|
|
 |
September 2005 IRS rule affects written tax advice Circular 230 imposes strict requirements on written opinions, harsh penalties on non-compliant tax professionals, and thinner protection for taxpayers The IRS has issued new rules that will affect how we, as your tax professionals, communicate with you, as our client. The rules, which went into effect June 21 and are contained in IRS Circular 230, apply whenever we provide you with tax advice in any written form (letter, memo, fax, email, etc.). The rules stem from the federal government’s concern over abusive tax shelters and its desire to prevent promoters of tax shelters from obtaining generic, boiler-plate tax opinions. Taxpayers engaging in abusive transactions use these types of opinions to escape tax penalties of 20% or more, on top of what they owe in taxes, by claiming they “reasonably” and “in good faith” relied on the tax opinion for their belief that the transaction was permissible. The rules outline two categories of written tax advice: “covered opinions” and “other written advice.” A covered opinion is written advice concerning a federal tax issue arising from:
Common transactions affected. Unfortunately for tax professionals and their clients, the new rules also apply to advice given on many common and accepted transactions. Under the new rules, you cannot rely on a tax opinion for protection from penalties unless you receive a comprehensive opinion that discusses all relevant facts and laws and how they relate to each other; a conclusion as to the legal consequences of each tax issue; and the likelihood that you will prevail in an IRS challenge. The “significant purpose of tax avoidance” standard is vague, in large part because the IRS did not want to create any loopholes; consequently, we could be effectively required to apply the new rules to many routine, non-abusive transactions. It would appear likely that almost all tax planning strategies could be deemed to have a significant tax avoidance purpose. As tax advisors, we can be severely penalized for providing written advice that does not meet the above requirements. Penalties include disbarment from practice before the IRS. Disclaimer. An alternative to writing an expensive opinion is to include a disclaimer on written advice that we furnish to you. Therefore, we will routinely attach a disclaimer, such as the following, to written tax advice so that there is no issue if the advice is deemed related to a transaction for which tax avoidance is a significant purpose:
Even with this disclaimer, other defenses to penalties are available to you, and you will not be automatically penalized if the IRS challenges a transaction. Please be assured that we will continue to act diligently to meet your needs. Use of this disclaimer does not change the quality of our service or the depth of advice you have come to expect from us. Only when circumstances dictate, and only after consultation with you, will we provide a comprehensive opinion pursuant to the new rules. Based in Mesa, Arizona, and serving closely held businesses in the East Valley, the Phoenix area and throughout Arizona, Schmidt Westergard & Company, PLLC, is an independent full-service tax, audit, accounting and business advisory firm focusing on the middle market. |