FREQUENTLY ASKED QUESTIONS REGARDING THE NEW CIRCULAR 230 REGULATIONS REGARDING WRITTEN FEDERAL TAX ADVICE
Q1: Why were the new rules created?
A1: The new rules were developed by the government to attack the mechanisms used by tax shelter promoters to sell abusive tax shelters and to address potential abuses by a minority of tax practitioners. The new rules were initially adopted to address the practice of promoters to obtain boiler-plate opinions for tax shelters. Taxpayers who engage in abusive transactions used these types of opinions to escape tax penalties of 20 percent or more, on top of what they owe in taxes, by claiming they "reasonably" and "in good faith" relied on the tax opinion of the tax practitioner for their belief that the transaction was permissible.
Q2: When do the rules apply?
A2: The new rules apply to three (3) categories of written tax advice: (1) tax advice on tax shelter transactions; (2) tax advice on transactions having a “primary purpose” of tax avoidance; and (3) transactions that have a "significant purpose" of tax avoidance. This standard is vague and uncertain, in large part because the IRS did not want to create any loopholes. Consequently, the new rules will sweep in many routine, non-abusive transactions. The penalties to practitioners can be severe for providing written advice that does not meet these requirements.
Q3: What does the IRS consider to be written federal tax advice?
A3: The rules apply whenever a practitioner provides written advice by e-mails, faxes, or letters on federal tax issues.
Q4: What written federal tax advice can a client reasonably and in good faith rely on to avoid federal tax penalties?
A4: The new IRS rules state that clients cannot rely on a written tax advice opinion for protection from penalties unless the tax practitioner provides a comprehensive written opinion that considers and discusses:
(1) All relevant facts and applicable law,
(2) The relationship between the facts and the law,
(3) A conclusion as to the legal consequences of each tax issue, and
(4) The likelihood that the taxpayer will prevail if the IRS challenges the transaction.
Because of the new rules, the cost of securing written tax advice that can be relied upon to avoid federal tax penalties will be substantially higher and will require a more comprehensive written opinion. In appropriate cases, after consultation with you, we will provide a comprehensive written opinion that meets the requirements of the new rules.
Q5: What alternatives are there to paying these higher fees for written tax advice?
A5: Any form of oral tax advice is not subject to these new requirements. Another alternative to writing a more comprehensive written opinion is to include a disclaimer on written advice furnished to the client. This disclaimer will state that the client cannot rely on the written advice for protection from tax penalties. Accordingly, Weaver and Tidwell, L.L.P. will routinely include the following language in written or electronic communications:
"U.S. TREASURY DEPARTMENT NOTICE: Pursuant to new regulations governing the practice of attorneys, certified public accountants, enrolled agents, enrolled actuaries and appraisers before the Internal Revenue Service, unless otherwise expressly stated, any federal or state tax advice in this communication (including any attachments) is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of (i) avoiding penalties that may be imposed under federal or state tax lawor (ii) promoting, marketing or recommending to another party any transaction or tax related matters addressed herein. "
The use of this legend does not change the quality of our service or the advice you have come to expect from us. It is our intention to continue to deliver the highest quality services to you in a cost effective manner. Even with this legend, there are other defenses to federal tax penalties that you may be entitled to rely upon.