In-House Tax Advisors and Actuaries Beware on Product Taxation

In June 20, 2005, new and more stringent standards of practice went into effect under IRS Circular 230 for tax consultants (lawyers, accountants and possibly actuaries) who practice before the IRS and provide tax advice. To oversimplify matters, any written tax advice (including electronic communications) that is intended to be relied upon to avoid penalties or is intended to be used in marketing, must rise to the status of a formal written opinion, that considers all the relevant facts and federal tax issues. Any tax advice that falls short of a formal opinion that reaches a confidence level of more likely than not on all significant tax issues must prominently state something like the following:

“This document does not reach a conclusion at a confidence level of at least more likely than not with respect to one or more significant Federal tax issues addressed by the document. With respect to those significant Federal tax issues, this document was not written, and cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.”

In addition, if the tax consultant understands that the tax advice may be used in marketing, IRS Circular 230 requires that the document disclose any compensation arrangement between the tax consultant and the promoter, indicate that it was written to support marketing and recommend that the taxpayer seek advice from an independent tax advisor.

Generally, tax advice given by an in-house tax advisor is not subject to these rules to the extent the tax advisor is providing the advice in his/her capacity as an employee solely for purposes of determining his/her employer’s tax liability. Importantly, however, there is no exception for tax advice from in-house tax professionals that addresses the tax treatment of customers. Likewise, there is no exception for “customer” tax advice based on whether or not the tax advice is used internally or in marketing materials.