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Annette Nellen
Annette Nellen

Give it in writing: A review of the new rules

How does Circular 230’s revised rule on written advice affect CPAs?

July 17, 2014
by Annette Nellen, Esq., CPA

We all know the saying—“get it in writing.” That’s good advice when an employer promises a bonus or a merchant promises a discount. The California Board of Equalization has a publication telling taxpayers to “get it in writing” if they want to rely on something from the Board (BOE-8 (May 2009)). The publication states: “For your protection, it is best to get tax advice in writing.”

To bolster the common-sense advice to “get it (and give it) in writing,” professional rules of conduct can come into play. Changes to Circular 230 in June warrant a review of the new and existing rules of conduct relevant to CPAs.

This article describes new Section 10.37 of Circular 230, as well as the AICPA Statement on Standards for Tax Services (SSTS) No. 7, which also deals with advice to taxpayers and gives tips for complying with these rules.

Written guidance provisions removed or modified

Before the recent amendments to Circular 230 (T.D. 9668 (6/12/14)), written advice was addressed in the following sections:

Section 10.35, Requirements for covered opinions: The covered opinion provision was a lengthy provision on a written advice requirement for various types of opinions, such as reliance and marketed opinions. It also addressed confidentiality and how the information was disclosed. This section also led practitioners to include the well-known email disclaimer to avoid a penalty that nothing in the email was intended as tax advice.

Section 10.37, Requirements for other written advice. This section stated that written advice could not be based on unreasonable factual and legal assumptions. Also, a practitioner could not unreasonably rely on information from the taxpayer or others, or assume a position would not be examined and was required to take into account all relevant facts the practitioner knew or should have known. A “heightened standard of care” was required for certain investments with a “significant purpose” of tax evasion or avoidance.

Written guidance provisions amended by T.D. 9668

T.D. 9668 makes the following changes relevant to written advice:

Covered opinion rule removed: Section 10.35, Requirements for covered opinions, is removed. Thus, the lengthy, complex rules on covered opinions are gone. The IRS found these rules burdensome “without necessarily increasing the quality of the tax advice that the client received” (79 Fed. Reg. 33686 (6/12/14)).

Also, practitioners overused the disclaimer, including it even when the associated information did not include tax advice. The IRS posited that having a single section on written advice (Section 10.37) was preferable. New Section 10.35, Competence, was added to require that practitioners have the “appropriate level of knowledge, skill, thoroughness, and preparation” to handle an assignment. This new section is effective June 12, 2014.

One section on written advice: The title of Section 10.37 is changed to Requirements for written advice, and the content modified accordingly. Written advice (via paper or electronic means) does not include a submission to the government covering general policy matters (such as comments on proposed regulations) or continuing education materials (unless materials market or promote transactions).

Section 10.37(a)(2) requires practitioners to do the following:

  • (i) Base the written advice on reasonable factual and legal assumptions (including assumptions  as to future events);
  • (ii) Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know;
  • (iii) Use reasonable efforts to identify and ascertain the facts relevant to written advice on each Federal tax matter;
  • (iv) Not rely upon representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) of the taxpayer or any other person if reliance on them would be unreasonable;
  • (v) Relate applicable law and authorities to facts; and
  • (vi) Not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.

Reliance on information is not reasonable if the practitioner “knows or reasonably should know that one or more representations or assumptions on which any representation is based are incorrect, incomplete, or inconsistent” (Section 10.37(a)(3)).

It is permissible to rely on another person’s advice if it is reasonable and warrants good-faith reliance based on the facts and circumstances. If the practitioner “knows or reasonably should know” that the other person’s opinion should not be relied on, or that person lacks the necessary competence or qualifications to provide the particular advice or has a conflict of interest, reliance on the other person is not reasonable.

The IRS will use a “reasonable practitioner standard” to determine if a practitioner properly complied with Section 10.37. In this analysis, the scope of the engagement is considered, as well as the specificity of the advice the client sought. Where a practitioner knows an opinion will be used to promote or market a plan to avoid or evade tax, the reasonable practitioner standard for determining if the practitioner has complied with Section 10.37 will also consider “the additional risk caused by the practitioner’s lack of knowledge of the taxpayer’s particular circumstances.”

Revised Section 10.37 is effective for written advice rendered after June 12, 2014.

Related SSTS guidance

The AICPA’s SSTSs provide seven enforceable standards for CPAs providing tax services. SSTS No. 7, Form and Content of Advice to Taxpayers, should be considered along with new Section 10.37 of Circular 230 in determining the proper format and foundation of advice provided to clients. Key points of SSTS No. 7 include:

  • Professional judgment must be exercised to ensure the advice appropriately serves the taxpayer’s needs.
  • Advice should consider tax return reporting and disclosure standards and possible penalties of a tax return position.
  • There is no obligation to communicate with the taxpayer when later developments affect the advice, unless such a requirement has been specifically agreed to or when assisting the taxpayer in implementing the advice.
  • No standard format is required for providing or documenting oral advice.
  • Decisions about the form of advice should consider various factors, including the importance of the transaction, dollar amounts involved, technical complexity, taxpayer’s level of tax sophistication, and the potential for penalties.
  • Caveats should be used as appropriate, including that advice is based on the facts provided, that the legal authorities may change, that professional judgment has been applied as the member understands the facts and relevant law, and that subsequent developments may affect the advice provided.
  • “Written communications are recommended in important, unusual, substantial dollar value, or complicated transactions.”
  • The member should be aware of “applicable confidentiality privileges.”

Tips for ethical compliance in rendering advice

  • Check if your malpractice carrier has new advice or requirements in light of the Circular 230 changes.
  • Consider client expectations about the form and content of advice.
  • Follow up oral advice in writing to ensure a permanent and clear record. If the advice relates to complex or significant issues, consider having the client return a signed copy of the advice to you.
  • Have procedures for documenting both oral and written advice. Those procedures should include how and where to store the information, how to maintain a log of the dates and nature of the advice provided, how to name electronic files for retrieval purposes, how to maintain confidentiality and security of the information, and how to record and store any client acknowledgment and response. Procedures should also exist for when client acknowledgment of receipt of written advice is required.
  • Have procedures for identifying any advice or documents that are privileged under Sec. 7525 as communications to federally authorized tax practitioners or protected by the work-product doctrine and how to preserve that protection.
  • Maintain a database of standard caveats to include on written advice, such as that the information is based on the law as of a specified date.
  • Follow a standard format for research memos and letters to better ensure that the research is complete and documented, that appropriate caveats are included, and that applicable penalties, such as Sec. 6662 (accuracy-related penalty) and Sec. 6694 (tax return preparer understatement penalty), are considered.

A helpful approach for considering these tips and to derive additional ones appropriate for your firm is to make time to discuss new Section 10.37 and SSTS No. 7 in your office. Also, because advice to clients is an important contact point, consider how all of this can help strengthen client relations.

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Annette Nellen, Esq., CPA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is a member of the AICPA Tax Executive Committee and Tax Reform Task Force. She has several reports on tax policy and reform and a blog.