Circular 230 Revisions Discussed at ABA Tax Section Today

Not quite a decade after the much-hated “covered opinion” rules, the Treasury and Service today announced proposed amendments to Circular 230 that wipe the slate clean.  See REG-138367-06.  The amendments include a few other changes that will assuage some worries about the role of OPR in discipline of attorneys.

The government panel at the ABA Tax Section Standards Committee introduced the changes.  Karen Hawkins, OPR Director, was “excited about the changes”.  Section 10.1 clarifies the authority of OPR as the office with exclusive responsibility for discipline and sanctions of attorneys.  This issue had been a concern after the most recent amendments, which took out all references of OPR to accommodate the introduction of the new Return Preparer Office. 

Changes to section 10.31 make it clear that attorneys may not use “self-help” to acquire repayments from client’s tax refunds.  Whether a refund is through a paper check or some electronic means, attorneys must turn it over to the client and may not deposit to their accounts, including trust accounts.  Hawkins noted that this was a “broader rewrite than some anticipated”.  The result is consistent with the section 6695 regulations, and applies to all tax practitioners.

The big change was section 10.35.  The strict rules for written opinions and disclaimers are removed, with core principles of tough due diligence requirements incorporated in section 10.37, now the single provision covering written opinions.  The extensive disclaimer requirements are gone.   Why the change?  Several reasons.  While opinion practice seems to have improved (for the nonce), the government concluded that the strict rules in 10.37 were not an effective tool in squelching over-aggressive tax advice.  It had been expected the disclaimers would get the attention of clients, but instead they were generally not seen as a problem by sophisticated clients and created a confusing trap for unsophisticated ones.  Tax practitioners complained mightily about the difficulty of complying with the rules from the outset, saying the rules were too costly and too burdensome.  It’s likely that oral opinions substituted for written advice as a way of avoiding having to comply. 

New 10.35 is a quite short provision that requires attorneys to have the requisite skill, knowledge and competence for the role they are undertaking.  Astonishingly, though the Model Rules have long included such a requirement, Circular 230 governing practice before the IRS had not.  This is what might be called a “no-brainer” addition.

Section 10.36 places more responsibility on the person in a firm with principal authority for overseeing Circular 230 practice.  That person must take reasonable steps to be sure that everyone understands their Circular 230 obligations.  If s/he fails, s/he will be held personally liable.  If s/he takes steps but those s/he oversees still violate the rules and s/he does not take additional steps to stop the violations, personal liability is again possible.  As Hawkins said at the meeting, this is essentially a “respondeat superior” type of obligation.   An audience member asked about the application of this rule when there are independent contractors.  Hawkins noted that there is an interrelationship here between section 10.22, which requires due diligence and allows a practitioner to rely on another, and 10.36 which requires appropriate oversight of employees or the work cannot be relied on.  Either way, she noted, poor due diligence will result in being unable to rely on the work, under either 10.22 or 10.36.  (And Section 10.37 would be relevant if the independent contractor is preparing an opinion on which the practitioner expects to rely.)

 Section 10.37 is, as noted above, now the provision that governs all written tax advice.  It is, Hawkins said, a “sensible form of regulation that everyone can understand and follow, including both practitioners and clients.”  There are some significant changes beyond the elimination of the covered opinion rules.  For example, the original section 10.35 did not permit practitioners to consider settlement possibilities in giving written advice: under the proposed regulation, it is permissible to consider the hazards of litigation, but not the potential outcome of audits.  Rich Goldstein pointed out that “the regulations retain a ‘heightened scrutiny’ for marketed opinions, so they are not a shift back to the pre-2004 status but rather a decision to provide a rule that was easier to work with, easier to enforce and one that had the potential to be effective.”  Questioners asked what heightened scrutiny is intended to mean in this context.  Hawkins reminded everyone that “the basic standard is reasonableness.”  Goldstein explained that “if the opinion is marketed, it will be reviewed closely to ensure that it complies with the requirements, because the effect on tax administration is greater.”   In other words, there is not a different standard or level of confidence required by the practitioner, but a difference in how it will be reviewed.

Section 10.82 provides for expedited suspension in situations where there has already been a fitness adjudication by another body, such as a tax crime conviction or the loss of a state bar license.  These amendments add the possibility for expedited suspensions when practitioners have demonstrated willful disreputable conduct by failing to comply with tax filing obligations–e.g., failing to file for 4 of the last 5 years.  Hawkins noted that with many new practitioners, it is reasonable to expect that there will be some compliance problems, and it would be a drain to have to take all of those cases before an administrative law judge when the result is clear.  Although there was a similar effort to create additional expedited process a decade ago, Hawkins suggested that this revision was “better, more thoughtful, and more confined.”  But having opposed the original attempt to permit expedited process in these types of situations, she noted that she “would particularly invite the Committee to provide feedback on this issue.  She reminded that in an expedited suspension, OPR initates the process with what is now called an “order to show cause” to the practitioner, who can talk to OPR and perhaps end the process.  If not, the suspension takes place and then full due process protections apply.

The notice also withdraws the proposed regulations for state and local bonds, proposed in 2004.

There is a comment period for 60 days, which will end November 15, and a hearing will be held December 7.  Hawkins noted that it is important to let the government know if they have missed something since otherwise “in two-three years we will be back in the same place again with a variant of 10.35, if these rules are not effective.”