b'\x0cEthics of Tax Lawyering\nby\n\nMichael Hatfield\nProfessor of Law\nUniversity of Washington\n\nMarch 2015\n\nii\n\n\x0cAbout the Author\n\nMichael Hatfield is a Professor of Law at University of Washington School\nof Law. Previously he was a Professor of Law at Texas Tech University\nwhere he served as the Associate Dean for Faculty Development and Research\nand held the Glenn D. West Research Professorship. Michael has served as a\n\nVisiting Professor of Law at the University of Washington School of Law\nand at the Seattle University School of Law, and worked as an associate at\nDebevoise & Plimpton in New York, New York and at Simpson, Thacher\n& Bartlett in New York, New York. From 2010-2012, Michael served as\nthe Glenn D. West Research Professor at Texas Tech University. In 2010,\nhe was awarded the Texas Tech University President\'s Excellence in\nTeaching Award, and in 2006, 2008, 2009, 2011, and 2012 he was named\nthe Outstanding Professor of the Year. In 2007 he was awarded the Texas\nTech University Alumni Association New Faculty Award. He teaches\ncourses in taxation, ethics, and trusts and estates. His research has been\npublished in the Florida Tax Review, the Northwestern Law Review\nColloquy, the NYU Annual Survey of American Law, the Baylor Law\nReview, the Notre Dame Journal of Ethics and Public Policy, the Lewis &\nClark Law Review, the Texas Tech Law Review, Tax Notes and the Johns\nHopkins University Press. With Baylor Law School Mills Cox Professor of\nLaw Thomas M. Featherston, Jr. he co-authored Q&A: Wills, Trusts and\nEstates (2nd. ed., 2008).\n\niii\n\n\x0cNotices\n\nThis is the third version of this chapter, updated March 2015. Visit\nhttp://elangdell.cali.org/ for the latest version revision history.\n\nThis work by Michael Hatfield is licensed and published by CALI\neLangdell Press under a Creative Commons Attribution-NonCommercialShareAlike 3.0 Unported License. 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ELangdell\xc2\xae is our electronic\npress with a mission to publish more open books for legal education.\nHow do we define "open?"\n\xef\x82\xb7\n\nCompatibility with devices like smartphones, tablets, and e-readers; as\nwell as print.\n\n\xef\x82\xb7\n\nThe right for educators to remix the materials through more lenient\ncopyright policies.\n\n\xef\x82\xb7\n\nThe ability for educators and students to adopt the materials for free.\n\nFind available and upcoming eLangdell titles at elangdell.cali.org. Show support\nfor CALI by following us on Facebook and Twitter, and by telling your friends\nand colleagues where you received your free book.\n\nvi\n\n\x0cTable of Contents\nAbout the Author ................................................................................... iii\nNotices ....................................................................................................iv\nAbout CALI eLangdell Press .................................................................vi\nTable of Contents ..................................................................................vii\n1. Introducing Legal Ethics for Tax Lawyers ........................................ 1\n1.1. Ethics for Lawyers ........................................................................... 1\nNotes and Questions ................................................................................................ 2\n1.2. The Duty to the Tax System ...........................................................3\nNotes and Questions ................................................................................................ 3\n1.3. Sharing the Profession with Non-Lawyers .....................................3\nGrace v. Allen ............................................................................................................. 4\nNotes and Questions ................................................................................................ 8\n\n2. Regulating Tax Lawyering ............................................................... 11\n2.1. Regulating Tax Lawyering through the IRC ................................ 11\nIRC \xc2\xa7 7206. Fraud and false statements ............................................................12\nNotes and Questions ..............................................................................................12\n\xc2\xa7 6694. Understatement of taxpayer\'s liability by tax return preparer .......14\nNotes and Questions ..............................................................................................19\n2.2. Regulating Tax Lawyering through Circular 230 ......................... 21\nNotes and Questions ..............................................................................................32\nWASHBURN v. SHAPIRO .................................................................................35\n2.3. Regulating Tax Lawyering through Malpractice Standards ........ 36\n\n3. Ethical Problems for Tax Lawyers .................................................. 39\n3.1. Tax Opinions and Tax Shelters .................................................... 39\nNotes and Questions ..............................................................................................43\n\nvii\n\n\x0c3.2. Mistakes ........................................................................................ 43\nNotes and Questions ..............................................................................................45\n3.3. Working with IRS Lawyers and Other Employees ....................... 46\n\xc2\xa7 10.51 Incompetence and disreputable conduct............................................48\nInternal Revenue Manual 4.1.1.7.6.1 - Badges of Practitioner Abuse (0520-2005)......................................................................................................................49\nFrom 1991-2 C.B. 1137:.........................................................................................50\nNotes and Questions ..............................................................................................51\n\nviii\n\n\x0c1. Introducing Legal Ethics\nfor Tax Lawyers\nIn order to appreciate the ethical complications in which tax lawyers\noften find themselves, it is essential to appreciate and understand the\ngreater contexts of legal ethics and the tax system. While it is\nimportant to begin with this more general discussion of ethics and\ntax lawyers, it may also be useful to re-read this section after finishing\nthe chapter\xe2\x80\x94to get a view of the forest after inspecting some of the\ntrees.\n1.1. Ethics for Lawyers\nEthics is practical reasoning. It is thinking through the most\nimportant implications of behavior. For lawyers, ethical reflection\ninvolves considering not only the lawyer\xe2\x80\x99s personal values but also\nthe lawyer\xe2\x80\x99s roles as officers in the legal system and as agents and\nadvisors for clients. Organizing and clarifying the layers of\nobligations and duties implicated in lawyer behavior is the subject\nmatter of legal ethics. The objective is to define a lawyer\xe2\x80\x99s\nprofessional responsibilities. It is not an abstract or idealistic exercise.\nA lawyer with a misunderstanding of her professional responsibilities\nmay find herself disbarred from the practice of law, sued by her\nformer clients, fined and jailed\xe2\x80\x94personally miserable even if she\nescapes discipline, suit, or criminal punishment.\nMany ethical considerations reflect a lawyer\xe2\x80\x99s personal values, such as\nthe choice of practice area or choice of clients. However, legal ethics\nis not simply the domain of personal values. A great many duties are\nimposed on lawyers by fiduciary and contract laws, and, of course,\neach state has its own ethics rules and means of enforcement. Most\nstates have adopted some version of the American Bar Association\xe2\x80\x99s\nModel Rules of Professional Conduct, and many have followed the\nABA\xe2\x80\x99s subsequent amendments (as amended, the \xe2\x80\x9cModel Rules.\xe2\x80\x9d).\nWhile the popular image of a lawyer may be as a courtroom strategist\nand dramatist focused on winning at any cost, the Model Rules reflect\nthe complex realities of lawyering, prescribing different standards for\n\n\x0ca lawyer working as an advisor, neutral third party, and advocate, as\nwell as unavoidable duties to third parties, opposing counsel, and the\ntribunal.\nUnfortunately for the practicing lawyer, burdened with thinking\nthrough the consequences of her professional behavior, complying\nwith the state ethics rules does not necessarily mean she escapes\nliability under malpractice standards. Lawyers may be sued by former\nclients\xe2\x80\x94and even third parties who were never clients\xe2\x80\x94on either\ntort or contractual grounds where compliance with the state ethics\nrules may not provide a sufficient defense. Although the different\nstandards used in disciplinary and malpractice claims may appear to\nbe confusing, a prudent lawyer should never close her eyes, rely on\nuntutored intuition, and hope for the best.\n\nNotes and Questions\n1. Under the Model Rules, what are the differences between a\nlawyer acting as an advisor and a lawyer acting as an advocate?\nHas the state in which you intend to be admitted adopted the\nABA Model Rules? The Tax Court has adopted the Model\nRules\xe2\x80\x94both their \xe2\x80\x9cletter and spirit.\xe2\x80\x9d United States Tax Court\nRules of Practice Rule 202(a)(3). What does \xe2\x80\x9cspirit\xe2\x80\x9d mean? How\ndoes one comply with the \xe2\x80\x9cspirit\xe2\x80\x9d when it is not described in the\n\xe2\x80\x9cletter?\xe2\x80\x9d We may speak in these terms in casual conversation, but\nif you are the lawyer needing to know how to proceed in court,\nhow do you determine if \xe2\x80\x9cletter\xe2\x80\x9d and \xe2\x80\x9cspirit\xe2\x80\x9d have different\nrequirements? If the requirements are the same, why mention\nboth? If the requirements are not the same, how do you know? Is\nyour client\xe2\x80\x99s interest relevant in determining the \xe2\x80\x9cspirit\xe2\x80\x9d of the\nModel Rules?\n2. Due to the cost of legal advice, tax advice from a lawyer is rarely\njustified unless a substantial dollar amount is involved. What does\nthat mean about the amount of damages likely to be sought in a\ntax malpractice suit?\n\n2\n\n\x0c1.2. The Duty to the Tax System\nTax lawyers may be disciplined by the authorities where they are\nadmitted to practice; they also risk malpractice suits for negligence\nand otherwise failing to fulfill fiduciary or contractual duties to clients\nor others. Furthermore, they may be subject to discipline by the\nInternal Revenue Service (the \xe2\x80\x9cIRS\xe2\x80\x9d) under extensive written\nregulations (usually referenced as \xe2\x80\x9cCircular 230\xe2\x80\x9d). 1 Under these\nregulations, the minimum standard for advice as to an undisclosed\ntax return position is \xe2\x80\x9csubstantial authority,\xe2\x80\x9d2 which is often\ndescribed as \xe2\x80\x9caround a 40% chance of success on the merits.\xe2\x80\x9d 3 This\nstandard has no counterpart in the Model Rules, and is much higher\nthan the non-frivolous standard for advocacy under ABA Model Rule\n3.1.\nSuch standards for tax lawyers are often described as the tax lawyer\xe2\x80\x99s\n\xe2\x80\x9cduty to the system.\xe2\x80\x9d4 This duty reflects the self-reporting nature of\nour tax system in which only 1\xe2\x80\x932% of tax returns are audited. It\nrequires ignoring the low audit rate. Tax advice must be given on the\npresumption that the issue will be litigated in court rather than\ngambling that the IRS will never examine the issue (playing \xe2\x80\x9caudit\nroulette,\xe2\x80\x9d as it is often called). 5 After all, with a 2% audit rate, even\nthe worst tax advice has a 98% chance of \xe2\x80\x9csucceeding\xe2\x80\x9d (as 98% of\ntax returns are not audited).\n\nNotes and Questions\n3. If 100% of tax returns were thoroughly audited, would it be\nrelevant in terms of tax lawyers\xe2\x80\x99 duty to the system? What would\nbe the duty to the system if returns were never audited?\n4. What if criminal defense lawyers had to have \xe2\x80\x9csubstantial\nauthority\xe2\x80\x9d for every legal argument made on behalf of their\nclients? What are some of the differences between advising as to\ntax return positions and advising as to criminal defense?\n\n1.3. Sharing the Profession with Non-Lawyers\nTax lawyers share the tax field with Certified Public Accountants\n(\xe2\x80\x9cCPAs\xe2\x80\x9d). Federal law authorizes both lawyers and CPAs to\nrepresent clients before the IRS, 6 where both practice before the IRS\n\n3\n\n\x0cand are regulated by the Secretary of the Treasury. 7 Further, so long\nas they pass an examination, Rule 200(a)(3) of the United State Tax\nCourt Rules of Practice authorizes CPAs to represent clients before\nthe Tax Court.\nGrace v. Allen\n407 S.W.2d 321 (Tex. Civ. App. 1966)\n\nBATEMAN, Justice. This is a suit to recover the value of\naccountants\xe2\x80\x99 services performed\xe2\x80\xa6. Appellants pled, Inter\nalia, that appellees were not entitled to recover because their\nalleged services constituted the unauthorized practice of\nlaw\xe2\x80\xa6. The trial court rendered judgment for appellees for the\ntotal of $12,600, and appellants appeal on two points of error.\nThe first of these is that the court erred in holding as a matter\nof law that the services rendered by appellees did not\nconstitute the practice of law\xe2\x80\xa6. Appellees contend that their\nservices in question did not constitute the practice of law . . .,\nand that in any event such services were within the purview\nof the federal law and Treasury Department regulations; that\nalthough not members of the Bar, they were licensed to\npractice before the Treasury Department, that everything they\ndid was pursuant to and in accordance with that license, and\nthat if their services were proscribed under New York law\nthey were fully authorized by the federal law and Treasury\nregulations and, therefore, lawful\xe2\x80\xa6.\nThere is no substantial dispute as to the facts. Appellees were\nboth licensed public accountants, one of them being certified,\nand both were admitted to practice before the Treasury\nDepartment, although neither of them was a lawyer. Both of\nthem had been employed by the Internal Revenue Service for\na number of years before entering private practice. Although\nthe appellees had not prepared the appellants\xe2\x80\x99 income tax\nreturns for the years 1955, 1956, 1957 and 1958, when the\nInternal Revenue Service assessed additional taxes for those\nyears they were employed to work with appellants\' attorneys\nin New York City in the preparation and presentation of a\n\n4\n\n\x0cprotest of such assessment. They did so, and it is these\nservices which appellants say constituted the unauthorized\npractice of law, pointing out that one of the appellees testified\nthat \xe2\x80\x98complicated issues\xe2\x80\x99 were involved, that the protest cited\nnumerous cases as authority for the position they were taking,\nsome of which cases had been discussed with the lawyers but\nsome of which had been found as a result of research by the\nappellee Brown. Appellees had prepared in their office several\nForms 872, \xe2\x80\x98Consent to Extension of the Statute of\nLimitations,\xe2\x80\x99 also memoranda used and presented in various\nconferences, with representatives of the Internal Revenue\nService. Appellees conferred frequently with appellants\xe2\x80\x99\nattorneys and kept them advised by telephone and mail as to\naudits by the Internal Revenue Service and the preparation of\nthe protest. The attorneys participated and cooperated in the\npreparation of the protest and in conferences with the\nInternal Revenue Service examining agent and conference\ncoordinator. Appellees also prepared a power of attorney\nauthorizing the attorneys to act for appellees in connection\nwith audits of appellants\xe2\x80\x99 tax returns. Appellants employed\nappellees to prepare and file their Federal and New York\nState income tax returns for 1960 and their declarations of\nestimated income tax (Federal and State) for 1961; also to\nmaintain appellants\xe2\x80\x99 proper books and records therefor.\nTo support their position that under New York law the work\ndone by appellees constituted unauthorized law practice,\nappellants rely wholly on the case of In the Matter of New\nYork County Lawyers Association (Bernard Bercu,\nRespondent), 273 App. Div. 524, 78 N.Y.S.2d 209, 9\nA.L.R.2d 787. In that case . . . the court recognized that an\naccountant employed to keep a taxpayer\xe2\x80\x99s books or prepare\nhis tax return would be expected and permitted to answer\nlegal questions arising out of and incidental to the accounting\nwork. The court also recognized that the matter of taxation,\n\xe2\x80\x98which permeates almost every phase of modern life, is so\ninextricably interwoven with nearly every branch of law that\n\n5\n\n\x0cone could hardly pick any tax problem and say this is a\nquestion of pure taxation or pure tax law wholly unconnected\nwith other legal principles, incidents or ramifications.\xe2\x80\x99\nRecognizing the necessity of drawing a line of demarcation\nbetween the work of the tax lawyer and that of the tax\naccountant, the court said, \xe2\x80\x98the point at which it must be\ndrawn, at very least, is where the accountant or non-lawyer\nundertakes to pass upon a legal question apart from the\nregular pursuit of his calling.\xe2\x80\x99. . .\nHowever, in the case at bar it is not shown that appellants\nconsulted appellees or sought or obtained their opinion on\nany legal subject that was not incidental to their accounting\nwork. Appellees were preparing the appellants\xe2\x80\x99 1960 income\ntax returns and were the regular accountants for appellants.\nThey were also doing accounting work in reviewing and\nclassifying the great volume of papers and records of\nappellants necessary to the preparation of the protest of the\ntax assessment and to enable them to discuss with the\nRevenue Agents the asserted tax liability. It is true that in the\npreparation of the protest appellees cited numerous cases in\nsupport of their position, but this was necessary and\nincidental to the preparation and presentation of the protest.\nMoreover, appellees consulted the appellants\xe2\x80\x99 attorneys\nconcerning these authorities and other aspects of the work\nbeing done and kept them informed as the work progressed. .\n..\nIt is clear from the record before us that the work performed\nby appellees, which appellants assert constituted the\nunauthorized practice of law, was only incidental to their\naccounting work and was therefore permissible and not\nunlawful under New York law.\nAppellees assert, and appellants do not deny, that the work\ndone by appellees was all within the purview of their licenses\nto practice before the Treasury Department. It was agreed on\nthe trial that the court might take judicial notice of the federal\n\n6\n\n\x0claw and Treasury regulations on the subject. One of those\nregulations, in part, provides:\nPractice before the Internal Revenue Service\ncomprehends all matters connected with\npresentations to the Internal Revenue Service\nor any of its officers or employees relating to\na client\xe2\x80\x99s rights, privileges, or liabilities under\nlaws or regulations administered by the\nInternal Revenue Service. Such presentations\ninclude the preparation and filing of necessary\ndocuments, correspondence with, and\ncommunications to the Internal Revenue\nService, and the representation of a client at\nconferences, hearings, and meetings.\nAppellees take the position that if there is a conflict between\nthe state law and the federal law, the former must yield, and\nthat, since the regulations referred to were promulgated under\nsanction of the federal law, they have the force and effect of\nlaw. We agree with appellees. The rights conferred by the\nadmission to practice before the Treasury Department are\nfederal rights which cannot be impinged upon by the states in\ntheir praiseworthy efforts to protect their citizens from\nunskilled and unethical practitioners of the law. Sperry v.\nState of Florida ex rel. Florida Bar, 373 U.S. 379, 83 S. Ct.\n1322, 10 L. Ed.2d 428.\nThis is not to say that the states have surrendered their right\nto regulate and control the practice of law within their\nrespective boundaries, as was done in the Bercu case. See also\nHexter Title & Abstract Co. v. Grievance Committee, 142\nTex. 506, 179 S.W.2d 946, 157 A.L.R. 268. In fact, one of the\nTreasury regulations referred to (\xc2\xa7 10.39) contains this\nproviso: \xe2\x80\x98And provided further: That nothing in the\nregulations in this part shall be construed as authorizing\npersons not members of the Bar to practice law.\xe2\x80\x99 See also\nFree v. Bland, 369 U.S. 663, 82 S. Ct. 1089, 8 L. Ed.2d 180;\nHatfried, Inc. v. Commissioner of Internal Revenue, 3 Cir.,\n162 F.2d 628; Haywood Lumber & Mining Co. v.\n\n7\n\n\x0cCommissioner of Internal Revenue, 2 Cir., 178 F.2d 769;\nBurton Swartz Land Corp. v. Commissioner of Internal\nRevenue, 5 Cir., 198 F.2d 558. Appellants\' first point is\noverruled\xe2\x80\xa6.\nFinding no error requiring reversal, we affirm the judgment\nof the trial court.\n\nNotes and Questions\n5. The Grace court cites Sperry v. State of Florida ex rel. Florida Bar, 373\nU.S. 379, 83 S. Ct. 1322, 10 L. Ed.2d 428 (1963). The Sperry case\ninvolved a practitioner authorized to practice before the U.S.\nPatent Office, but not authorized to practice law in Florida,\nwhich is where he maintained his office. Federal law authorizes\nnon-lawyers to practice before the U.S. Patent Office. May\nsomeone who is not admitted to practice law in the state in which\nhe has offices engage in the practice of tax law? How can federal\ntax issues and state law issues, such as corporate, creditor, and\nproperty issues, be separated in any practical sense? For example,\nif a tax issue requires determination of the nature of an\nunderlying property right under state law, is someone authorized\nto practice tax entitled to opine as to the underlying state law\nissue? Or is it that someone authorized to practice tax law is\nentitled to opine as to the tax law issue, only if someone else, who\nis authorized to practice state law, has opined on the state law\nissue? What does Circular 230 \xc2\xa7 10.39 mean? As to Circular 230,\nsee below.\n6. What do CPAs do? The National Conference of Lawyers and\nCertified Public Accountants issued a study on the relationship\nbetween lawyers and CPAs. Like lawyers, CPAs are licensed to\npractice by state professional boards. CPAs engage in accounting\nand auditing, tax and management consulting, and especially in\nexpert examination of financial statements. They develop and\nanalyze data, especially data expressed in monetary or other\nquantitative forms. 8\n7. What do lawyers do? Trying to define the \xe2\x80\x9cpractice of law\xe2\x80\x9d in\norder to prohibit the unauthorized practice of law has consumed\n\n8\n\n\x0cmany courts, and few generalizations are useful. Many nonlawyers routinely interpret, apply, and discuss the consequences\nof the law (e.g., consider bank employees who advise customers\non the survivorship rights in accounts). Many non-lawyers\nroutinely prepare legally-binding documents (e.g., consider real\nestate agents who prepare sales contracts). And many nonlawyers represent others before agencies (e.g., the U.S. Patent\nOffice) and in court (e.g., the U.S. Court of Appeals for Veterans\nClaims).\n8. If CPAs and tax lawyers share the tax field, how is the work\ndivided? Both may prepare tax returns, though, in practice, few\ntax lawyers specialize in routinely preparing income tax returns\nfor clients. With respect to ascertaining the \xe2\x80\x9cprobable tax effects\nof transactions,\xe2\x80\x9d the National Conference of Lawyers and\nCertified Public Accountants (\xe2\x80\x9cThe Conference\xe2\x80\x9d) recognize that\nboth lawyers and CPAs are qualified, but urge CPAs to consult\nlawyers when there are uncertainties as to the interpretation or\napplication of laws, and urge lawyers to consult CPAs when there\nare uncertainties as to describing the transaction in money terms\nor interpreting financial results. 9 The Conference identifies\npreparing legal documents as part of the special training of\nlawyers, and the preparation of financial statements and similar\nreports as part of the special training of accountants. 10 The\nConference recognizes the opportunity for CPAs to represent\nclients before the Tax Court, but, noting that the client may also\npursue remedies in a District Court or the Court of Claims,\nsuggests that a lawyer be consulted when the IRS issues a notice\nof deficiency. 11\n9. The Conference concludes that all matters involving criminal\ninvestigations should be referred to lawyers. 12 Why?\n10. Usually we think of lawyers as having a monopoly on advising\nclients on legal issues and representing clients in court. However,\nCPAs are authorized to advise clients on the tax law, and CPAs\nare authorized to represent clients in Tax Court. We also usually\nthink of lawyers as an independent profession\xe2\x80\x94one that\nregulates itself. However, tax lawyers, like CPAs, are regulated by\n\n9\n\n\x0cthe Treasury Department. What is the essence of being a lawyer?\nWould it make more sense to classify tax lawyers as part of a \xe2\x80\x9ctax\nprofession\xe2\x80\x9d shared with CPAs? Are tax lawyers and medical\nmalpractice lawyers or criminal defense lawyers members of a\nshared profession in any meaningful sense?\n\n10\n\n\x0c2. Regulating Tax Lawyering\nLawyers often think of the legal profession\xe2\x80\x99s uniqueness as inhering\nin\xe2\x80\x94or reflecting\xe2\x80\x94the profession\xe2\x80\x99s self-regulated nature and its\nmonopoly on certain services, such as representing clients in courts.\nYet, for tax lawyers, matters are quite different. Whereas most\nlawyers are subject to regulation only by the state authorities where\nthey are admitted and the federal courts in which they practice,\nCongress has enacted parts of the Internal Revenue Code to\nprescribe tax lawyering standards. Tax lawyers may be subject to both\ncivil and criminal penalties as a result of their tax advice. The\nTreasury Secretary exercises authority over tax lawyers through\nDirector of the Office of Professional Responsibility (the \xe2\x80\x9cOPR\xe2\x80\x9d)\nand Circular 230. CPAs who \xe2\x80\x9cpractice tax\xe2\x80\x9d are also subject to the\nOPR and Circular 230. Unlike most other lawyers, tax lawyers share\ntheir profession with non-lawyers and are regulated by non-lawyers.\n\n2.1. Regulating Tax Lawyering through the IRC\nA taxpayer has the right to structure his affairs so as to minimize his\ntax liabilities. This is the right to avoid unnecessary taxation, that is,\ntaxes he is not obligated to pay. However, a taxpayer commits a\nfelony if he willfully attempts to evade or defeat taxes he is obligated\nto pay. Under I.R.C. \xc2\xa7 7201, such a taxpayer may be fined $100,000\nand imprisoned for up to five years. Of course, lawyers may not\nengage in assisting clients in any criminal behavior, including tax\nevasion. Model Rule 1.2(d). But where is the line between legal tax\navoidance (for which tax lawyers are well-paid) and criminal tax\nevasion (which can land both client and tax lawyer in prison)?\nGenerally, criminal tax evasion requires that the taxpayer knew her\nobligations under the tax law but intentionally did not fulfill those\nobligations. In other words, ignorance of the tax law is a defense to\ncriminal conviction. See, e.g., United States v. Harris, 942 F.2d. 1125\n(7th Cir. 1991) (mistresses who received payments but argued\nexclusion as \xe2\x80\x9cgifts\xe2\x80\x9d were not criminally liable for tax evasion as the\nprevailing legal standard was too unclear to establish willful evasion).\nA civil fraud penalty may also apply. I.R.C. \xc2\xa7 6663.\n\n\x0cWillfully filing a return that the taxpayer does not believe is true and\ncorrect as to every material matter is a felony punishable by up to\n$100,000 and imprisonment for up to three years. I.R.C. \xc2\xa7 7206(a)(1).\nSo is aiding or assisting anyone in doing so:\nIRC \xc2\xa7 7206. Fraud and false statements\nAny person who-***\n(2) Aid or assistance.--Willfully aids or assists\nin, or procures, counsels, or advises the\npreparation or presentation under, or in\nconnection with any matter arising under, the\ninternal revenue laws, of a return, affidavit,\nclaim, or other document, which is fraudulent\nor is false as to any material matter, whether\nor not such falsity or fraud is with the\nknowledge or consent of the person\nauthorized or required to present such return,\naffidavit, claim, or document; [\xe2\x80\xa6]\n***\nshall be guilty of a felony and, upon\nconviction thereof, shall be fined not more\nthan $100,000 ($500,000 in the case of a\ncorporation), or imprisoned not more than 3\nyears, or both, together with the costs of\nprosecution.\n\nNotes and Questions\n11. Note that \xc2\xa7 6701 provides a civil penalty for aiding and abetting a\ntax liability understatement that is very similar to the \xc2\xa7 7206(a)(2)\ncriminal penalty.\n12. A lawyer who prepares tax-related documents that are\n\xe2\x80\x9cfraudulent\xe2\x80\x9d or \xe2\x80\x9cfalse as to any material matter\xe2\x80\x9d may be\ncommitting a felony under \xc2\xa7 7206(a)(2). The false statement need\nnot be material to calculating the tax liability. U. S. v. Abbas, 504\nF.2d 123 (9th Cir. 1974), certiorari denied 95 S. Ct. 1990, 421 U.S.\n988, 44 L. Ed.2d 477 (1975). Of course, if the return is audited\n\n12\n\n\x0cand the falsity discovered, no tax will be successfully evaded.\nHowever, success in evasion is not relevant. U.S. v. Borgis, 182\nF.2d 274 (7th Cir. 1950). Note that \xc2\xa7 7206(a)(2) applies to \xe2\x80\x9cany\nperson,\xe2\x80\x9d not only a preparer of the return. For example, an\nengineer who prepared a fraudulent report about coal reserves,\nknowing the report would be used in claiming undue tax benefits,\nviolated \xc2\xa7 7206(a)(2). U.S. v. Nealy, 729 F.2d 961 (4th Cir. 1984).\n13. Laura is a second year associate in the tax department of a large\nlaw firm. A corporate client was involved in a merger. It was\nessential for the best tax consequences that the merger be\ncompleted on July 1, as this was the first day of the fiscal year for\nthe parties involved. For two months prior to this deadline,\nLaura, along with many of the other lawyers involved, worked 80\nhour weeks. The deal seemed to be completed as planned.\nHowever, over the July 4th holiday, the junior partner supervising\nLaura asked her into his office. He told her that several\ndocuments that should have been executed on July 1 had not\nbeen. He instructed Laura to prepare the documents with a July 1\ndate, and that he would send the documents by courier to the\nclient for immediate execution. If Laura knows that the\ndocuments will be used in preparing the client\xe2\x80\x99s tax returns, is she\ncommitting a \xc2\xa7 7206(a)(2) felony if she follows the instructions?\nWould she be subject to the IRC \xc2\xa7 6701 civil penalty if she\nfollows the instructions? What if Laura is unsure how these\nparticular documents relate to the tax return? What if she asks the\npartner, and he tells her that it is a good question but not to\nworry about it? What if, instead of telling her not to worry about\nit, he explains that the documents are very useful for\n\xe2\x80\x9chousekeeping\xe2\x80\x9d purposes but not essential to the tax treatment\nand not a material matter for tax purposes? Does Model Rule 5.2\napply? Would complying with the Model Rules protect Laura\nfrom criminal prosecution? Being convicted under \xc2\xa7 7206(a)(2)\nmay lead to being permanently disbarred by the Secretary of the\nTreasury (and the state bar). See the Washburn case below.\n14. There are multiple IRC sections that impose criminal sanctions.\nReview IRC \xc2\xa7\xc2\xa7 7201\xe2\x80\x9317. There are also criminal provisions\n\n13\n\n\x0celsewhere in federal law that may apply when tax lawyers assist\ntheir clients in crossing the line from tax avoidance into tax\nevasion, such as conspiracy to defraud the United States (18\nU.S.C. \xc2\xa7 371 (2012)) or making false statements to the federal\ngovernment (18 U.S.C. \xc2\xa7 1001 (2012)). The mailing of a\nfraudulent tax return may be a mail fraud felony (18 U.S.C. \xc2\xa7\xc2\xa7\n1341, 1343 (2012)), which may be a predicate crime for\nprosecution under the RICO Act (18 U.S.C. \xc2\xa7\xc2\xa7 1341\xe2\x80\x9351 (2012)).\nAt what point does advising a client on minimizing taxes become\na conspiracy between the lawyer and client to defraud the federal\ngovernment of its property? Would it be a prudent office\nprocedure to avoid mailing tax returns on behalf of clients?\nWhile the criminal penalties and civil fraud penalties for tax evasion\nraise many interesting issues, most taxpayers do not willfully evade\ntheir tax liabilities or commit fraud. In fact, American taxpayers\nwillfully pay the taxes they owe at a rate that is very high compared to\nothers in the world (about 85%). Most American taxpayers want to\n\xe2\x80\x9cget it right,\xe2\x80\x9d it seems. But given the complexities of tax law, they\nmay not be able to do so. The tax law is a strict liability law: taxpayers\nowe what they owe regardless of their knowledge or intention. When\na client turns to a tax lawyer for advice, the client should be able to\nrely on the advice, expecting it to be accurate.\nIRC \xc2\xa7 6694(a) is prominent in regulating the advice tax lawyers give\nin connection with tax return preparation. It sets a relatively high\nstandard for the advice, and it imposes a penalty on a tax return\npreparer if there is an \xe2\x80\x9cunreasonable position\xe2\x80\x9d on the return that\nresults in an understatement of tax liability.\n\xc2\xa7 6694. Understatement of taxpayer\'s liability by tax\nreturn preparer\n(a) Understatement due to unreasonable\npositions.\n(1) In general.\xe2\x80\x94If a tax return preparer\xe2\x80\x94\n(A) prepares any return or claim of\nrefund with respect to which any\npart of an understatement of\n\n14\n\n\x0cliability is due to a position\ndescribed in paragraph (2), and\n(B) knew (or reasonably should\nhave known) of the position, such\ntax return preparer shall pay a\npenalty with respect to each such\nreturn or claim in an amount equal\nto the greater of $1,000 or 50\npercent of the income derived (or\nto be derived) by the tax return\npreparer with respect to the return\nor claim.\n(2) Unreasonable position.\xe2\x80\x94\n(A) In general.\xe2\x80\x94Except as\notherwise provided in this\nparagraph, a position is described\nin this paragraph unless there is or\nwas substantial authority for the\nposition.\n(B) Disclosed positions.\xe2\x80\x94If the\nposition was disclosed as provided\nin section 6662(d)(2)(B)(ii)(I) and\nis not a position to which\nsubparagraph (C) applies, the\nposition is described in this\nparagraph unless there is a\nreasonable basis for the position.\n***\n(3) Reasonable cause exception.\xe2\x80\x94No penalty\nshall be imposed under this subsection if it is\nshown that there is reasonable cause for the\nunderstatement and the tax return preparer\nacted in good faith.\nIRC \xc2\xa7 6694(a)(2)(A) and (B) secure two types of positions from being\ncharacterized as \xe2\x80\x9cunreasonable.\xe2\x80\x9d First are positions for which there is\n\xe2\x80\x9csubstantial authority.\xe2\x80\x9d Second are positions for which there is a\n\n15\n\n\x0c\xe2\x80\x9creasonable basis\xe2\x80\x9d and were disclosed on IRS Form 8275 or 8275-R.\nBut what does \xe2\x80\x9csubstantial authority\xe2\x80\x9d and \xe2\x80\x9creasonable basis\xe2\x80\x9d mean?\n\xe2\x80\x9cSubstantial authority\xe2\x80\x9d is often thought to mean \xe2\x80\x9caround a 40%\nchance of success on the merits.\xe2\x80\x9d13 According to IRS Notice 2009-5,\n\xe2\x80\x9csubstantial authority\xe2\x80\x9d has the same meaning under IRC \xc2\xa7 6694 as in\n\xc2\xa7 1.6662-4(d)(2) and (d)(3) which provides as follows:\n(2) Substantial authority standard. The\nsubstantial authority standard is an objective\nstandard involving an analysis of the law and\napplication of the law to relevant facts. The\nsubstantial authority standard is less stringent\nthan the more likely than not standard (the\nstandard that is met when there is a greater\nthan 50-percent likelihood of the position\nbeing upheld), but more stringent than the\nreasonable basis standard as defined in \xc2\xa7\n1.6662-3(b)(3). The possibility that a return\nwill not be audited or, if audited, that an item\nwill not be raised on audit, is not relevant in\ndetermining whether the substantial authority\nstandard (or the reasonable basis standard) is\nsatisfied.\n(3) Determination of whether substantial\nauthority is present\xe2\x80\x93\n(i) Evaluation of authorities. There is\nsubstantial authority for the tax treatment\nof an item only if the weight of the\nauthorities supporting the treatment is\nsubstantial in relation to the weight of\nauthorities supporting contrary treatment.\nAll authorities relevant to the tax\ntreatment of an item, including the\nauthorities contrary to the treatment, are\ntaken into account in determining whether\nsubstantial authority exists. . . . There may\nbe substantial authority for more than one\nposition with respect to the same item.\nBecause the substantial authority standard\n\n16\n\n\x0cis an objective standard, the taxpayer\'s\nbelief that there is substantial authority for\nthe tax treatment of an item is not\nrelevant in determining whether there is\nsubstantial authority for that treatment.\n(ii) Nature of analysis. The weight\naccorded an authority depends on its\nrelevance and persuasiveness, and the type\nof document providing the authority. For\nexample, [an] authority that merely states a\nconclusion ordinarily is less persuasive\nthan one that reaches its conclusion by\ncogently relating the applicable law to\npertinent facts. . . . For example, a revenue\nruling is accorded greater weight than a\nprivate letter ruling addressing the same\nissue. An older [document] must be\naccorded less weight than a more recent\none. Any document described in the\npreceding sentence that is more than 10\nyears old generally is accorded very little\nweight\xe2\x80\xa6. There may be substantial\nauthority for the tax treatment of an item\ndespite the absence of certain types of\nauthority. Thus, a taxpayer may have\nsubstantial authority for a position that is\nsupported only by a well-reasoned\nconstruction of the applicable statutory\nprovision.\n(iii) Types of authority. [Generally, the]\nfollowing are authority for purposes of\ndetermining whether there is substantial\nauthority for the tax treatment of an item:\nApplicable provisions of the Internal\nRevenue Code and other statutory\nprovisions; proposed, temporary and final\nregulations construing such statutes;\nrevenue rulings and revenue procedures;\ntax treaties and regulations thereunder;\n\n17\n\n\x0cand Treasury Department and other\nofficial explanations of such treaties; court\ncases; congressional intent as reflected in\ncommittee reports, joint explanatory\nstatements of managers included in\nconference committee reports, and floor\nstatements made prior to enactment by\none of a bill\'s managers; General\nExplanations of tax legislation prepared\nby the Joint Committee on Taxation (the\nBlue Book); private letter rulings and\ntechnical advice memoranda issued after\nOctober 31, 1976; actions on decisions\nand general counsel memoranda issued\nafter March 12, 1981 (as well as general\ncounsel memoranda published in pre1955 volumes of the Cumulative Bulletin);\nInternal Revenue Service information or\npress\nreleases;\nand\nnotices,\nannouncements and other administrative\npronouncements\xe2\x80\xa6. Conclusions reached\nin treatises, legal periodicals, legal\nopinions or opinions rendered by tax\nprofessionals are not authority. The\nauthorities underlying such expressions of\nopinion where applicable to the facts of a\nparticular case, however, may give rise to\nsubstantial authority for the tax treatment\nof an item\xe2\x80\xa6. In the case of court\ndecisions, for example, a district court\nopinion on an issue is not an authority if\noverruled or reversed by the United States\nCourt of Appeals for such district.\nHowever, a Tax Court opinion is not\nconsidered to be overruled or modified by\na court of appeals to which a taxpayer\ndoes not have a right of appeal, unless the\nTax Court adopts the holding of the court\nof appeal....\n\n18\n\n\x0cA position with a \xe2\x80\x9creasonable basis\xe2\x80\x9d is often thought to be one with\na 10\xe2\x80\x9320% chance of success on the merits. 14 Though not as high a\nstandard as \xe2\x80\x9csubstantial authority,\xe2\x80\x9d Treasury Regulations \xc2\xa7 1.6662 3(b)(3) and \xc2\xa7 1.6694-2(d)(2) provide that the \xe2\x80\x9creasonable basis\xe2\x80\x9d\nstandard is a relatively high standard of tax reporting, that is,\nsignificantly higher than not frivolous or not patently improper. The\nreasonable basis standard is not satisfied by a return position that is\nmerely arguable or that is merely a colorable claim. If a return\nposition is reasonably based on one or more of the authorities set\nforth above regarding substantial authority, the return position will\ngenerally satisfy the reasonable basis standard even though it may not\nsatisfy the substantiality authority standard.\n\nNotes and Questions\n15. Although \xc2\xa7 6694 only applies to a tax return preparer, the\ndefinition of a \xe2\x80\x9cpreparer\xe2\x80\x9d is broader than may be anticipated.\nEven if a tax lawyer does not literally prepare the return, she may\nbe deemed to be a preparer by virtue of providing advice about\nan entry on a return. In general, advice given prior to a\ntransaction does not turn a tax lawyer into a preparer but advice\ngiven afterwards may. The distinction between \xe2\x80\x9cbefore\xe2\x80\x9d and\n\xe2\x80\x9cafter\xe2\x80\x9d advice is easy to maintain in theory, but may rarely hold in\npractice\xe2\x80\x94after all, there are often follow-up questions. Read\nTreasury Regulations \xc2\xa7 301.7701-15.\n16. Laura is a tax lawyer who provides tax advice to a client in\nconnection with the sale of certain business assets. The client\nconsummates the transaction as advised by Laura. Laura\xe2\x80\x99s total\ntime involved in the transaction is thirty hours. After the\ntransaction is completed, Laura has no additional contact with the\nclient. The client\xe2\x80\x99s CPA prepares its tax return without consulting\nLaura. Is Laura a \xe2\x80\x9cpreparer\xe2\x80\x9d of that return? What if the client and\nthe client\xe2\x80\x99s CPA call Laura for a thirty minute follow-up on some\nof the tax issues so the CPA will know how to prepare the\nreturn? What if the follow up requires fifteen additional hours of\nwork by Laura? What if the client did not consult with Laura\nprior to the transaction but does so only afterwards?\n\n19\n\n\x0c17. How does a tax lawyer decide whether a position has a 20% or\n40% chance of success if litigated? Why should a tax lawyer ever\nbe able to advise a client to take a position if the chances are that\na court would hold against the position? After all, at about 40%,\nthe substantial authority standard is considered a relatively high\nstandard of legal advice, by definition, the chances are still about\n60% that it will lose in court. Could there be substantial authority\nfor conflicting positions?\n18. Private letter rulings are not precedential. Why are they\nconsidered \xe2\x80\x9cauthority\xe2\x80\x9d for these purposes? What makes a treatise\nor law journal authoritative?\n19. A position for which there is only a \xe2\x80\x9creasonable basis\xe2\x80\x9d will not be\nconsidered unreasonable if the position is disclosed to the IRS by\nattaching Form 8725 to the tax return. Review Form 8275. What\nis the purpose of Form 8275?\n20. The \xc2\xa7 6694(a) penalty applicable is the greater of $1,000 or 50%\nof the preparer\xe2\x80\x99s fee. Other punishments may also apply. For\nexample, the tax lawyer may be disciplined pursuant to Circular\n230, especially if there is a pattern of inappropriate advising. Note\nalso that \xc2\xa7 6694(b) imposes a greater penalty if the\nunderstatement was due to \xe2\x80\x9cwillful or reckless conduct\xe2\x80\x9d rather\nthan a merely \xe2\x80\x9cunreasonable position.\xe2\x80\x9d See also Circular 230 \xc2\xa7\n10.51(13).\n21. Alongside the \xe2\x80\x9csubstantial authority\xe2\x80\x9d and \xe2\x80\x9creasonable basis\xe2\x80\x9d\nstandards, there is also protection provided the preparer had\n\xe2\x80\x9creasonable cause\xe2\x80\x9d and acted in \xe2\x80\x9cgood faith.\xe2\x80\x9d \xc2\xa7 6694(a)(3).\nTreasury Regulations \xc2\xa7 1.6694-2(e) details this exception,\nemphasizing factors such as whether or not the provision\ninvolved was complex or highly technical; whether the error was\nisolated or part of a pattern; and whether or not the \xe2\x80\x9cnormal\noffice practice\xe2\x80\x9d of the preparer promotes \xe2\x80\x9caccuracy and\nconsistency.\xe2\x80\x9d This final factor emphasizes the importance of\ngood office practices, such as the routine use of checklists. Even\nthough a tax lawyer makes a mistake, the processes routinely used\n\n20\n\n\x0cin the office may turn out to be very important to providing\npenalty protection.\n\n2.2. Regulating Tax Lawyering through Circular 230\nConsider the following sections of Circular 230:\n\xc2\xa7 10.2 Definitions.\n(a) As used in this part, except where the text\nprovides otherwise\xe2\x80\x94\n***\n(4) Practice before the Internal Revenue\nService comprehends all matters connected\nwith a presentation to the Internal Revenue\nService or any of its officers or employees\nrelating to a taxpayer\'s rights, privileges, or\nliabilities under laws or regulations\nadministered by the Internal Revenue\nService. Such presentations include, but are\nnot limited to, preparing and filing\ndocuments,\ncorresponding\nand\ncommunicating with the Internal Revenue\nService, rendering written advice with\nrespect to any entity, transaction, plan or\narrangement, or other plan or arrangement\nhaving a potential for tax avoidance or\nevasion, and representing a client at\nconferences, hearings and meetings.\n***\n\xc2\xa7 10.3 Who may practice.\n(a) Attorneys. Any attorney who is not\ncurrently under suspension or disbarment\nfrom practice before the Internal Revenue\nService may practice before the Internal\nRevenue Service\xe2\x80\xa6.\n(b) Certified public accountants. Any certified\npublic accountant who is not currently under\nsuspension or disbarment from practice\n\n21\n\n\x0cbefore the Internal Revenue Service may\npractice before the Internal Revenue\nService\xe2\x80\xa6.\n***\n\xc2\xa7 10.20 Information to be furnished.\n(a) To the Internal Revenue Service.\n(1) A practitioner must, on a proper and\nlawful request by a duly authorized officer\nor employee of the Internal Revenue\nService, promptly submit records or\ninformation in any matter before the\nInternal Revenue Service unless the\npractitioner believes in good faith and on\nreasonable grounds that the records or\ninformation are privileged.\n(2) Where the requested records or\ninformation are not in the possession of, or\nsubject to the control of, the practitioner or\nthe practitioner\'s client, the practitioner\nmust promptly notify the requesting\nInternal Revenue Service officer or\nemployee and the practitioner must provide\nany information that the practitioner has\nregarding the identity of any person who the\npractitioner believes may have possession or\ncontrol of the requested records or\ninformation\xe2\x80\xa6.\n***\n\xc2\xa7 10.22 Diligence as to accuracy.\n(a) In general. A practitioner must exercise\ndue diligence\xe2\x80\x94\n(1) In preparing or assisting in the\npreparation of, approving, and filing tax\nreturns, documents, affidavits, and other\npapers relating to Internal Revenue Service\nmatters;\n\n22\n\n\x0c(2) In determining the correctness of oral or\nwritten representations made by the\npractitioner to the Department of the\nTreasury; and\n(3) In determining the correctness of oral or\nwritten representations made by the\npractitioner to clients with reference to any\nmatter administered by the Internal\nRevenue Service.\n***\n\xc2\xa7 10.27 Fees.\n(a) In general. A practitioner may not charge\nan unconscionable fee in connection with any\nmatter before the Internal Revenue Service.\n(b) Contingent fees\xe2\x80\x94\n(1) Except as provided in paragraphs (b)(2),\n(3), and (4) of this section, a practitioner\nmay not charge a contingent fee for services\nrendered in connection with any matter\nbefore the Internal Revenue Service.\n(2) A practitioner may charge a contingent\nfee for services rendered in connection with\nthe Service\'s examination of, or challenge\nto\xe2\x80\x94\n(i) An original tax return; or\n(ii) An amended return or claim for\nrefund or credit where the amended\nreturn or claim for refund or credit was\nfiled within 120 days of the taxpayer\nreceiving a written notice of the\nexamination of, or a written challenge to\nthe original tax return.\n(3) A practitioner may charge a contingent\nfee for services rendered in connection with\na claim for credit or refund filed solely in\nconnection with the determination of\n\n23\n\n\x0cstatutory interest or penalties assessed by\nthe Internal Revenue Service.\n(4) A practitioner may charge a contingent\nfee for services rendered in connection with\nany judicial proceeding arising under the\nInternal Revenue Code.\n(c) Definitions. For purposes of this section\xe2\x80\x94\n(1) Contingent fee is any fee that is based, in\nwhole or in part, on whether or not a\nposition taken on a tax return or other filing\navoids challenge by the Internal Revenue\nService or is sustained either by the Internal\nRevenue Service or in litigation. A\ncontingent fee includes a fee that is based\non a percentage of the refund reported on a\nreturn, that is based on a percentage of the\ntaxes saved, or that otherwise depends on\nthe specific result attained. A contingent fee\nalso includes any fee arrangement in which\nthe practitioner will reimburse the client for\nall or a portion of the client\'s fee in the\nevent that a position taken on a tax return\nor other filing is challenged by the Internal\nRevenue Service or is not sustained,\nwhether pursuant to an indemnity\nagreement, a guarantee, rescission rights, or\nany other arrangement with a similar effect.\n(2) Matter before the Internal Revenue\nService includes tax planning and advice,\npreparing or filing or assisting in preparing\nor filing returns or claims for refund or\ncredit, and all matters connected with a\npresentation to the Internal Revenue Service\nor any of its officers or employees relating\nto a taxpayer\'s rights, privileges, or liabilities\nunder laws or regulations administered by\nthe Internal Revenue Service. Such\npresentations include, but are not limited to,\n\n24\n\n\x0cpreparing\nand\nfiling\ndocuments,\ncorresponding and communicating with the\nInternal Revenue Service, rendering written\nadvice with respect to any entity,\ntransaction, plan or arrangement, and\nrepresenting a client at conferences,\nhearings, and meetings.\n***\n\xc2\xa7 10.33 Best practices for tax advisors.\n(a) Best practices. Tax advisors should\nprovide clients with the highest quality\nrepresentation concerning Federal tax issues\nby adhering to best practices in providing\nadvice and in preparing or assisting in the\npreparation of a submission to the Internal\nRevenue Service. In addition to compliance\nwith the standards of practice provided\nelsewhere in this part, best practices include\nthe following:\n(1) Communicating clearly with the client\nregarding the terms of the engagement. For\nexample, the advisor should determine the\nclient\'s expected purpose for and use of the\nadvice and should have a clear\nunderstanding with the client regarding the\nform and scope of the advice or assistance\nto be rendered.\n(2) Establishing the facts, determining\nwhich facts are relevant, evaluating the\nreasonableness of any assumptions or\nrepresentations, relating the applicable law\n(including potentially applicable judicial\ndoctrines) to the relevant facts, and arriving\nat a conclusion supported by the law and\nthe facts.\n(3) Advising the client regarding the import\nof the conclusions reached, including, for\nexample, whether a taxpayer may avoid\n\n25\n\n\x0caccuracy-related penalties under the Internal\nRevenue Code if a taxpayer acts in reliance\non the advice.\n(4) Acting fairly and with integrity in\npractice before the Internal Revenue\nService.\n(b) Procedures to ensure best practices for tax\nadvisors. Tax advisors with responsibility for\noverseeing a firm\'s practice of providing\nadvice concerning Federal tax issues or of\npreparing or assisting in the preparation of\nsubmissions to the Internal Revenue Service\nshould take reasonable steps to ensure that\nthe firm\'s procedures for all members,\nassociates, and employees are consistent with\nthe best practices set forth in paragraph (a) of\nthis section.\n\xc2\xa7 10.34 Standards with respect to tax\nreturns and documents, affidavits and\nother papers.\n(a) Tax returns.\n(1) A practitioner may not willfully,\nrecklessly,\nor\nthrough\ngross\nincompetence\xe2\x80\x94\n***\n(ii) Advise a client to take a\nposition on a tax return or claim\nfor refund, or prepare a portion of\na tax return or claim for refund\ncontaining a position, that\xe2\x80\x94\n(A) Lacks a reasonable basis;\n(B) Is an unreasonable position as\ndescribed in section 6694(a)(2) of\nthe Code (including the related\nregulations and other published\n\n26\n\n\x0cguidance) [i.e., an undisclosed position\nwithout substantial authority, ed.]; or\n(C) Is a willful attempt by the\npractitioner to understate the\nliability for tax or a reckless or\nintentional disregard of rules or\nregulations by the practitioner as\ndescribed in section 6694(b)(2) of\nthe Code (including the related\nregulations and other published\nguidance).\n(2) A pattern of conduct is a factor that\nwill be taken into account in determining\nwhether a practitioner acted willfully,\nrecklessly, or through gross incompetence.\n***\n(d) Relying on information furnished by\nclients. A practitioner advising a client to take\na position on a tax return, document, affidavit\nor other paper submitted to the Internal\nRevenue Service, or preparing or signing a tax\nreturn as a preparer, generally may rely in\ngood faith without verification upon\ninformation furnished by the client. The\npractitioner may not, however, ignore the\nimplications of information furnished to, or\nactually known by, the practitioner, and must\nmake reasonable inquiries if the information\nas furnished appears to be incorrect,\ninconsistent with an important fact or another\nfactual assumption, or incomplete.\n***\n10.36 Procedures to ensure compliance.\n(a) Any individual subject to the provisions of\nthis part who has (or individuals who have or\nshare) principal authority and responsibility\nfor overseeing a firm\xe2\x80\x99s practice governed by\n\n27\n\n\x0cthis part, including the provision of advice\nconcerning Federal tax matters and\npreparation of tax returns, claims for refund,\nor other documents for submission to the\nInternal Revenue Service, must take\nreasonable steps to ensure that the firm has\nadequate procedures in effect for all members,\nassociates, and employees for purposes of\ncomplying with subparts A, B, and C of this\npart, as applicable. In the absence of a person\nor persons identified by the firm as having the\nprincipal authority and responsibility\ndescribed in this paragraph, the Internal\nRevenue Service may identify one or more\nindividuals subject to the provisions of this\npart responsible for compliance with the\nrequirements of this section.\n(b) Any such individual who has (or such\nindividuals who have or share) principal\nauthority as described in paragraph (a) of this\nsection will be subject to discipline for failing\nto comply with the requirements of this\nsection if\xe2\x80\x94\n(1) The individual through willfulness,\nrecklessness, or gross incompetence does\nnot take reasonable steps to ensure that the\nfirm has adequate procedures to comply\nwith this part, as applicable, and one or\nmore individuals who are members of,\nassociated with, or employed by, the firm\nare, or have, engaged in a pattern or\npractice, in connection with their practice\nwith the firm, of failing to comply with this\npart, as applicable;\n(2) The individual through willfulness,\nrecklessness, or gross incompetence does\nnot take reasonable steps to ensure that firm\nprocedures in effect are properly followed,\nand one or more individuals who are\n\n28\n\n\x0cmembers of, associated with, or employed\nby, the firm are, or have, engaged in a\npattern or practice, in connection with their\npractice with the firm, of failing to comply\nwith this part, as applicable; or\n(3) The individual knows or should know\nthat one or more individuals who are\nmembers of, associated with, or employed\nby, the firm are, or have, engaged in a\npattern or practice, in connection with their\npractice with the firm, that does not comply\nwith this part, as applicable, and the\nindividual, through willfulness, recklessness,\nor gross incompetence fails to take prompt\naction to correct the noncompliance.\n(c) Effective/applicability date. This section is\napplicable beginning June 12, 2014.\n\xc2\xa7 10.37 Requirements for written advice.\n(a) Requirements.\n(1) A practitioner may give written advice\n(including by means of electronic\ncommunication) concerning one or more\nFederal tax matters subject to the\nrequirements in paragraph (a)(2) of this\nsection. Government submissions on\nmatters of general policy are not considered\nwritten advice on a Federal tax matter for\npurposes of this section. Continuing\neducation presentations provided to an\naudience solely for the purpose of\nenhancing\npractitioners\xe2\x80\x99\nprofessional\nknowledge on Federal tax matters are not\nconsidered written advice on a Federal tax\nmatter for purposes of this section. The\npreceding sentence does not apply to\npresentations marketing or promoting\ntransactions.\n(2) The practitioner must\xe2\x80\x94\n\n29\n\n\x0c(i) Base the written advice on reasonable\nfactual and legal assumptions (including\nassumptions as to future events);\n(ii) Reasonably consider all relevant facts\nand circumstances that the practitioner\nknows or reasonably should know;\n(iii) Use reasonable efforts to identify and\nascertain the facts relevant to written\nadvice on each Federal tax matter;\n(iv) Not rely upon representations,\nstatements, findings, or agreements\n(including projections, financial forecasts,\nor appraisals) of the taxpayer or any other\nperson if reliance on them would be\nunreasonable;\n(v) Relate applicable law and authorities to\nfacts; and\n(vi) Not, in evaluating a Federal tax\nmatter, take into account the possibility\nthat a tax return will not be audited or that\na matter will not be raised on audit.\n(3) Reliance on representations, statements,\nfindings, or agreements is unreasonable if\nthe practitioner knows or reasonably should\nknow that one or more representations or\nassumptions on which any representation is\nbased are incorrect, incomplete, or\ninconsistent.\n(b) Reliance on advice of others. A practitioner\nmay only rely on the advice of another person\nif the advice was reasonable and the reliance is\nin good faith considering all the facts and\ncircumstances. Reliance is not reasonable\nwhen\xe2\x80\x94\n(1) The practitioner knows or reasonably\nshould know that the opinion of the other\nperson should not be relied on;\n\n30\n\n\x0c(2) The practitioner knows or reasonably\nshould know that the other person is not\ncompetent or lacks the necessary\nqualifications to provide the advice; or\n(3) The practitioner knows or reasonably\nshould know that the other person has a\nconflict of interest in violation of the rules\ndescribed in this part.\n(c) Standard of review.\n(1) In evaluating whether a practitioner\ngiving written advice concerning one or\nmore Federal tax matters complied with the\nrequirements of this section, the\nCommissioner, or delegate, will apply a\nreasonable\npractitioner\nstandard,\nconsidering all facts and circumstances,\nincluding, but not limited to, the scope of\nthe engagement and the type and specificity\nof the advice sought by the client.\n(2) In the case of an opinion the practitioner\nknows or has reason to know will be used\nor referred to by a person other than the\npractitioner (or a person who is a member\nof, associated with, or employed by the\npractitioner\xe2\x80\x99s firm) in promoting, marketing,\nor recommending to one or more taxpayers\na partnership or other entity, investment\nplan or arrangement a significant purpose of\nwhich is the avoidance or evasion of any tax\nimposed by the Internal Revenue Code, the\nCommissioner, or delegate, will apply a\nreasonable\npractitioner\nstandard,\nconsidering all facts and circumstances, with\nemphasis given to the additional risk caused\nby the practitioner\xe2\x80\x99s lack of knowledge of\nthe taxpayer\xe2\x80\x99s particular circumstances,\nwhen determining whether a practitioner\nhas failed to comply with this section.\n\n31\n\n\x0c(d) Federal tax matter. A Federal tax matter, as\nused in this section, is any matter concerning\nthe application or interpretation of\xe2\x80\x94\n(1) A revenue provision as defined in\nsection 6110(i)(1)(B) of the Internal\nRevenue Code;\n(2) Any provision of law impacting a\nperson\xe2\x80\x99s obligations under the internal\nrevenue laws and regulations, including but\nnot limited to the person\xe2\x80\x99s liability to pay\ntax or obligation to file returns; or\n(3) Any other law or regulation administered\nby the Internal Revenue Service.\n(e) Effective/applicability date. This section is\napplicable to written advice rendered after\nJune 12, 2014.\n\nNotes and Questions\n22. Leon is a tax lawyer who regularly e-mails his clients. His clients\nappreciate the convenience. Carla has asked Leon to consider the\ntax planning possibilities of a particular investment she is\nconsidering, and Leon responds in an e-mail advising her of\nvarious ways the investment can be planned in order to avoid\nunnecessary taxes. Is Leon engaged in practice before the IRS? If\nso, what are the requirements for the advice he is writing in his email? What if Leon does not e-mail Carla but only explains the\nalternatives in a telephone call, is he subject to Circular 230 with\nrespect to the phone call\xe2\x80\x99s contents?\n23. Laura is a tax lawyer. Her client Cody is an impatient business\nman, he is always pressing Laura for the \xe2\x80\x9cbottom line\xe2\x80\x9d and \xe2\x80\x9cto\nget there without a bunch of lawyer time.\xe2\x80\x9d Cody has invested in a\nbusiness that has generated a loss this year. Cody\xe2\x80\x99s CPA wants to\navoid the application of the IRC \xc2\xa7 469 passive activity loss limit.\nIn order to do so, Cody\xe2\x80\x99s participation in the activity must have\nbeen \xe2\x80\x9cmaterial,\xe2\x80\x9d and the CPA is taking the return position that\n\n32\n\n\x0cColby\xe2\x80\x99s participation was material. The CPA has told Cody that\nhe can be protected from an IRC \xc2\xa7 6662 negligence penalty even\nif the \xe2\x80\x9cmaterial participation\xe2\x80\x9d return position is not sustained on\naudit or in litigation, so long as he has written advice from a\nlawyer. Prompted by his CPA, Cody tells Laura to assume that he\nspent more than 500 hours actively engaged in the business. This\nis an essential fact, as, if true, it would mean Cody materially\nparticipated and thus is not subject to the passive activity loss\nlimits. Laura does not know whether Cody spent so much time\nwith the business. On the one hand, he is a very busy man\ninvolved in many different businesses, but, on the other hand,\nshe knows he is a very hard worker and it is possible that he did.\nCody has told Laura not to \xe2\x80\x9crack up the legal fees\xe2\x80\x9d on this but\njust send him a short e-mail advising him of the tax consequences\nif the assumption is true. What should Laura do? If she makes the\nassumption, she may be violating her duties under Circular 230.\nHowever, if she spends more time on the issue, trying to\ndocument how many hours he spent on the business, she is\nviolating her client\xe2\x80\x99s instructions (and he will not pay for it!).\nShould she undertake the additional work\xe2\x80\x94but simply not\ncharge Cody for it? Query why the CPA suggested Cody ask\nLaura for the analysis and did not provide it herself\xe2\x80\x94after all, the\nCPA would earn a fee for the work. (Is the CPA right about so\neasily avoiding the negligence penalty? Read Treasury Regulations\n\xc2\xa7 1.6664-4(c)).\n24. Review the explanation of \xe2\x80\x9csubstantial authority\xe2\x80\x9d in Treasury\nRegulations \xc2\xa7\xc2\xa7 1.6662-4(d)(2) and (d)(3) (above). Under Circular\n230 \xc2\xa7 10.34(a)(2), a tax lawyer may not willfully advise a client to\ntake a position that lacks substantial authority, unless the position\nis disclosed to the IRS. As explained above, this is often\ncharacterized as a 40% chance of success on the merits. This is\nthe minimum standard of confidence required for undisclosed\npositions, and it became the requirement in 2011. However, in\n1985, the ABA Section of Taxation\xe2\x80\x99s Committee on the\nStandards of Tax Practice issued guidelines that tax advice should\nhave a \xe2\x80\x9crealistic possibility\xe2\x80\x9d of successful defense in court,\n\n33\n\n\x0cmeaning a \xe2\x80\x9clikelihood of success closely approaching one-third\n\xe2\x80\xa6.\xe2\x80\x9d15 Thus, the tax section\xe2\x80\x99s minimum standard is lower than\nthat of Circular 230. Who regulates the tax bar? Who has the\npower to discipline tax lawyers? How much advice is likely to fall\nbelow the \xe2\x80\x9csubstantial authority\xe2\x80\x9d standard while remaining above\nthe \xe2\x80\x9crealistic possibility\xe2\x80\x9d standard? Note that, after the changes to\nCircular 230, the penalty standard in the Code and the standard in\nCircular 230 have been harmonized. Should a tax lawyer ever be\nentitled to advise a client to take a position contrary to penalty\nstandards?\n25. While the substantial authority standard might not seem high\ncompared to the realistic possibility standard, compared to a\nstandard that legal advice should be merely non-frivolous, the\nsubstantial authority standard seems very high. Advice with even\na 5% chance of success in court may not be frivolous, but the\nrealistic possibility standard requires about a 33% chance of\nsuccess. But, why should a lawyer ever give advice she believes is\nmore likely than not to fail in court? After all, if the advice has a\n40% chance of success, it has a 60% chance of failure. What\npercentage of success do you think clients expect to \xe2\x80\x9cbuy\xe2\x80\x9d with\ntax advice from a tax lawyer?\n26. Liz is a tax lawyer who has met with a potential new client, Chris.\nChris owns several business entities. Chris has not retained Liz.\nRather, after reviewing his information, Liz is going to make a\npresentation to Chris and then he will decide whether or not to\nhire her. Liz studies the structure of the business entities, and she\ndiscovers that the structure is very tax inefficient. She concludes\nthat with some straightforward re-structuring she could reduce\nthe overall tax liabilities of the entities by about $30,000 each\nyear. The restructuring is very straightforward and Liz is surprised\nthat Chris has not done it in the past. She believes it is so\nstraightforward that it will take only about six hours of her time,\nwhich at her standard $500 an hour billing rate is $3000. Liz is\nvery interested in making a good impression on Chris, hoping to\nwin his long-term business. She believes she can impress him if\nshe \xe2\x80\x9cguarantees\xe2\x80\x9d her work as part of her presentation to him. She\n\n34\n\n\x0cis considering offering to charge him a contingent fee of 10% of\nthe tax savings, which she thinks will be about $3000. Further, if\nthe IRS successfully challenges the restructuring in the future, she\nwill refund the fee. Ignoring the complications of reasonably\ndefining \xe2\x80\x9ctax savings,\xe2\x80\x9d is this type of fee proper?\n27. Circular 230 obligates the lawyer on many issues that are also the\nsubject of state law, such as conflicts of interest, client\ninformation, and diligence. The Circular 230 requirements and\nthe state law requirements may not be identical. For example, the\nconflict waiver requirements under \xc2\xa7 10.29 include time periods\nand signatures that may not be found in state bar rules regarding\nconflicts of interest. What if the two directly conflict? What if, for\nexample, information required to be disclosed under \xc2\xa7 10.20 is\nprohibited from being disclosed by state bar laws? If it is\nimpossible to comply with both, what is a tax lawyer to do? In\nsome situations, federal regulations pre-empt state law. Does\nCircular 230? (Model Rule 1.6 allows disclosure of confidential\ninformation when necessary to comply with \xe2\x80\x9cother law.\xe2\x80\x9d Is\nCircular 230 \xe2\x80\x9cother law\xe2\x80\x9d?)\n28. Lou is the senior partner in a tax law firm. What are his\nresponsibilities with respect to the firm\xe2\x80\x99s practices under Circular\n230 \xc2\xa7\xc2\xa7 10.33 and 10.36? How would Lou educate himself about\nwhat constitutes \xe2\x80\x9cbest practices?\xe2\x80\x9d Recall that Treasury\nRegulations \xc2\xa7 1.6694-2(e) references office procedures that may\nprotect tax lawyers from certain penalties.\nCircular 230 establishes disciplinary procedures. Those who practice\nbefore the IRS may be reprimanded, suspended, or disbarred.\nCircular 230 \xc2\xa7\xc2\xa7 10.25\xe2\x80\x93.52. If a practitioner is suspended or disbarred,\nno other practitioner may employ or accept assistance from them.\nCircular \xc2\xa7 10.24. Consider that the agency before which the lawyer\nrepresents clients is the same agency that is authorized to suspend or\ndisbar him or her from doing so. Is that troubling?\nWASHBURN v. SHAPIRO\n\n409 F. Supp. 3 (S.D. Fla. 1976)\n\n35\n\n\x0cAn accountant was criminally convicted under \xc2\xa7 7206(a)(2) (he\nknowingly prepared a joint return for a client who signed on behalf\nof his wife even though he was not authorized to do so). As a result\nof his criminal conviction, the Director of Practice instituted\ndisbarment proceedings. An administrative law judge held that the\naccountant had violated Circular 230 \xc2\xa7 10.50 (he had behaved\ndisreputably), and he disbarred the accountant from practice before\nthe IRS. The accountant appealed to the General Counsel of the\nTreasury Department, who affirmed the administrative law judge\xe2\x80\x99s\ndecision. The judicial review of this final decision, of an\nadministrative agency, is \xe2\x80\x9cwhether there is substantial evidence in the\nrecord to support the challenged administrative determination,\xe2\x80\x9d and\nthe court found there was. The accountant was convicted of a felony\nand did not deny it, and under Circular 230 the conviction subjected\nhim to disbarment. The accountant complained that his rights to due\nprocess had been violated, but, upon reviewing various steps in the\nprocess, the court concluded he received \xe2\x80\x9cthe requisites of\nelementary fairness\xe2\x80\x93due notice and the opportunity to be heard\xe2\x80\x9d to\nwhich he was entitled.\n\n2.3. Regulating Tax Lawyering through Malpractice\nStandards\nLawyers may be sued by unhappy former clients and, in some cases,\npersons who may not have been clients\xe2\x80\x94or who, at least, the lawyer\ndid not consider to be a client. Most commonly those suits are\npremised on the lawyer\xe2\x80\x99s negligence or violation of fiduciary duties to\nthe client (or non-client third parties) or contractual duties between\nthe lawyer and client. Lawyering with an eye on a successful defense\nof professional judgment can consume the mental and emotional\nenergy of lawyers on a regular basis. Limiting liability, especially for\nthe acts of those with whom one works, is an ongoing concern of\nlawyers. Many lawyers carry malpractice insurance, which means that\ncomplying with the terms of the policy becomes important. Worrying\nabout malpractice suits and the consequent strategies for reducing\nrisk may do far more to regulate lawyering than fear of discipline by\nthe state bar and, for tax lawyers, the Treasury Department.\n\n36\n\n\x0cIn a malpractice suit, lawyers are liable for failing to \xe2\x80\x9cexercise\nthe competence and diligence normally exercised by lawyers in similar\ncircumstances.\xe2\x80\x9d16 Both competence and diligence also are required\nunder Model Rules 1.1 and 1.3 and Circular 230 \xc2\xa7\xc2\xa7 10.22 and 10.35.\nOf course, the difference is that a malpractice suit may result in a\nfinancial judgment against the lawyer, while violating the ethics rules\nmay result in disciplinary actions. Generally, in terms of damages, tax\nlawyers may find themselves liable for the penalties and interest their\nclients had to pay the IRS for the improper tax position, but usually\nnot the increased tax liability itself.\n\nNotes and Questions\n29. Carl is involved in a real estate transaction that could easily have\nbeen structured to qualify for non-recognition under IRC \xc2\xa7 1031.\nHowever, his lawyer, Lee, failed to advise him of this possibility.\nThe result is an immediate $400,000 tax liability that otherwise\nmight have been deferred indefinitely. What if Lee thought Carl\nhad a CPA providing him tax advice? What if Lee had written a\nletter to Carl stating that he would not be responsible for tax\nadvice? What if a provision to that effect was in Lee\xe2\x80\x99s\nengagement agreement with Carl? Is it ethically appropriate for\nLee to attempt to transfer the burden of the tax advice to a CPA?\nWould it make a difference if he attempted to transfer it to\nanother lawyer? Could he be disciplined by the state bar for\nattempting to do this? Would this be a reasonable limit on his\nscope of representation? (Read Model Rule 1.2(c).) If you were\nrepresenting Carl in a malpractice suit, what would you argue the\ndamages should be based on? If you were defending Lee, what\nwould you argue about the right measurement of damages?\n30. Lara is a lawyer who has been practicing for a year. She is a solo\npractitioner. She has no experience in handling tax matters. She is\nhandling her first divorce case and she is concerned that there\nmay be tax issues. She wants to involve a specialist. Her law\nschool classmate, Ted, is a first year lawyer interested in handling\ntax matters. She also knows Terry who is a very experienced tax\nlawyer. Lara\xe2\x80\x99s client is of very modest means and the total\n\n37\n\n\x0cproperty involved is of relatively little value. Lara could refer her\nclient to either Ted or Terry. Ted, as a new lawyer, charges a\nmuch lower fee than Terry. In fact, it seems unlikely that her\nclient could afford Terry\xe2\x80\x99s fees. Lara also knows an experienced\nCPA who would be willing to \xe2\x80\x9chelp\xe2\x80\x9d Lara with the tax issues but\nnot take primary responsibility. The CPA\xe2\x80\x99s rates are much lower.\nWhat should Lara do? What if she refers the client to Ted,\nknowing Ted is not very experienced, would she be liable for\nTed\xe2\x80\x99s mistakes? What if, as a practical matter, the client cannot\nafford the tax expertise she needs\xe2\x80\x94but Lara is representing her?\n31. Leo is not a tax lawyer. When tax issues arise, he routinely\nprovides his clients with the names of three tax specialists,\nsuggesting they interview each of them. He does this in an effort\nto protect himself from claims by disgruntled former clients that\nhe should be liable for the bad advice of the lawyer to whom he\nreferred them. If a tax issue arises that is so unusual and technical\nthat only one of those tax lawyers is competent, how should Leo\nhandle the referral? Since Leo is not a tax lawyer, how would he\nrecognize that the issue is so unusual and technical that only one\nof those lawyers is competent? On a more basic level, how does\nLeo spot all the tax issues that need referral when he is not a tax\nlawyer?\n32. Model Rules 1.1 requires a lawyer to provide \xe2\x80\x9ccompetent\nrepresentation.\xe2\x80\x9d The comments explain that a \xe2\x80\x9clawyer can\nprovide adequate representation in a wholly novel field through\nnecessary study.\xe2\x80\x9d Is that really true? What are the risks of taking a\nclient with the plan of engaging in \xe2\x80\x9cnecessary study\xe2\x80\x9d in order to\ncompetently represent the client?\n33. Both lawyers and CPAs practice in the tax field. How do you\nthink assessment of malpractice risks affect the division of the\nfield between the two professions?\n\n38\n\n\x0c3. Ethical Problems for Tax\nLawyers\nWhile tax lawyers face many of the professional responsibility\nproblems other lawyers do, such as conflicts of interest and handling\nconfidential information, there are several distinctive situations that\npose ethical problems for tax lawyers. First are those situations in\nwhich a tax lawyer provides advice to a client in a manner expected\nto protect the client from certain penalties, even if the advice turns\nout to be wrong. Second are situations involving mistakes, such as\ndiscovering that a prior year\xe2\x80\x99s tax return is incorrect or catching the\nIRS making a mistake in the client\xe2\x80\x99s favor. Finally are situations that\ninvolve how private tax lawyers interact with lawyers and other\nemployees at the IRS.\n\n3.1. Tax Opinions and Tax Shelters\nA taxpayer who makes an \xe2\x80\x9chonest mistake\xe2\x80\x9d still owes the taxes due\n(and interest on the amount due), an audit may reveal this. Yet, the\ntaxpayer must pay additional penalties only in certain situations. For\nexample, IRC \xc2\xa7 6662 imposes a 20% penalty, if the taxpayer\nunderpaid tax due to \xe2\x80\x9cnegligence or disregard of the rules or\nregulations,\xe2\x80\x9d or, regardless of negligence or disregard, if the\nunderpayment was \xe2\x80\x9csubstantial\xe2\x80\x9d (i.e., more than the greater of $5,000\nor 10% of the tax owed). IRC \xc2\xa7 6662(b)(1), (b)(2), (d)(1). 17 It is in\nseeking protection from penalties that many clients turn to tax\nlawyers. Thus, clients will often seek assurances from a tax lawyer as\nto a favorable position on the return since such assurances may\nprotect them from the penalties, even if the position fails to be\nsustained on audit or in litigation. Tax lawyers earn significant fees in\nproviding such assurances (i.e., providing opinions as to the proper\ntax treatment).\nIn general, a taxpayer will not be subject to a \xc2\xa7 6662 penalty if she\nacted reasonably and in good faith with respect to the return position\nthat resulted in the underpayment of tax. IRC \xc2\xa7 6664(c)(1). A\ntaxpayer who relies on a tax lawyer\xe2\x80\x99s professional advice may cite\n\n\x0cdoing so as evidence of acting reasonably and in good faith. Treasury\nRegulations \xc2\xa7 1.6664-4(b)(1). However, the taxpayer must have\ndisclosed all relevant facts to the lawyer, and the lawyer must base the\nadvice on all relevant law taking the facts into consideration, making\nno unreasonable assumptions. Treasury Regulations \xc2\xa7 1.6664-4(b)(1).\nIn short, the tax lawyer\xe2\x80\x99s advice must be reasonable and in good faith\nand the taxpayer\xe2\x80\x99s reliance itself must be reasonable and in good\nfaith.\nWhile the taxpayer penalty regime is complex, it is important to note\nthat there are specific protections provided for different levels of\nconfidence in tax advice. Similar to the requirements on a tax return\npreparer under \xc2\xa7 6694, there will be no penalty premised on a tax\nposition for which there is \xe2\x80\x9csubstantial authority\xe2\x80\x9d or a tax position\nthat is disclosed on Form 8275 and for which there is a \xe2\x80\x9creasonable\nbasis.\xe2\x80\x9d IRC \xc2\xa7 6662(d)(2)(B). Re-read the considerations described\nabove with respect to \xc2\xa7 6694 and the meaning of \xe2\x80\x9csubstantial\nauthority\xe2\x80\x9d and \xe2\x80\x9creasonable basis.\xe2\x80\x9d Remember that a position with\nsubstantial authority is one for which there is about a 40% chance of\nsuccess, if litigated, and a position for which there is a reasonable\nbasis is one for which there is about a 10\xe2\x80\x9320% chance of success if\nlitigated.\nThe substantial authority and reasonable basis standards are objective\nstandards. However, in some instances, in order to avoid a penalty,\nthe taxpayer must also reasonably believe that the position is \xe2\x80\x9cmore\nlikely than not\xe2\x80\x9d to be sustained on its merits in litigation. 18 The \xe2\x80\x9cmore\nlikely than not\xe2\x80\x9d standard is greater than 50%. A taxpayer is\nconsidered to \xe2\x80\x9creasonably believe\xe2\x80\x9d if the taxpayer reasonably relies in\ngood faith on the opinion of a professional tax advisor, if the opinion\nis based on the tax advisor\xe2\x80\x99s analysis of the pertinent facts and\nauthorities \xe2\x80\xa6 and unambiguously states that the tax advisor\nconcludes that there is a greater than 50-percent likelihood that the\ntax treatment of the item will be upheld if challenged by the Internal\nRevenue Service. Treasury Regulations \xc2\xa7\xc2\xa7 1.6662-4(g)(4)(i)(B) [noncorporate taxpayer]; 1.6664-4(f)(2)(B)(2) [corporate taxpayer].\nThis special requirement applies to \xe2\x80\x9ctax shelters.\xe2\x80\x9d In common usage,\na \xe2\x80\x9ctax shelter\xe2\x80\x9d is a complicated tax scheme intended to generate\n\n40\n\n\x0csubstantial tax benefits that do not correspond to the underlying\neconomic realities of the scheme. In other words, it is a complicated\nand abusive tax plan. Tax shelters tend to be marketed as\ninvestments, and those who are marketing the shelters hire tax\nlawyers to provide written tax opinions designed to protect the\ninvestors from penalties. 19 Thus, these opinions are extremely\nvaluable to tax shelter promoters\xe2\x80\x94and providing these opinions on\nlaw firm letterhead can be an extremely lucrative business for tax\nlawyers. Over a five year period, one large firm tax partner\n\xe2\x80\x9cpersonally netted $93 million\xe2\x80\x9d\xe2\x80\x94and hundreds of millions for his\nfirm\xe2\x80\x94by providing about six hundred tax shelter opinions. 20\nHowever, when the tax shelters began to unravel under IRS scrutiny,\nthe lawyer and his firm were sued in a class action suit brought by the\ntax shelter investors, which resulted in the dissolution of the law firm,\npayments to the investors, and criminal penalties. 21\nThe war against tax shelters began in the 1970s. 22 With income tax\nrates exceeding 70%, many high earning individual taxpayers were\ninvesting in tax shelters. These shelters had no economic reality\xe2\x80\x94and\noften no other reality\xe2\x80\x94but supposedly generated great tax\ndeductions that could be used to offset (i.e., \xe2\x80\x9cshelter\xe2\x80\x9d) other income.\nBy 1980, the IRS began to focus on written opinions given by tax\nadvisors. These opinions were given to protect investors from\npenalties, even if the underlying tax benefits were ultimately\ndisallowed. Given the significant tax \xe2\x80\x9csavings\xe2\x80\x9d of these shelters and\nthe time value of money, even if the investors had to pay the taxes at\nsome point, the shelter could remain a good \xe2\x80\x9cinvestment,\xe2\x80\x9d so long as\nthere were no penalties imposed. The IRS focused on four types of\nproblematic opinions: (1) substantively incompetent opinions; (2)\nopinions based only on assumed facts; (3) opinions that discussed the\nlaw and the facts but never related the two; and (4) negative opinions,\nthose that said there was a reasonable basis but that it was more likely\nthan not the position would not be sustained. In 1982, Congress\namended the substantive law regarding tax penalties, making these\nproblematic opinions useless for penalty protection. In that same\nyear, the American Bar Association Committee on Professional\nResponsibility issued guidance requiring tax lawyers writing opinions\n\n41\n\n\x0cto make factual inquiries and relate the law to the facts. In the\ncontext of the new penalty law, Circular230 was amended in 1984to\ninclude a new \xc2\xa7 10.33 on tax shelter opinions, which essentially\nmirrored the ABA guidance. This was the first time that tax advice as\nsuch was covered by Circular 230.\nAbout twenty years later, tax shelters had become increasingly\nsophisticated and oriented towards corporate taxpayers. Congress\namended the law to explicitly sanction the regulation of written tax\nadvice by the IRS and the IRS was encouraged to expand its efforts\nagainst tax shelter opinions. The result was a new Circular 230 \xc2\xa7\n10.35. The purpose of Circular 230 \xc2\xa7 10.35 was to make it more\ndifficult for taxpayers to evade penalties by claiming good faith\nreliance on tax opinions. This was done by forcing tax professionals\nto write those opinions in a very detailed way. Each relevant fact had\nto be identified and related to the relevant law. In short, all was to be\nmade explicit, nothing left implicit or assumed or ignored. The\nprofessional had to give a more likely than not opinion on every\nsignificant tax issue. If the professional wasn\xe2\x80\x99t willing to do that, then\nthe opinion had to inform the taxpayer that it wouldn\xe2\x80\x99t provide\npenalty protection.\nMany tax lawyers became concerned that Circular 230 \xc2\xa7 10.35 did not\napply only to tax shelters, but also might be applied to less\ncontroversial tax avoidance techniques. Considerable anxiety\ndeveloped in the tax bar as to giving written advice, and the IRS did\nnothing to lessen the anxiety. The only way to avoid having to\nprovide a detailed written opinion that complied with covered\nopinion rules was to include a disclaimer on written advice that it did\nnot provide penalty protection. The result was the near-universal use\nof such disclaimers on lawyer e-mails and other communications.\nHowever, within a decade, it became generally agreed that the effect\nof Circular 230 \xc2\xa7 10.35 was not so much to increase the quality of tax\nadvice as it was to increase the amount of boilerplate disclaimers. In\n2014, the opinion rules were removed from Circular 230, leaving\nwritten advice to be governed by \xc2\xa7 10.37, which required nothing in\nparticular other than reasonableness.\n\n42\n\n\x0cNotes and Questions\n34. \xe2\x80\x9cTax shelters\xe2\x80\x9d are commonly thought of as abusive transactions.\nHowever, the technical definition of a tax shelter includes \xe2\x80\x9cany\nplan or arrangement, if a significant purpose of such \xe2\x80\xa6 plan or\narrangement is the avoidance \xe2\x80\xa6 of Federal income tax.\xe2\x80\x9d IRC \xc2\xa7\n6662(d)(2)(C). While the organized tax bar disapproves of tax\nlawyers engaged in abusive planning, this definition of \xe2\x80\x9ctax\nshelter\xe2\x80\x9d has troubled many tax lawyers because it technically\nseems to include legitimate tax planning. How might \xe2\x80\x9ctax shelter\xe2\x80\x9d\nbe re-defined so that it included only abusive transactions?\n35. It may be that criminal prosecution of tax advisors becomes the\n\xe2\x80\x9cweapon of choice\xe2\x80\x9d for deterring abusive tax scheming. 23 Given\nthat professional ethics standards have failed, is criminal\nprosecution the only alternative left?\n\n3.2. Mistakes\nTo err is human. But there are many kinds of errors, and when the\nerrors involve the administration of the tax law, the tax lawyer may\nfind herself pondering what to do. For example, tax lawyers routinely\nponder what to do when they discover mistakes in a prior year\xe2\x80\x99s\nreturn.\nCircular 230 \xc2\xa7 10.21 provides as follows:\nA practitioner who, having been retained by a\nclient with respect to a matter administered by\nthe Internal Revenue Service, knows that the\nclient has not complied with the revenue laws\nof the United States or has made an error in\nor omission from any return, document,\naffidavit, or other paper which the client\nsubmitted or executed under the revenue laws\nof the United States, must advise the client\npromptly of the fact of such noncompliance,\nerror, or omission. The practitioner must\nadvise the client of the consequences as\n\n43\n\n\x0cprovided under the Code and regulations of\nsuch noncompliance, error, or omission.\nCircular 230 makes it clear that a tax lawyer has the obligation to\nadvise the client of any \xe2\x80\x9cnoncompliance, error, or omission.\xe2\x80\x9d If a tax\nlawyer discovers a mistake on a prior year\xe2\x80\x99s return, it is clear that the\ntax lawyer should inform the client of the mistake. Note that there is\nno requirement that the client be advised to file an amended return,\nbut Circular 230 requires the client be advised of the \xe2\x80\x9cconsequences\xe2\x80\x9d\nof the mistake. What are the consequences?\nIt is often said that there is no legal obligation to file an amended tax\nreturn correcting a prior year\xe2\x80\x99s return. Some, however, argue that\nbecause the tax is legally due and owing, the taxpayer is legally\nobligated to correct the prior return and pay the tax due. 24 In other\nwords, the argument is that, even if the IRC does not require an\namended return, other legal principles do. Others may point to\nlanguage in the Treasury Regulations that provide that taxpayers\n\xe2\x80\x9cshould\xe2\x80\x9d file an amended return, but it is hard to miss that the\nregulations do not use the word \xe2\x80\x9cmust\xe2\x80\x9d or \xe2\x80\x9cshall.\xe2\x80\x9d See Treasury\nRegulations \xc2\xa7\xc2\xa7 1.45-1(a) and 1.461-1(a)(3). The IRS certainly\nencourages the filing of amended returns; it provides forms for that\npurpose. Even if filing an amended return is not required by the IRC,\nfiling the return and paying the tax due may be useful for other\nreasons, such as stopping the accrual of interest\xe2\x80\x94after all, the tax\ndue may be discovered on an audit, even if no amended return is\nfiled.\nWhat if the mistake on the prior year\xe2\x80\x99s return was not an \xe2\x80\x9chonest\nmistake,\xe2\x80\x9d but intentional? Choosing to amend the return may be the\nchoice to disclose a crime and Fifth Amendment rights may be\nimplicated. If a taxpayer has the right not to incriminate himself,\nobviously his lawyer is not obligated to advise him to do so.\nTax returns are filed on an annual basis, but a given return may be\nrelevant across many years. If the client chooses not to amend the\nreturn to correct one year\xe2\x80\x99s mistake, the tax lawyer cannot simply\nignore her knowledge of the mistake in continuing to represent the\nclient. She must be diligent in ensuring that she does not incorporate\n\n44\n\n\x0cthe mistake into future planning or reporting. Review Circular 230 \xc2\xa7\n10.22; Model Rules 1.2, 1.6, 4.1 and 8.4; IRC \xc2\xa7\xc2\xa7 6701 and 7206(2).\nThis may be very difficult in some situations, but not others. In some\nsituations, the most prudent course of action may be withdrawing\nfrom the representation (and the client should be advised that\nwithdrawal may be one of the \xe2\x80\x9cconsequences\xe2\x80\x9d implicated by \xc2\xa7 10.21.)\nOf course, as a client\xe2\x80\x99s circumstances and tax planning changes, and\nas the tax law changes, tax positions in prior years may suddenly\nbecome more important in later years than anyone would have\nanticipated.\nIf the client chooses not to correct the return and the return later\nbecomes the subject of an audit, the tax lawyer\xe2\x80\x99s bind increases and\nshe may need to withdraw. While the return is being reviewed, it may\nbe almost impossible for the lawyer not to make a false or misleading\nstatement about the return, and, of course, she is also generally\nunable to disclose the error over the objection of the client. Review\nCircular 230 \xc2\xa7 10.22; Model Rules 1.2, 1.6, 4.1, and 8.4.\nWhat if the mistake in question was not made by the client on a prior\nyear\xe2\x80\x99s return but rather by the IRS\xe2\x80\x94and it is a mistake in your\nclient\xe2\x80\x99s favor? The Committee on Standards of Tax Practice of the\nABA Tax Section considered this issue in detail in its Standards of\nTax Practice 1999-1. The Committee distinguished between\ncomputational and conceptual mistakes, generally advising that the\ntax lawyer notify the IRS of the mistake if it is computational (i.e., a\nmath mistake) but not if it is conceptual. The Committee considered\nthat, on the one hand, the lawyer may not disclose confidential\ninformation without the client\xe2\x80\x99s consent (Model Rule 1.6(a)) but, on\nthe other hand, the lawyer may not engage in dishonest conduct\n(Model Rule 8.4(c)). If the client objects to disclosing the IRS\xe2\x80\x99s\ncomputational mistake to it, the tax lawyer may have the duty to\nwithdraw.\n\nNotes and Questions\n36. ABA Formal Opinion 314 instructs the lawyer who knows of a\nmistake on a prior return to advise the client to file an amended\nreturn. However, Circular 230 only requires advising the client as\n\n45\n\n\x0cto the consequences of failing to correct the mistake. Presumably\nbar authorities in states that have adopted the Model Rules would\nconsult the ABA Formal Opinions in considering discipline\nunder the rules. Such opinions serve as persuasive authority along\nwith state ethics opinions. But wouldn\xe2\x80\x99t those authorities be likely\nto consult Circular 230 too?\n37. Lanny is a tax lawyer who has been hired by a new client. In\nreviewing the client\xe2\x80\x99s files in order to provide some tax advice for\na possible business deal, Lanny reviews a prior year\xe2\x80\x99s tax return in\ndetail. During this review, he discovers a minor mistake that\nresulted in very limited tax savings and is extremely unlikely to be\nrelevant in any future years. Lanny believes the mistake was\n\xe2\x80\x9chonest,\xe2\x80\x9d and that no negligence or other penalty would be\napplicable. He believes the client has no legal obligation to amend\nthe return. The client\xe2\x80\x99s CPA prepared the return. Lanny is\nsurprised to discover any mistake on a return prepared by this\nCPA, as she is well-known for her extraordinary work. Lanny is\nconcerned that if he tells the client of the mistake, the client may\nfire the CPA. Lanny believes the client is very hot-tempered and\nfairly unsophisticated and is unlikely to comprehend that hiring a\nnew CPA will not ensure mistake-free returns in the future. It will\nalso involve a great deal of transition costs as the new CPA\nwould have to spend a good deal of time learning about the\nclient\xe2\x80\x99s business and reviewing the files. Lanny believes it is in the\nclient\xe2\x80\x99s best interests to retain this CPA. Must Lanny tell the\nclient about the mistake? What if Lanny believes the error was\nnot a \xe2\x80\x9cmistake\xe2\x80\x9d but intentional? What if Lanny had prepared the\nreturn, and then later discovered the error?\n\n3.3. Working with IRS Lawyers and Other Employees\nWho would want to be an IRS lawyer? It is a complicated role with\nconsiderable regulation. There are, of course, the state ethics rules,\nbut there is also Circular 230, tax code provisions (such as IRC \xc2\xa7\xc2\xa7\n6103 and 7214), and the general restrictions on all federal\ngovernment lawyers and employees. As with all government lawyers\nthere are inter-agency issues, intra-agency issues, and bureaucratic\n\n46\n\n\x0crealities. There is also the fact that IRS employees, in general, and\nIRS lawyers in particular, are rarely well-received. Mentioning at a\ndinner party that one is a tax lawyer may chill conversation, but\nsaying that one is a lawyer for the IRS may have even more dire social\nconsequences. Violence against IRS employees in general is also a\nreal risk; more than 900 threats against IRS employees are\ninvestigated each year. 25\nYet many tax lawyers choose to work for the IRS. Working for the\nfederal government has its benefits in terms of lifestyle, even if not in\nterms of cash compensation. But many tax lawyers who choose this\nline do it for other reasons. Though not as prevalent a professional\ndevelopment choice as it once was, service in the IRS may be good\nprofessional training for future private tax lawyers, perhaps much like\na stint in the prosecutor\xe2\x80\x99s office serves future defense attorneys. One\nreason some tax lawyers choose the IRS is in order to defend the\ninterests of the honest taxpayers. These lawyers often think of\nthemselves not as representing \xe2\x80\x9cthe system\xe2\x80\x9d but \xe2\x80\x9call the taxpayers.\xe2\x80\x9d\nWhen litigating against a taxpayer who crossed the line, these lawyers\nconsider themselves to be representing all of the taxpayers who did\nnot cross the line.\nWhen private tax lawyers believe their clients did not cross the line in\ntax planning and their clients\xe2\x80\x99 reputations and assets are on the line,\nthey too, of course, consider themselves to be carrying on a noble\ncrusade. The conflict between the private tax lawyer and the IRS tax\nlawyer may occur in an emotional and stressful situation for the\nclient. It is here that professional rules are essential for navigating the\nhigh stakes and high stresses that otherwise might erode the\nprofessional barriers and reduce the conflict to a personal level.\nThese situations may also involve another source of tension\xe2\x80\x94\npotential sanctions against the tax lawyer. Review the readings above\nrelated to \xe2\x80\x9csubstantial authority\xe2\x80\x9d and \xe2\x80\x9creasonable basis\xe2\x80\x9d and the\npenalties to which tax lawyers may be subject to as a result of their\ntax advice (IRC \xc2\xa7 6694), as well as the materials above related to the\ncriminal sanctions that may be imposed on tax lawyers in certain\nsituations (IRC \xc2\xa7 7206). The tax lawyer may be personally at risk as a\nresult of a review of the client\xe2\x80\x99s tax reporting, and thus the tax lawyer\n\n47\n\n\x0cmay be defending not only his client but himself. Indeed, it is often\nprudent, and in some situations necessary, for the tax lawyer who\nprovided the tax planning advice not to be the tax lawyer who\ndefends it.\nWith these tensions in mind, consider the following from Circular\n230:\n\xc2\xa7 10.51 Incompetence and disreputable conduct.\n(a) Incompetence and disreputable conduct.\nIncompetence and disreputable conduct for\nwhich a practitioner may be sanctioned under\n\xc2\xa7 10.50 includes, but is not limited to\xe2\x80\x94\n***\n(4) Giving false or misleading information,\nor participating in any way in the giving of\nfalse or misleading information to the\nDepartment of the Treasury or any officer\nor employee thereof . . . knowing the\ninformation to be false or misleading. Facts\nor other matters contained in testimony,\nFederal tax returns, financial statements,\napplications for enrollment, affidavits,\ndeclarations, and any other document or\nstatement, written or oral, are included in\nthe term \xe2\x80\x9cinformation.\xe2\x80\x9d\n***\n(7)\nWillfully\nassisting,\ncounseling,\nencouraging a client or prospective client in\nviolating, or suggesting to a client or\nprospective client to violate, any Federal tax\nlaw, or knowingly counseling or suggesting\nto a client or prospective client an illegal\nplan to evade Federal taxes or payment\nthereof.\n***\n(9) Directly or indirectly attempting to\ninfluence, or offering or agreeing to attempt\n\n48\n\n\x0cto influence, the official action of any\nofficer or employee of the Internal Revenue\nService by the use of threats, false\naccusations, duress or coercion, by the offer\nof any special inducement or promise of an\nadvantage, or by the bestowing of any gift,\nfavor or thing of value.\n***\n(12) Contemptuous conduct in connection\nwith practice before the Internal Revenue\nService, including the use of abusive\nlanguage, making false accusations or\nstatements, knowing them to be false or\ncirculating or publishing malicious or\nlibelous matter.\n(13) Giving a false opinion, knowingly,\nrecklessly, or through gross incompetence,\nincluding an opinion which is intentionally\nor recklessly misleading, or engaging in a\npattern of providing incompetent opinions\non questions arising under the Federal tax\nlaws. \xe2\x80\xa6\n\nInternal Revenue Manual 4.1.1.7.6.1 - Badges of\nPractitioner Abuse (05-20-2005)\n(1) Practitioners may be subject to discipline\nunder Circular 230 if they exhibit a pattern of\nattempting to influence the case disposition or\na Service employee to obtain the desired\nresults in several collection investigations by:\n\xef\x82\xb7 Using abusive language\n\xef\x82\xb7 Threatening claims of misconduct (e.g.\nSection 1203)\n\xef\x82\xb7 Making false claims of misconduct\n\xef\x82\xb7 Making false accusations\n\xef\x82\xb7 Verbal/Physical threats or assaults\n\n49\n\n\x0c\xef\x82\xb7 Making a bribe (e.g. offering gifts or other\nthings of value)\n***\n(2) A second badge of practitioner\nmisconduct is a pattern of delay by the\npractitioner in performing one or more of the\nfollowing actions (Circular No. 230 Section\n10.20) during the course of several collection\ncases:\n\xef\x82\xb7 Missing appointments\n\xef\x82\xb7 Canceling appointments at the last\nmoment with no good cause provided\n\xef\x82\xb7 Agreeing\nto\nprovide\nrequested\ndocumentation and/or information and\nthen refusing to do so, thereby hindering\nthe Service\'s efforts to continue its\ninvestigation\n\xef\x82\xb7 Providing partial information requiring\nrepeated call backs and correspondence\ncausing delays\n\nFrom 1991-2 C.B. 1137:\nA practitioner\'s meeting with IRS representatives concerning a\nclient\'s affairs deteriorated into acrimony. As people began to leave\nthe meeting room, the practitioner grasped a revenue officer by the\nshoulder and urged her to continue the meeting. The revenue officer\nrefused, telling the practitioner to remove his hand. The practitioner\nagain grasped the revenue officer by the shoulder and repeated his\nrequest, which was refused.\nThe matter was referred to the Director of Practice. The Director\nnotified the practitioner of his possible violation of Treasury\nDepartment Circular No. 230, section 10.51(i), which states that a\npractitioner may be discharged or suspended for contemptuous\nconduct in connection with practice before the IRS.\n\n50\n\n\x0cThe physical contact, the Director found, was akin to contemptuous\nconduct as defined in section 10.51(i). The practitioner consented to\na short suspension from practice before the IRS. The Director\ndeemed suspension appropriate due to the seriousness of physically\naccosting an IRS employee engaged in the performance of his duties.\nHowever, the Director\'s finding that the practitioner made no\nattempt to threaten or coerce was a mitigating circumstance.\n\nNotes and Questions\n38. If a tax lawyer is disciplined under Circular 230, how likely is it\nshe will also be disciplined by state bar authorities? What is the\ndifference?\n39. IRS lawyers may be motivated by the idea that they represent \xe2\x80\x9call\nthe (other) taxpayers.\xe2\x80\x9d But, of course, this is an insufficient\nconception of their client\xe2\x80\x99s identity. It is important for a lawyer to\nknow who the client is, for example, in order to determine with\nwhom confidential information may be shared. If Leo is an IRS\nlawyer, who is his client? The U.S. government? The President?\nThe Treasury Department? The IRS? The Secretary of the\nTreasury? The Commissioner of the IRS? If Leo is asked by\nCongress to provide certain information, may he? Must he? In\nwhat circumstances? What if the President requests it? What if\nthe IRS Commissioner requests it? Lawyering for the government\nraises complex professional responsibility issues.\n40. If an IRS lawyer concludes that the taxpayer\xe2\x80\x99s argument is very\nstrong and the government\xe2\x80\x99s argument is very weak, may she\ncontinue to pursue the taxpayer? What if she concludes the law is\nsquarely on the taxpayer\xe2\x80\x99s side rather than the government\xe2\x80\x99s side?\nWhat if the government\xe2\x80\x99s position is not frivolous, but close to\nit? In Rev. Proc. 64-22, 1964-1 C.B. 689, the IRS announces that\nit will not assert a \xe2\x80\x9cstrained construction\xe2\x80\x9d of the law. What does\nthat mean?\n41. Lacey is a tax lawyer. She is representing Cory before the IRS.\nLacey discusses the return with both Cory and the CPA who\nprepared the return. One of the transactions reflected on Cory\xe2\x80\x99s\nreturn relates to the sale of real property to Cory\xe2\x80\x99s sister-in-law in\n\n51\n\n\x0cexchange for a promissory note. Lacy learns that, initially, the\ntransaction \xe2\x80\x9cwas not documented exactly right,\xe2\x80\x9d as the CPA put\nit. But, after first being contacted by the IRS, the CPA advised\nCory to contact a lawyer, Abe, who \xe2\x80\x9cfixed the problem\xe2\x80\x9d by\nproviding documentation back-dated to the date of sale and\ncontaining the terms the CPA advised should be contained in\norder to qualify for the position taken on the return. The CPA\nhas provided Lacy with an envelope of supporting documents,\nmost of which are not related to this transaction but rather were\nspecifically requested by the IRS. If Lacy simply forwards the\nenvelope to the IRS with a cover letter stating only \xe2\x80\x9cenclosed\nplease find the requested materials,\xe2\x80\x9d is she subject to discipline?\nHas she committed mail fraud? Has she committed any other\ncrime?\n42. Larry is a tax lawyer. He is representing Casey before the IRS.\nThe IRS employee has asked Larry for copies of a sales contract,\nthe minutes of a corporation Casey owns, and a lease agreement.\nLarry agrees to send these documents during the first week of\nJuly. When he fails to do so, the IRS employee calls and asks him\nfor the information. He sends the sales contract in the last week\nof July. He then sends several pages of the lease agreement in\nmid-August, and then, two weeks later, after receiving another\ncall from the IRS employee, he sends the remainder of the lease\nagreement with a cover letter apologizing for failing to send the\nentire agreement earlier. In September he sends the corporation\xe2\x80\x99s\nminutes for its annual meeting, and then in October, after the\nIRS employee calls to ask if there are other minutes, Larry\nprovides the minutes for the corporation\xe2\x80\x99s special meetings. Is\nthis misconduct? Does it matter if Larry is intending to delay the\nmatter, or if, instead, he is simply disorganized?\n\n1\n\n31 U.S.C. \xc2\xa7 330 (2012?).\n\n2\n\nCircular 230 \xc2\xa7 10.34.\n\n52\n\n\x0cDonald B. Tobin, Richard Lavoie, and Richard E. Trogolo, Problems in\nTax Ethics 22 (2009). See Jasper L. Cummings, Jr., The Range of Legal Tax\nOpinions, with Emphasis on the \xe2\x80\x98Should\xe2\x80\x99 Opinion, Tax Notes, February 17,\n2003, p. 1125, 1128.\n3\n\nTax lawyers are said to have a \xe2\x80\x9cduty to the system.\xe2\x80\x9d Bernard Wolfman,\nJames P. Holden, and Kenneth L. Harris, Standards of Tax Practice \xc2\xa7 101.2\n(5th ed., 1999). Professor Deborah Schenk has written that the selfreporting nature of the tax system means that the tax system cannot permit\nthe \xe2\x80\x9cabsolute adversarial\xe2\x80\x9d relationship that lawyers might have in other\nsituations. Deborah H. Schenk, Book Review: Tax Ethics, 95 Harv. L. Rev.\n1995, 2004 (1982). The idea that \xe2\x80\x9ctax ethics \xe2\x80\xa6 must be approached from a\nspecial perspective\xe2\x80\x9d, as a consequence of the self-reporting nature of our\ntax system, seems the most common argument for tax lawyers\xe2\x80\x99 duty to the\nsystem. Id. at 89. See also Anthony C. Infanti, Eyes Wide Shut: Surveying\nErosion in the Professional Tax Bar, 22 Va. Tax. Rev. 589, 606 (2003).\nHowever, some have criticized this conception of the tax lawyer. See, e.g.,\nDavid J. Moraine, Loyalty Divided: Duties to Clients and Duties to\nOthers\xe2\x80\x94the Civil Liability of Tax Attorneys Made Possible by the\nAcceptance of a Duty to the System, 63 Tax Law. 169 (2009).\n4\n\nSee, e.g., Treasury Regulations \xc2\xa7 1.6662-4(d)(2) (\xe2\x80\x9cThe possibility that a\nreturn will not be audited, or, if audited, that an item will not be raised on\naudit, is not relevant in determining whether the substantial authority\nstandard (or the reasonable basis standard) is satisfied.\xe2\x80\x9d)\n5\n\n6\n\n5 U.S.C. \xc2\xa7 500 (2012?).\n\nIndeed, under Circular 230 \xc2\xa710.3(c), enrolled agents may also practice\nbefore the IRS, but this discussion is limited to tax lawyers and CPAs as\nthese two professions dominate tax planning.\n7\n\nNational Conference of Lawyers and Certified Public Accountants: A\nStudy of Interprofessional Relationships, 36 Tax Law. 26, 28\xe2\x80\x9329 (1981).\n8\n\n9\n\nId. at 33\xe2\x80\x9334.\n\n10\n\nId. at 34.\n\n11\n\nId. at 34\xe2\x80\x9335.\n\n12\n\nId. at 35.\n\nDonald B. Tobin, Richard Lavoie, and Richard E. Trogolo, Problems in\nTax Ethics 22 (2009). See Jasper L. Cummings, Jr., The Range of Legal Tax\n13\n\n53\n\n\x0cOpinions, with Emphasis on the \xe2\x80\x98Should\xe2\x80\x99 Opinion, Tax Notes, February 17,\n2003, p. 1125, 1128.\nDonald B. Tobin, supra, note 11, at 25 Cummings, supra, note 11, 1126\xe2\x80\x93\n27.\n14\n\nReport of the Special Task Force on Formal Opinion 85-352, 39 Tax\nLaw. 635, 639-40(1985). The realistic possibility standard does not need to\nbe met if the position \xe2\x80\x9cis advanced by payment of the tax and claim for\nrefund, which necessarily sets forth in detail each ground upon which a\nrefund is claimed.\xe2\x80\x9d ABA Tax Section\xe2\x80\x99s Report of the Special Task Force on\nFormal Opinion 85-352, 39 Tax Law. 635, 639 (1985). See also IRC\n\xc2\xa76694(a)(2)(B) and IRC \xc2\xa7 6692(d)(2)(B). Note that pursuit-of-refund\nalternative would only be available for taxpayers with sufficient funds to pay\nthe tax upfront and then pursue the refund. This connects with the forumshopping issues between the Tax Court and the federal district\ncourts/Court of Federal Claims.\n15\n\nRestatement (Third) of Law Governing Lawyers \xc2\xa7 52 (The Standard of\nCare).\n16\n\nAdditionally, the penalty applies to substantial valuation misstatements.\nIRC \xc2\xa7 6662(b)(3).\n17\n\nIf the tax lawyer is considered a preparer (as discussed above), a position\nrelated to a tax shelter or reportable transaction will be considered\nunreasonable, unless it was reasonable for the lawyer to believe that the\nposition was \xe2\x80\x9cmore likely than not to be sustained on its merits\xe2\x80\x9d in\nlitigation. IRC \xc2\xa7 6694(a)(2)(C).\n18\n\nThe opinions, of course, do not protect the investors from paying any\nback taxes (and interest) due when the scheme is audited, but are intended\nto protect the investors from penalties.\n19\n\nKaren C. Burke and Grayson M.P. Crouch, COBRA Strikes Back:\nAnatomy of a Tax Shelter, 62 Tax Law 59, 61-62 (2008).\n20\n\n21\n\nId. at 63.\n\nSee Michael Hatfield, Committee Opinions and Treasury Regulation: Tax\nLawyer Ethics, 1965-1985, 15 Fla. Tax Rev. 675\xe2\x80\x93735 (2014).\n22\n\nSee Scott A. Schumacher, Magnifying Deterrence by Prosecuting\nProfessionals, 89 Ind. L.J. 511\xe2\x80\x9358 (2014).\n23\n\n54\n\n\x0cIt is assumed that a mistaken past return resulting in an overpayment will\nbe corrected in order to claim a refund.\n24\n\nAndrea Ball, Hatred Toward IRS Nothing New, The Dallas Morning\nNews, March 3, 2010,\nhttp://www.dallasnews.com/sharedcontent/dws/news/texassouthwest/\nstories/DN-irsworkers_03tex.ART.State.Edition1.4bdd764.html.\n25\n\n55\n\n\x0c'