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.
The problem, Ochsenschlager said, is that it isn't always clear when a communication with a client would be a covered opinion and when it wouldn't -- and getting it wrong could lead to suspension or disbarment from practice before the IRS and Treasury Department.
"The primary concern is that the rules are, almost of necessity, somewhat vague, but because they are somewhat vague there's some uncertainty as to when you might become entrapped, and if you do, the penalty is [professional] execution.
"They keep saying, 'Trust us, we're not going to look at you for minor infractions,' " he added, but "the scary thing is, your whole livelihood is at stake if you make a bad call."
The rules allow a professional to specify that an opinion is not to be relied on for penalty protection, and taxpayers may begin seeing such notations on letters from their accountants and lawyers later this year. Some in the field worry that clients will read that as meaning the advice isn't reliable or correct.
Still others have complained that doing all the analysis required by the rules for covered opinions means much additional work, analyzing the facts and applying the current law.
But Namorato said, "I don't see how the hell could you give an opinion without doing any of that."
He said tax professionals doing their jobs properly have little to worry about.
"I think that if practitioners just take the time to read [the new rules] and apply a little common sense, they will not cause any undue burdens on their ability to practice tax law," he said.
If practitioners don't want to comply with the requirements for covered opinions, "they have an opt-out provision. All they have to do is say they are not providing penalty protection to their client. But where they are, we want to hold them to a higher standard."
In fact, Namorato said, his office is really interested in improving tax practice in a wide range of areas, not merely stamping out tax shelter abuses. The office wants to help see that taxpayers get competent advice from practitioners who are neither making promises they can't keep to clients nor trying to use delay or other underhanded means to stave off the IRS.
He said his office responds to complaints against practitioners, but also listens to the practitioner's side of the story.
And, he said, the IRS has an interest in effective, competent practitioners who do their jobs well.
"In a voluntary compliance system of taxation, they're on the front lines, and we have to rely on them. A tax professional really is unique in that he has a dual obligation. He's got an obligation to his client, but he also has an obligation to the tax system," he said.
Taxpayers who don't have a good case but try to use the courts simply to stall tax collections are finding the tactic increasingly expensive, the IRS warns.
Since the beginning of last year, the U.S. Tax Court has imposed penalties totaling $117,500 on taxpayers for bringing frivolous cases to delay collections. This brings the total penalties in such cases since 2001 to $378,900, the IRS said. In addition, federal appeals courts have upheld six earlier Tax Court decisions imposing penalties totaling $15,600.
"Taxpayers have rights they should use when appropriate," said Kevin M. Brown, commissioner of the IRS Small Business/Self-Employed Division. "But anyone who abuses those rights should understand they can incur significant penalties."
Under the law, the Tax Court may impose penalties of up to $25,000 on taxpayers who go to court merely to delay having to pay.
Nearly nine out of 10 Americans (87 percent) turn to others for financial advice, most commonly parents or a spouse, according to a recent survey.
Thirty-one percent said they rely primarily on a relative's advice about saving and investing; 27 percent consult a financial services professional, 16 percent talk to a friend or co-worker, the survey found. Some 8 percent rely on financial publications or television shows, and 4 percent go to the Internet. Ten percent say they rely only on themselves.
Sixty-two percent of respondents said they had either total trust (22 percent) or a great deal of trust (40 percent) in the advice they received. Women were significantly more likely than men to have total or a great deal of trust in the advice received (69 percent vs. 53 percent).
The survey as done by Thrivent Financial for Lutherans, a nonprofit financial services organization.