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May 12, 2005 - Phil Hodgen

IRS pushing and shoving–Circular 230

Among tax lawyers there is currently a great deal of anxiety and uncertainty about a new move by the IRS that is set to take effect in June. For those of you who need tax advice, or who run into trouble with the IRS and need a lawyer or accountant to help dig you out of trouble, these rules are likely to have a profound and unpleasant impact.

CIRCULAR 230

Circular 230 [PDF] is an IRS publication that sets the rules of the road for how tax professionals interact with the IRS. There’s a BIG stick in there. If the IRS decides — under its own murky reasoning — that the tax professional is being a bad dog, they can take action that will prevent the tax professional from ever representing a taxpayer in front of the IRS again. In other words, the IRS holds a nuclear device in its bureaucratic hands to threaten your lawyer — do things our way or your career is over.

In its present configuration Circular 230 is so broadly drafted that even the most basic tax lawyer work would be covered and potentially punishable if the lawyer didn’t jump through the hoops correctly.

“Jump through the hoops correctly” means that the tax lawyer must follow some explicit and very cumbersome rules if he or she renders written advice. Thus, forget about sending me an email asking my off the cuff opinion about a tax question. I have to research it thoroughly, verify the facts independently, and issue you a gigantic opinion.

The IRS is currently saying to tax lawyers “trust us, don’t worry, use your common sense, it will all be OK.” But . . . .

BYPASS THE LAWYER

First, consider this. You’re in tax trouble. You hire a lawyer to deal with the IRS. What if the IRS says they’ll bypass your lawyer and go straight after you? Not so pleasant!

Here is a copy of an internal IRS memo (PDF) showing how the IRS will do this. Look at the bottom of page 2 of that memorandum. Question: What do you think they mean by saying that Circular 230 is an “effective tool?” Answer: it is a brute force club that gives the IRS a significant advantage over the taxpayer and the taxpayer’s representative.

Bypassing the lawyer is not a new concept for the IRS. But using the club of Circular 230 is an interesting twist.

What this means for you is that your tax lawyer will be a bit more wary about dealing with the IRS.

And your lawyer will be a bit more wary about dealing with you, the client. If you cause a delay, the lawyer could get blamed by the IRS and get hammered by the IRS’s Office of Professional Responsibility.

AMERICAN BAR ASSOCIATION COMMENTS

The American Bar Association has issued comments on the regulations [PDF] issued under Circular 230, if you’re interested.

WHAT DOES IT ALL MEAN, BUCKY?

For lawyers, Circular 230 potentially introduces severe personal financial risk to their own personal wallets via the fear of losing that professional ticket to do tax representation for a living. I expect it to successfully (from the IRS’s perspective) cow lawyers into compliance in tax controversy matters.

For tax planning matters (How should I set up my estate plan? How should I deal with this business tax question? Should I make an IRA contribution?) the process of giving advice will become more cumbersome. Either you will get oral advice from your lawyer (“Don’t quote me on this and you didn’t hear it from me, but here’s what you can do”) or the cost of a written opinion will jump dramatically.

That is, unless the IRS takes a maturity pill or two.

What we’re looking at here is the tax version of the PATRIOT Act — give the government great big powers and then believe them when they say “Trust us, we won’t abuse these powers.” Right.

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