[Federal Register Volume 77, Number 180 (Monday, September 17, 2012)]
[Proposed Rules]
[Pages 57055-57063]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-22836]
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DEPARTMENT OF THE TREASURY
Office of the Secretary
31 CFR Part 10
[REG-138367-06]
RIN 1545-BF96
Regulations Governing Practice Before the Internal Revenue
Service
AGENCY: Office of the Secretary, Treasury.
ACTION: Withdrawal of notice of proposed rulemaking; notice of proposed
rulemaking and notice of public hearing.
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SUMMARY: This document proposes modifications of the regulations
governing practice before the Internal Revenue Service (IRS). These
proposed regulations affect individuals who practice before the IRS.
These proposed regulations modify the standards governing written
advice and update certain provisions as appropriate. This document also
provides notice of a
[[Page 57056]]
public hearing on the proposed regulations and withdraws the notice of
proposed rulemaking published on December 20, 2004, setting forth
standards for State or local bond opinions.
DATES: Comments must be received by November 16, 2012. Outlines of
topics to be discussed at the public hearing scheduled for December 7,
2012 at 10 a.m., in the Auditorium of the Internal Revenue Service
building at 1111 Constitution Avenue NW., Washington, DC 20224, must be
received by November 16, 2012.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-138367-06), Room
5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
138367-06), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC, or sent electronically via the Federal
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-138367-
06). The public hearing will be held in the Auditorium, Internal
Revenue Building, 1111 Constitution Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning issues for comment, Matthew
D. Lucey at (202) 622-4940; concerning submissions of comments the
public hearing, or to be placed on the building access list to attend
the hearing, Oluwafunmilayo Taylor at (202) 622-7180; (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 330 of title 31 of the United States Code authorizes the
Secretary of the Treasury to regulate practice before the Treasury
Department (Treasury). The Secretary has published regulations
governing practice before the IRS in 31 CFR part 10 and reprinted the
regulations as Treasury Department Circular No. 230 (Circular 230).
Treasury and the IRS have consistently maintained that tax
practitioners must meet minimum standards of conduct with respect to
written tax advice, and those who do not should be subject to
disciplinary action, including suspension or disbarment. In accordance
with these principles, the regulations have been amended from time to
time to address issues relating to tax opinions and written tax advice.
In February 1984, the regulations were amended to provide standards
for providing opinions used in tax shelter offerings in accordance with
American Bar Association Formal Opinion 346 (49 FR 6719). The 1984
amendments required a practitioner who renders a tax shelter opinion to
exercise responsibility with respect to the accuracy of the relevant
facts; apply the law to the particular facts of the tax shelter
offering; ascertain that all material Federal tax issues have been
considered; when possible, provide an opinion as to the likely outcome
on the merits of each material tax issue; provide an evaluation of the
extent to which the material tax benefits in the aggregate will be
realized; and assure that the nature and extent of the tax shelter
opinion is described correctly in the offering materials.
In January 2001, Treasury and the IRS proposed additional
amendments regarding tax shelter opinions. See 66 FR 3276. The 2001
notice of proposed rulemaking addressed both general matters pertaining
to practice before the IRS and matters pertaining specifically to tax
shelter opinions, but the portion of these regulations regarding tax
shelter opinions was not finalized. Rather, on December 30, 2003,
Treasury and the IRS published in the Federal Register (68 FR 75186)
(the 2003 proposed regulations) a second notice of proposed rulemaking
to set forth best practices for tax advisors and to modify the
standards for certain tax shelter opinions. Subsequently, Congress
amended section 330 of title 31 to clarify that the Secretary may
impose standards for written advice relating to a matter that is
identified as having a potential for tax avoidance or evasion (American
Jobs Creation Act of 2004, Public Law 108-357, 118 Stat. 1418).
In December 2004, Treasury and the IRS finalized the 2003 proposed
regulations by publishing final regulations (TD 9165) in the Federal
Register (69 FR 75839) setting forth best practices for tax advisors
and providing standards for covered opinions and other written advice.
Treasury and the IRS simultaneously issued a notice of proposed
rulemaking (REG-159824-04) in the Federal Register (69 FR 75887)
proposing standards for practice before the IRS relating to State or
local bond opinions. In May 2005, Treasury and the IRS published
revisions to the final regulations (TD 9201) in the Federal Register
(70 FR 28824) to clarify the standards for covered opinions. In June
2005, Treasury and the IRS published Notice 2005-47 (2005-1 CB 1373),
providing interim guidance and information concerning State or local
bond opinions. While not a complete list of revisions to Circular 230,
the preceding history demonstrates Treasury and the IRS' commitment to
maintaining minimum standards for written advice that foster an ethical
environment for practitioners and taxpayers.
As explained later in the Explanation of Provisions section of this
preamble, these proposed regulations amend Circular 230 by eliminating
the complex rules governing covered opinions in current Sec. 10.35. In
addition, these proposed regulations expand the requirements for
written advice under Sec. 10.37 and withdraw the proposed amendments
to Sec. 10.39 of the regulations governing requirements for State or
local bond opinions. These proposed regulations also broaden the scope
of the procedures to ensure compliance under Sec. 10.36 by requiring
that a practitioner with principal authority for overseeing a firm's
Federal tax practice take reasonable steps to ensure the firm has
adequate procedures in place for purposes of complying with Circular
230. These proposed regulations clarify that practitioners must
exercise competence when engaged in practice before the IRS and that
the prohibition on a practitioner endorsing or otherwise negotiating
any check issued to a taxpayer in respect of a Federal tax liability
applies to government payments made by any means, electronic or
otherwise. These proposed regulations expand the categories of
violations subject to the expedited proceedings in Sec. 10.82 to
include failures to comply with a practitioner's personal tax filing
obligations that demonstrate a pattern of willful disreputable conduct.
The proposed regulations also clarify the Office of Professional
Responsibility's scope of responsibility.
Explanation of Provisions
Public awareness of the standards for written tax advice and the
accountability of practitioners offering tax advice have increased
since Treasury and the IRS published final regulations on covered
opinions. This increased awareness and accountability is having a
positive effect on our Federal tax system. Years of practical
experience, however, have shown that the covered opinion rules in
current Sec. 10.35 have produced some unintended consequences and
should be reconsidered.
Reconsideration of the covered opinion rules is appropriate in
light of continued practitioner dissatisfaction due to the difficulty
and cost of compliance with the rules. Practitioners have consistently
voiced their concern over the current rules since their promulgation in
2004. See the docket for IRS REG-138367-06 at
[[Page 57057]]
www.regulations.gov. Practitioners overwhelmingly conclude that the
rules are overbroad, difficult to apply, and do not necessarily produce
higher quality tax advice. Many practitioners have stated that the
rules unduly interfere with their client relationships and are not an
ethical standard that everyone, including clients, can comprehend
easily. Some practitioners have also opined that these rules may
reduce, rather than enhance, tax compliance due to the perception that
a covered opinion takes more time to produce and is more expensive for
the client than other tax advice. In this same regard, it has been
suggested that the rules increase the likelihood that practitioners
will provide oral advice to their clients when written advice is more
appropriate because current Sec. 10.35 does not govern oral advice.
Another concern that the government has heard from practitioners
relates to the unrestrained use of disclaimers on nearly every
practitioner communication regardless of whether the communication
contains tax advice. Practitioners have stated that this practice
discourages compliance with the ethical requirements because some
practitioners have concluded that, if they include a disclaimer, they
are free to disregard the standards in current Sec. 10.35 regarding
written tax advice. The disclaimers also lead to confusion for clients
because clients often do not understand why the disclaimer is present
and its consequences. In addition, practitioners have complained that
the disclaimer's widespread overuse causes clients to ignore the
disclaimers altogether, and may render their use in some circumstances
irrelevant.
Although practitioners have informed us that they support sensible
regulation of written tax advice, they have expressed little support
for the rules in their current form and we have received numerous
requests to revise the rules. After years of experience with these
rules, the government and practitioners agree that the covered opinion
rules are often burdensome and provide only minimal taxpayer
protection. Overall, the benefit is insufficient to justify the
additional costs associated with practitioner compliance with the
covered opinion rules. After careful consideration, including
consideration of the public's experience with and comments on these
rules, Treasury and the IRS have concluded that the written advice
standards should be revised.
The proposed regulations will streamline the existing rules for
written tax advice by removing current Sec. 10.35 and applying one
standard for all written tax advice under proposed Sec. 10.37.
Proposed Sec. 10.37 provides that the practitioner must base all
written advice on reasonable factual and legal assumptions, exercise
reasonable reliance, and consider all relevant facts that the
practitioner knows or should know. The proposed removal of Sec. 10.35
will eliminate the requirement that practitioners fully describe the
relevant facts (including the factual and legal assumptions relied
upon) and the application of the law to the facts in the written advice
itself, and the use of Circular 230 disclaimers in documents and
transmissions, including emails.
Other provisions, Sec. Sec. 10.31, 10.36, and 10.82, are also
being updated at this time to reflect the current practice environment.
In addition, a general competence standard is being proposed in new
Sec. 10.35. The proposed regulations also clarify that the Office of
Professional Responsibility has exclusive responsibility for matters
related to practitioner discipline, including disciplinary proceedings
and sanctions.
The scope of these regulations is limited to practice before the
IRS. These regulations do not alter or supplant other ethical standards
applicable to practitioners.
1. Amendments Regarding Rules Governing Written Advice
A. Elimination of Covered Opinion Rules in Sec. 10.35
Current Sec. Sec. 10.35 and 10.37 provide comprehensive rules with
respect to written tax advice. Specifically, current Sec. 10.35
provides detailed rules for tax opinions that constitute ``covered
opinions'' under Circular 230. Covered opinions include written advice
concerning: (1) A listed transaction; (2) a transaction with the
principal purpose of tax avoidance or evasion; or (3) a transaction
with a significant purpose of tax avoidance or evasion, if the advice
is a reliance opinion, marketed opinion, subject to conditions of
confidentiality, or subject to a contractual protection.
The definitions of the various types of covered opinions under
Circular 230 require considerable effort on behalf of practitioners to
determine whether the advice rendered in a particular circumstance is
subject to the covered opinion rules in current Sec. 10.35. Because of
the effort involved, many practitioners attempt to exempt the advice
from the covered opinion rules by making a prominent disclosure or
disclaimer stating that the opinion cannot be relied upon for penalty
protection, as permitted by Circular 230.
Circular 230 also requires that practitioners comply with the
extensive requirements set forth in Sec. 10.35 when providing written
advice that constitutes a covered opinion. Many of the standards in
current Sec. 10.35 track principles a competent practitioner uses when
considering and rendering any advice, although these standards may be
more rigid and cumbersome in application than generally applicable
ethical standards. For example, current Sec. 10.35 requires the
practitioner to include in the written advice the relevant facts
(including assumptions and representations), the application of the law
to those facts, and the practitioner's conclusion with respect to the
law and the facts. This mechanical requirement of automatic inclusion
of information will sometimes lead to awkward or unnecessary, highly
technical discussions in the opinion that may hinder the practitioner's
ability to provide quality tax advice. Further, the inclusion of this
particular detail almost always burdens the practitioner and the client
with significant increased costs, without necessarily increasing the
quality of the tax advice that the client receives.
Significant progress has been made in combating abusive tax
shelters and schemes, and preventing unscrupulous individuals from
promoting those arrangements. In recent years, heightened awareness of
the ethical standards governing tax advice contributed to this improved
state and has benefited practitioners, taxpayers, and the government.
At the same time, there is no direct evidence to suggest that the
overly-technical and detailed requirements of current Sec. 10.35 were
responsible for, or particularly effective at, curtailing the behavior
of individuals attempting to profit from promoting frivolous
transactions or transactions without a reasonable basis.
For these reasons, the proposed regulations eliminate the covered
opinion rules in Sec. 10.35 and instead subject all written tax advice
to streamlined standards under proposed Sec. 10.37, as described later
in this preamble. The proposed regulations also remove references to
current Sec. 10.35 in Sec. Sec. 10.3, 10.22, and 10.52. The burden
reduction that should result from the proposed regulations is
consistent with the President's directive in Executive Order 13563 to
remove or modify regulations that are outmoded, ineffective,
insufficient, or too burdensome.
The elimination of the covered opinion rules in this notice of
proposed rulemaking would, at a minimum, save tax practitioners
$5,333,200. This
[[Page 57058]]
burden reduction comes from the elimination of the provisions requiring
practitioners to make certain disclosures in the covered opinion.
This number does not include a number of other significant savings
to both tax practitioners and taxpayers relating to the cost of
obtaining a covered opinion under the current rules that would occur as
a result of the proposed regulations. Practitioners spend many hours
each year determining whether they need to prepare a covered opinion
for a client or if the advice falls into one of the exceptions. This
requires significant time to, among other things, research and review
the complicated covered opinion rules and discuss the issue with other
practitioners in the firm to determine the right course of action. If
the practitioner decides, after undertaking these activities, that a
covered opinion is necessary, the practitioner must discuss the covered
opinion rules with the client, including how the rules affect the scope
of the work that the client has asked the practitioner to perform,
because the client will incur significant extra costs to obtain the
written advice the client requested. These significant extra costs can,
in some cases, tip the scales against obtaining written advice.
B. Revision of Requirements for Written Advice
Treasury and the IRS continue to be aware of the risk associated
with practitioners providing and marketing written tax opinions.
Proposed Sec. 10.37, therefore, replaces the covered opinion rules
with basic principles to which all practitioners must adhere when
rendering written advice. The proposed provisions also complement the
best practices of Sec. 10.33 and the due diligence requirements in
Sec. 10.22. Specifically, the proposed regulations revise Sec. 10.37
to state affirmatively the standards to which a practitioner must
adhere when providing written advice on a Federal tax matter. Proposed
Sec. 10.37 requires, among other things, that the practitioner base
all written advice on reasonable factual and legal assumptions,
exercise reasonable reliance, and consider all relevant facts that the
practitioner knows or should know. A practitioner must also use
reasonable efforts to identify and ascertain the facts relevant to
written advice on a Federal tax matter under the proposed regulations.
Consistent with current Sec. 10.37, the proposed regulations
provide that a practitioner must not, in evaluating a Federal tax
matter, take into account the possibility that a tax return will not be
audited or that an issue will not be raised on audit. Proposed Sec.
10.37 eliminates the provision in the current regulations that
prohibits a practitioner from taking into account the possibility that
an issue will be resolved through settlement if raised when giving
written advice evaluating a Federal tax matter. Treasury and IRS
conclude that the current rule may unduly restrict the ability of a
practitioner to provide comprehensive written advice because the
existence or nonexistence of legitimate hazards that may make
settlement more or less likely may be a material issue for which the
practitioner has an obligation to inform the client.
Under proposed Sec. 10.37(c)(2), the IRS will continue to apply a
heightened standard of review to determine whether a practitioner has
satisfied the written advice standards when the practitioner knows or
has reason to know that the written advice will be used in promoting,
marketing, or recommending an investment plan or arrangement a
significant purpose of which is the avoidance or evasion of any tax
imposed by the Internal Revenue Code.
Proposed Sec. 10.37(b) also provides that a practitioner may rely
on the advice of another practitioner only if the reliance on that
advice is reasonable and in good faith considering the facts and
circumstances. Specifically, proposed Sec. 10.37(b) provides that
reliance is not reasonable when the practitioner knows or should know
that the opinion of the other practitioner should not be relied on, the
other practitioner is not competent to provide the advice, or the other
practitioner has a conflict of interest. These proposed reliance
provisions incorporate reliance concepts from current Sec. Sec. 10.22
and 10.35(d). Proposed Sec. 10.37, unlike current Sec. 10.35, does
not require that the practitioner describe in the written advice the
relevant facts (including assumptions and representations), the
application of the law to those facts, and the practitioner's
conclusion with respect to the law and the facts. Rather, the scope of
the engagement and the type and specificity of the advice sought by the
client, in addition to all other appropriate facts and circumstances,
are factors in determining the extent that the relevant facts,
application of the law to those facts, and the practitioner's
conclusion with respect to the law and the facts must be set forth in
the written advice. Also, under proposed Sec. 10.37, unlike current
Sec. 10.35, the practitioner may consider these factors in determining
the scope of the written advice. Further, the determination of whether
a practitioner has failed to comply with the requirements of proposed
Sec. 10.37 will be based on all facts and circumstances, not on
whether each requirement is addressed in the written advice.
As discussed earlier in this preamble, many practitioners currently
use a Circular 230 disclaimer at the conclusion of every email or other
writing as a measure to remove the advice from the covered opinion
rules in Sec. 10.35. In many instances, these disclaimers are
frequently inserted without regard to whether the disclaimer is
necessary or appropriate. These types of disclaimers are routinely
inserted in any written transmission, including writings that do not
contain any tax advice. The proposed removal of current Sec. 10.35
eliminates the detailed provisions concerning covered opinions and
disclosures in written opinions. Because proposed Sec. 10.37 does not
include the disclosure provisions in the current covered opinion rules,
Treasury and the IRS expect that these amendments, if adopted, will
eliminate the use of a Circular 230 disclaimer in email and other
writings.
Overall, Treasury and the IRS have determined that the proposed
regulations regarding written advice strike an appropriate balance
between allowing practitioners flexibility in providing written advice
and at the same time maintaining standards that require the
practitioner to act ethically and competently. Treasury and the IRS are
particularly interested in comments responding to whether the proposed
rules achieve that appropriate balance.
C. Municipal Bond Opinions
The proposed regulations withdraw the proposed amendments to Sec.
10.39 governing requirements for State or local bond opinions, and
remove the definition of, and exclusion for, State or local bond
opinions from the definition of covered opinions in Sec. 10.35. The
previously proposed amendments to Sec. 10.39 are no longer necessary
because these proposed regulations remove entirely the concept of
covered opinions from Circular 230. Under these proposed regulations,
practitioners rendering opinions concerning the tax treatment of
municipal bonds are subject to the standards in Sec. 10.37, the same
professional standards that apply to all written tax advice.
2. Procedures To Ensure Compliance
Current Sec. 10.36(a) provides requirements for procedures to
ensure compliance with Sec. 10.35. Because these proposed regulations
remove current Sec. 10.35, these regulations also remove current Sec.
10.36(a). Treasury and the IRS,
[[Page 57059]]
however, are proposing a new Sec. 10.36 to ensure compliance with
Circular 230 generally.
The procedures to ensure compliance have produced great successes
in encouraging firms to self-regulate, without the excessive burden
often associated with a rigid one-size-fits-all approach. Treasury and
the IRS expanded Sec. 10.36 in June 2011 to require firms to have
procedures in place to ensure Circular 230 compliance with respect to a
firm's tax return preparation practice. Under Sec. 10.36 of these
proposed regulations, the requirement for procedures to ensure
compliance are expanded to include all provisions of Circular 230.
Firm responsibility is a critical factor in ensuring high quality
advice and representation for taxpayers. Accordingly, Treasury and the
IRS conclude that firm management with principal authority and
responsibility for overseeing a firm's practice governed by Circular
230 should be responsible for establishing procedures to ensure
compliance with all provisions of Circular 230, and not merely the
provisions regarding tax advice and tax return preparation. For
purposes of Sec. 10.36, ``principal'' management will be interpreted
in a manner consistent with its use in Sec. 1.6694-2(a)(2) and Notice
2007-39.
3. General Standard of Competence
Proposed Sec. 10.35 provides that a practitioner must exercise
competence when engaged in practice before the IRS. Although a
practitioner can be sanctioned for incompetent conduct under Sec.
10.51, no provision of Circular 230 specifically requires a
practitioner to exercise competence when engaged in practice before the
IRS. Section 10.35 is revised, therefore, to clarify that a
practitioner must possess the necessary competence when engaged in
practice before the IRS. Proposed Sec. 10.35 specifies that competent
practice requires the knowledge, skill, thoroughness, and preparation
necessary for the matter for which the practitioner is engaged.
4. Electronic Negotiation of Taxpayer Refunds
Proposed Sec. 10.31 provides that a practitioner may not endorse
or otherwise negotiate any check (including directing or accepting
payment by any means, electronic or otherwise, into an account owned or
controlled by the practitioner or any firm or other entity with whom
the practitioner is associated) issued to a client by the government in
respect of a Federal tax liability.
Treasury and the IRS are proposing to revise Sec. 10.31 to clarify
that the prohibition on practitioner negotiation of taxpayer refunds
applies in the modern-day electronic environment in which the IRS and
practitioners operate today. The proposed regulations also expand Sec.
10.31 to apply to all individuals who practice before the IRS, not just
those practitioners who are tax return preparers. Treasury and the IRS
continue to encounter a small number of unscrupulous preparers and
practitioners who attempt to manipulate the electronic refund process
with the intent to defraud their clients and the IRS. The proposed
regulations clarify that it constitutes disreputable conduct for a
practitioner to direct the payment (or accept payment) of any monies
issued to a client by the government in respect of a Federal tax
liability to the practitioner or any firm or entity with which the
practitioner is associated and that such conduct is subject to
sanction.
5. Expedited Suspension Procedures
Section 10.82 of the current regulations authorizes the immediate
suspension of a practitioner who has engaged in certain conduct. The
proposed regulations extend the expedited disciplinary procedures to
disciplinary proceedings against practitioners who have willfully
failed to comply with their Federal tax filing obligations. Treasury
and the IRS issued a notice of proposed rulemaking in 2006, which
included provisions that proposed extension of the availability of the
expedited suspension procedures to practitioners not compliant with tax
filing and payment obligations. See 71 FR 6421. These provisions were
not finalized in the attendant 2007 final regulations due to
practitioners' concerns that the proposed rule would erode due process
rights. See 72 FR 54540. Treasury and the IRS continue, however, to
encounter practitioners who demonstrate they are unfit to practice by
repeatedly failing to comply with their own tax obligations.
Accordingly, these proposed regulations permit prompt action
against practitioners who have engaged in a pattern of willful
disreputable conduct as demonstrated by non-compliance with their
Federal tax obligations, but in a manner more narrowly tailored than
the 2006 proposal. These proposed regulations only permit the use of
expedited procedures in the limited circumstances when a noncompliant
practitioner demonstrates a pattern of willful disreputable conduct by
(1) failing to make an annual Federal tax return during four of five
tax years immediately before the institution of an expedited suspension
proceeding; or (2) failing to make a return required more frequently
than annually during five of seven tax periods immediately before the
institution of an expedited suspension proceeding. For purposes of
proposed Sec. 10.82, the phrase ``make a return'' has the same meaning
as used in sections 6011 and 6012 of the Internal Revenue Code and
Sec. 10.51(a)(6) of this part. Additionally, the practitioner must be
noncompliant with a tax filing obligation at the time the notice of
suspension is served on the practitioner for the expedited procedures
to apply.
Unlike the previously proposed regulations, these proposed
regulations do not permit the use of expedited suspension proceedings
against practitioners who have not paid their Federal tax obligations.
This modification responds to commentators' concern that a
practitioner's failure to pay can be precipitated by circumstances
outside of the practitioner's control and that it may be inequitable to
suspend a practitioner expeditiously in these situations. Treasury and
the IRS conclude, however, that expedited suspension is appropriate for
practitioners who have not complied with basic tax filing obligations
for the immediately preceding four of five years for annual returns (or
five of seven tax periods). Practitioners engaging in this repeated
pattern of non-filing demonstrate a high level of disregard for the
Federal tax system and a level of willfulness sufficient for
practitioner sanction under Circular 230. Treasury and the IRS have
determined that the proposed rule is appropriate because practitioners
demonstrating this high level of disregard for the Federal tax system
are unfit to represent others who are making a good faith attempt to
comply with their own Federal tax obligations. Expedited action in
these cases will likely prevent harm to these taxpayers and the Federal
tax system.
Current Sec. 10.82(f)(2) provides that a suspension under the
expedited procedures is effective until the suspension is lifted by the
IRS, an Administrative Law Judge, or the Secretary of the Treasury.
Circular 230 does not otherwise provide guidance with respect to the
length of suspension or the time period in which the practitioner is
permitted to apply for reinstatement. Section 10.81, however, currently
provides that a disbarred practitioner (or disqualified appraiser) may
apply for reinstatement after five years following the practitioner's
disbarment or disqualification.
[[Page 57060]]
Proposed Sec. 10.81 makes these rules consistent and applies the same
five-year time period for both disbarred and suspended practitioners.
Treasury and IRS are also proposing several non-substantive changes
to the terms of Sec. 10.82 that will help practitioners distinguish
between the expedited suspension procedures of Sec. 10.82 and
otherwise generally applicable procedures for sanctions instituted
under Sec. 10.60. For example, to begin an expedited suspension under
the proposed regulations, the IRS would issue a ``show cause order''
instead of a ``complaint'' and the practitioner would submit a
``response'' instead of an ``answer.'' The terms ``complaint'' and
``answer'' are currently used to describe the documents used in both
expedited suspensions under Sec. 10.82 and regular proceedings under
Sec. 10.60. These revisions do not generally change current expedited
suspension procedures, or the contents of what must be included in the
underlying documents, but are proposed to make Sec. 10.82 easier to
understand.
Proposed Sec. 10.82(g) clarifies that practitioners subject to an
expedited proceeding may demand a complaint under Sec. 10.60, and that
the demand must specifically reference the suspension action under
Sec. 10.82. Current Sec. 10.82(g) provides that the IRS has 30 days
to issue a complaint after receiving the practitioner's demand for a
complaint. In some cases, extra time may be necessary to provide the
practitioner and Administrative Law Judge with the most current
information regarding the practitioner's fitness to practice before the
IRS. Treasury and the IRS have determined that 45 days will provide the
IRS with sufficient time to ensure the complaint complies with the
requirements in Sec. 10.62. Accordingly, proposed Sec. 10.82(g)
provides that the IRS has 45 days to issue a complaint after receiving
a demand for a complaint from a practitioner suspended under the
expedited procedures.
6. Scope of the Office of Professional Responsibility
IRS and Treasury propose revising current Sec. 10.1 to clarify
that the Office of Professional Responsibility has exclusive
responsibility for matters related to practitioner discipline,
including disciplinary proceedings and sanctions.
Effect on Other Documents
Notice 2005-47 (2005-1 CB 1373) will be obsolete beginning on the
date that final regulations are published in the Federal Register.
Availability of IRS Documents
IRS notices cited in this preamble are made available by the
Superintendent of Documents, U.S. Government Printing Office,
Washington, DC 20402.
Special Analyses
It has been determined that this proposed rule is not a significant
regulatory action as defined in Executive Order 12866, as supplemented
by Executive Order 13563. Therefore, a regulatory assessment is not
required. It is hereby certified that these regulations will not have a
significant economic impact on a substantial number of small entities.
The proposed rule affects practitioners who practice before the IRS.
Persons authorized to practice before the IRS have long been required
to comply with certain standards of conduct, and those who provide
written tax advice currently must comply with specific rules for this
advice. Because these proposed rules replace the rigid rules for
written tax advice with more flexible rules and eliminate the necessity
to provide disclaimers in certain written tax advice, these rules will
reduce the burden imposed on small entities that issue written tax
advice. Therefore, the updating amendments and requirements for written
advice imposed by these regulations will not have a significant
economic impact on a substantial number of small entities. Therefore, a
regulatory flexibility analysis under the Regulatory Flexibility Act (5
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of proposed rulemaking has been
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small businesses.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are timely submitted
to the IRS as prescribed in this preamble under the ADDRESSES heading.
Treasury and the IRS request comments on all aspects of the proposed
rules. All comments will be available at www.regulations.gov or upon
request.
The public hearing is scheduled for December 7, 2012, from 10 a.m.,
and will be held in the Auditorium, Internal Revenue Building, 1111
Constitution Avenue NW., Washington, DC. Due to building security
procedures, visitors must enter at the Constitution Avenue entrance.
All visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 30 minutes before the hearing
starts. For information about having your name placed on the building
access list to attend the hearing, see the FOR FURTHER INFORMATION
CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit comments by
November 16, 2012 and an outline of the topics to be discussed and the
time to be devoted to each topic by November 16, 2012. A period of 10
minutes will be allocated to each person for making comments. An agenda
showing the scheduling of the speakers will be prepared after the
deadline for receiving outlines has passed. Copies of the agenda will
be available free of charge at the hearing.
Drafting Information
The principal author of these regulations is Matthew D. Lucey of
the Office of the Associate Chief Counsel (Procedure and
Administration).
List of Subjects in 31 CFR Part 10
Accountants, Administrative practice and procedure, Lawyers,
Reporting and recordkeeping requirements, Taxes.
Withdrawal of Notice of Proposed Rulemaking
Accordingly, under the authority of 31 CFR part 330, the notice of
proposed rulemaking (REG-159824-04) that was published in the Federal
Register on December 20, 2004 (69 FR 75887) is withdrawn.
Proposed Amendments to the Regulations
Accordingly, 31 CFR part 10 is proposed to be amended as follows:
PART 10--PRACTICE BEFORE THE INTERNAL REVENUE SERVICE
Paragraph 1. The authority citation for 31 CFR part 10 continues to
read as follows:
Authority: Sec. 3, 23 Stat. 258, secs. 2-12, 60 Stat. 237 et.
seq.; 5 U.S.C. 301, 500, 551-559; 31 U.S.C. 321; 31 U.S.C. 330;
Reorg. Plan No. 26 of 1950, 15 FR 4935, 64 Stat. 1280, 3 CFR, 1949-
1953 Comp., p. 1017.
Par. 2. Section 10.1 is amended by revising paragraphs (a)(1) and
(d) to read as follows:
Sec. 10.1 Offices.
(a) * * *
(1) The Office of Professional Responsibility, which shall
generally have responsibility for matters related to practitioner
conduct and shall have exclusive responsibility for discipline,
[[Page 57061]]
including disciplinary proceedings and sanctions; and
* * * * *
(d) Effective/applicability date. This section is applicable
beginning after the date that final regulations are published in the
Federal Register.
Par. 3. Section 10.3 is amended by revising paragraphs (a), (b),
(g), and (j) to read as follows:
Sec. 10.3 Who may practice.
(a) Attorneys. Any attorney who is not currently under suspension
or disbarment from practice before the Internal Revenue Service may
practice before the Internal Revenue Service by filing with the
Internal Revenue Service a written declaration that the attorney is
currently qualified as an attorney and is authorized to represent the
party or parties. Notwithstanding the preceding sentence, attorneys who
are not currently under suspension or disbarment from practice before
the Internal Revenue Service are not required to file a written
declaration with the IRS before rendering written advice covered under
Sec. 10.37, but their rendering of this advice is practice before the
Internal Revenue Service.
(b) Certified public accountants. Any certified public accountant
who is not currently under suspension or disbarment from practice
before the Internal Revenue Service may practice before the Internal
Revenue Service by filing with the Internal Revenue Service a written
declaration that the certified public accountant is currently qualified
as a certified public accountant and is authorized to represent the
party or parties. Notwithstanding the preceding sentence, certified
public accountants who are not currently under suspension or disbarment
from practice before the Internal Revenue Service are not required to
file a written declaration with the IRS before rendering written advice
covered under Sec. 10.37, but their rendering of this advice is
practice before the Internal Revenue Service.
* * * * *
(g) Others. Any individual qualifying under Sec. 10.5(e) or Sec.
10.7 is eligible to practice before the Internal Revenue Service to the
extent provided in those sections.
* * * * *
(j) Effective/applicability date. This section is applicable
beginning after the date that final regulations are published in the
Federal Register.
Par. 4. Section 10.22 is amended by revising paragraphs (b) and (c)
to read as follows:
Sec. 10.22 Diligence as to accuracy.
* * * * *
(b) Reliance on others. Except as provided in Sec. Sec. 10.34 and
10.37, a practitioner will be presumed to have exercised due diligence
for purposes of this section if the practitioner relies on the work
product of another person and the practitioner used reasonable care in
engaging, supervising, training, and evaluating the person, taking
proper account of the nature of the relationship between the
practitioner and the person.
(c) Effective/applicability date. This section is applicable
beginning after the date that final regulations are published in the
Federal Register.
Par. 5. Section 10.31 is revised to read as follows:
Sec. 10.31 Negotiation of taxpayer checks.
(a) A practitioner may not endorse or otherwise negotiate any check
(including directing or accepting payment by any means, electronic or
otherwise, in an account owned or controlled by the practitioner or any
firm or other entity with whom the practitioner is associated) issued
to a client by the government in respect of a Federal tax liability.
(b) Effective/applicability date. This section is applicable
beginning after the date that final regulations are published in the
Federal Register.
Sec. 10.35 Competence.
(a) A practitioner must possess the necessary competence to engage
in practice before the Internal Revenue. Competent practice requires
the knowledge, skill, thoroughness, and preparation necessary for the
matter for which the practitioner is engaged.
(b) Effective/applicability date. This section is applicable
beginning after the date that final regulations are published in the
Federal Register.
Par. 7. Section 10.36 is revised to read as follows:
Sec. 10.36 Procedures to ensure compliance.
(a) Any practitioner who has (or practitioners who have or share)
principal authority and responsibility for overseeing a firm's practice
governed by this part, including the provision of advice concerning
Federal tax matters and preparation of tax returns, claims for refund,
or other documents for submission to the Internal Revenue Service, must
take reasonable steps to ensure that the firm has adequate procedures
in effect for all members, associates, and employees for purposes of
complying with this part, as applicable. Any practitioner who has (or
practitioners who have or share) this principal authority will be
subject to discipline for failing to comply with the requirements of
this paragraph (a) if--
(1) The practitioner through willfulness, recklessness, or gross
incompetence does not take reasonable steps to ensure that the firm has
adequate procedures to comply with this part, as applicable, and one or
more individuals who are members of, associated with, or employed by,
the firm are, or have, engaged in a pattern or practice, in connection
with their practice with the firm, of failing to comply with this part,
as applicable; or
(2) The practitioner knows or should know that one or more
individuals who are members of, associated with, or employed by, the
firm are, or have, engaged in a pattern or practice, in connection with
their practice with the firm, that does not comply with this part, as
applicable, and the practitioner, through willfulness, recklessness, or
gross incompetence fails to take prompt action to correct the
noncompliance.
(b) Effective/applicability date. This section is applicable
beginning after the date that final regulations are published in the
Federal Register.
Par. 8. Section 10.37 is revised to read as follows:
Sec. 10.37 Requirements for written advice.
(a) Requirements. (1) A practitioner may give written advice
(including by means of electronic communication) concerning one or more
Federal tax matters subject to the requirements in paragraph (a)(2) of
this section.
(2) The practitioner must--
(i) Base the written advice on reasonable factual and legal
assumptions (including assumptions as to future events);
(ii) Reasonably consider all relevant facts that the practitioner
knows or should know;
(iii) Use reasonable efforts to identify and ascertain the facts
relevant to written advice on each Federal tax matter;
(iv) Not rely upon representations, statements, findings, or
agreements (including projections, financial forecasts, or appraisals)
of the taxpayer or any other person if reliance on them would be
unreasonable; and
(v) Not, in evaluating a Federal tax matter, take into account the
possibility that a tax return will not be audited or that a matter will
not be raised on audit.
(3) Reliance on representations, statements, findings, or
agreements is unreasonable if the practitioner knows or should know
that one or more representations or assumptions on which any
representation is based are incorrect or incomplete.
(b) Reliance on advice of others. A practitioner may only rely on
the advice of another practitioner if the advice was
[[Page 57062]]
reasonable and the reliance is in good faith considering all the facts
and circumstances. Reliance is not reasonable when--
(1) The practitioner knows or should know that the opinion of the
other practitioner should not be relied on;
(2) The practitioner knows or should know that the other
practitioner is not competent or lacks the necessary qualifications to
provide the advice; or
(3) The practitioner knows or should know that the other
practitioner has a conflict of interest as described in this part.
(c) Standard of review. (1) In evaluating whether a practitioner
giving written advice concerning one or more Federal tax matters
complied with the requirements of this section, the Commissioner, or
delegate, will apply a reasonableness standard, considering all facts
and circumstances, including, but not limited to, the scope of the
engagement and the type and specificity of the advice sought by the
client.
(2) In the case of an opinion the practitioner knows or has reason
to know will be used or referred to by a person other than the
practitioner (or a person who is a member of, associated with, or
employed by the practitioner's firm) in promoting, marketing, or
recommending to one or more taxpayers a partnership or other entity,
investment plan or arrangement a significant purpose of which is the
avoidance or evasion of any tax imposed by the Internal Revenue Code,
the determination of whether a practitioner has failed to comply with
this section will be made on the basis of a heightened standard of
review because of the greater risk caused by the practitioner's lack of
knowledge of the taxpayer's particular circumstances.
(d) Effective/applicability date. The rules of this section will
apply to written advice that is rendered after the date of publication
of the Treasury decision adopting these rules as final regulations in
the Federal Register.
Par. 9. Section 10.52 is revised to read as follows:
Sec. 10.52 Violations subject to sanction.
(a) A practitioner may be sanctioned under Sec. 10.50 if the
practitioner--
(1) Willfully violates any of the regulations (other than Sec.
10.33) contained in this part; or
(2) Recklessly or through gross incompetence (within the meaning of
Sec. 10.51(a)(13)) violates Sec. Sec. 10.34, 10.36, or 10.37.
(b) Effective/applicability date. This section is applicable to
conduct occurring on or after the date final regulations are published
in the Federal Register.
Par. 10. Section 10.81 is revised to read as follows:
Sec. 10.81 Petition for reinstatement.
(a) In general. A practitioner disbarred or suspended under Sec.
10.60, or suspended under Sec. 10.82, or a disqualified appraiser may
petition for reinstatement before the Internal Revenue Service after
the expiration of 5 years following such disbarment, suspension, or
disqualification. Reinstatement will not be granted unless the Internal
Revenue Service is satisfied that the petitioner is not likely to
engage thereafter in conduct contrary to the regulations in this part,
and that granting such reinstatement would not be contrary to the
public interest.
(b) Effective/applicability date. This section is applicable
beginning on the date final regulations are published in the Federal
Register.
Par 11. Section 10.82 is amended by:
1. Revising paragraph (a) and the introductory text of paragraph
(b).
2. Adding paragraph (b)(5).
3. Revising paragraphs (c), (d), (e), (f), (g), and (h).
The revisions and additions read as follows:
Sec. 10.82 Expedited suspension.
(a) When applicable. Whenever the Commissioner, or delegate,
determines that a practitioner is described in paragraph (b) of this
section, the expedited procedures described in this section may be used
to suspend the practitioner from practice before the Internal Revenue
Service.
(b) To whom applicable. This section applies to any practitioner
who, within 5 years prior to the date that a show cause order under
this section's expedited suspension procedures is served:
* * * * *
(5) Has demonstrated a pattern of willful disreputable conduct by--
(i) Failing to make an annual Federal tax return, in violation of
the Federal tax laws, during 4 of the 5 tax years immediately preceding
the institution of a proceeding under paragraph (c) of this section and
remains noncompliant with any of the practitioner's Federal tax filing
obligations at the time the notice of suspension is issued under
paragraph (f) of this section; or
(ii) Failing to make a return required more frequently than
annually, in violation of the Federal tax laws, during 5 of the 7 tax
periods immediately preceding the institution of a proceeding under
paragraph (c) of this section and remains noncompliant with any of the
practitioner's Federal tax filing obligations at the time the notice of
suspension is issued under paragraph (f) of this section.
(c) Expedited suspension procedures. A suspension under this
section will be proposed by a show cause order that names the
respondent, is signed by an authorized representative of the Internal
Revenue Service under Sec. 10.69(a)(1), and served according to the
rules set forth in paragraph (a) of Sec. 10.63. The show cause order
must give a plain and concise description of the allegations that
constitute the basis for the proposed suspension. The show cause order
must notify the respondent--
(1) Of the place and due date for filing a response;
(2) That an expedited suspension decision by default may be
rendered if the respondent fails to file a response as required;
(3) That the respondent may request a conference to address the
merits of the show cause order and that any such request must be made
in the response; and
(4) That the respondent may be suspended either immediately
following the expiration of the period within which a response must be
filed or, if a conference is requested, immediately following the
conference.
(d) Response. The response to the show cause order described in
this section must be filed no later than 30 calendar days following the
date the show cause order is served, unless the time for filing is
extended. The response must be filed in accordance with the rules set
forth for answers to a complaint in Sec. 10.64, except as otherwise
provided in this section. The response must include a request for a
conference, if a conference is desired. The respondent is entitled to
the conference only if the request is made in a timely filed response.
(e) Conference. An authorized representative of the Internal
Revenue Service will preside at a conference described in this section.
The conference will be held at a place and time selected by the
Internal Revenue Service, but no sooner than 14 calendar days after the
date by which the response must be filed with the Internal Revenue
Service, unless the respondent agrees to an earlier date. An authorized
representative may represent the respondent at the conference.
(f) Suspension--(1) In general. The Commissioner, or delegate, may
suspend the respondent from practice before the Internal Revenue
Service by a written notice of expedited suspension immediately
following:
[[Page 57063]]
(i) The expiration of the period within which a response to a show
cause order must be filed if the respondent does not file a response as
required by paragraph (d) of this section;
(ii) The conference described in paragraph (e) of this section if
the Internal Revenue Service finds that the respondent is described in
paragraph (b) of this section;
(iii) The respondent's failure to appear, either personally or
through an authorized representative, at a conference scheduled by the
Internal Revenue Service under paragraph (e) of this section.
(2) Duration of suspension. A suspension under this section will
commence on the date that the written notice of expedited suspension is
served on the practitioner, either personally or through an authorized
representative. The suspension will remain effective until the earlier
of:
(i) The date the Internal Revenue Service lifts the suspension
after determining that the practitioner is no longer described in
paragraph (b) of this section or for any other reason; or
(ii) The date the suspension is lifted by an Administrative Law
Judge or the Secretary of the Treasury, or delegate deciding appeals,
in a proceeding referred to in paragraph (g) of this section and
instituted under Sec. 10.60.
(g) Practitioner request for Sec. 10.60 proceeding. If the
Internal Revenue Service suspends a practitioner under the expedited
suspension procedures described in this section, the practitioner may
demand that the Internal Revenue Service institute a proceeding under
Sec. 10.60 and issue the complaint described in Sec. 10.62. The
request must be in writing, specifically reference the suspension
action under Sec. 10.82, and be made within 2 years from the date on
which the practitioner's suspension commenced. The Internal Revenue
Service must issue a complaint demanded under this paragraph (g) within
45 calendar days of receiving the demand.
(h) Effective/applicability date. This section is applicable
beginning on the date that final regulations are published in the
Federal Register.
Par. 12. Section 10.91 is revised to read as follows:
Sec. 10.91 Saving provision.
Any proceeding instituted under this part prior to the date that
final regulations are published in the Federal Register, for which a
final decision has not been reached or for which judicial review is
still available is not affected by these revisions. Any proceeding
under this part based on conduct engaged in prior to the date that
final regulations are published in the Federal Register, which is
instituted after that date, will apply subpart D and E of this part as
revised, but the conduct engaged in prior to the effective date of
these revisions will be judged by the regulations in effect at the time
the conduct occurred.
Par. 13. Section 10.93 is revised to read as follows:
Sec. 10.93 Effective date.
Except as otherwise provided in each section and subject to Sec.
10.91, Part 10 is applicable on the date that final regulations are
published in the Federal Register.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2012-22836 Filed 9-14-12; 8:45 am]
BILLING CODE 4830-01-P