Tax advice and tax opinion letters* are most valuable during the documenting and planning phases of a transaction. However, sometimes the transaction has closed and the only remaining step is for the taxpayer and his or her advisors to determine the best way to treat the transaction for tax purposes. A tax opinion can provide comfort to the client and his or her financial advisors in taking a specific tax position and in planning a transaction.
Tax advice might be helpful in analyzing a specific transaction, but only a written tax opinion can demonstrate that the law supports your position sufficient to rely on that advice. To be effective, an opinion must be based on analyzing the possible tax treatments and applying case law, judicial decisions, and IRS guidance to the taxpayer’s specific facts and circumstances.
Most of the tax opinions I prepare are for clients referred to me by his or her financial advisor or CPA, and sometimes the taxpayer just wants the comfort of a tax opinion letter. In some cases individuals request that a tax opinion be prepared to explore tax efficient options that decrease the risks of losing an IRS’ audit. In other cases, a financial advisor or the taxpayer might require an opinion letter to provide some assurance of the desired tax result or to clarify conflicting legal authority.
In general, audits by the IRS rarely occur. Nonetheless, a tax opinion is prepared under the assumption that the IRS will audit the tax position. A written tax opinion letter can add value in supporting that position during audit and avoiding accuracy penalties imposed by the IRS where the opinion reaches at least a “reasonable basis standard.” *
Of course, most taxpayers do not want to simply avoid penalties while still paying the taxes and interest. Taxpayers want to have their position upheld by the IRS. A tax opinion can help guide a pending transaction and increase the chances that it will be properly documented and supported by the applicable law if ever audited.
Opinion standards most commonly fall within one of the following categories (lowest to highest): not frivolous position, reasonable basis for position, substantial authority supporting position, more likely than not position will prevail, position should prevail, or position has strong authority that it will prevail. Generally a careful analysis of the facts and circumstances determine the appropriate level of the opinion for a specific situation.
A tax opinion can prove useful to support a tax position. An opinion can also alleviate concerns of clients and financial professionals with taking specific position on tax returns. Please call Curtis Harris at 801-765-0279 for a free consultation to evaluate how a tax opinion letter might help in your case.
* This comment does not refer to a “Marketed Opinion.” Market Opinions must meet at least a “More Likely Than Not” opinion standard. This comment only refers to tax opinions customized to a taxpayer’s specific situation.