b)(4)(ii). Technically, the content of this disclosure might be untrue because, under the current accuracy-related penalty regulations, reliance on professional advice can serve as the basis for penalty avoidance. It is expected that Treasury will modify the penalty regulations to provide consistency with Circular 230. Also note that advice that constitutes a listed transaction or principal purpose opinion cannot use a disclosure to avoid compliance with the due diligence and drafting guidelines, discussed below, that apply to covered opinions. 23. Circular (b)(8). 24. Id. 25. Id TNT (June 17, 2005). 27. Circular (b)(5)(i). 28. Circular (b)(5)(ii). 29. Circular (b)(5)(ii) and (b)(8). 30. Circular (b)(6). 31. Id. 32. Circular (b)(7). 33. Id. 34. Circular (b)(2)(ii)(A). 35. Circular (b)(2)(ii)(B) Fed. Reg. 75,887-75,891 (Dec. 20, 2004). 37. Circular (b)(2)(ii)(C). 38. Id. 39. Circular (b)(2)(ii)(D). 40. Circular (b)(2)(ii)(E). 41. Circular (c). 42. Circular (c)(1)(i). 43. Circular (c)(1)(ii). 44. Id. 45. Circular (c)(1)(iii). 46. Circular (c)(2)(i). 47. Circular (c)(2)(ii). 48. Id. 49. Circular (c)(2)(iii). 50. Circular (c)(3)(i). 51. Circular (c)(3)(ii). 52. Id. 53. Id. 54. Id. 55. Id. 56. See the discussion herein of marketed opinion disclosures concerning penalty avoidance, marketing the transaction, and seeking advice from an independent tax advisor. See also Circular (c)(3)(vi). 57. Circular (c)(3)(iii). 58. Id. 59. Circular (c)(4)(i). 60. Id. 61. Circular (c)(4)(ii). 62. Circular (c)(3)(v)(A)(1). 63. Circular (c)(3)(v)(A)(2). 64. Circular (c)(3)(v)(B). 65. Circular (d)(1). 66. Id. 67. Id. 68. Circular (d)(2). 69. Circular (e)(1). 70. Id. 71. Circular (e)(2). 72. Circular (e)(3)(i). 73. Circular (e)(3)(ii). 74. Circular (e)(3)(iii). 75. Circular (e)(4). 76. Circular (e)(5). 77. Circular (f). 78. Id. 79. See notes 10 and 11, supra, and accompanying text. 80. Circular Circular (a)(1). 82. Circular (a)(2). 83. Circular (a). 84. Id. 85. Id. 86. Id. 87. Id. 88. Id. 89. Id U.S.C. 330(b). 91. Id. 92. Id. The Colorado Lawyer / November 2005 / Vol. 34, No. 11 / 37