What is a Tax Opinion Letter?
A Tax Opinion will shield you from exposure to penalties that might result from a position you rely on that is described under the opinion.
The United States Code of Federal Regulations, Title 31, Part 10, regulates the practice of federal tax law before the Internal Revenue Service. Section 10.37 establishes the “requirements for written advice.” Essentially Section 10.37 explains to practitioners how to issue what we in the legal community has informally refer to as “Tax Opinions,”, or written advice on international and federal tax matters including ancillary state tax matters, which can be relied on by you in making your choice about a deal or strategy.
Types of opinions:
Of course the tax code is not always clear. Here are the different levels of certainty you might see in a tax opinion:
Under a “Will Opinion” the issuer has absolutely no doubt whatsoever that the legal position would be accepted by both the IRS and any federal judge that reviews the case.
Under a “Should Opinion” if contested by the Service, the position advanced has a 70 percent to 85 percent chance of succeeding on the merits.
Under a “More Likely Than Not Opinion” if contested by the Service, the position advanced has a greater than 50 percent chance of succeeding on the merits.
Under a “Substantial Authority Opinion” if contested by the Service, the position advanced has a greater than 35 percent but less than 50 percent chance of succeeding on the merits; in other words, it is not likely to prevail in court.
Under a “Reasonable Basis Opinion” the issuer is limiting the opinion to the possibility that, if challenged by the Internal Revenue Service, the tax position advanced has a 20 percent to 35 percent chance of succeeding on the merits. This means that while you can make an argument for the legal position, it is substantially likely to not be upheld in court.
How can an Opinion Save You From Liability for Penalties?
Accuracy-Related Penalty for Negligence – The only requirement to avoid a finding of negligence is having reasonable basis for taking the legal position. Under Section 6662(c) negligence includes “any failure to make a reasonable attempt to comply” with tax law. A reasonable basis is actually a fairly easy standard to meet, given you have the right research skills and someone knowledgeable in constructing legal arguments. The standard to avoid penalties, by some estimates, requires only 20% of legal authorities to support a position for it to be able to be relied upon.
Accuracy-Related Penalty for Substantial Understatement of Tax – A tax position resulting in a substantial understatement of tax is exempt from the Section 6662 Accuracy-Related Penalty if it was adequately disclosed in the original tax return and the taxpayer has reasonable basis for the reliance on the tax opinion.
Good-Faith Reasonable Cause Exception – 6664(c)(1) provides “no penalty shall be imposed under section 6662 or 6663 with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.” This means if you rely upon a tax opinion, and that opinion is reasonable you can avoid the penalties.
At The Weil Law Group, we know tax payers often take positions that are firmly in the grey when it comes to paying taxes. The IRS tends to try to be as aggressive as possible when collecting taxes, why worry about the risk of potential penalties, when The Weil Law Group is here to help. To learn more, call us at 954-603-7603.Contact For A Free Consultation
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