Academic journal article Journal of Accountancy

Covered Opinion Rules Would Be Eased

Academic journal article Journal of Accountancy

Covered Opinion Rules Would Be Eased

Article excerpt

The IRS released proposed regulations that would eliminate the complex rules in Circular 230, Section 10.35, governing covered opinions (REG-138367-06). To replace them, the proposed regulations would expand the requirements for written advice under Circular 230, Section 10.37.

The IRS notes in the preamble to the proposed regulations that "[y]ears of practical experience ... have shown that the covered opinion rules in current [section] 10.35 have produced some unintended consequences and should be reconsidered." For example, the IRS has observed that many practitioners attempt to exempt their advice from the covered opinion rules by making a prominent disclaimer stating that the opinion cannot be relied on for penalty protection.

Under current Circular 230, Section 10.35, covered opinions include written advice concerning:

1. A listed transaction;

2. A transaction with the principal purpose of tax avoidance or evasion; or

3. A transaction with a significant purpose of tax avoidance or evasion, if the advice is a reliance opinion, marketed opinion, subject to conditions of confidentiality, or subject to a contractual protection.

Practitioners must comply with extensive requirements when providing written advice that constitutes a written opinion, and the IRS acknowledges that they have to expend considerable effort to determine whether advice rendered in a particular circumstance is subject to the covered opinion rules.

The IRS has concluded that the rules are overbroad, are difficult to apply, and do not necessarily produce higher-quality tax advice. Proposed Section 10.37 would require practitioners to base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance, and consider all relevant facts that the practitioner knows or should know. …

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