NOTE: This tax practice guidance was developed as a service for AICPA Tax Section members. In this instance, the guidance has been made accessible to all visitors. If you are reading this as a non-member of the AICPA Tax Section and found it useful, please consider joining the Tax Section to take advantage of other tax practice guidance developed and delivered to our members on a regular basis.
The AICPA has communicated to the IRS and Treasury the need for clarification of the new Circular 230 rules and continues to monitor the issue area. Prior Tax Section E-Alerts have shared concerns about the rule changes that went into effect on June 20, 2005. The following are some additional thoughts.
Section 10.33 "Best Practices"
Section 10.37 "Requirements for Written Advice"
Section 10.35 "Requirements for Covered Opinions"
Section 10.33 "Best Practices"
This section states that "tax advisors should provide clients with the highest quality representation concerning Federal tax issues by adhering to best practices in providing advice and in preparing or assisting in the preparation of a submission to the IRS." The section details what constitutes "best practices" in the areas of communications with clients regarding the terms of the engagement, establishing the facts, and advising clients on the importance of conclusions reached. The section further addresses procedures to ensure best practices for tax advisors.
IRS has indicated that "best practices" are "aspirational" and accordingly, a practitioner who fails to comply with, or who fails to implement procedures consistent with, best practices will not be subject to discipline under these regulations. Nevertheless, the IRS expects tax professionals to observe these practices to preserve public confidence in the tax system. Clearly, the IRS wants all tax practitioners to excel in their standards of performance and is depending on practitioners to voluntarily comply with a "best practices" model. Although aspirational—thereby giving CPA's latitude in their practices to implement the necessary procedures to affect conformity with Circular 230—the "best practices" approach should be embraced by tax practitioners as a tool to better operate their practices and assist their clients, while still maintaining the position as advocate for their clients.
Implementation of "best practices" will require different procedures depending on the size of the firm and area of expertise in which the firm practices. The broad language used makes this section applicable to most areas of tax practice by CPA's and covers both formal and informal advice, oral or written, given to clients. As such, it creates the responsibility for all CPAs to reevaluate their procedures for tax practice. Small firms without established tax departments, in particular, may have a significant burden in conforming.
Back to top
Section 10.37 "Requirements for Written Advice"
This section covers any written advice furnished to clients, including electronic communications. The section requires that a practitioner must not give written advice if the practitioner: fails to consider all relevant facts that the practitioner knows or should know; unreasonably relies on representations, statements, findings or agreements of taxpayer or any other person; relies on unreasonable factual or legal assumptions; or, takes into account the possibility that the return will not be audited, that the issue will not be raised or that the issue will be resolved through settlement.
Factors to be considered in evaluating whether a practitioner failed to comply with this section include: all facts and circumstances; the scope of engagement; and the type and specificity of the advice sought by the client.
Back to top
Section 10.35 "Requirements for Covered Opinions"
This section outlines the standards to be followed where a practitioner provides advice defined as a "covered opinion." A "heightened" standard of care must be followed when the practitioner knows or has reason to know the written advice, including electronic communications, given will be: used or referred to by a person other than the practitioner (or a person who is a member of, associated with, or employed by the practitioner's firm); in promoting, marketing or recommending to one or more taxpayers a partnership or other entity, investment plan or arrangement; or where a significant purpose is the avoidance or evasion of any tax imposed by the Internal Revenue Code. It is important that practice units communicate this "heightened standard of care" to both the members and clients of the firm. Further, practitioners need to take extra care to ensure that such advice is not subject to the rules under Section 10.35, or if it is subject to Section 10.35 that the appropriate standards have been followed.
Because of concerns about the application of this section, many firms have adopted the policy that all client communications (i.e., client letters, memos, e-mails, etc.) on federal tax matters (i.e., taxation and planning for personal, business, estate, financial, compensation, benefits, etc.) should include standard disclaimer language, which may vary depending on the circumstances and the scope of the engagements. Such notice must be "prominently disclosed" in a separate section of the correspondence (not in a footnote) and must be at least the same typeface and print size as used in any discussion of facts or law.
Additional Resources:
· The full text of Circular 230.
· A sample of standard disclaimer language is available in the July 21, 2005 E-Alert.
· A sample letter to clients explaining why the practitioner has added the Circular 230 disclaimer to correspondence.
· The AICPA Tax Section has established a Tax Discussion Forum on Circular 230 Concerns.
Back to top