The IRS has announced that it will focus on tax practitioners as a further means of reducing the tax gap. See
This is a timely announcement, since anecdotal evidence suggests that the tax minimization norm continues to drive practitioners and preparers to make unwarranted assumptions that reduce their clients' tax liabilities, such as guesses about basis, unsupportable assumptions about home offices, and guestimates of expenses that can be deducted for a business.
Of course, attempts to chastise tax practitioners for stepping over the bounds don't always pan out. The Treasury's Office of Professional Responsibility filed a complaint, under the older version of Circular 230 governing practice before the IRS, to discipline one of the tax advisors in the Long Term Capital Holdings case, 330 F. Supp. 2d 122 (D.Ct. 2004). The adviser gave a "should" opinion in a transaction that purportedly created high basis stock in a section 351 incorporation transaction, without providing any analysis and relying on the promoter's claims for issues critical to the analysis.
A federal administrative law judge decided the case against OPR. Note that the ALJ is not in the OPR office--ALJs are "borrowed" from other agencies for these opinions in tax, because there is no standing group of ALJs in Treasury to be used for such cases. That is a serious problem in and of itself, since ALJs in other agencies don't have any background in tax law or tax standards of practice. Apparently the ALJ thought it was merely a question of the practitioner having failed to provide an explanation of the background analysis earlier in the process--the opinion was a short form opinion without explanation, one that would not satisfy the current standards for coverred opinions under Circular 230. The ALJ considered the practitioner not to be disciplinable since he had merely followed the normal standards in the trade of lawyering, as illustrated in a bar report on closing opinions for corporate transactions (quite a different context from tax opinions) that held that "would" and "should" had the same meaning and that "should" did not necessarily reflect a diminished level of confidence in the conclusion.
This doesn't seem to be a proper analysis for tax, where my experience certainly was that firms considered it good practice to give an analyses in an opinion that is expressed at any lower confidence level than "will". It was not unusual to hear lawyers say that qualified opinions expressed with "should" indicate a probability of being correct that is perhaps in the 75% range-- more than the just over 50% probability of a "more likely than not" opinion but less than the near certainty expressed in "will" opinions.
Further, the ALJ treated IRS Notice 95-53, which warned taxpayers about the LTCH type of tax shelter, as mostly irrelevant, since it merely gave the agency's opinion but did not change the law. The tax adviser didn't need to discuss the Notice, said the ALJ, any more than he needed to discuss the specific statutes and doctrines he considered in arriving at his conclusion, as long as he reasonably concluded that they "should" give the result indicated in the opinion. The ALJ similar found no harm in the adviser's reliance on the shelter promoter for assurances about business purpose and profit potential.
The problem, of course, is that the practice of tax is one in which the tax minimization norm is far too predominant, and tax practitioners too easily allow themselves to rationalize an opinion in their client's favor, especially with the low standards for required confidence levels (in nonshelter transactions, "substantial authority" is sufficient to avoid a penalty for understatements even when the position is not disclosed to the IRS). The need for the covered opinion rules arose because of just these sorts of adviser opinions in tax shelters that assume away critical issues. Aside from the problem of having ALJs who are not conversant with tax law reaching decisions about reasonable opinion practice based on entirely different areas of the law, this opinion is just one more item supporting the need to focus on taxpayer and tax adviser standards--even nonshelter cases should require a more likely than not confidence level, supported, as required under the new written opinion rules, by a reasoned opinion that does not assume away critical issues.
[description of ALJ opinion draws heavily on RIA Checkpoint, ALJ rejects OPR complaint against long term capital holdings counsel, May 26, 2009]
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