The Eyes of the IRS Are Upon You  

Now you know they’re really serious when they pump out final regulations the day following the release of proposed regulations that were the subject of the previous byline. Circular 230 is becoming an ever-more used adjunct to the enforcement of the tax law, and tax professionals must become more familiar with its contents to maintain a practice that is ethical in the eyes of the Service.

Perhaps the most welcome change from the proposed form was the loosening of the contingent fee rules. Under the final regulations, practitioners are permitted to charge contingent fees for matters relating to an original or amended tax return filed within 120 days of receiving an exam notice, as well as in cases involving interest and penalty reviews. The Service has sought to find a rule restricting contingent fees for preparing tax returns in order to promote voluntary compliance with the federal tax laws by discouraging return positions that exploit the audit selection process. In particular, it believes that contingent fee arrangements have this potential in connection with claims for refund or amended returns filed late in the examination process.

IRS review of the taxpayer's position is probable and the fees do not provide an incentive for abuse (including interest and penalty reviews, private letter rulings, pre-filing agreements, advance pricing agreements, and requests for relief under §9100). In the case of contingent fees for interest and penalty reviews, there is no exploitation of the audit lottery in these situations as they are generally completed on a post-examination basis. A practitioner, therefore, may charge a contingent fee for services rendered in connection with a claim for credit or refund filed in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service. The regulations do not, however, address the other areas in the parentheses that were suggested by practitioners commenting on the regulations.

To eliminate any adverse impact that the adoption of these final regulations could have on pending or imminent transactions, the contingent fee arrangement provisions will apply to fee arrangements entered into after March 26, 2008.

Another controversial area in the proposed regulations -- what constitutes practice before the IRS -- has been adopted without change. The final regulations provide that practice before the IRS comprehends all matters connected with a presentation to the IRS or any of its officers or employees relating to a taxpayer's rights, privileges, or liabilities under laws or regulations administered by the IRS. Consistent with the Jobs Act amendment to §330 of title 31, the final regulations provide that practice includes rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion. The Office of Professional Responsibility’s jurisdiction is limited to such practice by a practitioner (a defined term). The inclusion of such advice in the same category as preparing and filing documents, corresponding and communicating with the Internal Revenue Service, and representing a client at conferences, hearings, and meetings places the professional who merely opines on a tax position on a similar footing as the preparer of the return reflecting the position.

With respect to conduct occurring before or after September 26, 2007, a practitioner may be sanctioned if the practitioner either willfully violates any of the Circular 230 regulations (other than for best practices for tax advisors); or recklessly or through gross incompetence violates the return preparation or advice regulations. Under the current procedures, any proceedings to determine either monetary sanctions or disciplinary action are held in private; but under the proposed rules, all hearings, all pleadings, all evidence, and all reports and decisions would, subject to some limitations, have been public and open to inspection. Copies of these documents may, at the discretion of the Secretary of the Treasury, be made publicly available on the Internal Revenue Service Web page (www.irs.gov) or through other means. All of the dirty laundry that might have escaped detection by clients and fellow practitioners in the past will become open and notorious. One modest change that may avoid an unwarranted damage to a practitioner’s reputation is that the publication will be made in the 30 days after the agency's decision becomes final.

You can also find out more at the following course:

How to Beat the IRS Legally: Tax Planning and Strategies for the Closely-Held Business (BILB)