McKay Hochman - Commentary

Commentary

Circular 230
July 8, 2005
Retirement plan practitioners may well be affected by the newly effective regulations governing practice before the IRS (contained in Circular 230). The regulations generally affect the content of the advice practitioners can provide to plan sponsors. In certain cases, the regs introduce new disclosure language requirements. CIRCULAR 230 CHANGES IN WRITTEN ADVICE The Internal Revenue Service and Treasury have issued revised regulations under 31 CFR Part 10, commonly known as Circular 230. The main purpose of this update of Circular 230 is the reduction of the occurrence of tax avoidance and tax evasion schemes. Circular 230 applies to individuals who practice before the IRS. The new final regulations provide what the IRS considers best practices to be followed by tax advisors who either provide advice to taxpayers relating to Federal tax issues or make submissions on their behalf to the IRS. These regulations also provide standards for covered opinions and written advice. CIRCULAR 230'S APPLICATION TO RELIANCE OPINIONS AND OTHER WRITTEN ADVICE The IRS defines a reliance opinion as “written advice that concludes at a confidence level of at least more likely than not that one or more significant Federal tax issues would be resolved in the taxpayer's favor.” This regulation applies to written advice, including electronic communications such as e-mails and faxes, provided by any of the four classifications of tax practitioner that may practice before the IRS, i.e., an actuary, an attorney, an accountant, or an enrolled agent. According to the IRS, "Written advice will not be treated as a reliance opinion if the practitioner prominently discloses in the written advice that it was not written to be used and cannot not be used for the purpose of avoiding penalties. Similarly written advice will not be treated as a marketed opinion if it does not concern a listed transaction or a plan or arrangement having the principal purpose of avoidance or evasion of tax and the written advice contains the disclosure."
COVERED OPINIONS DEFINED Written advice, including electronic communications, provided by a tax practitioner is covered by Circular 230 and must follow the disclosure procedures under the new rules if it concerns any of the following Federal tax issues:
1.		a listed transaction (defined below),
2.		any plan or arrangement, the principal purpose of which is the avoidance or evasion of tax; or
3.		any plan or arrangement, a significant purpose of which is the avoidance of tax if the written advice:
	a.	is a reliance opinion, (defined as written advice that confidently concludes that Federal tax issues would be resolved in the taxpayer's favor) ,
	b.	is a market opinion
	c.	is subject to conditions of confidentiality, or
	d.	is subject to contractual protection.
Circular 230 is in CFR 31. Therefore, the Treasury and IRS have stated that they intend to amend the Internal Revenue Regulations (CFR 26 1.6664-4) to clarify that a taxpayer may not rely upon written advice that contains the disclosure to establish the reasonable cause and good faith defense to the accuracy-related penalties. LISTED TRANSACTIONS The IRS has identified the following transactions involving employee benefit plans as "listed transactions":
	•	401(k) Accelerated Deductions

	•	S Corporation ESOP Abuse of Delayed Effective Date for Section 409(p)

	•	Collectively Bargained Welfare Benefit Funds under Section 419A(f)(5)

	•	Certain Trust Arrangements Seeking to Qualify for Exemption from Section 419

	•	Abusive Roth IRA Transactions

	•	S Corporation ESOP Abuses: Certain Business Structures Held to Violate Code Section 409(p)

	•	Deductions for Excess Life Insurance in a Section 412(i) or Other Defined Benefit Plan
QUALIFIED PLAN EXCLUSION FROM WRITTEN ADVICE Written advice regarding a plan or arrangement having a significant purpose of tax avoidance or evasion is excluded from the definition of a covered opinion if the written advice concerns the qualification of a qualified plan or is included in documents required to be filed with the SEC. The final regulations also adopt an exclusion for preliminary advice, if the practitioner is reasonably expected to provide subsequent advice that satisfies the requirements of the regulations. Disclaimers will become commonplace As a result of the amendment of Circular 230, written disclaimers will now be appearing in many places. The disclaimers generally will indicate that anything provided in the written message will not be able to be used to avoid IRS penalties. The disclaimers must be displayed distinctly in the body of the communication i.e. prominently placed as to alert the reader to this disclaimer. For example, a disclaimer may read as follows:
	IRS Circular 230 Disclosure IRS regulations require us to notify you that this communication was not intended or written to be used, and cannot be used, by you as the taxpayer, for the purpose of avoiding penalties that the IRS might impose on you.
We are evaluating our own disclaimer policy at this time. You can expect to see them on written answers we give to client questions. AJCA adds teeth to the disclosure requirements The American Jobs Creation Act of 2004 (AJCA) gave the Treasury Secretary the ability to impose standards for written advice relating to a matter that is identified as having a potential for tax avoidance or evasion, including a monetary penalty against a practitioner who violates Circular 230. The current Circular 230 update does not reflect the AJCA changes and additional proposed regulations will be forthcoming.

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LISTED TRANSACTIONS The IRS has identified the following transactions involving employee benefit plans as "listed transactions":

LISTED TRANSACTIONS
The IRS has identified the following transactions involving employee benefit plans as "listed transactions":