A tax opinion is essential for major financial transactions or income items as it provides formal written advice about your specific tax circumstances and facts. This could include settlements, legal fees, stock sales, asset exchanges, or other significant events. Tax opinions are thorough, discussing your facts, numbers, and legal authorities to provide a conclusion on the likelihood of your argument prevailing. The various levels of conclusions range from “Not Frivolous” to “Will,” with each indicating the probability of your argument succeeding.
While a tax opinion does not bind the IRS or state tax authorities, it can be beneficial in an audit situation. The opinion should assume an audit will occur, and the higher the standard of opinion, the more it can help with penalties. Even a lower-level opinion can be enough to protect you if you disclose your position on your return. The ultimate goal of a tax opinion is to have your tax position upheld to avoid penalties, taxes, and interest payments.
A tax opinion can provide substantial benefits by putting you in the best possible position regarding both facts and the law. It is advisable to seek tax advice before making major decisions that will impact your taxes, as this can help shape the formal tax opinion and make it stronger. Once the opinion is written and tax returns are filed, it serves as a valuable resource if the IRS challenges your position. Using the opinion to craft responses to the IRS can make a significant difference in resolving any disputes.
Timing is crucial when it comes to tax opinions, with early planning and advice before making decisions being highly advantageous. While tax opinions can sometimes be prepared after filing a tax return to justify a position, it is generally recommended to have the opinion completed before filing. This gives you the strongest argument for avoiding penalties and ensures that you are relying on the tax opinion when signing and submitting your tax return.
Overall, a tax opinion is a valuable tool for individuals facing complex tax situations, providing detailed and researched advice on the strengths and weaknesses of your tax position. By obtaining a thorough tax opinion, individuals can better navigate major financial transactions, legal settlements, and other significant tax events, ultimately helping to protect against penalties and ensure compliance with tax laws.
