Circular Argument: What is Wrong, and Right, with the Circular 230 “Covered Opinion” Regulations

The covered opinion regulations set forth in Treasury Department Circular 230 impose a number of stringent requirements on the provision of written tax advice by attorneys, accountants and others admitted to practice before the Internal Revenue Service. Since they became effective in 2005, the covered opinion regulations have been disparaged by both practitioners and scholars as overly broad and unduly burdensome. The regulations were originally intended to govern advice concerning potentially abusive tax shelters; however, they are drafted so broadly that they actually apply to written opinions regarding virtually any tax matter—including routine and legitimate tax planning. On the occasion of their five-year anniversary, attorney Steven Z. Hodaszy examines the covered opinion regulations and analyzes whether their benefits justify their burdens. Hodaszy contends that, because of a continuing need to reign in unscrupulous opinion practices in the tax shelter area, some form of the regulations must remain in place. Yet he also maintains that the regulations should be reformed so that they clearly apply only to tax shelter advice (as they were meant to). To accomplish this, Hodaszy proposes a specific textual revision to the regulations’ definition of a “covered opinion.” In conjunction with that proposal, he argues for the repeal of rules that presently allow practitioners to opt out of compliance with the regulations under some circumstances. Similarly, he rejects calls to restrict application of the regulations to practitioners who “opt in” to compliance with them. Neither the current “opt-out” rules nor an alternative “opt-in” approach would be justifiable, once the covered opinion regulations are appropriately restricted to advice concerning tax shelters. Moreover, as Hodaszy explains, either maintaining the "opt-out" rules or replacing them with an "opt-in" regime could effectively vitiate the regulations altogether, in the advent of a new strict-liability accuracy-related penalty for transactions lacking economic substance. Hodaszy asserts that, with the changes he proposes, the covered opinion regulations can instead continue to function as an important tool to deter abusive tax shelters, but without imposing detrimentally on other areas of tax practice