CPA Exam — REG (Regulation)Ethics, Professional Responsibilities, and Federal Tax ProceduresHard
A tax practitioner is preparing a tax opinion for a client regarding a complex transaction. The opinion concludes that there is a 'more likely than not' chance that the tax treatment will be sustained. However, the practitioner knows that the client intends to use this opinion to avoid accuracy-related penalties on an understatement of tax. Under Circular 230, what is a key requirement for this opinion to be considered a 'reliance opinion' and protect the client from penalties?
- AThe opinion must be submitted to the IRS for pre-approval before the transaction occurs.
- BThe opinion must contain a disclaimer stating that it cannot be relied upon for penalty protection.
- CThe opinion must identify and consider all relevant facts and not rely on unreasonable factual assumptions.
- DThe opinion must be issued by a licensed attorney, not a CPA.
Show answer & explanationAnswer & explanation
Correct answer: C. The opinion must identify and consider all relevant facts and not rely on unreasonable factual assumptions.
For a tax opinion to be considered a 'reliance opinion' under Circular 230, and thus potentially protect a client from accuracy-related penalties, it must meet stringent requirements. A key requirement is that the practitioner must consider all relevant facts and not base the opinion on unreasonable factual or legal assumptions, representations, or findings.
Why the other options are wrong
- A. The IRS does not generally pre-approve tax opinions; the opinion's validity for penalty protection is assessed after the fact.
- B. Such a disclaimer would defeat the purpose of a reliance opinion, which is to provide penalty protection.
- D. CPAs are authorized to issue tax opinions under Circular 230, provided they meet the requirements.
Circular 230 Reliance Opinion
A written tax opinion that meets specific Circular 230 standards, primarily used by clients to establish reasonable cause and good faith to avoid accuracy-related penalties.
- Must identify and consider all relevant facts.
- Cannot be based on unreasonable factual or legal assumptions.
- Must relate the applicable law to the relevant facts.
- Must clearly state the conclusion as to the likelihood of success (e.g., 'more likely than not').
Memory trick: Facts must be true, assumptions few, for penalty protection's due.