Type: Law Bulletins
Date: 06/24/2014

U.S. Treasury Releases Final Rules on Tax Practitioner Written Advice, Competency and Risk Management

On June 12, 2014, the United States Treasury Department published long-awaited regulatory changes to Circular No. 230 regarding several key aspects of practice before the Internal Revenue Service (“IRS”).1 Effective immediately, many of the June 14 rules fundamentally alter the way written client communications should be negotiated, prepared and delivered. They also change the manner in which federal tax practitioners in firms of all sizes (from 1 to 1,000+) should establish and implement internal risk management. Described in greater detail in our white paper are some of the changes, including:

  • The elimination of the “covered opinion” standards in former section 10.35 and the expansion (both in scope and degree) of principal-based standards for all written federal tax advice, including opinions and other substantive communications.
  • The expansion of the standards for practitioner competence.
  • The extension of compliance-driven procedures in section 10.36 to all of the substantive rules within Circular 230 that govern practitioners.

For the first time in a generation, Circular 230 eschews proscriptive rules for written federal tax advice, including the form of delivery. When a client requests written tax advice, the practitioner will be required to use reasoned judgment to determine the nature and scope of the advice and the appropriate path to take from initiation of the service to delivery of the work product, keeping in mind all facts and circumstances. A practitioner may no longer rely on one or more of the now prevalent standardized legends in order to reduce the duty of care and diligence otherwise appropriately required in delivering written advice, including the infamous Circular 230 disclosures that legend nearly every advisor email, letter, information bulletin and other written communication.

Tax practice leader(s) in professional services firms are required to go beyond the scope of opinion and tax return review to all practitioner responsibilities governed by Circular 230, including oversight with respect to the new minimum competency requirements (or “table stakes”). Firms that offer federal tax services are now required to review existing internal controls and governance practices against the new paradigm presented by the June 2014 rules. From such a review, a renewed emphasis on practitioner development and oversight, client communication and risk management will likely emerge. Hopefully, firms will see those developments as silver linings, permitting them to readjust internal management roles over tax advisory and opinion practices. The June 2014 rules also present an opportunity—and an obligation—for firms to communicate with clients about the impact the revised rules will have on firms and clients alike. 

1 Treas. Dec. 9668 (the “June 2014 Rules”), adopting substantially as proposed rules first released in REG-138367-06, 77 (Sept. 17, 2012) (the “September 2012 Proposals”).  All section references are to Circular No. 230 (“Circular 230”).

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