AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Comments on Proposed Regulations, REG-122379-02
Regarding Modifications to Treasury Department Circular No. 230
Developed By:
Tax Practice Responsibilities Committee
J. Edward Swails, Chair
Dan L. Mendelson, Immediate Past Chair
J. Coalter Baker
Lawrence H. Carlton
Conrad M. Davis
Evelyn Elgin
Dean A. Jorgensen
Stuart Kessler
Keith R. Lee
Jay M. Levine
Michael J. Predhomme
Gerard H. Schreiber
Mark N. Schneider
Thomas G. Tierney
And AICPA Tax Division Members:
Harvey L. Coustan
John C. Gardner
Joseph F. Scutellaro
Benson S. Goldstein, Technical Manager
Approved By:
Tax Executive Committee
Submitted to the Internal Revenue Service
February 12, 2004
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Comments on Proposed Regulations, REG-122379-02
Regarding Modifications to Treasury Department Circular No. 230
General Comments
In REG-122379-02, the Treasury Department proposed amendments to Circular No. 230
(“Circular 230”), the regulations governing practice of Certified Public Accountants, attorneys,
enrolled agents, enrolled actuaries, and appraisers before the Internal Revenue Service. In
general, Circular 230 requires persons who practice before the IRS to be knowledgeable and
competent in tax law matters and to adhere to certain ethical standards. REG-122379-02
provides for proposed amendments to Circular 230 that set forth (1) best practices for tax
advisors providing advice to taxpayers relating to Federal tax issues or submissions to the IRS,
(2) modifications to the standards for certain tax shelter opinions, (3) procedures to ensure
compliance, and (4) the establishment of advisory committees. These proposed regulations have
been issued, in part, in conjunction with (1) a notice of proposed rulemaking for amendments to
Circular 230 dated January 12, 2001, and (2) with respect to final regulations involving the nontax shelter related provisions relating to this January 12, 2001 notice of proposed rulemaking.
The AICPA has a longstanding track record of establishing professional standards for our CPA
members. The AICPA has a Code of Professional Conduct, as well as enforceable Statements on
Standards for Tax Services (SSTSs). Both the Code of Professional Conduct and the SSTSs
provide meaningful guidance to CPA members in the performance of their professional
responsibilities.
The AICPA submitted comments on April 23, 2001, in response to the January 12, 2001 notice
of proposed rulemaking, and supplemental comments regarding the notice to Treasury on
January 7, 2002, June 17, 2002, and October 1, 2002. Moreover, the AICPA submitted
comments on March 11, 2003 on REG-122380-2, an advance notice of proposed amendments
regarding such policy questions as (1) the reorganization of the Office of Director of Practice, (2)
the definition of practice and who may practice, (3) enrolled agents and eligibility for enrollment,
(4) sanctions and disciplinary proceedings, (5) contingent fees, and (4) confidentiality
agreements.
We commend Treasury in issuing REG-122379-02 as a meaningful step in regulating tax
practitioners, particularly those involved in advising taxpayers concerning participation in tax
shelters.
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Specific Comments
1.
Proposed Section 10.33, Best Practices for Tax Advisors
Proposed section 10.33 of Circular 230 states that “[t]ax advisors should provide clients with the
highest quality representation concerning Federal tax issues by adhering to best practices in
providing advice and in preparing” a submission to the IRS. Also, while not limited thereto,
proposed section 10.33(a) provides six characteristics of best practices for tax advisors.
The AICPA supports the concept of “best practices” for tax advisors as a central component of
REG-122379-02. We agree with the statement in the preamble that “[t]he tax system is best
served when the public has confidence in the honesty and integrity of the professionals providing
tax advice. To restore, promote and maintain the public’s confidence in those individuals and
firms, these proposed regulations set forth best practices applicable to all tax advisors.”
We note that the preamble also states that the proposed regulations “are limited to practice before
the IRS and do not alter or supplant other ethical standards applicable to practitioners.” This is a
positive statement as it recognizes the critical role that professional standards such as the
AICPA’s Code of Professional Conduct and Statements on Standards for Tax Services play in
setting ethical standards of behavior for CPAs and other practitioners. Nevertheless, the IRS
must also realize that Circular 230 requirements will be noted in private civil litigation matters–
even though the Service states that the proposed regulations “are limited to practice before the
IRS.” Circular 230 is a well-established body of ethical standards and as such, it is often cited in
civil malpractice litigation.
The aspirational language of proposed section 10.33 sets forth a goal of the “ideal” actions and
behaviors for practice before the Service. However, given the traditional constraints placed on a
practitioner (e.g., time and resource limitations, and the subjective nature of what constitutes the
“quality” of one’s work product), we believe it may be impossible for a practitioner to
demonstrate “the highest” quality representation in all situations. The AICPA is concerned that
proposed section 10.33 will create an untenable civil malpractice environment; specifically with
respect to the term “highest quality representation” under proposed section 10.33(a).
Accordingly, we suggest that the word “high” replace the words “the highest” under this
proposed section. We believe this change should create a realistic goal for practice before the
IRS while providing reasonable protection from unwarranted civil malpractice litigation.
For similar reasons, the AICPA respectfully suggests the following clarifications:
The phrase “whenever possible” should be inserted into proposed section 10.33(a) after
the word “adhering”. The insertion of “whenever possible” in proposed section 10.33
should promote a positive goal while still maintaining flexibility to address unusual or
unique fact patterns.
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The phrase “but are not limited to” should be inserted into proposed section 10.33(a)
after the words “Best practices include”. This change will clarify that “best practices”
can include actions and behaviors other than those specifically enumerated in proposed
section 10.33(a)(1)-(6), including those outlined in the AICPA Statements on Standards
for Tax Services (SSTSs).
We believe that a practitioner’s adherence to aspirational goals will vary directly with his or her
understanding of those goals. Thus, for purposes of clarification of proposed section 10.33(a)(5),
we suggest that the words “likely implications and ramifications” replace the word “import.”
In addition to Circular 230, AICPA members also follow professional standards as promulgated
by the AICPA’s Tax Executive Committee set forth in the eight enforceable SSTSs. SSTS No. 1
states that “our self-assessment tax system can function effectively only if the taxpayers file tax
returns that are true, correct and complete. A tax return is primarily a taxpayer’s representation
of facts, and the taxpayer has the final responsibility for positions taken on the return.” CPAs,
and all tax professionals, have duties both to the taxpayers and to the tax system. However, it is
well established that the taxpayer has no obligation to pay more taxes than are legally owed, and
a member has a duty to the taxpayer to assist in achieving that result. This dual duty is
recognized by AICPA members who serve taxpayers and is emphasized in SSTS No.1.
Accordingly, we believe that section 10.33(a)(6) should be modified to read:
Acting fairly, with integrity, and in conformity with professional standards governing the
practitioner, recognizing his or her responsibilities to both clients and the tax system,
when representing taxpayers before the Internal Revenue Service.
We recommend that an effective date be established after the lapse of a reasonable time after the
section is finalized, to allow practitioners time to study the final provisions, educate themselves,
and establish systems to monitor and document compliance.
Furthermore, we understand, as no changes are proposed to section 10.52, that violations of
proposed section 10.33 would be subject to discipline under Circular 230 only if those violations
were willful, reckless or grossly incompetent. We believe this is an appropriate level of
discipline and consistent with the notion that the proposed section 10.33 “best practices” are
intended to be aspirational. It would not be appropriate to be subject to sanction under Circular
230 for mere “shortfalls” in meeting those “best practices.”
2.
Proposed Section 10.35, Definition of Tax Shelter
The AICPA appreciates the difficulty that is inherent in defining the term “tax shelter.” In this
context, proposed section 10.35 retains the definition of tax shelter as originally proposed in
January 2001 by utilizing “a significant purpose” test language of
IRC section
6662(d)(2)(C)(iii). We continue, however, to believe that this language (i.e., an entity, plan, or
arrangement that has “a significant purpose” of which is the avoidance or evasion of Federal
income tax) lacks clear definition, is overly-broad, and may result in inconsistent administration
or enforcement of the regulations. Accordingly we urge the IRS to consider amending the
proposed section 10.35(c)(2) definition of tax shelter in order to ensure that enforcement is
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focused on clear violations of the tax law and regulations, thereby providing less opportunity for
inappropriate assertions of the application of the law or penalties against practitioners.
Proposed section 10.33(a)(5) provides that it is a best practice for a practitioner to advise a client
regarding the import of the conclusions reached, including, for example, whether a taxpayer may
avoid penalties for a substantial understatement of income tax under section 6662(d) of the
Internal Revenue Code if a taxpayer acts in reliance on the advice. We recommend that this
provision be clarified to apply only where there is a reasonable exposure to the section 6662
penalty, i.e., the position lacks substantial authority if the position is not related to a tax shelter,
or more likely than not support if the position is related to a tax shelter.
3.
Proposed Section 10.35, Requirements for Certain Tax Shelter Opinions
The AICPA supports the efforts of Treasury and IRS to address tax shelter opinions and to “raise
the bar” regarding the quality and professionalism with respect to all written tax opinions.
However, we note several instances where the language of the proposed amendment is
inconsistent, imprecise, or may be misunderstood. For these reasons, we suggest the following
changes:
a.
Proposed section 10.35(a)(1)(i) provides as to factual matters that, “The practitioner must
use reasonable efforts to identify and ascertain the facts….The opinion must identify and
consider all relevant facts.” To be consistent with “reasonable efforts to identify and
ascertain the facts,” we suggest that the second sentence be modified to read that “The
opinion must consider all relevant facts that have been identified through reasonable
efforts.”
b.
Proposed section 10.35(a)(1)(ii) provides that, “…it is unreasonable…to make an
assumption with respect to a material valuation issue.” Clarification is needed that these
rules do not contemplate that the practitioner will require the taxpayer to obtain an
appraisal in all instances, but that reasonable representations as to value may be obtained
from the taxpayer or a reliable third party for this purpose.
c.
Proposed section 10.35(a)(2)(i) provides that, “The practitioner must relate the applicable
law (including potentially applicable judicial doctrines) to the relevant facts. As noted in
our comments on the earlier version of this amendment, we are troubled by the inference
that a practitioner must identify “potentially applicable” judicial doctrines rather than
“clearly relevant” judicial doctrines, because no one can reasonably predict the course
and development of judicial doctrines.
d.
Proposed section 10.35(a)(3)(iv) provides that “The practitioner must not take into
account the possibility that a tax return will not be audited, that an issue will not be raised
on audit, or that an issue will be settled.” We suggest that this sentence be preceded with,
“In formulating his or her opinion”.
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e.
Proposed section 10.35(a)(4) refers to the “likelihood that the Federal tax treatment of
the tax shelter item or items is the proper treatment….” We suggest, “Likelihood that the
Federal tax treatment of the tax shelter item or items will prevail.”
f.
Proposed section 10.35(c)(4)(i) provides that, “A tax shelter opinion is written advice by
a practitioner concerning the Federal tax aspects of any Federal tax issue relating to a tax
shelter item or items.” We recommend the insertion of “other than informal written
communication such as e-mail” after “written advice” to recognize the common use of
informal written communication as a substitute for a telephone conversation or
otherwise as a mechanism for conveying views that fall short of more formal opinions.
g.
Proposed section 10.35(f), Effective date. The proposed amendment would apply the
new standards to opinions rendered after the date final regulations are published in the
Federal Register. We suggest that Treasury and IRS provide 60 days after the date
published in the Federal Register for practitioners to modify their procedures and to train
their colleagues.
4.
Proposed 10.36, Procedures to Ensure Compliance
We support proposed section 10.36(a), Best practices for tax advisors. For the purpose of aiding
compliance, we suggest that this section be expanded to provide the following example as
constituting steps tax advisors (charged with responsibility under the section) may take to ensure
that their firm’s procedures are consistent with the best practices described in proposed section
10.36; that is, the adoption of an appropriate quality control manual or similar guidance. In this
regard, we note that the AICPA has published a Tax Practice Quality Control Guide. We urge
Treasury to recognize that the formality and scope of any manual must be scaled to the size and
complexity of any particular tax practice. In addition, we suggest that the section encourage the
adoption of review programs, including internal reviews by members of the same firm and peer
review programs. We note that the AICPA has a Voluntary Tax Practice Review Program and
has published materials that provide guidelines on the conduct of such programs.
Proposed section 10.36(c) provides that section 10.36(a) is effective on the date the final
regulations are published in the Federal Register. We suggest that this section be revised or
eliminated since it is conceptually difficult to understand why a provision calling for the
following of best practices should have any effective date. If Treasury nonetheless feels that an
effective date is warranted for this provision, it should provide that affected individuals should
take appropriate steps to put appropriate measures in place within a reasonable time period
following the finalization of this section.
The AICPA also conceptually agrees with proposed section 10.36(b), Requirements for certain
tax shelter opinions. We believe this proposal will increase the accountability that a firm’s
leadership has over practitioners who render tax opinions, particularly when in many cases the
opinions are issued under the firm’s name. We recognize that differences in size, complexity
and organization of firms that issue tax opinions, make the issuance of detailed rules under
proposed section 10.36(b) difficult; especially with respect to the rules concerning who has
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principal authority and responsibility for overseeing a firm's practice involving the providing of
advice on Federal tax issues.
We recommend the addition of simple examples to address some fundamental issues of who is
held responsible under proposed section 10.36(b). For example, in a firm with a lead tax partner
who is principally responsible for the economic management of the firm’s tax practice and a tax
opinion committee that has the responsibility for the approval of all tax opinions by the firm, is
the responsible partner the lead tax partner, the chair of the tax opinion committee, or both?
Similarly, if the firm has a tax management committee that makes the policy decisions for the
firm’s tax practice, including approval of the firm’s policies, and a partner responsible for
drafting the firm’s policies concerning tax opinions, is the responsible partner the chair of the
management committee, the partner responsible for drafting the firm’s policies, both, or even a
larger group such as all members of the management committee?
Because this section contemplates the creation of monitoring and managing the requirements of
section 10.35, which themselves have not been finalized, we recommend that the effective date
of section 10.36(b) be delayed until 90 days after the finalization of section 10.35 to give firms a
reasonable amount of time to implement appropriate monitoring and management systems.
5.
Proposed Section 10.37, Establishment of Advisory Committees
The AICPA will be commenting on proposed section 10.37, establishment of advisory
committees, in a separate letter to Treasury.
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