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A Rebirth of Common Sense? After Ten Years, We Bid Adieu to Circular 230 Tax Disclaimers

June 10, 2014 Business & Tax Blog Ethics

If you received an email or letter from an attorney or CPA in the last decade, you probably have seen a Circular 230 disclaimer. Since 2004, the Internal Revenue Service has required that almost all written communications from tax practitioners concerning federal tax matters include this disclaimer notifying the reader that advice contained in the written communications cannot be used to avoid certain tax penalties.

Effective June 12, 2014, new regulations eliminate the Circular 230 disclaimer requirement. Why?

The requirement was a reaction to aggressive tax shelters marketed in the late 1990s and early 2000s. It was perceived that tax advisors told taxpayers the worst-case scenario was that, after an audit, the Internal Revenue Service would impose tax and interest on the shelter transactions, but that professional tax opinions would protect them from penalties. A perception existed that the opinions in question did not accurately describe the transactions or in some cases were obviously faulty to a tax professional.

The problem was that a non-tax expert has a hard time discerning a good opinion from a bad opinion. The Internal Revenue Service hoped that requiring the disclaimer for all but the most thorough and detailed written advice would protect taxpayers from unscrupulous tax practitioners selling bad advice because the “bad” opinions would have the “no penalty protection” disclaimer.

While well-intentioned, it is doubtful the disclaimer ever served its purpose. Few taxpayers could or would pay for formal tax opinions on most issues, and there weren’t enough tax practitioners to give most advice in a manner sufficiently detailed to avoid the disclaimer. So few communications satisfied the stringent requirements to avoid the disclaimer that almost all communications included it. Instead of serving as a red flag to wary taxpayers, it became routine boilerpate that taxpayers ignored.

The Internal Revenue Service has not abandoned its quest to encourage practitioners to behave responsibly. The new rules still require tax practitioners to exercise diligence in giving advice. With the disclaimer’s elimination, however, we can thank the Internal Revenue Service for saving us all time, ink, paper, and data storage capacity in the future. After ten years, common sense prevailed.

E. John Wagner, II