IRS Circular 230 Disclosure – What Does it Mean

October 6, 2011Leave a reply

CIRCULAR 230 DISCLOSURE: Pursuant to Regulations Governing Practice Before the Internal Revenue Service, any tax advice contained herein is not intended or written to be used and cannot be used by a taxpayer for the purpose of avoiding tax penalties that may be imposed on the taxpayer.

It’s at the bottom of every email that our office sends out, and at the bottom of all of our web pages. Chances are, it’s even been at the bottom of a letter or two we have sent you. It’s the Circular 230 disclosure, and you will find it in some variation in just about any piece of correspondence from Accountants, Lawyers, or Tax Preparers.

At first glance it looks like we are saying the advice you are paying for is useless, but what does it really mean, and why is it there?

If we were general contractors and someone asked what it would cost for a room addition, it would be acceptable to give them a ball-park figure of what it usually costs. And if we got there to build it and find the foundation needs repairs first, most people would understand that we didn’t have all of the information needed when we made our first estimates. For accountants, Lawyers, and anyone else registered to practice before the IRS it is actually the opposite – unless they tell you this is an incomplete estimate, the IRS holds them responsible for every piece of advice they give.

Circular 230 was first introduced in 1966 and has been amended by the IRS 15 times since then – but it wasn’t until the revisions introduced in the 2003, 2005 and 2008 revisions that it became a headache for tax preparers and payers alike. The actual target of the new regulations was to stop dishonest practitioners from recommending questionable tax shelters to their clients. Their idea was that they get their clients in these tax constructs, and if they are audited the client can ask for a dismissal of penalties because they were relying on the tax professional’s advice. When the IRS would then file penalties against the professional, they would claim it was not a tax opinion, but just some off-the-cuff remarks – thereby avoiding the practitioner penalties.

To help stop this abuse (or at lease hold someone accountable), the IRS revised the circular 230 regulations. Under these regulations, a person licensed to appear before the IRS on tax matters are held responsible for all of their client communications. Clients cannot rely on a tax opinion for protection from penalties unless the practitioner provides a formal, comprehensive opinion that outlines and discusses at length:

  • All relevant facts and applicable law,
  • The relationship between the facts and the law,
  • A conclusion as to the legal consequences of each tax issue, and
  • The likelihood that the taxpayer will prevail if the IRS challenges the transaction.

The standards governing when such a formal, comprehensive opinion is required are vague and uncertain, in large part because the IRS did not want to create any loopholes. Consequently, the new rules may sweep in many routine, non-abusive planning arrangements and may cover many writings that don’t really constitute “tax advice.” Unfortunately, the penalties to practitioners for providing written advice that does not meet the Circular 230 requirements can be severe, including disbarment from practice before the IRS.

Going back to the example of a general contractor, it would be much like going over the house with an inspector, ordering environmental studies, testing the affected portions of the home for code violations, and then finally submitting an estimate along with a bill for all of the testing done so far.

So, since June of 2005, all effected professionals have had a choice when responding to their clients – spend untold hours to analyze the clients situation before answering them, or include a disclaimer that says you can’t use our tax advice for your taxes. Accordingly, we now routinely include a Circular 230 Notice in written communications.

Please be assured that the use of a Circular 230 disclaimer will not in any way change the quality of the service or advice you receive from us.

If you have any questions about this important development, please don’t hesitate to contact us.

About author:

Scott Macklin, E.A. is an Enrolled Agent at Darrel Whitehead CPAs and has been working in public accounting for over 15 years. Scott specializes in corporate taxation and consulting, primarily on start-up infrastructure, technology, and international tax reporting.

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