Ethical Standards for and Accountability of Practitioners Offering Tax Advice Relating to Employee Benefit Plans

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Note - Any federal tax advice contained in this transcript is intended to apply to the specific situation described and should not be considered official guidance independent of the presentation. The tax advice and statements contained herein should not be relied upon for retirement planning purposes without first consulting a tax or retirement planning professional. This transcript has been edited for technical accuracy and may differ slightly from the audio recording of the Ethics Phone Forum. This information is current as of February 13, 2013. Since changes may have occurred, no guarantees are made concerning the technical accuracy after that date.

Mark:  Hi Everyone! I am Mark O'Donnell, Director of IRS Employee Plans Customer Education and Outreach. Welcome to our Ethics Phone Forum for Employee Benefit Plan Practitioners. Thank you for joining us today. Today you will be hearing from Karen Hawkins, the Director of the Office of Professional Responsibility and Gabe Minc, an Employee Plans Senior Tax Law Specialist.

Before we start I would like to point out a couple of things. If you have registered for this program and you attend the entire live forum, you will receive a certificate of completion by email in about a week. Enrolled agents, enrolled retirement plan agents, and enrolled actuaries are entitled to continuing education credit for this session. Other types of tax professionals should consult their licensing organization to see if today's session qualifies for continuing education credit.  As with all our presentations, the comments expressed by our speakers should not be construed as formal guidance from the IRS.

We have an array of retirement plan resources available for you. You can visit our web pages at www.irs.gov/retirement or from the main irs.gov landing page, click on the "Information For" drop down box on the upper right hand side of the screen and select "Retirement Plans."  While you are visiting our website, you might also want to subscribe to our free electronic newsletters. To subscribe, select the "Subscriptions" drop down from the top of the screen, choose "more" and then select "Retirement News for Employers" for our newsletter that's for   employers sponsoring retirement plans and "Employee Plans News" for our newsletter for retirement plan professionals.

Now let's hear from Karen Hawkins and Gabe Minc.

Karen:  Thanks. This is Karen and welcome to the presentation. Today we are going to try to focus specifically on giving advice, and written advice in particular, under Circular 230 as it may relate to employee benefit plans. We put together a program that will start with me covering a few  summary items about Circular 230 and the Office of Professional Responsibility. We have a couple of new, proposed regulations that we think are applicable in this area that I will describe to you. Gabe is going to talk a bit about some of the Title 26 penalties that are applicable in this area, and  we will work our way through some hypothetical fact patterns to see if we can analyze and make some sense of how the standards of Circular 230 and the Title 26 penalties might be applied in real situations. I understand you all may, in one way, shape or form, have a copy of the PowerPoint slides.

I am going to start with page 3, and I am going to do something immediately to throw you all off balance. I am going to start with the last bullet instead of the first bullet because I think it's more relevant for me to talk a little bit to you about what Circular 230 is before I then place OPR in that context. As a general matter, it's important, I think, for people to realize that the thing we call Circular 230 is really a set of Federal regulations. These regulations  have  evolved into, and been around for so long as, a separate pamphlet referred to a Circular 230, that many people lose sight of the fact that all of the standards of practice  in there  have gone through the regulatory drafting, notice, and comment periods before they were incorporated into the Circular.

The Circular and the regulations, themselves, have their foundation in a statute that is found in Title 31 of the United States Code. The first thing that you, and particularly those of you who work in the employee plans area, are a little more familiar with is working with multiple parts of the United States Code. A lot of tax practitioners are not. But as we all know, Title 26 is where the Internal Revenue provisions are contained. 

Circular 230 and, therefore, most everything that governs standards of practice before the IRS,  is found in Title 31 of the U.S. Code. Title 31 of the Code and the regulations promulgated there under have a rich history. The statute dates back to 1884, and the regulations started to be written in 1886. 

We are talking about concepts and intentions around supervision and oversight of practitioners that predates the Internal Revenue Service and the Internal Revenue Code. Back in 1884, when the statute was enacted, it authorized The Treasury Department to regulate the representation of persons before The Treasury Department.  It was put in place right after the Civil War in order to ensure that the claims that were being made by the citizens of this country regarding property that was taken for use during the Civil War were submitted in a competent and ethical fashion, so that the claims were truthful and that they were being presented competently.

That is the underpinning of the statute, itself, that has now evolved into a whole body of our procedures and standards by which people who practice before the Internal Revenue Service are governed. There are a number of ways that the Office of Professional Responsibility functions under the Title 31 provisions. First, OPR's authority is based primarily in Title 31, but you need to be aware, particularly for those of you who are attorneys, that OPR is specifically given authority to regulate the practice of CPAs and attorneys, but it is subject to section 500 of Title 5 of the United States Code. That effectively says that an attorney can practice before any federal agency in the United States, and another section explicitly says that a CPA can  practice before the Internal Revenue Service with a CPA license in good standing. Those two professions are actually, kind of, if you will, pre-authorized to practice before the Internal Revenue Service.  The rest of you who are listening, or almost the rest of you, are federally licensed as either an enrolled agent or enrolled retirement plan agent who takes the test administered by the IRS, or you are an enrolled actuary.

If you are a return preparer, or if you are a retirement plan administrator, or a trust plan administrator, I have come across all of those kinds of people who work in this area, you are subject to Circular 230 jurisdiction and to OPR's oversight, by virtue of a regulation that was added to Circular 230 in August of 2011. That provision effectively says that anybody who prepares, for compensation, all or substantially all of a document for presentation to the Internal Revenue Service with respect to tax  liabilities is subject to the rules and regulations under Circular 230. You may find that if you do not have one of those licensing or professional designations, you are still covered by section 10.8(c) Circular 230 and, therefore, governed by the Office of Professional Responsibility.

What does the Office of Professional Responsibility do? Well, we are not a very big office. There  are only about 40 of us, and we are charged with regulating and overseeing the standards of practice for any licensed professional tax professional or practitioner before the agency called the Internal Revenue Service. In that capacity, we make determinations about someone's fitness to practice if there are allegations made to us that someone is misbehaving in the system. We are authorized to make determinations about that individual related to their character, their reputation, their integrity, their qualifications, or their competence, and to make determinations as to whether they should be allowed to continue to practice before the agency. 

I think it is terribly important for everybody to realize that we don't operate in a vacuum. We have a very explicit and very detailed set of rules that we have to follow that essentially provide and protect for due process: notice and hearing opportunities for a practitioner to discuss with us what any allegations of misconduct may be about, and whether any such conduct is egregious enough to really warrant any kind of time out from practice, or whether something like a reprimand or censure would be more appropriate.

We take our job very seriously. We spend a lot of time analyzing and making determinations about the nature of someone's conduct, and whether any form of sanction is warranted.

I am moving to slide four very quickly. That's really an informational slide for you as to how you can access Circular 230 in its entirety. We no longer publish that thing called Circular 230. It became economically prohibitive for us to do that. Now, Circular 230 is only available electronically. You can certainly print it yourself, and if you do that in a double-sided way, you can get it out in about 40 pages. So, it's not too onerous, and this slide tells you where to look and how to pull it down. 

Moving to slide five, this is sort of a continuation of the conversation I started to have about what we can do, or what we have responsibility for doing, with respect to people who are determined to have violated Circular 230. The list on this slide five is essentially the various options that we have. 

A "reprimand" is a private letter from OPR to a practitioner that points out to him or her that he or she has probably, technically violated Circular 230, but it appears that the violation is an aberration in his or her behavior. It looks like a one-time pop-up on our radar screen. We are not going to take any action, but we do want to give that practitioner a little wake-up call with the reprimand letter.

The rest of the options on this slide five are all public events. Essentially, "censure" is a one-time public reprimand. A "suspension" can range anywhere from from six months to 59 months. "Disbarment" starts at five years. A monetary sanction may be imposed up to 100% of the gross income derived, or anticipated to be derived, from the alleged misconduct. A monetary penalty is the only sanction we can impose on both individuals and firms.

One of the things that I would really like to make clear, again, is that there are myriad due process opportunities under Circular 230 for a practitioner to defend him or herself and to participate in this process. It is also important to understand that OPR cannot arbitrarily impose any sanction, except for reprimand, which I guess OPR can do, if you want to call it arbitrarily. OPR doesn't, but could, issue a reprimand without consulting with the practitioner. With respect to any of the other disciplinary options, the practitioner would have to agree to it. It's a negotiation that goes on between OPR and the practitioner. It is not a one-sided event. 

If the practitioner doesn't agree with OPR, for example, if OPR thinks that whatever has been done is enough to warrant a suspension of a few months, and the practitioner doesn't agree with that, then OPR does have the option of taking that case before an administrative law judge and making its case, just like any other kind of case. So OPR would have to prepare a complaint. It would be filed with the administrative law judge, and OPR would essentially be reciting the facts that it thinks properly describes the misconduct warranting the sanction. OPR would have to set forth its position as to why it believes the misconduct deserves the specified amount of discipline. OPR  would have to prove its case to the administrative law judge by clear and convincing evidence, and would have to show that the conduct involved was willful. Willful in this context is not like some of you may think - that an individual has to really, really mean it.  Rather, "willful," in the legal context, is just defined as the voluntary and intentional violation of a known legal duty. In other words, the individual knew that he or she was supposed to do something, and didn't do it. The individual doesn't have to have had an evil intent or motive - what the law calls "malice aforethought." None of that is required. Instead, an individual need only have known or should have known that he or she had an obligation and failed to fulfill that obligation. 

A lot of what we do under Circular 230 is  look at the provisions that require certain behavior or prohibit certain behavior. A practitioner is deemed  to have knowledge of the practice standards under Circular 230. A practitioner is deemed to know his or her responsibility to do certain things or not to do certain things under Circular 230. To the extent a practitioner does something contrary to that expectation, that's when OPR must develop the evidence needed to show that such conduct is "willful." 

Some conduct is easier to prove in that way than others. So, the burden of proof is not an easy one for OPR. We have to think about it, and we have to be careful about how we are putting our evidence together. Again, there are lots of protections and lots of opportunities for the practitioner to participate in this process to their benefit. 

Moving to slide six … this …

Gabe:  I am sorry … this is Gabe Minc, so sorry to interrupt you, but,

Karen:  Go … go.

Gabe:  I thought this might be a good time to ask whether, in your experience, there is one type of fact pattern, or a particular behavior, that most often results in the imposition of one of the forms of sanctions under Circular 230 you have described?

Karen:  I have been the Director here at OPR for about four years. I would say I have not ever seen the same fact pattern twice. A lot of the more recent cases we are seeing would boil down to not so much a specific set of facts, but rather, to violations of certain provisions in Circular 230. The provisions that are most often violated are the ones that I would call the due diligence provisions, for example, sections 10.22, 10.34, 10.37, and 10.51(a)(13). Those provisions are all variations on expectations about due diligence. We are going to talk about these provisions in greater detail as we move through this PowerPoint presentation. However, these due diligence provisions are, more often than not, the catchall provisions that we end up using to find that there has been errant conduct. 

The other place where we see a lot of activity is listed on slide  six, which I was about to talk about. A lot of the referrals to OPR come from the field. The first bullet of slide six refers to "IRS examinations," but I would say, "IRS examinations, collections and appeals." A lot of the cases that come from the IRS, and they are the bulk of where we get our referrals, are allegations of a practitioner presenting misleading, false or fraudulent information to the agency. That can occur in the course of an examination, where a practioner is trying to support some items, or positions taken, on a tax return, or amounts reported or deducted on a tax return. It can come up in the context of someone who is representing a taxpayer in a collection matter where they may be a little more aggressive than they should be with respect to the financial statements. It can come up in the tax-exempt area with the submission of financial forms for an organization that is seeking exempt status that are not accurate. It can come up in the benefits area in the context of a practitioner submitting information with respect to the plan, or with respect to a contribution made to the plan, or an analysis done to calculate the amount of the contribution, that is not accurate.

Many of those cases  fall, for us, under the provision in Circular 230 that is at 10.51(a)(4), which is the presentation of false or misleading information to the agency. The other Circular 230 provision that is the  big one in the area is section 10.51(a)(7), which relates to a submission, or encouraging, counseling, or advising a client to do things or take tax positions that essentially constitute violations of the tax law. Section 10.51(a)(7) is a  kind of a variation on the section 10.51(a)(4) provision and I would say most of the behaviors that we see start falling into one of the categories I've just described. These  are the big categories of misconduct that we see. I guess these categories of misconduct are just endemic to the field. 

Also, a lot of practitioners don't seem to get the message that if they want to practice before the agency, they really need to file their own tax returns and pay their own tax liabilities, but that one irritates me to talk about. I would just mention it and move on. 

The rest of slide six is essentially a recitation of all of the various places within the agency and external to the agency that OPR collaborates with, or has contact with, or otherwise has exchanges of information with. So, you can see we have a close relationship with the Criminal Investigation division, Treasury Inspector General for Tax Administration. Those are usually in the context of criminal investigations that are either declined for prosecution or that are successful prosecutions and then we come in behind them and determine whether further discipline is warranted. We tend to work with the Department of Justice on promoter cases, and we work with them on injunctive cases. We also work with the Federal Trade Commission regarding  tax debt collection company activities. In the past, we have also assisted some of the state attorneys general in actions they have taken under consumer protection laws against practitioners who are misleading the public. We have a much broader reach than people realize. We have much broader relationships within the government than people realize with respect to the responsibilities that we have for the oversight of tax practitioners. 

I would just very quickly reference slide seven. It speaks for itself. It's just a recitation of the various subparts of Circular 230. Subpart A will be familiar to those of you who might be enrolled agents or enrolled actuaries because that's essentially a recitation of how you get to be one of those licensed individuals. Subpart B, I think, is the most important one. If you have never read Circular 230, that's the one that you should take a very close look at because that contains all the individual paragraphs that recite the expectations for conduct, or for not taking certain actions, that would be expected under Circular 230. Subpart C talks about our authority to impose  sanctions. It also contains a very big subpart, and I have mentioned it already, section 10.51 contains 18 subparagraphs that recite various expectations the agency has for how practitioners should  conduct themselves.

Earlier, I mentioned sections 10.51(a)(4) and (a)(7). There is a series of statements about disreputable and incompetent conduct involving convictions - felony convictions for tax crimes, for fiduciary crimes, and for loss of license. So, those of you who are attorneys and CPAs, if your state disciplines you in any fashion that warrants or results in the revocation, termination, or suspension of your license to practice in the State, Circular 230 authorizes OPR to piggyback on that state action and remove your authority to practice before the agency, because without your state license, you have no authority to practice before the Internal Revenue Service, unless you come in and take one of the agency's  licensing tests.

One of the provisions that has been getting a lot of attention recently, and that I know Gabe wanted me to talk about with you, is a new proposed revision to Circular 230 regarding written opinions. Before I can talk about that, I need to give you a little background in the history. I am  at slide eight. In September of 2012, there was a notice of proposed rulemaking issued by the agency to make some revisions to Circular 230, and one of the biggest ones, and the one that frankly got the most positive reactions, was the agency's proposal to rescind and delete the current section 10.35 provision in Circular 230. I don't expect you all to know instantly what section 10.35 of Circular 230 is about, but I am going to tell you. If you have sent or received an email that has a disclaimer in it saying that the email is not a tax opinion on which the recipient of the email can rely for tax penalty protection, no matter what the content of the email is, including a lunch date, a spa date, or a golf date, then you are familiar with section 10.35, even though you didn't realize it. Section 10.35 is known as the "covered opinion due diligence rule." In section 10.35, there is  a requirement that if a practitioner is  giving an opinion that could be defined as a "covered opinion" and the practitioner hasn't done a certain amount of due diligence that is also outlined in the current 10.35, then that disclaimer had to accompany whatever opinion was being given. It is required for written advice with respect to certain covered opinions. The problem was that everybody, probably yourselves included, started to add that disclaimer to every communication because nobody wanted to think too hard about whether they were writing a covered opinion or not. I would think a lunch date invitation, for example, would certainly be an obvious one that wasn't a covered opinion. Nevertheless,  I know a lot of the large firms embedded that disclaimer into all of their lawyers' emails to ensure that there was never a mistake made.

We had reached a point after ten years, because that's about how long section 10.35 has been in Circular 230, where the disclaimer had no meaning. Nobody was really paying much attention to the disclaimers. I think most clients didn't even understand what it meant anymore. If the disclaimer had served a purpose in the early days, it seemed as though it was no longer serving that purpose, and it was, in fact, becoming a burden. Therefore, we are proposing to completely remove section 10.35 regarding  covered opinions from Circular 230.

Now, the hearing on the proposed revisions to Circular 230 was held in December. There were a bunch of written comments that were received during the applicable comment period. Those are all being sifted through and analyzed. I would anticipate that  a notice of final rule making would be coming out sometime in 2013, but one never knows exactly what the timing is. So, all I can say, at the moment, is that it's in process and watch for it because perhaps you will be able to take that disclaimer out of your emails.

There is presently a proposed new section 10.35. However, I wanted to just mention to you that the proposed section 10.35 is not intended to be a revision of the old, current section 10.35. This is a brand new provision that we are proposing to insert into Circular 230. It just happens to bear the 10.35 number. Proposed section 10.35 states  a general expectation that  practitioners be competent when they are engaged to  practice  before the Internal Revenue Service. Proposed section 10.35 further says that competence requires knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged. This is a very broad principals-based expectation of competency. A determination of competency under proposed section 10.35 is facts and circumstances focused. But, we do expect you to be competent when you are expecting your clients to pay you for the work that you are doing.

When we say "competent," this is a professional standard that is modeled after the ABA model rules, and we take the same position that the ABA does on this. You don't have to be competent yourself. You can hire competence; you can educate yourself to be competent; you can engage competent people for certain pieces of what you are doing, and not others in which you have the requisite expertise. The expectation of competence does not mean that you, individually, always have to be the subject matter expert on the engagement. However, you do have to ensure that the client is getting the appropriate qualifications and competence for whatever they are paying for.

The next proposed Circular 230 provision is, I guess, the last one before we really get to some of the hypos. This is the giant one – the proposed changes to section 10.37. Section 10.37 is in Circular 230 right now and is labeled "Other Written Advice." Current section 10.37 states  the due diligence expectation for other written advice. Proposed section 10.37 is going to be called "Written Advice," because section 10.37, as proposed, will provide all of the due diligence expectations applicable to all manners of written advice. There are other provisions in Circular 230 dealing with oral advice, but section 10.37 is the one that will address  written advice.

Again, here, what you see is a transition from a checklist-based concept, to a more principals- based concept. Under proposed section 10.37, the word "reasonable" is all over the place. So, the practitioner is expected to make reasonable factual and legal assumptions. You are supposed to reasonably consider all the relevant facts that are associated with whatever the engagement is. You have to make reasonable efforts to identify and ascertain the relevant facts. You can't rely upon representations, or statements, or findings, or agreements, if that reliance would be unreasonable. Furthermore, you can't take into account the possibility that a tax return will not be audited or that a matter won't be raised on audit, but you may consider the possibility of resolution through settlement, if challenged.

That will be a difference between the current section 10.37 and the proposed section 10.37. The current 10.37 prohibits you from considering the possibility of resolution through settlement.

We are getting a little bit more flexibility, there again focusing more on the principals-based aspects of how one practices. Proposed 10.37 goes on to say that reliance on taxpayer information is going to be unreasonable if you know or you should know that one or more of the representations or the assumptions on which that taxpayer information is based is either incorrect or incomplete, and I would add, or inconsistent, with other facts that you have.

Under proposed section 10.37, you may rely on the advice of another practitioner only if the advice is reasonable and the reliance is in good faith considering all of the facts and circumstances. Proposed section 10.37 says that reliance on another practitioner is going to be unreasonable if the practitioner is unqualified to render the advice, or is incompetent. If you know, or should know, that that person is unqualified or incompetent, you may not be relying on them. You also may not rely on another practitioner if you know, or you should know, that that practitioner has a conflict of interest.

That's where the proposed  section 10.37 is coming out in terms of the expectations around written advice. These rules will apply when you are putting written material together.

I guess we have  proposed section 10.36 to talk about, also. If you have employees, or you engage others as independent contractors to do a piece of work for you, section 10.36, as proposed, imposes certain duties on any practitioner who has the principal authority for overseeing your business, your firm, or whatever it may be. This includes any  federal practice involving any of the activities that are covered by Circular 230. The practitioner with such principal authority has to take reasonable steps to ensure that the firm has adequate protection for purposes of ensuring that all of its employees comply with Circular 230. I'm on slide 15, if you lost me. If you fail to take such  steps, and you have people in your firm who violate Circular 230, depending again upon the facts and circumstances, you may find yourself being held personally liable for those violations. If you take reasonable steps to put procedures in place and you still have people who violate 230 and you are aware of it, or you should be aware of it, and you failed to take steps to correct what they have done, then you are also potentially subject to personal liability. I am going to skip slide 17 because I really covered that material in my conversation about section 10.37.

Gabe, I think you wanted to say some things about the IRS approach to promoters and abusive tax avoidance.

Gabe:  Karen, thank you very much. This is Gabe Minc. I should say, first of all, how happy I am to be here on this call with Karen. Also, I should mention that any opinions I express today are  not necessarily those of the Internal Revenue Service. They are entirely my own.

What I tried to do in the next few slides is talk more specifically about abusive tax avoidance transactions. These  are  situations where a practitioner is being overly aggressive in his or her tax positions. In the past, it sometimes took a really long time, if there was a particular scheme that firms were selling over and over again, to stop the scheme from proliferating. The reason, in part, was the approach  the Service was using to address  the problem. The IRS was finding out about the scheme one taxpayer at a time, and then trying to respond to the issue one taxpayer at a time. The problem with that approach is that it is somewhat of a losing proposition in that it takes forever to shut down the scheme.

In my personal view, it seems like the emphasis over the past 20 years, or so, has really changed and continues to change very rapidly to one where the Service - and I don't think the Service alone - I think other governmental agencies as well, look to the particular people who are promoting these schemes and try to address the problem there. What we are seeing is the IRS being much quicker about going into federal court and looking for an injunction against the particular tax preparer or promoter of a particular scheme in order to stop it as expeditiously  as possible. As part of that, in addition to the filing of injunctions and so on is that the Code has been increasingly fortified with a number of civil and criminal penalties that apply to promoters of these types of schemes, and I hope to touch upon those penalties a little bit later, assuming we have time. Slide 18 talks about the shift in the approach in addressing abusive tax avoidance transactions and the legislative changes that have been happening over time.

Karen:  I would just like to add that, as I am observing what is going on in a number of injunction actions the Justice Department is bringing with respect to abuses of all sorts under  the Internal Revenue Code, the number of these cases has jumped exponentially. The Justice Department has become, I think, appropriately aggressive. I am reading every day about one or more injunction actions in this country that has something to do with an individual trying to evade tax liabilities somehow. It is a very aggressive approach that is now being taken.

Gabe:  I agree. What I would like to do next, before working through some short hypothetical fact patterns that, hopefully, illustrate some of the things we have been taking about, is talk briefly about the organization of our PowerPoint slides. We have a number of hypothetical fact patterns and raise some ethical issues. At the end of the PowerPoint slides, starting at slide number 27, we have a a listing of most of  the different provisions of Circular 230, the Internal Revenue Code, and other federal law, that we are going to rely on in order to analyze these hypothetical fact patterns and ethical issues.

We start with hypothetical #one, and in this one we have a practitioner that recommends including undocumented workers in a pension plan's census data. The intent is to never actually provide any benefits to those undocumented workers. The practitioner will provide a written opinion stating that the plan census data indicates that the plan is not discriminatory under Internal Revenue Code Section 410(b).

I don't make up these fact patterns. These facts actually arise in the natural world. A variant of this fact pattern is one where the practitioner actually gives the client the Social Security numbers, and so on, of the practitioner's own employees to be included in the client's pension plan census data.

The first ethical issue under hypothetical #one is - can the practitioner be held accountable for the written opinion that he or she knows is misleading or omits critical information? The point of this ethical issue is to discuss the difficult situation in which a practitioner's opinion arrives at a conclusion by turning a blind eye to some troubling underlying facts. Karen, I know you already started to talk about this problem. I was wondering if you would go through this in more detail?

Karen:  Yes, I guess this is where it starts to feel very scary for people because I can see immediate ways in which this practitioner has gotten himself in trouble. Here, we have  a practitioner who is recommending that the client take  this inappropriate action. It is not  simply a question of the client acting badly. So, you have a practitioner who already appears to have some willful behavior going on. But, as I analyzed this, and for me the fact that it was a written opinion would almost be one of the last things that I would look at, because the first thing I would look at is that there is a general provision of expectation of due diligence in Circular 230 at section 10.22. That section requires that a practitioner exercise due diligence when they are preparing, assisting in preparing, approving, or filing returns or documents, or any other papers, that relate to Internal Revenue Service matters. Of greater importance to me, is that there is an expectation in section 10.22 that the practitioner will exercise due diligence to determine the correctness of any oral or written representation that the practitioner is making either to the Treasury Department or to their client.

Section 10.22 has this very general umbrella of expectations of integrity and competence that every practitioner is expected to exercise in every moment that he or she is  engaging with the client with respect to federal tax matters. The first violation I would see here quite easily Is under section 10.22, particularly if the practitioner is making this recommendation to the client without alerting them to the fact that what they are both doing is fraudulent and illegal.

Section 10.34 is another due diligence provision in Circular 230 and most people recognize section 10.34 as it relates to taking positions on tax returns. But, I would suspect that here section 10.34(b) is equally as relevant. It is the applicable due diligence provision when a practitioner is advising a client to take a position on a document or other paper that is being submitted to the Internal Revenue Service. Section 10.34 says that when you are doing your tax returns, or advising a taxpayer to take a position on a tax return, you can't take, or advise the taxpayer to take, a position that lacks a reasonable basis or that is an unreasonable position, or that is a willful attempt to understate the tax liability.

If you are making a submission which contains a position, it can't be a frivolous position, and it can't be designed to delay or impede tax administration. I think each of those would have to be looked at, analyzed and developed, if this case came to my office, in terms of these due diligence provisions.

Then, because we have a written opinion in this hypothetical, we would have to analyze Circular 230's provisions regarding written opinions. I don't think we  have a covered opinion under current section 10.35. But, certainly the section 10.37 provisions for other written advice would come into play. Therefore, we would have to analyze whether the facts have been reasonably determined, and whether the law has been reasonably determined and applied. I think all of this would fail based on the advice that has been given.

For me, probably the two biggies are the ones I talked about when I was talking about the Circular 230 generally, which are sections 10.51(a)(4) and 10.51(a)(7), because this practitioner is engaging, or about to engage, in submitting false and misleading information, or assisting in the submission of false and misleading information, to the agency with respect to this plan. Under section 10.51(a)(7), the practitioner is e aiding and abetting the taxpayer in the violation of a tax law, or the practitioner is counseling an illegal plan to evade taxes by including these illegals in the plan with an intent to never provide any benefits to those individuals. I think both sections 10.51(a)(4) and 10.51(a)(7) would come into play in terms of our analysis.

If that were not enough, to pile on, I would probably take a look at section 10.51(a)(13). That provision  applies to giving false opinions. The false opinions can be either oral or in writing, so the fact that this was identified as a written opinion wouldn't stop me from looking at (a)(13) and asking whether  the advice is being given in some reckless, highly unreasonable way. I would inquire whether there is a pattern of intentionally, or recklessly misleading, or of knowingly or recklessly giving a false opinion. I think we would probably have something to say under section 10.51(a)(13) were we ever to be brought into this matter to take a look at whether the practitioner warranted discipline or not.

So, that's probably exhausted the sum total of the sorts of things I would think about on that hypo.

Gabe:  Alright, that brings us to hypothetical #2, which is a more classic sort of abusive tax avoidance transaction. In hypothetical #2, a practitioner recommends an abusive insurance product of an offshore enterprise to U.S. clients and provides related services. As  part of that, the practitioner prepares the tax opinion that validates the efficacy of the offshore insurance product. Additionally, the practitioner, in this particular fact pattern, has an  economic relationship with the offshore enterprise. In ethical issue B, I ask whether  the practitioner can issue a written tax opinion recommending the transaction with respect to which he or she has a financial interest. One of the reasons I am interested in this particular question is because, in the back of my mind, I am asking myself -  at what point does the  practitioner stop being just someone who provides an opinion regarding  the tax law and, instead, becomes a  participant or promoter of an abusive tax avoidance scheme.  Karen, do you have any thoughts about this particular ethical issue B?

Karen:  Yes … actually, I'm not sure where you got this hypothetical. I really haven't asked you that, but it looks suspiciously like a press release that OPR put out last June with respect to an attorney who was sanctioned  for having conflicts of interests because of his involvement with what the agency felt was an abusive tax shelter. He played multiple roles in a transaction, some of which look suspiciously like the ones described here. The most obvious, although there are probably some others, provision here would be section 10.29 of Circular 230, which is the conflict of interest provision. Section 10.29 defines a conflict of interest as representing one client who is directly adverse to another. We don't have that issue here, but section 10.29  goes on to say that a conflict of interest also includes a situation where there is a significant risk that the representation of one or more clients will be materially limited by the practitioner's responsibilities to another client, a former client, a third person or by the personal interest of the practitioner. In this situation, the  practitioner is recommending a product for which he has been paid to write the tax opinion that presumably supports the product, and the practitioner has an economic relationship of some sort with the offshore enterprise selling the product.

All of those roles create a significant risk that this practitioner is going to be materially limited in his ability to advise each of these different, if you will, clients on their respective rights,  obligations, and duties when his primary interest would appear to be his own economic interests. I would say that he is square in the context of section 10.29 in terms of the definition of a conflict of interest. Under section 10.29, I have to say, you can still continue with your representation if you can make a determination in good faith, using  a reasonable person standard, that you can continue with the representation and do so in a manner that provides competent and diligent representation to each of the affected clients, and each of the clients involved waives  the conflict of interest. In other words, each affected client would have to provide "informed consent" for you to continue with the representation.

In this situation, the practitioner would have to advise the client that this is a shelter that, at least, the IRS considers to be abusive. I cannot tell from the fact pattern whether the IRS position regarding such a transaction has been adjudicated or not. So, if the practitioner has a stake in the transaction, the practitioner must disclose to all affected clients all of his economic interests in the transaction. If the client hears all of those things and still wants to continue with the representation, and the practitioner still thinks that he can do that without being distracted from zealously representing the taxpayer, then he can proceed. It is impossible to gage the severity of the conflict of interest in this case because the hypothetical fact pattern is ambiguous regarding that.

Gabe:  Thank you very much. That brings us to slide number 24, ethical issue C. This question asks whether the practitioner can be exposed to civil liability for issuing a written tax opinion that supports an abusive tax avoidance transaction. This ethical issue is intended to introduce civil remedies available to  the Internal Revenue Service outside of the structure of Circular 230 under the Internal Revenue Code, that may apply to a practitioner that advocates or supports overly aggressive tax positions. I should emphasize that this discussion only focuses on civil remedies under the Code available to the IRS, and not on private causes of action that may be brought under state malpractice laws, the federal ERISA statute or other state or federal laws. With that in mind, we are now going to go through some of the civil remedies under the Code. I start with Section 6694 of the Code, which is summarized in slide number 38. Section 6694  imposes penalties on tax return preparers for conduct giving rise to certain understatements of liability under a return or claim for refund.

This  penalty is imposed on different types of tax opinions, and is broken down into two major categories; the first has to do with opinions that do not relate to a tax shelter or reportable transaction. Under this category,  a penalty is imposed on a disclosed position for which there is no reasonable basis. In the case of an undisclosed position, a penalty may be imposed on an opinion for  which there is no substantial authority. In the case of a tax shelter or reportable transaction, as those terms are defined in Code Section 6662, the Section 6694 penalty is imposed on tax return preparers for an understatement of tax liabilities for which it is not reasonable to believe the position would, more likely than  not, be sustained on the merits.

Section 6694 applies to tax return preparers. However, under the statute, the term "tax return preparer" is defined very broadly to include an individual that is primarily responsible for the position in the return or claims for refund giving rise to the understatement. There are also other …

Karen:  Can I just tie this in. This language that Gabe has been reciting  from Section 6694 of the Internal Revenue Code tracks the language in section 10.34(a) of Circular 230. So, taking a position on a return, or advising a position on a return, can't be done unless there is a reasonable basis, and can't be done if the position is unreasonable. An unreasonable position, for purposes of section 10.34(a) of Circular 230, and as defined in Code Section 6694, is a disclosed position for which there is no reasonable basis, or an undisclosed position for which there is no substantial authority. There is an overlap here between the Code Section 6694 civil penalty and the section 10.34(a) disciplinary section under Circular 230, although the analysis, at the end of the day, is slightly different.

Gabe:  I am glad you said that because, clearly, these two provisions were intended to work in tandem. Thank you for bringing that out.

Karen:  The other interesting thing to tell you is that if you incur a Code Section 6694(b) penalty, or the IRS proposes such a penalty, there is a mandatory directive that the matter must be referred to OPR for consideration on practice standards issues. If the Section 6694(a) penalty, the negligence penalty, is imposed, the IRS field personnel can use their discretion as to whether to refer the matter to OPR or not, considering whether the practitioner has demonstrated a pattern of behavior or a one-time offense.

Gabe:  Thank you very much. I just wanted to mention a couple of other civil liability provisions and, again, these provisions are listed for you at the end of this PowerPoint presentation. I wanted to talk about two provisions which were introduced as part of the Tax Equity and Fiscal  Responsibility Act of 1982 (TEFRA). These include Code Section 6700, which imposes civil penalties for promoting abusive tax shelters; and Code Section 6701, which imposes  civil penalties for aiding and betting an understatement of tax liability. These two Code Sections are listed on slide number 40.

Also, civil penalties can be imposed on a practitioner for failure to comply with Code Sections 6111 and 6112.

Code Section 6111 requires a material advisor to provide information about any reportable  transaction to the IRS. For this purpose, a "material advisor" is any person who provides material support in connection with a reportable transaction, and who directly or indirectly derives gross income in excess of a threshold amount.

The threshold amount is $50,000, in the case of reportable transaction for the benefit of a natural person, and $250,000 in any other case.

The term "reportable transaction" is defined in the Code. It includes listed transactions, confidential transactions, transactions with  contractual protection, loss transactions and transactions of interest.

All of those terms are defined  in the Code.

Code Section 6112, requires every material advisor with respect to a reportable transaction to maintain a list identifying each person to whom the advisor acted as a material advisor in connection with the transaction.

The civil penalties for failure to comply with Code Sections 6111 and 6112 are imposed under: Code Sections 6707 (relating to a failure to furnish information regarding reportable transaction); Code Section 6707A (relating to a failure to include reportable transaction information with a return); and Code Section 6708 (relating to a failure to maintain lists of advisees with respect to a reportable transaction). These Code sections are listed on slide number 43.

In addition  to those civil penalty provisions, there are a number of Code sections that support the bringing of injunction actions against promoters of abusive tax avoidance transactions. You will find these provisions in Code Section 7402 (relating jurisdiction of federal district courts); Code Section 7407 (relating to an action to enjoin tax return preparers); and Code Section 7408 (relating to an action to enjoin specified conduct related to tax shelters and reportable transactions). Those  provisions are listed in slide number 39. We've got  about two minutes left.

The last hypothetical has to deal with what amounts to criminal conduct. Really, that last  hypothetical is intended  to show how easily a practitioner can become involved in criminal conduct relating to an employee benefit plan. In my years of private practice before joining the IRS, a client never approached me for advice on how to commit a crime. Rather, a request for advice was always framed as  how a particular transaction could be structured correctly. But if the end result or intended consequence of a transaction, when viewed in its broader context, is criminal,  even an otherwise innocent and well-structured transaction can embroil a practitioner in serious problems.

I have included, just for your awareness, in slide number 44, information relating to 18c U.S.C. Section 664 (relating to criminal theft from an employee benefit plan).

In slide number 45, I  provided you some information regarding 18 U.S.C. Section 1027, which relates to criminal false statements and concealment of facts with respect to information required to be disclosed under Title I of ERISA.

I think, with that, we are completely out of time.