Lawyers’ Tax Disclaimers Soon to be Obsolete

by Jerry Meek

At the bottom of most lawyers’ emails, you’ll find an oddly worded tax disclaimer.  In its usual form, it cautions the recipient that “any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purpose of avoiding tax related penalties or promoting, marketing or recommending to another party any tax related matter addressed herein.”

Usually, it appears regardless of whether any tax advice is being offered.  Sometimes the attorney using it will not even know why it’s being used.  But when proposed amendments to Treasury Regulations become final at the end of this year, the disclaimer will become a thing of the past.

This so-called “Circular 230 disclaimer” finds its origin in Treasury Regulations governing practice before the IRS, codified at 31 CFR § 10 et. seq. and commonly known as Circular 230 regulations.  An attorney who renders “written advice” relating to an entity or transaction having a “potential for tax avoidance or evasion” is considered to be practicing before the IRS, even if he or she has no contact with the IRS.

Section 10.35 of the regulations establishes a category of written opinions, known as “covered opinions.”  The rules impose special requirements on any lawyer writing a covered opinion.  For example, the lawyer’s conclusions, and the presentation of those conclusions, must comply with a prescribed format.

A covered opinion includes, among other things, any opinion about a plan or arrangement “a significant purpose of which is the avoidance or evasion of any tax,” if the written advice is (among other types) a “reliance opinion” or a “marketed opinion.”  Generally, a reliance opinion is one in which the lawyer concludes that it is more likely than not that a federal tax issue will be resolved in favor of the taxpayer.  A marketed opinion is one which the lawyer knows, or has reason to know, will be used to promote or market the plan or arrangement to others.

But a lawyer’s opinion will avoid classification as a reliance opinion, and may avoid classification as a marketed opinion, if it is accompanied by a disclaimer “that it was not intended or written by the practitioner to be used, and that it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.”  Hence the ubiquitous Circular 230 disclaimer.

Proposed amendments to the regulations, announced last week, will completely eliminate the category of “covered opinions.”  In its Notice of Proposed Rulemaking, Treasury noted the “unrestrained use of disclaimers on nearly every practitioner communication” and the tendency of clients to “ignore the disclaimers altogether.”  The elimination of covered opinions, according to Treasury, “will eliminate the use of a Circular 230 disclaimer in e-mail and other writings.”

Assuming the amendments become final, all written tax opinions will be subject to a single, streamlined standard.  Lawyers will still be required to base the advice solely on reasonable factual and legal assumptions and to use reasonable efforts to identify and ascertain all relevant facts.  Lawyers will also still be prohibited from considering the likelihood that a tax return will be audited or that a particular issue will be raised on audit.  But the Circular 230 disclaimer will become a thing of the past.