IRS to simplify ‘Circular 230’ tax advice regime

18 October 2012

The US Internal Revenue Service (IRS) is planning to drop the complex rules governing written opinions supplied by tax-planning advisors, and replace them with a single simplified regulation applying to all tax advice.

The existing rules were introduced in 2004 by Treasury Department Circular 230, amid a supposed tide of ‘abusive and illegal’ tax shelters promoted by unscrupulous advisors. Circular 230 demands that virtually all written tax-planning advice (or ‘covered opinions’) sets out all the relevant facts and laws, including case law and judicial doctrines; is backed by rigorous due diligence procedures and legal analysis; is comprehensive enough to cover ‘all significant federal tax issues’; and provides an estimate of the probability that the tax scheme will fail. Any advice that does not meet these standards must carry conspicuous wording stating that it cannot be relied upon for the avoidance of penalties.

The regulation was said to be unpopular with practitioners right from the start, regarded as difficult and expensive to comply with, and not doing much as practitioners can circumvent them by giving oral rather than written advice.

The IRS has acknowledged the force of this criticism and published proposals to replace Circular 230 with a simpler catch-all regulation.

This new standard requires the advisor to base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance, consider all relevant facts, and use reasonable efforts to identify and ascertain the relevant facts. But there is no longer an obligation to list all the relevant facts and law in the written advice. Some of the disclaimer requirements are also being relaxed.

The revocation of the Circular 230 rules is ‘long overdue and welcome’, said Thomas Wechter of law firm Duane Morris. ‘At the very least, it will remove the incomprehensible Circular 230 disclaimers indiscriminately used by practitioners on all written and electronic communications, whether or not the communication contains tax advice, to the consternation of the client.’



Duane Morris

Cadwalader, Wickersham & Taft (PDF file)




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