- IRS Circular 230 Disclosure
IRS Circular 230 Disclosure
In December of 2004, the United States Treasury and the Internal Revenue Service issued final regulations, which were further revised in May of 2005, governing practice before the Internal Revenue Service (commonly referred to as Circular 230). As a result of these regulations, written tax advice (including an electronic transmission) rendered by a tax practitioner to a taxpayer must comply with the requirements of Circular 230.
Written Tax Advice
Circular 230 divides all written tax advice into two categories, i.e. "covered opinions" and "other written advice." Depending on what category written advice belongs to, different disclosure and compliance requirements apply. In particular, if the written advice falls within the category of a "covered opinion," a practitioner must undertake extensive due diligence inquiries and evaluations, and comply with elaborate disclosure requirements. If the written advice falls outside the category of a "covered opinion," a practitioner must ensure that a proper factual and legal basis exists for rendering such tax opinion.
Circular 230 provides that written advice will be considered a "covered opinion" if it concerns one or more federal tax issues arising in the following situations.
First of all, a "covered opinion" is written advice rendered in conjunction with a transaction that, at the time the advice is given, is the same or substantially similar to a listed transaction. A listed transaction is any transaction that is the same as, or substantially similar to, one of the types of transactions that the IRS has determined to be a tax-avoidance transaction. These transactions are listed in Notices, Regulations, or other forms of published guidance issued by the IRS.
Secondly, tax avoidance opinions regarding partnerships, entities, investment plans, or arrangements the principal purpose of which is the avoidance or evasion of any federal tax will fall within the category of "covered opinions." The arrangement will be considered to have tax avoidance as its "principal purpose" if such purpose exceeds any other purpose. The claiming of tax benefits in a manner consistent with the statutory provisions and Congressional purpose, however, is not considered to be avoidance or evasion of federal tax.
Finally, "covered opinions" include written advice regarding partnerships, entities, investment plans, or arrangements a significant purpose of which is avoidance or evasion of any federal tax.
The presence of the significant purpose in itself is not determinative unless written advice falls within one of the following categories:
1. Reliance Opinions. A reliance opinion is written advice which concludes that one or more significant federal tax issues would be more likely than not resolved in the taxpayer's favor.
2. Marketed Opinions. A marketed opinion is written advice that is intended to 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) to promote, market, or recommend the arrangement opined upon, to one or more taxpayers.
3. Advice Subject to Conditions of Confidentiality. A "covered opinion" includes written advice given by the tax practitioner on the condition that the taxpayer will not disclose the tax treatment and tax structure of the transaction. The requirement of confidentiality does not have to be legally binding. What is important is that such nondisclosure protects the confidentiality of the practitioner's tax strategies.
4. Advice Subject to Contractual Protection. Finally, a "covered opinion" includes written advice given on the condition that some or all of the fees charged for it are either refundable (if intended tax consequences are not sustained) or contingent upon the taxpayer's realization of tax benefits from the transaction.
Written Advice Excluded from Covered Opinions
Even though written advice may address tax issues, it will not necessarily be a "covered opinion." In particular, Circular 230 expressly excludes certain tax advice from the category of "covered opinions." The regulations also provide for a disclosure that takes tax advice outside the realm of "covered opinions."
1. Expressly Excluded Written Tax Advice. The following written tax advice is expressly excluded from the definition of "covered opinions":
a. The initial written advice provided to a client during the course of an engagement, if it is reasonably expected to be followed by subsequent written advice which will satisfy the disclosure requirements.
b. Written advice which concerns the qualification of a qualified plan, or is a State or local bond opinion, or is included in the documents required to be filed with the Securities and Exchange Commission.
c. Written advice prepared for and provided to a taxpayer, solely for use by that taxpayer, after the taxpayer has filed a tax return with the Internal Revenue Service reflecting the tax benefits of the transaction.
d. Written advice provided to an employer by a practitioner in that practitioner's capacity as an employee of that employer solely for purposes of determining the tax liability of the employer.
e. Written advice that does not resolve a federal tax issue in the taxpayer's favor, unless the advice reaches a conclusion favorable to the taxpayer at any confidence level with respect to that issue.
2. Regulatory Disclosure. Although Circular 230 includes "reliance opinions" and "marketed opinions" within the category of "covered opinions," it also allows such opinions to be removed from "covered opinions" by prominently displaying the appropriate disclosure language in the tax advice. The purpose of including the disclosure is to apprise the taxpayers of any limitation on their ability to rely on written tax advice for the purpose of avoiding penalties under the Internal Revenue Code.
In order to comply with the Circular 230 rules and provide our clients with prompt tax advice without violating disclosure standards and due diligence requirements, our firm will include the following disclosure legends in the written tax advice, as applicable.
The following disclosure legend will be included in written communication if we advise our clients, directly or indirectly, about likely resolution of one or more federal tax issues in their favor:
IRS Circular 230 Disclosure: Any federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or for promoting, marketing, or recommending to another party any transaction or matter addressed herein. For additional information about this disclosure, please see http://www.kmgslaw.com/circular230/.
The following disclosure legend will be used by our firm in written tax advice if it is intended to be a marketed opinion:
IRS Circular 230 Disclosure: The federal tax advice contained in this communication (including any attachments or enclosures) is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. This advice was written to support the promotion or marketing of the transaction addressed herein. Each taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor. For more information about this disclosure, please see http://www.kmgslaw.com/circular230.
There may be instances when the requested written advice will need to meet strict compliance requirements imposed by Circular 230 upon "covered opinions." If our clients would like to proceed with such opinions, our firm will undertake extensive factual due diligence inquiries and evaluations prior to issuing such written tax advice.