Circular 230 Disclosure – Its Meaning and Purpose

Clients may notice an unfamiliar addendum at the end of letters, emails, faxes and other written communications they receive from members of the firm. The addendum will be in the following or in a similar form:

IRS Circular 230 Disclosure: To insure compliance with Treasury Regulations, we are required to inform you that any tax advice contained in this communication (including any attachments) was not intended or written by us to be used, and may not be used by you or anyone else, for the purpose of: (i) avoiding penalties imposed by the Internal Revenue Code; or (ii) promoting, marketing, or recommending to another party any tax-related matter addressed in this communication.

What is the meaning and purpose of this addendum?

Effective on June 21, 2005, all tax practitioners, including lawyers and certi¬fied public accountants, must follow a new set of rules (Circular 230) when providing written statements about federal tax issues. A federal tax issue is a question concern¬ing the federal tax treatment of an item of income, gain, loss, deduction or credit, whether or not a taxable transfer of property has or will occur (such as whether a transfer of property to another is subject to federal gift tax), or the value of property for federal tax purposes. Circular 230 covers much more than formal legal opinions and applies to any writing relating to any Internal Revenue Code matter, including email messages.

The new rules are intended, in part, to set standards that tax practitioners must meet in giving tax advice. Unless these standards are followed, a taxpayer may not “reasonably” and “in good faith” rely on the written advice of a tax practitioner in order to avoid tax penalties that might otherwise apply if a transaction is ultimately determined to be subject to tax. Depending on the nature of the tax matter involved, the new standards may require that the tax practitioner write a comprehensive opinion in order for a taxpayer to obtain potential penalty protection. Alternatively, the opinion or other communication may contain a disclosure warning, such as the one above, that informs a taxpayer that any tax advice given may not be relied upon to avoid tax penalties.

Because the new rules apply to all communications involving tax matters and because tax advice is often given regarding matters that have little or no risk of incurring tax penalties, some form of the above disclosure will frequently appear on preliminary communications. Making the disclosure will avoid the expense and time of having to determine how Circular 230 applies to the advice and what form the advice must take in order to conform with the Circular’s formal requirements.

In some cases, a formal opinion (called a “covered opinion”) may increase the likelihood (but cannot guarantee) that penalties will not be imposed by the IRS. Some clients may desire a formal opinion on a particular tax matter in order to decrease the likelihood that tax penalties will be imposed. Before preparing such an opinion, the attorney involved will discuss with the client the further Treasury requirements that must be met, whether it is possible to meet those requirements under the circumstances, and the anticipated time that will have to be spent to meet the stringent covered opinion requirements.