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Circular
230 Prompts Disclaimer Language
Protecting Firms When Tax Advice Does Not Rise to Covered-Opinion Status Additions to regulations issued by the Internal Revenue Service last December are prompting firms to protect themselves with disclaimers on written tax advice. The Circular 230 revision that went into effect on June 20 sets standards for providing written tax advice to clients. The standards require that such advice—or covered opinion—must have a greater than 50 percent likelihood of protecting a client from penalties for underpayment of a tax. While the revision was meant to protect tax professionals who practice before the IRS, it raised a question mark over their liability for advice that didn’t rise to the standard of a covered opinion, leaving CPAs and other tax advisors to use disclaimers on almost all kinds of written communications with their clients. “It seems like everyone is doing this to protect themselves until further guidance,” said David Sands, chairman of the New York State State Society of CPAs’ Relations with the IRS Committee. “People are feeling their way around, letting anyone they do business with know that…they’re just trying to adhere to the standards. That’s probably the safest thing to do. You don’t know where an e-mail may end up.” Practitioners before the IRS have been asking the service to clarify other forms of written communication. The New York State Bar Association in late June sent a written request for guidance. Practitioners expect such guidance in the near future. But there is concern about whether the revision makes professionals liable for all kinds of communication. During a discussion at the June meeting of the Society’s Closely Held and S Corporations Committee, members heard about an attorney who made a casual opinion about a legal matter to a passing acquaintance during a round of golf. The acquaintance later sued the lawyer for giving him bad legal advice. Whether the story is seen as alarmist or apocryphal, it illustrates the risks all professionals face in a litigious world, and makes conservative policy seem like prudence. “We’re going to put (the disclaimer) on all our e-mail and written correspondence,” Randy Schwartzman, of BDO Seidman, said. “(CPAs) need to make clients aware of why we’re including this statement. We’re in a whole new environment, and we need to educate our clients about why we do what we do, so we don’t scare them away.” The disclaimer Schwartzman’s firm uses is similar to other sample disclaimers that are beginning to propagate. “Under 6662 of the Internal Revenue Code,” the disclaimer reads (referring to the section of the IRC that imposes penalties for underpayment of taxes), “an accuracy-related penalty may be imposed on an underpayment of tax unless it can be shown that there was a reasonable cause for the underpayment and the taxpayer acted in good faith with respect to the underpayment. Pursuant to Treasury Circular 230 regulations, Government Practice Before the IRS, we wish to advise you that this written tax advice has not been prepared to be used, and cannot be used, by you for the purpose of avoiding such penalties that may be imposed.” Schwartzman said that clients should also know that they can receive covered opinions on such matters, but that that requires time and research, which means cost. Such cost, though, may pay for itself, considering the 20 percent penalty for substantial underpayments of tax. As the story of the attorney on the golf course suggests, firms must grapple with what falls between “casual advice” and covered opinion. “The hard part for practitioners is to figure out where you need a disclaimer,” Schwartzman said. “It’s a gray area, but the risk is that if you don’t have it in there and the taxpayer client thinks the advice rises to a covered opinion, the party providing the advice is at risk.” |
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