Practices and Procedures · Requirements for Enrolled Agents

Standards for written advice, covered opinions, tax return positions and preparing returns

Three sections cover this ground, and one no longer exists. The covered opinion rules that once occupied § 10.35 — their disclaimers, categories and elaborate procedural requirements — were removed in 2014 and replaced by a single principles-based written-advice section. Knowing what was repealed is as examinable as knowing what replaced it.

The rule

Return positions (Circular 230 § 10.34(a)). A practitioner may not wilfully, recklessly, or through gross incompetence sign a return or claim that they know or reasonably should know contains a position that lacks a reasonable basis, is an unreasonable position under IRC § 6694(a)(2), or is a wilful attempt to understate liability or a reckless or intentional disregard of rules under IRC § 6694(b)(2) — nor advise a client to take such a position or prepare a portion of a return containing one (§ 10.34(a)(1)).

Documents, affidavits and other papers (§ 10.34(b)). A practitioner may not advise a position on, or prepare or sign, a document, affidavit or other paper submitted to the IRS whose purpose is to delay or impede administration of the Federal tax laws, that is frivolous, or that contains or omits information demonstrating an intentional disregard of a rule — the last unless the practitioner also advises the client to submit a document evidencing a good faith challenge to the rule.

Advising on penalties (§ 10.34(c)). A practitioner must inform a client of any penalties reasonably likely to apply to a return position where the practitioner advised on it or prepared or signed the return, and to any document, affidavit or other paper submitted to the IRS — and of any opportunity to avoid them by disclosure, with the requirements for adequate disclosure. This applies even if the practitioner is not subject to a penalty.

Relying on client information (§ 10.34(d)). A practitioner advising on a position, or preparing or signing a return, generally may rely in good faith without verification on information furnished by the client — but may not ignore the implications of information furnished or actually known, and must make reasonable inquiries if it appears incorrect, inconsistent with an important fact or another assumption, or incomplete.

Competence (§ 10.35). A practitioner must possess the necessary competence to practise before the IRS: the appropriate level of knowledge, skill, thoroughness, and preparation for the matter engaged. A practitioner may become competent by methods “such as consulting with experts in the relevant area or studying the relevant law.”

Written advice (§ 10.37(a)). A practitioner may give written advice — including by electronic communication — on Federal tax matters subject to § 10.37(a)(2). Two things sit outside the section: government submissions on matters of general policy, and continuing education presentations given solely to enhance practitioners’ knowledge — though that exclusion does not apply to presentations marketing or promoting transactions.

The practitioner must (§ 10.37(a)(2)): base the advice on reasonable factual and legal assumptions, including as to future events; reasonably consider all relevant facts and circumstances they know or reasonably should know; use reasonable efforts to identify and ascertain the relevant facts; not rely on representations, findings or agreements — including projections, forecasts or appraisals — of the taxpayer or anyone else if reliance would be unreasonable; relate applicable law and authorities to facts; and not take into account the possibility that a return will not be audited or that a matter will not be raised on audit.

Reliance is unreasonable if the practitioner knows or reasonably should know that one or more representations or assumptions on which any representation is based are incorrect, incomplete, or inconsistent (§ 10.37(a)(3)).

Reliance on others’ advice (§ 10.37(b)). A practitioner may rely on another’s advice only if it was reasonable and the reliance in good faith on all the facts. Reliance is not reasonable where the practitioner knows or reasonably should know that the opinion should not be relied on, that the other person is not competent or lacks the qualifications, or that they have a conflict of interest under Part 10.

Standard of review (§ 10.37(c)). The Commissioner applies a reasonable practitioner standard on all the facts, including the scope of the engagement and the type and specificity of the advice sought. Where the practitioner knows or has reason to know the opinion will be used by someone else to promote, market or recommend an entity, investment plan or arrangement a significant purpose of which is tax avoidance or evasion, the same standard applies with emphasis on the additional risk caused by the practitioner’s lack of knowledge of the taxpayer’s particular circumstances.

Federal tax matter (§ 10.37(d)) means any matter concerning the application or interpretation of a revenue provision as defined in IRC § 6110(i)(1)(B), any provision of law impacting obligations under the internal revenue laws, or any other law or regulation the IRS administers.

Current figures

How it works in practice

The two standards in § 10.34 are different, and mixing them is the most common error here. For a tax return position, § 10.34(a) works off reasonable basis and the § 6694(a)(2) unreasonable-position rules. For a document, affidavit or other paper, § 10.34(b) works off a different trio — delay or impede, frivolous, intentional disregard. “Not frivolous” is the document standard; a return position that is non-frivolous but lacks a reasonable basis still violates § 10.34(a).

Note the mental state. Section 10.34(a) reaches only conduct that is wilful, reckless, or through gross incompetence; § 10.34(b) carries no such qualifier.

The good-faith-challenge escape in § 10.34(b)(iii) applies to one of the three prohibitions only: a paper that intentionally disregards a rule is permitted if the practitioner also advises the client to submit a document evidencing a good faith challenge. There is no equivalent for a frivolous paper or one designed to delay.

The penalty-advice duty in § 10.34(c) is affirmative and unconditional, and § 10.34(c)(3) is the sentence that catches people: it applies even where the practitioner faces no penalty. Section 10.34(d) is a presumption with three tripwires — good-faith reliance without verification holds until the information appears incorrect, inconsistent or incomplete, and the practitioner may never ignore the implications of what they were told or actually know.

Competence under § 10.35 is worth reading for what it permits. It does not require the practitioner to already know the area, and says in terms that a practitioner may become competent by consulting experts or studying the law. Declining the engagement is not the only compliant response to unfamiliarity.

For written advice, the six requirements in § 10.37(a)(2) are the whole test, and (vi) is the distinctive one: the practitioner may not take into account the possibility that a return will not be audited. Advice that is sound only because nobody will look is not sound advice. The section reaches electronic communication, so an email answering a client’s tax question is written advice subject to all six.

Section 10.37(c)(2) is the marketed-transaction rule and what survives of the covered-opinion regime’s concerns. It imposes no extra formal requirements; it raises the effective bar by directing emphasis to the risk arising from the practitioner’s ignorance of the particular taxpayer’s circumstances.

Finally, §§ 10.34, 10.35, 10.36 and 10.37 are the four sections named in § 10.52(a)(2), so a violation is sanctionable on recklessness or gross incompetence without proof of wilfulness. Section 10.22(a) notes that the diligence duty is modified by §§ 10.34 and 10.37 — those sections supply the standard where they apply.

How this has changed

T.D. 9668, applicable June 12, 2014, made the largest change to this area since 2004. It removed the covered opinion rules then occupying § 10.35, redesignated that number for a new competence section, and rewrote § 10.37 into the six-requirement standard now in force, applicable to written advice rendered after June 12, 2014 (§ 10.37(e)).

What went away matters. The covered-opinion regime defined categories of opinion — listed transactions, principal-purpose and significant-purpose arrangements, reliance and marketed opinions — and imposed formal requirements on each: factual due diligence, relating law to facts, evaluating every significant Federal tax issue, an overall conclusion, and prescribed disclosures. It also produced the Circular 230 disclaimer appended defensively to millions of emails. Since 2014 there is no covered opinion category, and those disclaimers serve no Circular 230 function. A question about covered opinion requirements is testing whether the candidate knows they were repealed.

What replaced it is principles-based: one standard for all written advice on Federal tax matters, no categories, no mandated disclosures, and the marketed-transaction problem handled through the standard of review in § 10.37(c)(2) rather than a separate rulebook.

Section 10.35’s competence requirement is also new in 2014 — before that Part 10 had no general competence provision, and incompetence reached OPR only through § 10.51(a)(13).

Section 10.34 was untouched by the 2014 project. Its text comes from T.D. 9359 (2007) as amended by T.D. 9527 (2011), with the split applicability dates in § 10.34(e): paragraph (a) applies to returns or claims filed, or advice provided, beginning August 2, 2011; (b) through (d) to papers filed on or after September 26, 2007. The 2011 amendment aligned § 10.34(a) with the post-2007 § 6694 standards.

Exam focus

The single most valuable fact is that the covered opinion rules were repealed in 2014 and § 10.35 is now competence. Expect a distractor built on the old regime.

Keep the two § 10.34 standards apart: reasonable basis and § 6694(a)(2) for return positions; delay or impede, frivolous, intentional disregard for documents and other papers, with a good-faith-challenge escape only for the intentional-disregard limb. Know that § 10.34(c) requires advising on penalties and on the disclosure route out of them, even where the practitioner faces no penalty, and that § 10.34(d)‘s three triggers for reasonable inquiry are incorrect, inconsistent, incomplete.

For § 10.37, know that it covers electronic communication, that the standard of review is the reasonable practitioner standard measured against the scope of the engagement, and that audit risk may not be considered.

Check yourself

1. Which standard governs a position taken on a tax return under Circular 230 § 10.34? (A) The position must not be frivolous (B) The position must not lack a reasonable basis, and must not be an unreasonable position under IRC § 6694(a)(2) (C) The position must be more likely than not to succeed (D) The position must have substantial authority in all cases Answer: B. Section 10.34(a)(1) uses reasonable basis and the § 6694(a)(2) standards; “not frivolous” is the document standard in § 10.34(b).

2. What happened to the covered opinion rules? (A) They were moved to § 10.37 unchanged (B) They were repealed by T.D. 9668 effective June 12, 2014, and § 10.35 now addresses competence (C) They apply only to listed transactions (D) They were codified in IRC § 6694 Answer: B. The 2014 amendments removed the covered opinion regime and replaced it with a single principles-based written-advice standard in § 10.37.

3. Must a practitioner advise a client of penalties where the practitioner faces no penalty exposure of their own? (A) No, the duty is tied to the practitioner’s own exposure (B) Only if the client asks (C) Yes, § 10.34(c)(3) applies the duty regardless (D) Only for positions the practitioner personally signed Answer: C. Section 10.34(c)(3) applies even if the practitioner is not subject to a penalty with respect to the position or paper, and the duty extends to disclosure opportunities and adequate disclosure requirements.

4. Which may a practitioner take into account in giving written advice? (A) The likelihood the return will not be audited (B) The likelihood the issue will not be raised (C) The scope of the engagement and the specificity of the advice sought (D) The client’s history of never being examined Answer: C. Section 10.37(c)(1) makes scope and specificity part of the reasonable practitioner standard; § 10.37(a)(2)(vi) forbids weighing audit risk.

5. When must a practitioner make reasonable inquiries of a client under § 10.34(d)? (A) Always, before signing any return (B) Where the information appears incorrect, inconsistent with an important fact or another assumption, or incomplete (C) Only where the client has been examined before (D) Never; good faith reliance is absolute Answer: B. Reliance in good faith without verification is the general rule, but the practitioner may not ignore the implications of information furnished or actually known.