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June 27, 2009

Internal Revenue Service Office of Professional Responsibility goes easy on Tax Attorney

The Internal Revenue Service Office of Professional Responsibility recently issued a decision regarding a complaint issued by the Director, Office of Professional Responsibility, Department of the Treasury, Internal Revenue Service, seeking the suspension of a tax attorney for the attorney's involvement in a questionable tax transaction and preparing a tax opinion not supported by the facts and law.  I have attached the decision below and have the following comments:

  1. The decision provides a good summary of the various weights of tax opinions, including: (i) more likely than not, which means that there is at least a 51 percent chance that the conclusions in the tax opinion are correct; (ii) reasonable basis, which has a 25 percent chance that the opinions are correct;  (iii) a substantial authority opinion, which means it has about a 40 percent chance; (iv) a should opinion, which has a 75 to 80 percent chance; and (v) a will opinion, which has about a 95 percent chance.   
  2. Providing a tax opinion whereby the opinions were intended and were reasonably expected to be a part of a taxpayer's presentation to the IRS in support of a position taken on a return constituted practice before the Internal Revenue Service for purposes of circular 230.
  3. The use of the short form tax opinion that summarizes only the facts and conclusions of a particular transaction, versus a long form opinion detailing all of the facts, all of the possible contingencies, and all of the legal issues, caused the complaint to be initiated in the first place. 
  4. The administrative law judge ultimately rejected the Director's complaint finding that the tax attorney completed the necessary due diligence, even though it was summarized in a short form opinion and even though it was an abusive tax shelter.  The significance of this decision from my perspective is that the decision highlights that you must continue to follow best practices when providing opinions to clients, which this attorney did for the most part.  That is, complete a thorough review of the facts, review all relevant legal authority, and prepare a well reasoned analysis based upon the facts and law.  I would also add that you should advise the client of the potential penalties that the Service may assess and properly document the scope of the engagement.  And, it goes without saying, that all of this should be in writing.
  5. Thus, even though this particular case dealt with a tax shelter that some may argue should have or could have been pursued criminally, the tax attorney was given a pass, mainly because he presented sufficient evidentiary support that he acted in good faith and within the general understanding of best practices for tax attorneys. 
  6. See the Office of Professional Responsibility decision attached. Download IRS Office of Professional Responsibility decision

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June 27, 2009

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