[Federal Register Volume 77, Number 180 (Monday, September 17, 2012)]
[Proposed Rules]
[Pages 57055-57063]
From the Federal Register Online via the Government Printing 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