I.   Executive Summary

A.   General.  In December, 2004, the Treasury Department issued final regulations that impose tough new standards applicable to all written federal tax advice rendered by law and accounting firms.[1]  The regulations, known as Circular 230, were issued with a delayed effective date applicable to advice rendered after June 20, 2005.  As recently as May 19, 2005, Treasury made substantive changes to the regulations, which has enhanced the burden of designing and implementing programs to comply with the regulations by the effective date.  The key provisions of Circular 230 do the following:

                  1.  Covered opinion standards.  Impose standards regarding the form and content of so-called "covered opinions."

                  2.  Other written advice standards.  Impose standards for any written advice regarding federal tax issues that is not a covered opinion. 

                  3.  Disciplinary standards.  Provide standards for the imposition of sanctions (including censure, suspension or disbarment from practice before the IRS[2]) on individual practitioners and/or on the head of the federal tax practice.  The 2004 Jobs Act authorizes Treasury to provide standards for the imposition of monetary penalties as well. 

B.  Definition and requirements for "covered opinions." 

                  1.  Definition.  In broad terms, Circular 230 defines a "covered opinion" by reference to how important tax avoidance objectives are to the transaction and whether the tax advice is a "marketed opinion" (i.e., may be used or referred to in marketing the transaction).  Any form of written advice (including electronic communications) concerning one or more federal tax issues can be a covered opinion.  It is important to note that the definition of a covered opinion overlaps only to a limited extent[3] with the types of transactions—known as "reportable transactions"—for which the Code[4] imposes tax shelter reporting, disclosure and recordkeeping requirements, and penalties for noncompliance, on taxpayers and their advisors (such as law firms, accounting firms and investment banks).  Thus, Circular 230 represents a separate, independent regulatory regime, significantly enhancing compliance burdens. 

                  2.  Requirements.  The covered opinion standards dictate the required form, scope and content of affected federal tax advice.

                      a.  General.  In general, a covered opinion must identify and consider all relevant facts, must not be based on any unreasonable legal or factual assumptions or representations, must relate the applicable law to the facts, must evaluate all significant federal tax issues (based on their merits rather than on likelihood of audit or settlement), must reach an overall conclusion on tax treatment of the transaction (or explain why such a conclusion cannot be reached), and must contain certain required disclosures in a designated format. 

                       b.  Exceptions.  There are narrowly crafted exceptions that remove some advice from the covered opinion rules, for example: (i) advice included in documents required to be filed with the SEC, (ii) some "preliminary" advice, (iii) certain "negative" ("don’t do it") advice, and (iv) opinions regarding the qualification of qualified employee benefit plans.

                        c.  Ability to "legend out" of covered opinion status.  For transactions that are considered to be significantly, but not principally, motivated by tax avoidance objectives, it is possible to "legend out" of covered opinion status by using certain legends, including disclosing in a designated manner that the tax advice cannot be relied upon by the taxpayer for purposes of avoiding penalties (such as the substantial underpayment penalty), and, if marketed-type advice is involved, including additional specified legends.  

                         d.  Limited scope covered opinions.  For transactions that are considered to be significantly, but not principally, motivated by tax avoidance objectives, if certain procedures are followed and certain disclosure legends are included, it is possible to satisfy the covered opinion requirements even though the advice does not address all the significant federal tax issues. 

                          e.  Enhanced standards for marketed opinions.  In the case of a marketed opinion, the opinion must provide the practitioner's conclusion with respect to each significant federal tax issue that the taxpayer will prevail on the merits at a confidence level of at least more likely than not.  If the practitioner cannot do so, the advice must not be provided, unless it qualifies to "legend out" of covered opinion status under I.B.2.c. 

                           f.  Enhanced standards for listed transactions and transactions principally motivated by tax avoidance purposes.  If advice pertains to a listed transaction or a transaction the principal purpose of which is tax avoidance, it must satisfy all covered opinion requirements, including the enhanced standards for marketed opinions if applicable, unless an exception under I.B.2.b applies.  No other exceptions or limitations are available. 

C.  Definition and requirements for "other written advice." 

                  1.  Definition.  Other written advice includes any and all written advice in any form concerning one or more federal tax issues if it is not a covered opinion. 

                  2.  Requirements.  The advice must not be based on unreasonable legal or factual assumptions or representations, must consider all relevant facts, and must be based on the merits and not on the possibility of audit or settlement. All facts and circumstances, including the scope of the engagement and the type and specificity of the advice sought by the client will be considered in determining whether a practitioner has complied with these requirements.  Marketed-type advice, such as marketed advice that qualifies for the legend out exclusion from status as a covered opinion, is subject to a heightened standard of care under the other written advice rules.

II.  Detailed discussion of covered opinions

A.  Certain definitions.

                  1.  Practitioner.  For purposes of the relevant portions of Circular 230, practitioner includes attorneys, CPAs, enrolled agents and enrolled actuaries. 

                  2.  Prominently disclosed.  

                       a.  Under Circular 230 as originally promulgated on December 20, 2004, an item required to be prominently disclosed must be set forth in a separate section at the beginning of the written advice in a bolded typeface that is larger than any other typeface used in the written advice. 

                       b.  Under amendments to Circular 230 effective May 19, 2005 (the "May 19, 2005 Amendments") an item is prominently disclosed if it is readily apparent to a reader of the written advice.  Whether an item is readily apparent will depend on the facts and circumstances surrounding the written advice including, but not limited to, the sophistication of the taxpayer and the length of the written advice.  At a minimum, to be prominently disclosed an item must be set forth in a separate section (and not in a footnote) in a typeface that is the same size or larger than the typeface of any discussion of the facts or law in the written advice. 

                  3.  Federal tax issue.  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.  

                  4.  Significant federal tax issue.  A federal tax issue is significant if the Internal Revenue Service has a reasonable basis for a successful challenge and its resolution could have a significant impact, whether beneficial or adverse and under any reasonably foreseeable circumstance, on the overall federal tax treatment of the transaction(s) or matter(s) addressed in the opinion. 

B.  Definition of covered opinion.  A covered opinion is written advice (including electronic communications) by a practitioner concerning one or more federal tax issues arising from one of the following:

                  1.  Listed transaction.  A transaction that is the same as or substantially similar to a transaction that, at the time the advice is rendered, the Internal Revenue Service has determined to be a tax avoidance transaction and identified by published guidance as a listed transaction under Treasury Regulations Section 1.6011-4(b)(2). 

                  2.  Principal purpose transaction.  Under Circular 230 as originally promulgated on December 20, 2004, this includes any partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, the principal purpose of which is the avoidance or evasion of any tax imposed by the Code.  The May 19, 2005 Amendments provide a definition of the principal purpose, as follows: 

                        a.  For purposes of the covered opinion rules, the principal purpose of a partnership or other entity, investment plan or arrangement, or other plan or arrangement is the avoidance or evasion of any tax imposed by the Internal Revenue Code if that purpose exceeds any other purpose. 

                        b.  The principal purpose of a partnership or other entity, investment plan or arrangement, or other plan or arrangement is not to avoid or evade Federal tax if that partnership, entity, plan or arrangement has as its purpose the claiming of tax benefits in a manner consistent with the statute and Congressional purpose. 

                        c.  A partnership, entity, plan or arrangement may have a significant purpose of avoidance or evasion even though it does not have the principal purpose of avoidance or evasion.

                  3.  Significant purpose transaction.  Any partnership or other entity, any investment plan or arrangement, or any other plan or arrangement, a significant purpose of which is the avoidance or evasion of any tax imposed by the Code.  There are four categories of written advice that constitute covered opinions with respect to significant purpose transactions.  They are discussed below in descending order of likelihood of being encountered in practice.

                       a.  A reliance opinion.  The advice concludes at a confidence level of at least more likely than not (i.e., a greater than 50 percent likelihood) that one or more significant federal tax issues would be resolved in the taxpayer's favor.  Thus, a conclusion of at least more likely than not on one significant federal tax issue makes the advice subject to the full blown covered opinion rules unless the advice qualifies for one of the exceptions to covered opinion status discussed below in II.B.3.a(i) (prominent disclosure exception for reliance opinions regarding significant purpose transactions), II.B.3.b(i) (prominent disclosure exception for marketed opinions regarding significant purpose transactions), or II.C (excluded advice regarding listed, principal purpose or significant purpose transactions), or qualifies as a limited scope opinion regarding a significant purpose transaction, discussed below in II.D.3.e.  Further, all opinions at a greater than 50 percent likelihood, including "will" and "should" opinions are covered. 

                             (i)  Prominent disclosure exception.  For purposes of a significant purpose transaction written advice is not treated as a reliance opinion if the practitioner prominently discloses in the written advice that it was not intended or written by the practitioner to be used, and that it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. 

                       b.  A marketed opinion.  The practitioner knows or has reason to know that the written advice will be used or referred to by a person other than the practitioner (or a person who is a member of, associated with, or employed by the practitioner's firm) in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to one or more taxpayer(s). 

                             (i)  Prominent disclosure exception.  Written advice with respect to a significant purpose transaction is not treated as a marketed opinion if the practitioner prominently discloses in the written advice that:

                                  (a)  The advice was not intended or written by the practitioner to be used, and that it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer;

                                  (b)  The advice was written to support the promotion or marketing of the transaction(s) or matter(s) addressed by the written advice; and

                                  (c)  The taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

                        c.  Subject to conditions of confidentiality.  Written advice is subject to conditions of confidentiality if the practitioner imposes on one or more recipients of the written advice a limitation on disclosure of the tax treatment or tax structure of the transaction and the limitation on disclosure protects the confidentiality of that practitioner's tax strategies, regardless of whether the limitation on disclosure is legally binding.  A claim that a transaction is proprietary or exclusive is not a limitation on disclosure if the practitioner confirms to all recipients of the written advice that there is no limitation on disclosure of the tax treatment or tax structure of the transaction that is the subject of the written advice.  

                       d.  Subject to contractual protection.  Written advice is subject to contractual protection if the taxpayer has the right to a full or partial refund of fees paid to the practitioner (or a person who is a member of, associated with, or employed by the practitioner's firm) if all or a part of the intended tax consequences from the matters addressed in the written advice are not sustained, or if the fees paid to the practitioner (or a person who is a member of, associated with, or employed by the practitioner's firm) are contingent on the taxpayer's realization of tax benefits from the transaction.  All the facts and circumstances relating to the matters addressed in the written advice will be considered when determining whether a fee is refundable or contingent, including the right to reimbursements of amounts that the parties to a transaction have not designated as fees or any agreement to provide services without reasonable compensation. 

C.  Excluded advice.  A covered opinion does not include any of the following (which exclusions do not distinguish between listed transactions, principal purpose transactions or significant purpose transactions):

                  1.  Preliminary advice.  Written advice provided to a client during the course of an engagement if a practitioner is reasonably expected to provide subsequent written advice to the client that satisfies the requirements of the covered opinion rules. 

                  2.  Certain transactions.  Written advice concerning a significant purpose transaction that is one of the following:

                       a.  Concerns the qualification of a qualified plan.

                       b.  A state or local bond opinion, i.e., written advice with respect to a federal tax issue included in any materials delivered to a purchaser of a state or local bond in connection with the issuance of the bond in a public or private offering, including an official statement, that concerns only the excludability of interest on a state or local bond from gross income under Code Section 103, the application of Code Section 55 to a state or local bond, the status of a state or local bond as a qualified tax-exempt obligation under Code Section 265(b)(3), the status of a state or local bond as a qualified zone academy bond under Code Section 1397E, or any combination of the above.

                        c.  Included in documents required to be filed with the Securities and Exchange Commission.

                  3.  Post-filing advice.  Written advice prepared for and provided to a taxpayer, solely for use by that taxpayer, after the taxpayer has filed a tax return with the Internal Revenue Service reflecting the tax benefits of the transaction.  This exception does not apply if the practitioner knows or has reason to know that the written advice will be relied upon by the taxpayer to take a position on a tax return (including for these purposes an amended return that claims tax benefits not reported on a previously filed return) filed after the date on which the advice is provided to the taxpayer;  

                  4.  In-house counsel exception.  Written advice provided to an employer by a practitioner in that practitioner’s capacity as an employee of that employer solely for purposes of determining the tax liability of the employer. 

                  5.  Negative advice.  Written advice that does not resolve a Federal tax issue in the taxpayer’s favor, unless the advice reaches a conclusion favorable to the taxpayer at any confidence level (e.g., not frivolous, realistic possibility of success, reasonable basis or substantial authority) with respect to that issue.  If written advice concerns more than one Federal tax issue, the advice must comply with the requirements for covered opinions with respect to any Federal tax issue that is not covered by the negative advice.  Government officials have stated that exception is a "just say no" exception for listed and principal purpose transactions.  According to government officials, advice that the taxpayer will "probably" lose may not qualify for this exception, since it implies up to a 49% chance of success.  Thus, if the practitioner wants to deliver nuanced negative advice, a covered opinion is required. 

D.  Standards for covered opinions.

                  1.  Factual matters.

                       a.  The practitioner must use reasonable efforts to identify and ascertain the facts, which may relate to future events if a transaction is prospective or proposed, and to determine which facts are relevant.  The opinion must identify and consider all facts that the practitioner determines to be relevant.

                       b.  The practitioner must not base the opinion on any unreasonable factual assumptions (including assumptions as to future events).  An unreasonable factual assumption includes a factual assumption that the practitioner knows or should know is incorrect or incomplete.  For example, it is unreasonable to assume that a transaction has a business purpose or that a transaction is potentially profitable apart from tax benefits.  A factual assumption includes reliance on a projection, financial forecast or appraisal.  It is unreasonable for a practitioner to rely on a projection, financial forecast or appraisal if the practitioner knows or should know that the projection, financial forecast or appraisal is incorrect or incomplete or was prepared by a person lacking the skills or qualifications necessary to prepare such projection, financial forecast or appraisal.  The opinion must identify in a separate section all factual assumptions relied upon by the practitioner.

                        c.  The practitioner must not base the opinion on any unreasonable factual representations, statements or findings of the taxpayer or any other person. An unreasonable factual representation includes a factual representation that the practitioner knows or should know is incorrect or incomplete.  For example, a practitioner may not rely on a factual representation that a transaction has a business purpose if the representation does not include a specific description of the business purpose or the practitioner knows or should know that the representation is incorrect or incomplete.  The opinion must identify in a separate section all factual representations, statements or findings of the taxpayer relied upon by the practitioner.

                  2.  Relate law to facts.

                       a.  The opinion must relate the applicable law (including potentially applicable judicial doctrines) to the relevant facts.

                        b.  The practitioner must not assume the favorable resolution of any significant federal tax issue (except as provided below in II.D.3.e regarding limited scope opinions for significant purpose transactions and below in II.E regarding reliance on opinions of others), or otherwise base an opinion on any unreasonable legal assumptions, representations, or conclusions.

                        c.  The opinion must not contain internally inconsistent legal analyses or conclusions.

                  3.  Evaluation of significant federal tax issues.

                       a.  In general. The opinion must consider all significant federal tax issues except as provided below in II.D.3.e regarding limited scope opinions for significant purpose transactions and II.E regarding reliance on opinions of others. 

                       b.  Conclusion as to each significant federal tax issue.  The opinion must provide the practitioner's conclusion as to the likelihood that the taxpayer will prevail on the merits with respect to each significant federal tax issue considered in the opinion.  If the practitioner is unable to reach a conclusion with respect to one or more of those issues, the opinion must state that the practitioner is unable to reach a conclusion with respect to those issues.  The opinion must describe the reasons for the conclusions, including the facts and analysis supporting the conclusions, or describe the reasons that the practitioner is unable to reach a conclusion as to one or more issues.  If the practitioner fails to reach a conclusion at a confidence level of at least more likely than not with respect to one or more significant federal tax issues considered, the opinion must include the appropriate disclosure(s) described below in II.F concerning required disclosures for covered opinions.  

                        c.  Evaluation based on chances of success on the merits.  In evaluating the significant federal tax issues addressed in the opinion, the practitioner must not take into account the possibility that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be resolved through settlement if raised.

                       d.  Special rules for conclusions in marketed opinions.  In the case of a marketed opinion, the opinion must provide the practitioner's conclusion that the taxpayer will prevail on the merits at a confidence level of at least more likely than not with respect to each significant federal tax issue.  If the practitioner is unable to reach a more likely than not conclusion with respect to each significant federal tax issue, the practitioner must not provide the marketed opinion, but may provide written advice with respect to a significant purpose transaction that satisfies the prominent disclosure exception set forth in II.B.3.b(i) above to not be treated as a marketed opinion.  Further, in the case of a marketed opinion, the opinion must provide the practitioner's overall conclusion that the Federal tax treatment of the transaction or matter that is the subject of the opinion is the proper treatment at a confidence level of at least more likely than not.

                       e.  Special rules permitting certain limited scope opinions regarding significant purpose transactions. 

                             (i)  General rules.  The practitioner may provide an opinion that considers less than all of the significant federal tax issues if:

                                  (a)  The practitioner and the taxpayer agree that the scope of the opinion and the taxpayer's potential reliance on the opinion for purposes of avoiding penalties that may be imposed on the taxpayer are limited to the federal tax issue(s) addressed in the opinion;

                                  (b)  The opinion is not advice concerning listed transactions, principal purpose transactions or a marketed opinion; and

                                  (c)  The opinion includes the appropriate disclosures described in II.F below. 

                             (ii)  Permissible assumptions.  A practitioner may make reasonable assumptions regarding the favorable resolution of a federal tax issue (an assumed issue) for purposes of providing an opinion on less than all of the significant federal tax issues.  The opinion must identify in a separate section all issues for which the practitioner assumed a favorable resolution.

                  4.  Overall conclusion.  The opinion must provide the practitioner's overall conclusion as to the likelihood that the federal tax treatment of the transaction or matter that is the subject of the opinion is the proper treatment and the reasons for that conclusion.  If the practitioner is unable to reach an overall conclusion, the opinion must state that the practitioner is unable to reach an overall conclusion and describe the reasons for the practitioner's inability to reach a conclusion. 

E.  Competence to provide opinion; reliance on opinions of others.

                  1.  General.  The practitioner must be knowledgeable in all of the aspects of federal tax law relevant to the opinion being rendered, except that the practitioner may rely on the opinion of another practitioner with respect to one or more significant federal tax issues, unless the practitioner knows or should know that the opinion of the other practitioner should not be relied on.  If a practitioner relies on the opinion of another practitioner, the relying practitioner's opinion must identify the other opinion and set forth the conclusions reached in the other opinion.

                  2.  Overall satisfaction of covered opinion standards.  The practitioner must be satisfied that the combined analysis of the opinions, taken as a whole, and the overall conclusion, if any, satisfy the requirements of the covered opinion standards. 

F.  Required disclosures.  A covered opinion must contain all of the following disclosures that apply:

                  1.  Disclosures regarding relationship with promoter.  An opinion must prominently disclose the existence of:

                       a.  Any compensation arrangement, such as a referral fee or a fee-sharing arrangement, between the practitioner (or the practitioner's firm or any person who is a member of, associated with, or employed by the practitioner's firm) and any person (other than the client for whom the opinion is prepared) with respect to promoting, marketing or recommending the entity, plan, or arrangement (or a substantially similar arrangement) that is the subject of the opinion; or 

                       b.  Any referral agreement between the practitioner (or the practitioner's firm or any person who is a member of, associated with, or employed by the practitioner's firm) and a person (other than the client for whom the opinion is prepared) engaged in promoting, marketing or recommending the entity, plan, or arrangement (or a substantially similar arrangement) that is the subject of the opinion.

                  2.  Disclosures regarding marketed opinions.  A marketed opinion must prominently disclose that:

                       a.  The opinion was written to support the promotion or marketing of the transaction(s) or matter(s) addressed in the opinion; and

                       b.  The taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

                  3.  Disclosures regarding limited scope opinions.  A limited scope opinion must prominently disclose that:

                       a.  The opinion is limited to the one or more federal tax issues addressed in the opinion;

                       b.  Additional issues may exist that could affect the federal tax treatment of the transaction or matter that is the subject of the opinion and the opinion does not consider or provide a conclusion with respect to any additional issues; and

                        c.  With respect to any significant federal tax issues outside the limited scope of the opinion, the opinion was not written, and cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.

                  4.  Disclosures regarding opinions that fail to reach a more likely than not conclusion.  An opinion that does not reach a conclusion at a confidence level of at least more likely than not with respect to a significant federal tax issue must prominently disclose that:

                       a.  The opinion 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 opinion; and

                       b.  With respect to those significant federal tax issues, the opinion was not written, and cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.

                  5.  Advice regarding required disclosures.  In the case of any required disclosure, the practitioner may not provide advice to any person that is contrary to or inconsistent with the required disclosure. 

                  6.  Marketed opinions.  In the case of a marketed opinion, as discussed in II.D.3.d above, the practitioner must reach a more likely than not overall conclusion and as to each significant federal tax issue, unless the prominent disclosure exception is satisfied for not treating the advice as a marketed opinion. 

III.  Detailed discussion of other written advice

A.  Definition.  Written advice (including electronic communications) concerning one or more federal tax issues.

B.  General standard.  A practitioner must not give written advice concerning one or more federal tax issues if the practitioner bases the written advice on:

                  1.  unreasonable factual or legal assumptions (including assumptions as to future events),

                  2.  unreasonably relies upon representations, statements, findings or agreements of the taxpayer or any other person,

                  3.  does not consider all relevant facts that the practitioner knows or should know, or,

                  4.  in evaluating a federal tax issue, takes into account the possibility that a tax return will not be audited, that an issue will not be raised on audit, or that an issue will be resolved through settlement if raised.

C.  Facts and circumstances. 

                  1.  General.  All facts and circumstances, including the scope of the engagement and the type and specificity of the advice sought by the client will be considered in determining whether a practitioner has failed to comply with the other written advice standards.

                  2.  Marketed-type advice.  In the case of an opinion the practitioner knows or has reason to know will be used or referred to by a person other than the practitioner (or a person who is a member of, associated with, or employed by the practitioner's firm) in promoting, marketing or recommending to one or more taxpayers a partnership or other entity, investment plan or arrangement a significant purpose of which is the avoidance or evasion of any tax imposed by the Internal Revenue Code, the determination of whether a practitioner has failed to comply with the standards will be made on the basis of a heightened standard of care because of the greater risk caused by the practitioner's lack of knowledge of the taxpayer's particular circumstances. 

IV.  Procedures to Ensure Compliance with Covered Opinion Standards

A.  Persons to whom compliance procedures apply.  Any practitioner who has (or practitioners who have or share) principal authority and responsibility for overseeing a firm's practice of providing advice concerning federal tax issues must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees for purposes of complying with the covered opinion standards. 

B.  Consequences of non compliance.  Any such practitioner will be subject to discipline for failing to comply with these requirements if:

                  1.  Standard of care.  The practitioner through willfulness, recklessness, or gross incompetence does not take reasonable steps to ensure that the firm has adequate procedures to comply with the covered opinion standards, and one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, of failing to comply with the covered opinion standards; or

                  2.  Knowledge.  The practitioner knows or should know that one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, that does not comply with the covered opinion standards and the practitioner, through willfulness, recklessness, or gross incompetence, fails to take prompt action to correct the noncompliance. 

V.  Detailed discussion of other sanctions for violations of regulations

A.  Scope.  Note that these sanctions apply at the individual practitioner level, as compared to the sanctions described in IV above which apply to the practitioner who has (or practitioners who have or share) principal authority and responsibility for overseeing a firm's practice of providing advice concerning federal tax issues.

B.  Range of sanctions.  A practitioner may be censured, suspended or disbarred from practice before the Internal Revenue Service for any of the following:

C.  Type of conduct.

                  1.  Willfulness.  Willfully violating any of the regulations (other than certain aspirational best practices for tax practitioners) contained in Circular 230; or

                  2.  Recklessness or gross incompetence.  Recklessly or through gross incompetence[5]) violating the covered opinion standards, the compliance procedures for covered opinions or the requirements for other written advice.