Former § 10.35 provided detailed rules for tax opinions that were “covered opinions” under Circular 230. As discussed in the notice of proposed rulemaking, Treasury and the IRS revisited the covered opinion rules because their application increased the burden on practitioners and clients, without necessarily increasing the quality of the tax advice that the client received. Commenters on the proposed regulations overwhelmingly supported the elimination of former § 10.35 because the former rules were burdensome and provided minimal benefit to taxpayers. Commenters agreed that the rules in former § 10.35 contributed to overuse, as well as misleading use, of disclaimers on most practitioner communications even when those communications did not constitute tax advice.

The final regulations adopt the approach taken in the proposed regulations, eliminating the covered opinion rules in former § 10.35 and instead subjecting all written tax advice to one standard under final § 10.37, as described later in this preamble. Because former § 10.35 is removed, these regulations also remove cross-references to former § 10.35 in §§ 10.3 and 10.22. The burden reduction that should result from these regulations is consistent with the directions in Executive Order 13563 to remove or modify regulations that are outmoded, ineffective, insufficient, or too burdensome.

As discussed in the preamble to the proposed regulations, the elimination of the collection of information requirements in the covered opinion rules in these regulations should save tax practitioners a minimum of $5,333,200. These savings come from the elimination of the provisions in the former regulations requiring practitioners to make certain disclosures in a covered opinion. In connection with the issuance of former § 10.35 in 2004, we estimated that 100,000 practitioners would be required to comply with the disclosure provisions of § 10.35. We estimated that each practitioner would spend 5 to 10 minutes complying with the provision at an average of 8 minutes for a total burden of 13,333 hours. This burden is no longer imposed on practitioners.

Specifically, the former regulations required a practitioner providing a covered opinion to make certain disclosures in marketed opinions, limited scope opinions, and opinions that fail to conclude at a confidence level of at least more likely than not that the issue will be resolved in favor of the taxpayer (in other words, when the practitioner could not conclude that it was more likely than not that the taxpayer’s position would be supported by the IRS). For example, a marketed opinion had to specifically contain a statement that the opinion was written to support the marketing of the transaction addressed in the opinion and that the taxpayer should seek advice from an independent tax advisor based on the taxpayer’s particular circumstances. In addition, certain relationships between the practitioner and a person promoting or marketing a tax shelter were required to be disclosed. These final regulations do not include the above-referenced collection of information/disclosure requirements, and practitioners and taxpayers are relieved of the entire cost associated with those collection of information/disclosure requirements.

Please note that while we estimate that the elimination of this information collection would save tax practitioners and taxpayers a minimum of $5,333,200, this estimate does not include the burden reduction, and the corresponding cost savings, associated with tax practitioners having to determine whether a covered opinion, and any related disclosure, is necessary. This determination can often take a tax practitioner many hours.

Treasury and the IRS anticipate that the elimination of the covered opinion rules will result in additional, significant savings for both tax practitioners and taxpayers. Practitioners consistently expressed dissatisfaction with the covered opinion rules due the difficulty and cost of compliance with the rules. Practitioners operating under the former rules spent many hours each year determining whether they needed to prepare a covered opinion for a client, or if the advice fell into one of the exceptions. This required significant time to, among other things, research and review the covered opinion rules to determine the right course of action. If, after undertaking these activities, the practitioner decided that a covered opinion was necessary, the practitioner, to keep the client fully informed had to discuss the covered opinion rules with the client, including how the rules affected the scope of the work that the client had asked the practitioner to perform. This discussion would have also been appropriate because preparation of a covered opinion under former § 10.35 would have generally resulted in an increased cost to the client to obtain the advice the client requested. The significant extra costs associated with these activities may, in some cases, have discouraged obtaining written advice. Because the final regulations remove the unnecessary burden related to the process of preparing a covered opinion, both practitioners and taxpayers will likely experience an overall decrease in the costs associated with obtaining written tax advice.

Robust and relevant standards for written tax advice remain appropriate because Treasury and the IRS continue to be aware of the risk for the issuance and marketing of written tax opinions to promote abusive transactions. Commenters overwhelmingly supported the rules in proposed § 10.37 as providing practical, flexible rules that are well suited to the issuance of quality written tax advice, provided in an ethical manner, in today’s practice environment. Commenters agreed that the comprehensive, principles-based approach of these amendments is more straightforward, simpler, and can be applied to all written tax advice in a less burdensome manner. Overall, Treasury and the IRS have determined that these written advice rules strike an appropriate balance between allowing flexibility in providing written advice, while at the same time maintaining standards that require individuals to act ethically and competently.

Like the proposed regulations, final § 10.37 replaces the covered opinion rules with principles to which all practitioners must adhere when rendering written advice. Specifically, § 10.37 states affirmatively the standards to which a practitioner must adhere when providing written advice on a Federal tax matter. Section 10.37 requires, among other things, that the practitioner base all written advice on reasonable factual and legal assumptions, exercise reasonable reliance, and consider all relevant facts that the practitioner knows or reasonably should know. A practitioner must also use reasonable efforts to identify and ascertain the facts relevant to written advice on a Federal tax matter.

As under the proposed regulations, § 10.37, unlike former § 10.35, does not require that the practitioner describe in the written advice the relevant facts (including assumptions and representations), the application of the law to those facts, and the practitioner’s conclusion with respect to the law and the facts. Rather, the scope of the engagement and the type and specificity of the advice sought by the client, in addition to all other appropriate facts and circumstances, are factors in determining the extent to which the relevant facts, application of the law to those facts, and the practitioner’s conclusion with respect to the law and the facts must be set forth in the written advice. Also, under § 10.37, unlike former § 10.35, the practitioner may consider these factors in determining the scope of the written advice. Further, the determination of whether a practitioner has failed to comply with the requirements of § 10.37 will be based on all facts and circumstances, not on whether each requirement is addressed in the written advice.

Several commenters were concerned that the proposed regulations did not include a requirement that the practitioner consider relevant legal authorities and relate that law to the relevant facts. While this requirement was not expressly stated in the proposed regulations, Treasury and the IRS believed that it was implicit in the requirement that practitioners base the written advice on reasonable legal and factual assumptions. To further clarify, however, the final regulations add this requirement to § 10.37. Although the final regulations, unlike former § 10.35, do not impose a specific requirement for a practitioner to include in the written advice itself any particular piece of information or analysis, Treasury and the IRS encourage practitioners to describe all relevant facts, law, analysis, and assumptions in appropriate circumstances. As noted above, the determination of whether a practitioner complied with the requirements of § 10.37 will be based on all facts and circumstances, including whether it was appropriate to describe all relevant facts, law, analysis, and assumptions in a particular piece of written tax advice. Treasury and the IRS also encourage practitioners to observe the aspirational best practices described in § 10.33 of Circular 230.

Some commenters requested clarification that § 10.37 will be applied on the basis of what is reasonable under the facts and circumstances. These commenters stated that the proposed regulations did not affirmatively provide that a practitioner should reasonably consider all facts and circumstances in determining their obligations under § 10.37. Treasury and the IRS agree that practitioners should consider what is reasonable under the facts and circumstances when providing written advice. Although Treasury and IRS believe that proposed § 10.37(a), (b), and (c) accurately reflected that principle, § 10.37(a)(2)(ii) has been clarified to more explicitly include the requirement.

One commenter expressed concern that proposed § 10.37’s requirement for practitioners to rely on “reasonable” factual and legal assumptions is too onerous and would prefer that the rule provide that practitioners are required to rely on factual and legal assumptions that are not unreasonable. The commenter would have preferred a rule similar to former § 10.37(a), which prohibits a practitioner from basing advice on unreasonable factual or legal assumptions. The commenter stated that requiring reasonableness puts the burden on the practitioner to prove reasonableness. Treasury and the IRS do not view the change from “not unreasonable” to “reasonable” to be a substantive alteration. This specific amendment is part of the larger effort undertaken in these regulations to affirmatively state the requirements and standards for practitioners rather than merely specifying prohibited conduct. Treasury and the IRS also disagree that a reasonableness standard is too burdensome. As other commenters stated, any advice based on invalid representations, incorrect facts, or unreasonable assumptions has little value. Thus, the final § 10.37 adopts the requirement of proposed § 10.37 that practitioners rely on reasonable factual and legal assumptions. Several commenters also stated that requiring reasonable assumptions is aimed at eliminating informal advice, but Treasury and the IRS disagree. There is no particular correlation between the requirement to base advice on reasonable assumptions and the format of that advice. All forms of advice should be based on reasonable assumptions.

Many individuals currently use a Circular 230 disclaimer at the conclusion of every e-mail or other writing to remove the communication from the covered opinion rules in former § 10.35. In many instances, these disclaimers are inserted without regard to whether the disclaimer is necessary or appropriate. These types of disclaimers are routinely inserted in any written transmission, including writings that do not contain any tax advice. The removal of former § 10.35 eliminates the detailed provisions concerning covered opinions and disclosures in written opinions. Because amended § 10.37 does not include the disclosure provisions in the current covered opinion rules, Treasury and the IRS expect that these amendments will eliminate the use of a Circular 230 disclaimer in e-mail and other writings. Although one commenter stated that the proposed regulations would result in increased use of the disclaimer, the rules in the final regulations are intended to eliminate the need for unnecessary disclaimers. Another commenter stated that the required disclaimer should be retained because it may be helpful in some circumstances. These rules do not, however, prohibit the use of an appropriate statement describing any reasonable and accurate limitations of the advice rendered to the client.

The proposed regulations did not define written advice. Commenters on the proposed regulations agreed that a detailed definition of written advice in Circular 230 is unnecessary. Some commenters, however, requested clarification that certain items, such as submissions to a governmental entity and continuing education presentations, would not be considered written tax advice. The final regulations have been revised to clarify that government submissions on matters of general policy are not considered written tax advice on a Federal tax matter for purposes of § 10.37. For example, if a law firm submitted comments on proposed regulations to Treasury and IRS on a client’s behalf, that submission would not be considered written advice on a Federal tax matter because comments on proposed regulations are government submissions on matters of general policy. The final regulations also clarify that continuing education presentations provided to an audience solely for the purpose of enhancing practitioners’ professional knowledge on Federal tax matters, such as presentations at tax professional organization meetings, are not considered written advice for purposes of § 10.37. Presentations marketing or promoting transactions will not be considered to be provided solely for the purpose of enhancing practitioners’ professional knowledge on Federal tax matters. Including contact information on a continuing education presentation provided solely for the purpose of enhancing professional knowledge, without more, does not convert an educational presentation into an item of written tax advice governed by the final regulations. Even though continuing education presentations provided to an audience solely for the purpose of enhancing practitioners’ professional knowledge on Federal tax matters are not considered written advice, Treasury and the IRS nonetheless expect that practitioners will follow the generally applicable diligence and competence standards under §§ 10.22 and 10.35 when engaged in those activities.

Former § 10.35 governed written tax advice addressing Federal tax issues. Under the prior regulations, a Federal tax issue was defined as a question concerning the Federal tax treatment of an item of income, gain, loss, deduction, or credit, the existence or absence of a taxable transfer of property, or the value of property for Federal tax purposes. Because the final regulations eliminate former § 10.35, this definition is no longer applicable.

Section 10.37 of the proposed regulations governed written advice addressing “Federal tax matters,” but did not define Federal tax matters. Some commenters requested clarification regarding the definition of a Federal tax matter, and Treasury and the IRS determined that it is appropriate to define Federal tax matter in the final regulations. Under final § 10.37(d), a Federal tax matter is any matter concerning the application or interpretation of (1) a revenue provision as defined in section 6110(i)(1)(B) of the Internal Revenue Code (Code), (2) any provision of law impacting a person’s obligations under the internal revenue laws and regulations, including but not limited to the person’s liability to pay tax or obligation to file returns, or (3) any other law or regulation administered by the IRS. The definition of Federal tax matter in the final regulations reflects the broad nature of advice rendered by Federal tax practitioners in today’s practice environment.

Other commenters expressed interest in keeping the definition of Federal tax issue contained in former § 10.35 for purposes of § 10.37. The final regulations do not retain the term Federal tax issue or its definition because practitioners provide advice on numerous tax related issues that are outside the scope of the definition of ”Federal tax issue” contained in former § 10.35 but nonetheless are Federal tax matters and should be subject to the reasonable practitioner standard embodied in final § 10.37.

Consistent with former § 10.37, the final regulations provide that a practitioner must not, in evaluating a Federal tax matter, take into account the possibility that a tax return will not be audited or that an issue will not be raised on audit. Although commenters agreed with the retention of this rule, one commenter expressed concern that stating this rule only in the context of written advice improperly sends the message that oral advice could take audit risk into account. Treasury and the IRS agree that audit risk should not be considered by practitioners in the course of advising a client on a Federal tax matter, regardless of the form in which the advice is given. Because § 10.37 addresses only written advice, Treasury and the IRS do not believe that the rule barring consideration of the possibility that a return or issue will be audited when giving written advice suggests that it may be considered when giving oral advice. Therefore, no change is made to § 10.37 in response to the comment.

Proposed § 10.37 sought to eliminate the provision in the former regulations that prohibits a practitioner from taking into account the possibility that an issue will be resolved through settlement if raised when giving written advice evaluating a Federal tax matter. Treasury and the IRS concluded that the former rule may have unduly restricted the ability of a practitioner to provide comprehensive written advice because the existence or nonexistence of legitimate hazards that may make settlement more or less likely may be a material issue for which the practitioner has an obligation to inform the client. Commenters agreed that this amendment is appropriate, and the final regulations retain it.

The proposed regulations provided that the IRS will apply a heightened standard of review to determine whether a practitioner has satisfied the written advice standards when the practitioner knows or has reason to know that the written advice will be used in promoting, marketing, or recommending an investment plan or arrangement a significant purpose of which is the avoidance or evasion of any tax imposed by the Code. Some commenters expressed concern that the term “heightened standard of review” was too vague and requested that Treasury and the IRS provide detailed rules and examples with respect to application of a heightened standard of review in these cases. The final regulations clarify in § 10.37(c)(2) that the Commissioner, or delegate, will apply a reasonable practitioner standard that considers all facts and circumstances with an emphasis given to the additional risk associated with the practitioner’s lack of knowledge of the taxpayer’s particular circumstances.

Proposed § 10.37(b) addressed a practitioner’s reliance on the advice of another practitioner. Commenters asked whether the standards in § 10.37(b) should apply to a practitioner’s reliance on advice from an appraiser or other individual not described as a practitioner in §§ 10.2 and 10.3 of Circular 230. Treasury and the IRS have determined that the provisions of § 10.37(b) should apply to a practitioner who relies on advice from any other person, including appraisers and other individuals not defined as practitioners under Circular 230. Final § 10.37(b), therefore, reflects that the standards apply to a practitioner relying on advice from another person. This reliance provision in the final regulations is consistent with reliance standards in current §§ 10.22 and 10.34(d), and former § 10.35(d). Commenters also requested special rules for reliance on certain professionals, but Treasury and the IRS have determined that the same standards should apply to all advice upon which a practitioner relies, bearing in mind that the reasonable practitioner standard under § 10.37(c) will be applied considering all facts and circumstances.

Proposed § 10.37(b)(1)–(3) provided that reliance is not reasonable when the practitioner “knows or should know” that the opinion of the other person should not be relied on, the other person is not competent to provide the advice, or the other person has a conflict of interest. Commenters suggested that the reliance provisions in proposed § 10.37(b)(1)–(3) be revised to use a “knows or reasonably should know standard.” Treasury and the IRS agree. Accordingly, the final regulations revise § 10.37(b)(1)–(3) to prohibit reliance when the practitioner “knows or reasonably should know” that the advice is disqualified as specified in each provision. The standard in final § 10.37(a) for reliance on representations also has been amended in a consistent manner.

Commenters also suggested that the reliance provision in proposed § 10.37(b)(2) is too broad because it imposes a duty on a practitioner to inquire into the skills and experience of the person whose advice is being relied upon. While Treasury and the IRS do not believe this standard imposes an affirmative duty on a practitioner to inquire into the skills and experience of the other person when the practitioner is already aware of the other person’s background, Treasury and the IRS believe practitioners should consider the skills and experience of a person when they are relying on the advice of that person. Relying on advice of another person without considering that person’s expertise and qualifications to provide that advice is inconsistent with the obligation of diligence required in § 10.22. Thus, a practitioner intending to rely on the advice of another person may have an obligation to inquire about that person’s background if the practitioner is not familiar with the person’s qualifications to render the advice on which the practitioner will be relying. Accordingly, the final regulations retain § 10.37(b)(2), which provides that a practitioner cannot rely on the advice of another when the practitioner knows or reasonably should know that the other person is not competent or lacks necessary qualifications to provide the advice.

Some commenters expressed concern with proposed § 10.37(b)(3), which provided that a practitioner could not rely on the advice of another when the practitioner knows or should know that the other practitioner has a conflict of interest as described in Circular 230. These commenters stated that this rule may prevent reliance when the other practitioner has a conflict of interest that has been properly waived by all affected clients, as permitted by § 10.29 of Circular 230. Treasury and the IRS agree that a practitioner should be able to rely on the advice of another person who has a conflict of interest when the practitioner knows that the other person’s conflict has been waived by all affected clients through informed consent, the representation is not prohibited by law (for example, Federal law prohibits representation by a former government lawyer in certain circumstances), and all parties and practitioners reasonably believe that the practitioner with the conflict can provide competent advice. Final § 10.37(b)(3), therefore, specifically provides that reliance is not permitted when the practitioner knows or reasonably should know that the other person has a conflict of interest in violation of the rules described in Circular 230.

Former § 10.36(a) provided requirements for practitioners to establish procedures to ensure compliance with former § 10.35. Because these regulations remove former § 10.35, these regulations also remove former § 10.36(a). As set forth in the notice of proposed rulemaking preceding these final regulations, Treasury and the IRS, however, amended § 10.36 to ensure compliance with Circular 230 generally.

The procedures to ensure compliance have produced great success in encouraging firms to self-regulate without the burden often associated with a rigid one-size-fits-all approach. Treasury and the IRS expanded § 10.36 in June 2011 to require firms to have procedures in place to ensure Circular 230 compliance with respect to a firm’s tax return preparation practice (76 FR 32286). Under proposed § 10.36, the requirement for procedures to ensure compliance were expanded to include all provisions in Subparts A (Rules Governing Authority to Practice), B (Duties and Restrictions Relating to Practice Before the Internal Revenue Service), and C (Sanctions for Violation of the Regulations) of Circular 230. Section 10.36 is finalized as proposed, except for the clarifications described in this preamble.

Commenters generally agreed with the amendments to § 10.36. One concern expressed by the commenters, however, was that the proposed rule would arguably permit firm management to be in compliance with Circular 230 if it had taken reasonable steps to ensure the firm had adequate procedures in place but did not take any steps to ensure those procedures are properly followed. Treasury and the IRS agree that § 10.36 should be clarified to require both the existence and implementation of adequate procedures. Accordingly, § 10.36(b)(2) of the final regulations is amended to provide this clarification.

Some commenters also expressed concern with the application of § 10.36 when certain members of firm management are not practitioners under Circular 230. Treasury and the IRS recognize that there may be instances when one or more members of firm management have principal authority and responsibility for overseeing a firm’s tax practice but are not practitioners under Circular 230. In these instances, other members of firm management may nonetheless be subject to the provisions of Circular 230. Accordingly, § 10.36 is revised to apply to any member of firm management subject to Circular 230. Although Treasury and the IRS realize there may be some instances in which no member of firm management is subject to Circular 230, the overwhelming majority of firms will have one or more members of firm management who are subject to Circular 230. Treasury and the IRS believe it is reasonable to expect those members of firm management who are subject to Circular 230 to ensure that the firm will have in place and implement adequate procedures to ensure compliance with Circular 230. The final regulations make clear that in the absence of a person or persons identified by the firm as having principal authority and responsibility, the IRS may identify one or more individuals subject to Circular 230 who will be held responsible for taking reasonable steps to ensure that the firm has adequate procedures in effect for all members for purposes of complying with Circular 230.

Because § 10.36 is expanded to apply to all provisions in Subparts A, B, and C of Circular 230, including § 10.51 (under which willful failure to file a tax return and willful evasion of the assessment or payment of tax is disreputable conduct), one commenter was concerned that § 10.36 imposes a duty on firm management to ensure that members of the firm are compliant with their own tax obligations. Treasury and the IRS recognize that personal filing and payment obligations are an individual responsibility, and there are limitations on a firm’s responsibility for the compliance of any member, associate, or employee with their personal tax obligations. But, Treasury and the IRS believe that firm management should not ignore the noncompliance with these obligations by any practitioner associated with the firm when such noncompliance is known or should be known to the firm.

One commenter stated that the expansion of § 10.36 should be limited to the practice standards prescribed in Subpart B of Circular 230, which pertains to Duties and Restrictions Relating to Practice Before the Internal Revenue Service. Treasury and the IRS disagree that final § 10.36 should be limited to Subpart B because Subparts A (Rules Governing Authority to Practice) and C (Sanctions for Violation of the Regulations) also impose substantive standards with which firm members must comply. Treasury and the IRS, however, do agree that it is not necessary for a firm’s procedures to ensure compliance with Subparts D (Rules Applicable to Disciplinary Proceedings) or E (General Provisions) of Circular 230, and have revised § 10.36 accordingly.

One commenter suggested that firm management should be subject to discipline even when there is no subordinate individual whose conduct is subject to sanction. Another commenter suggested that § 10.36 be expanded to govern contractual relationships occurring outside the firm or in-house context in which one party may supervise or manage the other party. Treasury and the IRS considered these comments and have determined that such authority is not necessary at this time because § 10.36, as amended, is broad enough for the IRS to be able to determine whether firm management is taking reasonable steps to comply with Circular 230. Future consideration may be given to broadening the rules consistent with these comments, if experience shows that additional changes are necessary.

Section 10.35 of the proposed regulations provided that a practitioner must possess the necessary competence to engage in practice before the IRS and that competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged.

Some commenters expressed concern over whether the competence standard permits practitioners to become competent by consulting other practitioners with relevant expertise or learning governing law through research and study. In response to these comments, the competence standard in final § 10.35 contemplates that practitioners may become competent in a variety of ways, including, among other things, consulting with experts in the relevant area and studying the relevant law. Whether consultation and/or research are adequate to make a practitioner competent in a particular situation depends on the facts and circumstances of the particular situation.

The proposed regulations provided that competent practice requires “the knowledge, skill, thoroughness, and preparation” necessary for the matter. Commenters questioned whether it is appropriate to consider “thoroughness and preparation” in determining competency because, in some circumstances, the failure to thoroughly prepare does not necessarily show a lack of competence. Treasury and the IRS recognize that a practitioner who is highly experienced in a particular matter may require less preparation than a practitioner who is handling the same matter for the first time. Accordingly, the final regulations clarify that competence requires the “appropriate level of” knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged.

Commenters suggested that the competence standard may be too broad because it could apply to all advice given to a client. The provision is intended to apply to all advice a practitioner provides to a client on a matter within the scope of Circular 230. This competence standard in Circular 230 does not apply to acts that are outside the scope of Circular 230. Treasury and the IRS, and the public, expect practitioners to be competent when they engage clients in matters covered by Circular 230, including the provision of advice. It is also expected that practitioners will advise clients to obtain other counsel when the practitioner is not competent or cannot become competent to provide advice requested on a matter within the scope of Circular 230. Treasury and the IRS, thus, believe the competence standard is not overbroad as it governs conduct within the purview of Circular 230. Accordingly, the final regulations retain the rules in the proposed regulations.

Some commenters noted that the proposed competency standard was nearly identical to the competency standard in the American Bar Association’s Model Rules of Professional Conduct. And a few commenters expressed confusion about whether the proposed regulations permitted different competency standards depending on the practitioner’s status as an attorney, CPA, enrolled agent, or other practitioner. The proposed regulations provided only one competency standard under Circular 230 and were clear that the same standard applies to all practitioners, regardless of the practitioner’s status as an attorney, CPA, enrolled agent, or other practitioner. As commenters noted, the competency standard in § 10.35 is nearly identical to the standard in the Model Rules of Professional Conduct for attorneys, but, unlike the Model Rules, § 10.35 applies to all individuals subject to Circular 230, not just attorneys.

Further, some commenters asked Treasury and the IRS to further develop the standard that would apply under § 10.52 for determining whether there is a violation of § 10.35. Section 10.52 provides the governing standards for determining whether any violation of a Circular 230 provision subjects an individual to sanction. Treasury and the IRS do not believe the standards in § 10.52 need to be expanded upon at this time. Section 10.52 already specifies that a practitioner will be subject to sanction under § 10.52 for violating § 10.35 by behaving recklessly or through gross incompetence. A pattern or practice of incompetent conduct may establish a violation of § 10.35. Under current practice, the IRS considers the presence of aggravating and mitigating factors in determining whether a sanction for a violation of Circular 230 is appropriate (see Notice 2007–39). Therefore, Treasury and the IRS do not believe additional guidance related to § 10.52 is necessary at this time.

Additionally, some commenters requested that the regulations include examples demonstrating practitioner competence. Treasury and the IRS have determined that the inclusion of examples in the regulations is not necessary because competence is not a new standard or concept, and whether the required standard is met must always be based on the relevant facts and circumstances. Although not binding on the IRS, Treasury and the IRS believe that the comments to Rule 1.1 of the Model Rules of Professional Conduct, State Bar opinions addressing the competence standard, and the American Institute of Certified Public Accountant’s competency standard are generally informative on the standard of competency expected of practitioners under Circular 230.

Proposed and final § 10.31 provide that a practitioner may not endorse or otherwise negotiate any check issued to a client by the government in respect of a Federal tax liability, including directing or accepting payment by any means, electronic or otherwise, into an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated. This prohibition on practitioner negotiation of taxpayer refunds is intended to provide guidance in the modern-day electronic environment in which practitioners, taxpayers, and the IRS operate. Proposed and final § 10.31 also amend former § 10.31 to apply to all individuals who practice as representatives of persons before the IRS, not just those practitioners who are tax return preparers.

Most commenters on the proposed regulations agreed with Treasury and the IRS that these revisions to § 10.31 are an appropriate standard for all practitioners as well as a necessary step in protecting taxpayers in today’s electronic commerce environment. Commenters recognized this is an area of abuse, and observed that the amendments to § 10.31 will improve public confidence in the profession. Accordingly, the final regulations retain this rule.

One commenter expressed concern that § 10.31 prohibits certain arrangements permissible under section 6695(f) of the Code, which imposes a penalty on a tax return preparer for endorsing or otherwise negotiating (directly or through an agent) a taxpayer’s check. Section 1.6695(f)–1(f)(2) of the Income Tax Regulations sets forth certain arrangements between a “tax return preparer-bank” and a taxpayer to which section 6695(f) does not apply. Treasury and the IRS do not believe that the rule in proposed § 10.31 prohibits the arrangements described in the section 6695 regulations or any arrangement that is not subject to the penalty under the section 6695(f), and therefore no change to finalized § 10.31 was made in this regard.

One commenter raised the concern that the administration of a trust or estate may be impaired due to the prohibition on practitioner check negotiation. Section 10.31 does not apply to an individual acting solely in the capacity of a trustee of a trust, or administrator/executor of an estate because that person is acting as the taxpayer, not as the taxpayer’s representative. See § 10.7(e) of Circular 230.

Section 10.82 authorizes the immediate suspension of a practitioner who has engaged in certain conduct. The proposed and final regulations extend the expedited disciplinary procedures to disciplinary proceedings against practitioners who have willfully failed to comply with their Federal tax filing obligations.

Amended § 10.82 only permits the use of expedited procedures in the limited circumstances when a tax noncompliant practitioner demonstrates a pattern of willful disreputable conduct by (1) failing to make an annual Federal tax return during four of five tax years immediately before the institution of an expedited suspension proceeding, or (2) failing to make a return required more frequently than annually during five of seven tax periods immediately before the institution of an expedited suspension proceeding. For purposes of § 10.82, the phrase “make a return” has the same meaning as used in sections 6011 and 6012 of the Code and § 10.51(a)(6) of Circular 230. Additionally, the practitioner must be noncompliant with a tax filing obligation at the time the notice of suspension is served on the practitioner for the expedited procedures to apply.

Commenters generally agreed that a practitioner’s willful non-filing is an appropriate grounds for expedited suspension, and that the final regulations are narrowly tailored to achieve the desired result. One commenter, however, opined that the amendments to § 10.82 should only apply to failures with respect to the requirement to file income tax returns. Treasury and the IRS do not agree with this comment because repeated instances of non-filing demonstrates a practitioner’s willfulness and potential harm to the tax system regardless of the type of return at issue.

Some commenters suggested that the periods of noncompliance for which expedited suspension may apply in the case of non-filing (four of five years for annual returns, or five of seven tax periods) are too short. Treasury and the IRS do not agree. Four of five tax years, or five of seven tax periods, of practitioner non-filing shows a level of disregard for the tax system beyond negligence. Practitioners engaging in this repeated pattern of non-filing demonstrate a high level of disregard for the Federal tax system and a level of willfulness sufficient for practitioner sanction under Circular 230.

Some commenters expressed concern that the failure to file four out of five years (or five of seven periods, as applicable) rule deems willfulness without providing the practitioner an opportunity to respond or explain any legitimate basis for the non-filing. A similar comment stated that expedited suspension would not be appropriate if a practitioner and the IRS may have a legitimate dispute as to whether employment tax returns were required to be filed. Section 10.82, however, provides the practitioner with an opportunity to file a response explaining any circumstances surrounding the failure to file prior to the suspension.

Accordingly, Treasury and the IRS have determined that the proposed amendments to § 10.82 are appropriate because practitioners demonstrating this high level of disregard for the Federal tax system are unfit to represent others who are making a good faith attempt to comply with their own Federal tax obligations. Expedited action in these cases will likely prevent harm to taxpayers and the Federal tax system. Furthermore, these changes to the regulations provide appropriate procedures to ensure due process for practitioners.

Prior to these regulations, Circular 230 did not otherwise provide guidance with respect to the length of suspension or the time period in which the practitioner is permitted to apply for reinstatement. Section 10.81, however, formerly provided that a disbarred practitioner (or disqualified appraiser) was eligible to apply for reinstatement after five years following the practitioner’s disbarment or disqualification. Proposed § 10.81 extended this standard to suspended practitioners. Consistent with proposed § 10.81, final § 10.81 makes the rules for disbarred and suspended practitioners consistent and applies the same five-year time period for both disbarred and suspended practitioners. One commenter observed that it also should be appropriate for a suspended practitioner to apply for reinstatement when the suspension expires, even if the suspension expires before the end of five years. Treasury and the IRS agree with this observation, and have revised § 10.81 accordingly.

Consistent with proposed § 10.82, final § 10.82 includes several non-substantive changes that will help practitioners distinguish between the expedited suspension procedures of § 10.82 and otherwise generally applicable procedures for sanctions instituted under § 10.60. For example, to begin an expedited suspension under these regulations, the IRS would issue a “show cause order” instead of a “complaint” and the practitioner would submit a “response” instead of an “answer.” Prior to the issuance of the proposed regulations, the terms “complaint” and “answer” described the documents used for both expedited suspensions under § 10.82 and regular proceedings under § 10.60. The changes made in the proposed regulations, which are retained in the final regulations, do not substantively change the expedited suspension procedures, or the contents of what must be included in the underlying documents, but are intended to make it easier to understand § 10.82.

Proposed § 10.82(d) provided that an individual subject to a proposed expedited suspension must file a response within 30 days of the show cause order proposing to suspend the individual. One commenter expressed concern that 30 days is not sufficient time for an individual out of the country to respond to the show cause order. As noted in the preceding paragraph, the proposed regulations sought to amend § 10.82 to assist in clarifying the distinction between expedited suspension procedures and the procedures generally applicable to disciplinary proceedings instituted under § 10.60. The 30-day period was not a change from the prior time period contained in § 10.82(d). The IRS has not experienced that individuals outside the country are defaulting on expedited suspension show cause orders (formerly referred to as complaints) or requesting additional time more frequently, as a general matter, than individuals inside the country to whom a show cause order has been issued. Therefore, Treasury and the IRS do not believe that it is necessary to extend the 30-day period for responding to show cause orders for those outside the United States at this time.

Section 10.82(g), as amended, clarifies that practitioners subject to an expedited proceeding may demand a complaint under § 10.60. Former § 10.82(g) provided that the IRS has 30 days to issue a complaint after receiving the practitioner’s demand for a complaint. In some cases, extra time may be necessary to provide the practitioner and Administrative Law Judge with the most current information regarding the practitioner’s fitness to practice as a representative of persons before the IRS. The proposed regulations increased the time to file the requested complaint to 45 days. No comments were received on this proposal. But, after further consideration, Treasury and the IRS have determined that, in some cases, more than 45 days may be needed for the IRS to provide the Administrative Law Judge with the most current information regarding the practitioner’s fitness to practice. Treasury and the IRS believe that 60 days will provide the IRS with sufficient time to ensure the complaint complies with the requirements in § 10.62. Accordingly, final § 10.82(g) provides that the IRS has 60 days to issue a complaint after receiving a demand for a complaint from a practitioner suspended under the expedited procedures.

Commenters expressed concern about what would happen if the IRS does not file a complaint within the period provided in § 10.82(g). In response to this concern, revised § 10.82 is clarified to provide that if the IRS does not issue a complaint within 60 days of receiving the demand, the suspension is lifted automatically. Lifting the suspension in these circumstances will not, however, preclude the Commissioner, or delegate, from instituting a proceeding under § 10.60.

Proposed § 10.1(a)(1) clarified that the Office of Professional Responsibility has exclusive responsibility for matters related to practitioner discipline, including disciplinary proceedings and sanctions. Commenters stated this amendment would abate previously expressed concerns that other IRS offices may be authorized to handle practitioner disciplinary proceedings. Accordingly, the final regulations retain this clarification. However, the effective date provision of § 10.1(d) is revised to clarify that the only provision of § 10.1 that has an effective date of June 12, 2014 is § 10.1(a)(1).

The purpose of this revenue procedure to set forth the 2013 requirements for:

This revenue procedure contains specifications for these information returns:

For purposes of this revenue procedure, a substitute form or statement is one that is not published by the IRS. For a substitute form or statement to be acceptable to the IRS, it must conform to the official form or the specifications outlined in this revenue procedure. Do not submit any substitute forms or statements listed above to the IRS for approval. Privately published forms may not state, “This is an IRS approved form.”

Filers making payments to certain recipients during a calendar year are required by the Internal Revenue Code (the Code) to file information returns with the IRS for these payments. These filers must also provide this information to their recipients. In some cases, this also applies to payments received. See Part 4 for specifications that apply to recipient statements (generally Copy B).

In general, section 6011 of the Code contains requirements for filers of information returns. A filer must file information returns electronically or on paper. A filer who is required to file 250 or more information returns of any one type during a calendar year must file those returns electronically.

Note. If you file electronically, do not file the same returns on paper.

Although not required, small volume filers (fewer than 250 returns during a calendar year) may file the forms electronically. See the requirements for filing information returns (and providing a copy to a payee) in the 2013 General Instructions for Certain Information Returns and the 2013 Instructions for Form 1042–S. In addition, see the current revision of Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922,5498, 8935, and W–2G through the IRS FIRE system.

The IRS prints and provides the forms on which various payments must be reported. See section 5.3.1., later, for ordering forms and instructions. Alternatively, filers may prepare substitute copies of these IRS forms and use such forms to report payments to the IRS.

Further information impacting Publication 1179, such as issues arising after its final release, will be posted on IRS.gov at www.irs.gov/pub1179.

The following changes have been made to this year’s revenue procedure:

Form recipient means the person to whom you are required by law to furnish a copy of the official form or information statement. The form recipient may be referred to by different names on various Forms 1099 and related forms (“borrower,” “debtor,” “donor,” “employee,” “insured,” “participant,” “payer/ borrower,” “policyholder,” “student,” “transferor,” or, in the case of Form W–2G, the “winner”). See Section 1.3.4.

Filer means the person or organization required by law to file with the IRS a form listed in Section 1.1.2 with the IRS. As outlined earlier, a filer may be a payer, creditor, recipient of mortgage or student loan interest payments, educational institution, broker, barter exchange, person reporting real estate transactions; trustee or issuer of any educational savings account, individual retirement arrangement or medical savings account; lender who acquires an interest in secured property or who has reason to know that the property has been abandoned, or certain donees of motor vehicles, boats, and airplanes.

Substitute form means a paper substitute of Copy A of an official form listed in Section 1.1.2 that totally conforms to the provisions in this revenue procedure.

Substitute form recipient statement means a paper statement of the information reported on a form listed in Section 1.1.2. This statement must be furnished to a person (form recipient), as defined under the applicable provisions of the Code and the applicable regulations.

Composite substitute statement means one in which two or more required statements (for example, Forms 1099–INT and 1099–DIV) are furnished to the recipient on one document. However, each statement must be designated separately and must contain all the requisite Form 1099 information except as provided under Section 4.2. A composite statement may not be filed with the IRS.

Paper substitutes for Form 1096 and Copy A of Forms 1097–BTC, 1098, 1099, 3921, 3922, 5498, W–2G, 1042–S, and 8935 that totally conform to the specifications listed in this revenue procedure may be privately printed and filed as returns with the IRS. The reference to the Department of the Treasury –Internal Revenue Service should be included on all such forms.

If you are uncertain of any specification and want it clarified, you may submit a letter citing the specification, stating your understanding and interpretation of the specification, and enclosing an example of the form (if appropriate) to:

Note. Allow at least 30 days for the IRS to respond.

You may also contact the Substitute Forms Program via e-mail at substituteforms@irs.gov. Please enter “Substitute Forms” on the Subject Line.

Forms 1096, 1097–BTC, 1098, 1099, 3921, 3922, 5498, W–2G, 1042–S, and 8935 are subject to annual review and possible change. Therefore, filers are cautioned against overstocking supplies of privately printed substitutes.

Some Forms 1097–BTC, 1098, 1099, 3921, 3922, 5498, W–2G, 1042–S, and 8935 that include logos, slogans and advertisements may not be recognized as important tax documents. A payee may not recognize the importance of the payee copy for tax reporting purposes due to the use of logos, slogans, and advertisements. Thus, the IRS has determined that logos, slogans and advertising will not be allowed on Forms 1096 or Copy A of Forms 1097–BTC, 1098, 1099, 3921, 3922, 5498, W–2G, 1042–S, 8935, or any payee copies, with the following exceptions:

The IRS e-file logo on the IRS official payee copies may be included, but it is not required, on any of the substitute form copies.

The information return and payee copies must clearly identify the payer’s name associated with its employer identification number.

Logos and slogans, may be used on permissible enclosures, such as a check or account statement, other than information returns and payee copies.

As indicated in Sections 1.3.1 and 5.1.3, of this revenue procedure, Forms 1096, 1097-BTC, 1098, 1099, 3921, 3922, 5498, W–2G, 1042–S, and 8935 are subject to annual review and possible change. If you have comments about the restrictions on including logos, slogans, and advertising on information returns and payee copies, send or email your comments to: Internal Revenue Service, Attn: Substitute Forms Program, SE:W:CAR:MP:P:TP, 5000 Ellin Road, C7–263, Lanham, MD 20706 or substituteforms@irs.gov.

Proposed substitutes of Copy A must be exact replicas of the official IRS form with respect to layout and content. Proposed substitutes for Copy A that do not conform to the specifications in this revenue procedure are not acceptable. Further, if you file such forms with the IRS, you may be subject to a penalty for failure to file a correct information return under section 6721 of the Code. The amount of the penalty is based on when you file the correct information return. The penalty is:

Copy B and Copy C of the following forms must contain the information in Part 4 to be considered a “statement” or “official form” under the applicable provisions of the Code. The format of this information is at the discretion of the filer with the exception of the location of the tax year, form number, form name, and the information for composite Form 1099 statements as outlined under Section 4.2.

Copy B, of the forms below, are for the following recipients.

Copy C of the following forms are:

Note. On Copy C, Form 1099–LTC, you may reverse the locations of the policyholder's and the insured's name, street address, city, state, and ZIP code for easier mailing.

Form identifying numbers (for example, 9191 for Form 1099–DIV) must be printed in nonreflective black carbon-based ink in print positions 15 through 19 using an OCR A font. The check boxes to the right of the form identifying numbers must be 10-point boxes. The “VOID” checkbox is in print position 25 (1.9” from left vertical line of the form). The “CORRECTED” check box is in print position 33 (2.7” from left vertical line of the form). Measurements are generally from the left edge of the paper, not including the perforated strip.

The substitute form Copy A must be an exact replica of the official IRS form with respect to layout and content. To determine the correct form measurements, see Exhibits A through FF at the end of this publication.

Exhibit B contains the general measurements for forms printed 2-to-a-page. All 3-to-a-page forms, except Form 5498–ESA, are 2.83”in height within the border lines. Exhibit C contains the general measurements for forms printed 3-to-a–page. All 2-to-a-page forms, except Form 1042–S, are 4.5”in height within the border lines. The printed area of all forms is 7.3”wide.

Hot wax and cold carbon spots are not permitted on any of the internal form plies. These spots are permitted on the back of a mailer top envelope ply.

Use of chemical transfer paper for Copy A is acceptable.

The Government Printing Office (GPO) symbol must be deleted.

Color and paper quality for Copy A (cut sheets and continuous pinfeed forms) as specified by JCP Code 0–25, dated November 29, 1978, must be white 100% bleached chemical wood, optical character recognition (OCR) bond produced in accordance with the following specifications.

Note. Reclaimed fiber in any percentage is permitted provided the requirements of this standard are met.

Chemical transfer paper is permitted for Copy A only if the following standards are met:

All copies must be clearly legible. Fading must be minimized to assure legibility.

All print on Copy A of Forms 1097–BTC, 1098, 1099, 3921, 3922, 5498, and the print on Form 1096 above the statement, “Return this entire page to the Internal Revenue Service. Photocopies are not acceptable.” must be in Flint J–6983 red OCR dropout ink or an exact match. However, the four-digit form identifying number must be in nonreflective carbon-based black ink in OCR A font.

The shaded areas of any substitute form should generally correspond to the format of the official form.

The printing for the Form 1096 statement and the following text may be in any shade or tone of black ink. Black ink should only appear on the lower part of the reverse side of Form 1096, where it will not bleed through and interfere with scanning.

Note. The instructions on the front and back of Form 1096, which include filing addresses, must be printed.

Separation between fields must be 0.1 inch.

Except for Forms 1097–BTC, 1099–R, and 1099–MISC, the numbered captions are printed as solid with no shaded background.

Other printing requirements are discussed below.

You must initiate or have a quality control program to assure OCR ink density. Readings will be made when printed on approved 20 lb. white OCR bond with a reflectance of not less than 80%. Black ink must not have a reflectance greater than 15%. These readings are based on requirements of the “Scan-Optics Series 9000” Optical Scanner using Flint J–6983 red OCR dropout ink or an exact match.

The following testers and ranges are acceptable:

Important information: The forms produced under these specifications must be guaranteed to function properly when processed through High Speed Scan-Optics 9000 mm scanners. Forms require precision spacing, printing, and trimming.

Density readings on the solid J–6983 (red) must be between the ranges of 0.95 to 0.90. The optimal scanning range is 0.93. Density readings on the solid black must be between the ranges of 112 to 108. The optimal scanning range is 110.

Note. The readings are taken using an Ex-Rite 500 series densitometer, in Status T with Obsolute or – paper setting under an Illuminate 5000 Kelvin Watt Light. You must maintain print contrast specification of ink and densitometer reflectivity reading throughout entire production run.

Type must be substantially identical in size and shape to the official form. All rules are either 1/2-point or 3/4-point. Rules must be identical to those on the official IRS form.

Note. The form identifying number must be nonreflective carbon-based black ink in OCR A font.

Generally, three copies A of Forms 1098, 1099, 3921, and 3922 are contained on a single page, 8 inches wide (without any snap-stubs and/or pinfeed holes) by 11 inches deep.

Exceptions. Forms 1097–BTC, 1099–B, 1099–DIV, 1099–INT, 1099–K, 1099–MISC, 1099–OID, 1099–R, 5498, and 1042–S contain two documents per page. Form 1098–C is a single page document.

There is a .33 inch top margin from the top of the corrected box, and a .2 to .25 inch right margin, with a +/− 1/20 (0.05) inch tolerance for the right margin. If the right and top margins are properly aligned, the left margin for all forms will be correct. All margins must be free of print. See Exhibits A through FF in this revenue procedure for correct form measurements.

These measurements are constant for certain Forms 1098, 1099, and 5498. These measurements are shown only once in this publication, on Form 1098 (Exhibit C). Exceptions to these measurements are shown on the rest of the exhibits.

The depth of the individual trim size of each form on a page must be 3² 3 inches, the same depth as the official form, or otherwise indicated.

Exceptions. The depth of Forms 1097–BTC, 1099–B, 1099–DIV, 1099–INT, 1099–K, 1099–MISC, 1099–OID, 1099–R, 5498, and 1042–S is 5–1/2 inches.

Copy A (three per page; two per page for Forms 1097–BTC, 1099–B, 1099–DIV, 1099–INT, 1099–K, 1099–MISC, 1099–OID, 1099–R, 5498, or 1042–S) of privately printed continuous substitute forms must be perforated at each 11“ page depth. No perforations are allowed between the 3² 3” forms or 5 ¹ 2" forms on a single copy page of Copies A.

The words “Do Not Cut or Separate Forms on This Page” must be printed in red dropout ink (as required by form specifications) between the three or two forms per page. This statement should not be included after the last form on the page.

Note. Perforations are recommended between all the other individual copies (Copies B and C, and Copies 1 and 2 of Forms 1099–R and 1099–MISC, and Copy D for Forms 1099–LTC and 1099–R) in the set. Any recipient copies printed on a single sheet of paper must be easily separated. The best method of separation is to provide perforations between the individual copies. Each copy should be easily distinguished whatever method of separation is used. See Section 4.6.1 for information on electronically furnishing forms to recipients.

You must include the OMB Number on Copies A and Form 1096 in the same location as on the official form.

The words “For Privacy Act and Paperwork Reduction Act Notice, see the current version of the General Instructions for Certain Information Returns” must be printed on Copy A; “For more information and the Privacy Act and Paperwork Reduction Act Notice, see the 2013 General Instructions for Certain Information Returns” must be printed on Form 1096.

A postal indicia may be used if it meets the following criteria:

The printer’s symbol (GPO) must not be printed on substitute Copy A. Instead, the employer identification number (EIN) of the form’s printer must be entered in the bottom margin on the face of each individual form of Copy A, or on the bottom margin on the back of each Form 1096.

The Catalog Number (Cat. No.) shown on the forms is used for IRS distribution purposes and should not be printed on any substitute forms.

The form must not contain the statement “IRS approved” or any similar statement.

The form recipient’s name, street address, city, state, ZIP code, and telephone number (if required) should be typed or machine printed in black ink in the same format as shown on the official IRS form. The city, state, and ZIP code must be on the same line.

The following rules apply to the form recipient’s name(s):

Because certain states require that trust accounts be provided in a different format, filers generally should provide information returns reflecting payments to trust accounts with the:

Although handwritten forms will be accepted, the IRS prefers that filers type or machine print data entries. Also, filers should insert data in the middle of blocks well separated from other printing and guidelines, and take measures to guarantee clear, dark black, sharp images. Photocopies are not acceptable.

NOTE: Recipient TINs must not be truncated on Copy A filed with the IRS.

Use the account number box on all Forms 1098, 1099, 3921, 3922, 5498, and W–2G for an account number designation when required by the official IRS form. The account number is required if you have multiple accounts for a recipient for whom you are filing more than one information return of the same type. Additionally, the IRS encourages you to include the recipients’ account numbers on paper forms if your system of records uses the account number rather than the name or TIN for identification purposes. Also, the IRS will include the account number in future notices to you about backup withholding. If you are using window envelopes to mail statements to recipients and using reduced rate mail, be sure the account number does not appear in the window. The Postal Service may not accept these for reduced rate mail.

Exception. Form 1098-T can have third-party provider information.

Machine-printed forms should be printed using a 6 lines/inch option, and should be printed in 10 pitch pica (10 print positions per inch) or 12 pitch elite (12 print positions per inch). Proportional spaced fonts are unacceptable.

Substitute forms prepared in continuous or strip form must be burst and stripped to conform to the size specified for a single sheet before they are filed with the IRS. The size specified does not include pin feed holes. Pin feed holes must not be present on forms filed with the IRS.

Mail completed paper forms to the IRS service center shown in the Instructions for Form 1096 and in the 2013 General Instructions for Certain Information Returns. Specific information needed to complete the forms mentioned in this revenue procedure are given in the specific form instructions. A chart, showing which form must be filed to report a particular payment, is included in the 2013 General Instructions for Certain Information Returns.

The following specifications give the format requirements for substitute Form W–2G (Copy A only), which is filed with the IRS.

A filer may use a substitute Form W–2G to file with the IRS (referred to as “substitute Copy A”). The substitute form must be an exact replica of the official form with respect to layout and content.

You must follow these specifications when printing substitute Copy A of the Form W–2G.

If you do not use the official IRS form to furnish statements to recipients, you must furnish an acceptable substitute statement. Information presented in substitute statements should be in a point size large enough to be easily read by recipients. To be acceptable, your substitute statement must comply with the rules in this Part. If you are furnishing a substitute form, see Regulations sections 1.6042–4, 1.6044–5, 1.6049–6, and 1.6050N–1 to determine how the following statements must be provided to recipients for most Forms 1099-DIV and 1099-INT, all Forms 1099-OID and 1099-PATR, and Form 1099-MISC or 1099-S for royalties. Generally, information returns may be furnished electronically with the consent of the recipient. See Section 4.6.1.

Note. A trustee of a grantor-type trust may choose to file Forms 1099 and furnish a statement to the grantor under Regulations sections 1.671–4(b)(2)(iii) and (b)(3)(ii). The statement required by those regulations is not subject to the requirements outlined in this section.

The rules in this section apply to Form 1099–B, 1099–INT (except for interest reportable under section 6041), 1099–DIV (except for section 404(k) dividends), 1099–OID, and 1099–PATR only. You may furnish form recipients with Copy B of the official Form 1099 or a substitute Form 1099 (form recipient statement) if it contains the same information as the official IRS form (such as aggregate amounts paid to the form recipient, any backup withholding, the name, address, and TIN of the person making the return, and any other information required by the official form). Information not required by the official form should not be included on the substitute form except for state income tax withholding information.

Note. Many of the information returns now include boxes for providing state withholding information as part of the official form. Payers may, however, provide the state withholding information separately (such as on a separate page or section) in order to assist the payee with completing a state income tax return that requires the attachment of any information return that includes state withholding amounts and payer numbers.

Exception for supplementary information. The substitute form may include supplementary information that will assist the payee with completing his or her tax return. Such information could include expense and cost basis factors related to the reporting for widely held fixed investment trusts (WHFITs), as required under Regulation section 1.671–5. It can also include information related to the purchases of debt instruments, such as bond premium, market discount or acquisition premium. The substitute statement should disclose to the payee that such supplementary information is not furnished to the IRS. See Section 4.3 for additional requirements when providing supplemental information with the Form 1099–B that is not furnished to the IRS.

Form 1099–B. Brokers that use substitute statements should segregate dispositions of noncovered securities from covered securities, and further segregate long-term and short-term dispositions of covered securities. They may also segregate long-term from short-term dispositions of noncovered securities, to the extent that date acquired is known. For 2013 dispositions, the substitute Forms 1099–B may have up to five separate sections, each with a heading identifying which securities are included in the list, and each separately totaled. Each section, after totaling or within the heading for the section, should indicate how to report the transactions on Form 8949, as indicated.

For each section, each transaction may include information not reported to the IRS, such as basis, date acquired, and gain or loss. Therefore, for short-term dispositions where basis was not reported to the IRS, basis and date acquired may be shown just as it would be shown for short-term dispositions where basis was reported to the IRS.

For 2013 dispositions, each of the applicable sections must have Sales Price and Cost or Other Basis (if known) separately totaled. Net gain or loss, if included for any of the sections, may also be totaled.

The substitute form requirements in the following paragraphs also apply to Form 1099–B.

Form 1099–INT, DIV, OID, and PATR. A substitute form recipient statement for Forms 1099–INT, 1099–DIV, 1099–OID, or 1099–PATR must comply with the following requirements:

You may enter a total of the individual accounts listed on the form only if they have been paid by the same payer. For example, if you are listing interest paid on several accounts by one financial institution on Form 1099–INT, you may also enter the total interest amount. You may also enter a date next to the corrected box if that box is checked.

Statements to form recipients for Forms 1097–BTC, 1098, 1098–C, 1098–E, 1098–MA, 1098–T, 1099–A, 1099–C, 1099–CAP, 1099–G, 1099–H, 1099–K, 1099–LTC, 1099–MISC, 1099–Q, 1099–R, 1099–S, 1099–SA, 3921, 3922, 5498, 5498–ESA, 5498–SA, 8935, W–2G, 1099–DIV (only for section 404(k) dividends reportable under section 6047), and 1099-INT (only for interest of $600 or more made in the course of a trade or business reportable under section 6041) can be copies of the official forms or an acceptable substitute.

Caution. The IRS does not require a donee to use Form 1098–C as the written acknowledgment for contributions of motor vehicles, boats, and airplanes. However, if you choose to use copies of Form 1098–C or an acceptable substitute as the written acknowledgment, then you must follow the requirements of this Section 4.1.3.

To be acceptable, a substitute form recipient statement must meet the following requirements.

A composite form recipient statement is permitted for reportable payments of interest, dividends, original issue discount, patronage dividends, and royalties. The following forms may be included on a composite substitute statement, when one payer is reporting more than one of these payments during a calendar year to the same form recipient.

Generally, do not include any other Form 1099 information (for example, 1098 or 1099–A) on a composite statement with the information required on the forms listed in the preceding sentence.

A composite form recipient statement for the forms specified in Section 4.1.3 is permitted when one filer is reporting more than one type of payment during a calendar year to the same form recipient. A composite statement is not allowed for a combination of forms listed in Section 4.1.3 and forms listed in Section 4.1.2.

Exceptions:

Although the composite form recipient statement may be on one sheet, the format of the composite form recipient statement must satisfy the requirements listed in Section 4.2.1 as well as the requirements in Section 4.1.3. A composite statement of Forms 1098 and 1099–INT (for interest reportable under section 6049) is not allowed.

A filer may include Form 1099–B information on a composite form with the forms listed in Section 4.1.2. Therefore supporting, explanatory, or comparable relevant information for covered and noncovered lots on the 1099–B portion of the composite statement can be included. This information includes display on the payee statement of data elements such as basis for noncovered lots, explanatory remarks on permissible basis adjustments for covered lots descriptions of the type of transaction (merger, buy to close, redemption, etc.), identification of contingent payment debt obligations, and lot relief methods.

If you wish to provide additional information to the investor on the same substitute recipient Form 1099–B, the form must follow the rules set forth in this Section 4.3 and should clearly delineate how the information is presented. Any information presented should make reference to its corresponding number on the official form as appropriate. You should clearly categorize each type of information you are reporting.

An additional separate legend is required that explains exactly which pieces of information are and which are not reported to the IRS to the extent, if any, the information is not already identified as not being reported to the IRS as described in Section 4.1.2. It should clearly explain how the information is presented. You may present this legend in a way that is consistent with your design as long as it clearly indicates which information is being provided to the IRS. Additionally, a reminder to taxpayers that they are ultimately responsible for the accuracy of their tax returns is also required.

Form 1098 recipient statements (Copy B) must contain the following legends:

Required Legends for Forms 1099 and W–2G

Recipient statements for these forms must contain the following legends:

Copies B, C, and in some cases, D, 1, and 2 are included in the official assembly for the convenience of the filer. You are not legally required to include all these copies with the privately printed substitute forms. Furnishing Copies B and, in some cases, C will satisfy the legal requirement to provide statements of information to form recipients.

Note. If an amount of federal income tax withheld is shown on Form 1099–R or W–2G, Copy B (to be attached to the tax return) and Copy C must be furnished to the recipient. Copy D (Forms 1099–R and W–2G) may be used for Payer records. Only Copy A should be filed with the IRS.

Copy A (“For Internal Revenue Service Center”) of all forms must be on top. The rest of the assembly must be arranged, from top to bottom, as follows. For:

Perforations are recommended between forms on all copies except Copy A to make separating the forms easier. Recipient copies, including those that are printed on a single sheet of paper, must be easily separated. The best method of separation is to provide perforations between the individual copies. Each copy should be easily distinguished whatever method of separation is used.

Perforations or other means of separation are required between forms on all copies except Copy A to make separating the forms easier. Exception: Copy A of Form W–2G may be perforated.

Note. Perforation does not apply to printouts of copies that are furnished electronically to recipients (as described in Regulations section 31.6051–1(j)).

However, these recipients should be cautioned to carefully separate any copies. See Section 4.6.

If you are required to furnish a written statement (Copy B or an acceptable substitute) to a recipient, then you may furnish the statement electronically instead of on paper. This includes furnishing the statement to recipients of Forms 1098, 1098–E, 1098–MA, 1098–T, 1099–A, 1099–B, 1099–C, CAP,DIV, G, H, INT, K, LTC, MISC, OID, PATR, Q, R, S, SA, 3921, 3922, 5498, 5498–ESA, 5498–SA, and 8935. It also includes Form W–2G (except for horse and dog racing, jai alai, sweepstakes, wagering pools, and lotteries).

Note. Until further guidance is issued, you can not furnish Form 1098–C electronically. Perforation (see Section 2.1.8) does not apply to printouts of copies of forms that are furnished electronically to recipients. However, recipients should be cautioned to carefully separate the copies.

If you meet the requirements listed below, you are treated as furnishing the statement timely.

The recipient must consent in the affirmative and not have withdrawn the consent before the statement is furnished. The consent by the recipient must be made electronically in a way that shows that he or she can access the statement in the electronic format in which it will be furnished. You must notify the recipient of any hardware or software changes prior to furnishing the statement. A new consent to receive the statement electronically is required after the new hardware or software is put into service. Prior to furnishing the statements electronically, you must provide the recipient a statement with the following statements prominently displayed:

Additionally, you must:

For more information, see Regulations section 31.6051–1. For electronic furnishing of Forms 1098–E and 1098–T, see Regulations sections 1.6050S–2 and 1.6050S–4. For electronic furnishing of Forms 1099–R, 1099–SA, 1099–Q,5498, 5498–ESA, and 5498–SA, see Notice 2004–10, 2004–1 C.B. 433.

Paper substitutes of Copy A for Form 1042–S, Foreign Person’s U.S. Source Income Subject to Withholding, that totally conform to the specifications contained in this procedure may be privately printed without prior approval from the Internal Revenue Service. Proposed substitutes not conforming to these specifications must be submitted for consideration.

Note. Copies B, C, D, and E of Form 1042–S may contain multiple income entries for the same recipient, that is multiple rows of the top boxes 1–10 of the form.

The request should be submitted by November 15 of the year prior to the year the form is to be used. This is to allow the Service adequate time to respond and the submitter adequate time to make any corrections. These requests should contain a copy of the proposed form, the need for the specific deviation(s), and the number of information returns to be printed.

Form 1042–S is subject to annual review and possible change. Withholding agents and form suppliers are cautioned against overstocking supplies of the privately printed substitutes.

Copies of the official form for the reporting year may be obtained from most Service offices. The Service provides only cut sheets of these forms. Continuous fan-fold/pin-fed forms are not provided.

Instructions for withholding agents:

The Paperwork Reduction Act (the Act) of 1995 (Public Law 104–13) requires that:

This information must be provided to any users of official or substitute IRS forms or instructions

The OMB requirements for substitute IRS forms are:

All substitute forms (Copy A only) must state “For Privacy Act and Paperwork Reduction Act Notice, see the 2013 General Instructions for Certain Information Returns.” (or “For Privacy Act and Paperwork Reduction Act Notice, see separate instructions.” for Copy A of Form 1042–S).

If no instructions are provided to users of your forms, you must furnish them with the exact text of the Privacy Act and Paperwork Reduction Act Notice.

The IRS DVD (Pub 1796) is no longer produced. You can order official IRS Forms (Forms 1096, 1098, 1099’s, W–2G, 1042S, and any other forms mentioned in this publication), instructions, and information copies of federal tax material by calling the IRS National Distribution Center at 1-800-TAX-FORM (1-800-829-3676).

You can also access and order forms by going to IRS.gov. Click on the Forms and Pubs tab and then select the Order Forms and Pubs link.

Note. Some forms on the internet are intended as information only and may not be submitted as an official IRS form (for example, Forms 1099, W–2, and W–3). Form 1096 and Copy A of 1098 series, 1099 series, 5498 series, and Forms 3921 and 3922 cannot be used for filing with the IRS when printed from a conventional printer. These forms contain drop-out ink requirements as described in Part 2 of this publication.

Revenue Procedure 2012–38, 2012–48, I.R.B. 575, dated November 26, 2012, is superseded by this revenue procedure.

Exhibits A through FF illustrate some of the specifications that were discussed earlier in this revenue procedure. The dimensions apply to the actual size forms, but the exhibits have been reduced in size.

Generally, the illustrated dimensions apply to all like forms. For example, Exhibit C shows 11.00" from the top edge to the bottom edge of Form 1098 and .85" between the bottom rule of the top form and the top rule of the second form on the page. These dimensions apply to all forms that are printed three to a page.

Keep in mind the following guidelines when printing substitute forms.