The US Internal Revenue Service (IRS) and the Treasury Department on May 18 issued revisions to the standards for written tax advice that were released at the end of last year.
The revised Circular 230 standards for written tax advice, which will come into force from June 20 2005, define when a particular transaction could be classified as an abusive transaction, which must be disclosed to the IRS. The revised standards take into account comments from tax advisers on the original rules that were released on December 20 2004.
The rules cover cases where tax advisers give clients written opinions to confirm the legality of potential transactions. They need to know what the IRS could classify as an abusive transaction and what it would not so that they can give their opinions with confidence, but they say that the definitions in the Circular 230 provisions of what is abusive and what is not abusive are unclear.
Another concern is that all types of written communication with clients will be deemed to be tax advice under the rules. "The fact that they cover all written advice that has a 'significant purpose the avoidance of tax', which arguably covers even routine advice, and that there is no exception or carve-out for the informal emails that I send out to clients every day is very inconvenient," said David Miller, a tax partner at Cadwalader, Wickersham & Taft in New York.
"Every email that I send after June 20 will contain a legend saying that clients may not rely on the opinion to protect them against penalties from the IRS," said Miller. "If clients want opinions to be Circular 230-compliant, it will be a lot more costly and lead to what we call 80-page opinions where all the reasoning will have to be laid out."
Peter Faber, a tax partner at McDermott Will & Emery in New York, had similar concerns: "The rules won't affect the substance of the advice we give but they will affect the amount of paperwork we have to do and frankly the cost to the client."
But Faber welcomed the expanded definition of excluded advice, which will not be subject to Circular 230 rules. Excluded advice includes:
• advice from in-house tax professionals to their employers;
• situations in which the advice is provided after the client files the relevant tax return; and
• so-called negative advice, where a tax adviser tells a client a transaction will not provide the purported tax benefit.
Mark Everson, the IRS commissioner, said that the revisions respond to concerns raised by tax advisers without weakening the underlying standards.
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