What is Circular 230?

That anyone would ask the question “what is Circular 230” might be surprising to tax lawyers and accountants. However, that is because Circular 230 provides a set of ethical rules that tax lawyers and accountants must constantly observe or be faced with the prospect of being prohibited from practicing before the Internal Revenue Service. That is, if us tax types do not follow the rules outlined by the IRS, they can kick us out of the club and prohibit our involvement in tax matters.

This brings us to the real question that I am periodically asked: “What is that Circular 230 disclaimer that regularly appears at the foot of a lawyer/accountant’s email and letters?” An example of such a disclaimer is:

“IRS CIRCULAR 230 DISCLOSURE: IRS regulations require that we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. If you would like an opinion that can be used for such purposes please contact the sender.”

Another example of the disclaimer can be found if you scroll down to the bottom of this blog site. The reason that these disclaimers appear all over the place is because of changes in the provisions of Circular 230’s ethical standards. The changes became effective as of June 21, 2005 and required that certain raised standards of diligence be used when providing written tax advice.

Unfortunately the time/work required to comply with these additional requirements made the cost of complying with the rules too expensive for many clients to tolerate. Therefore, tax practitioners sought to “legend out” of the new requirements where possible (i.e. see the disclaimer) to keep their services affordable. Tax types also sought to avoid inadvertently becoming subject to the heightened standards when giving run of the mill tax advice and started attaching the disclaimers to everything as a matter of course. Because the new ethical provisions were written so broadly, almost every written communication that you will see from a tax practitioner will include the Circular 230 disclaimer.

The disclaimer does not mean that the written advice is incorrect or should not be relied upon; it simply means that without going through the expanded diligence, you cannot avoid penalties by relying on the advice. Moreover, the disclaimer is a demonstration that the person you are working with is cognizant of the ethical rules that the IRS has issued and that he or she wants to continue working on tax matters for you and other clients.