Putting Tax Advisers On the Line

The accountants, lawyers and other experts who have long advised taxpayers on exactly what is, isn't and might be okay under the law have finally run up against an Internal Revenue Service regulation they say they can't figure out.

It's the one that covers them.

Known as Circular 230, the rule is designed to set standards for the nearly 250,000 tax advisers and return preparers who make money providing everything from routine advice and form-filing to sophisticated strategies to reduce the taxes paid by rich individuals and businesses.

Circular 230 has been around for years, but the IRS has recently revised it, tightening certain of its provisions. Those revisions are set to take effect June 20. Much of the circular is deemed "best practices" and is thus "aspirational," rather than mandatory. But some of the new rules carry stiff penalties.

The tax advice industry has been in bad odor recently after revelations that many experts, including some of the largest and most prestigious accounting firms in the nation, had been marketing highly complex schemes they claimed would enable their clients to shelter some or all of their income from taxation.

Instead of simply telling clients what is allowed and what is not, "the mantra [of accountants and others in the field] became 'risk management' and 'value creation,' " said Cono Namorato, director of the IRS's Office of Professional Responsibility, which oversees the group known collectively as tax practitioners.

The new Circular 230 rules are designed both to curb abusive practices and to "raise the bar" generally for tax professionals, Namorato said. But while most professionals support those broad goals, many are complaining about some of the provisions.

Most of the squawking from practitioners is focused on what are called "covered opinions." These are expert opinions that, among other things, taxpayers may rely upon in arguing to the IRS that a tax strategy they used may not have worked, but they used it in good-faith reliance on professional advice that it had a better-than-even chance of working. Having such an opinion in hand can allow a taxpayer to escape penalties when his or her strategy is disallowed by the IRS or the courts.

Hearings before the Senate Governmental Affairs permanent subcommittee on investigations last year revealed widespread complicity by professionals -- bankers, lawyers and accountants -- in devising and marketing abusive tax shelters that ultimately did not withstand scrutiny. Several law firms were accused of cranking out letters opining that certain shelters were more likely than not -- that's the standard, 51-49 -- to withstand IRS attack. The letters were used in marketing the shelters to taxpayers.

Covered opinions also include advice to taxpayers on issues that arise from "listed transactions" -- shelters already identified as abusive by the IRS -- or involving a partnership or other entity or strategy whose principal or significant purpose is the evasion or avoidance of taxes.

If an opinion is "covered" much tougher new requirements apply.

The new rules "are meant to avoid those cookie-cutter opinions," said Thomas P. Ochsenschlager, vice president of taxation at the American Institute of Certified Public Accountants.