We have all witnessed government overregulation of medicine. Doctors with whom I consult personally and on behalf of clients tell me that physicians are no longer in charge of their practices. Regulators tell them how long their patients' hospital stays will be, and steer them toward specific medicines, often on the basis of a lower cost rather than effectiveness.
For wealth planners, Circular 230 is the long, lean nose of government piercing the camel's tent. We have lived with Circular 230 for about two years and now have regulations, which are effective as of Jan. 1, 2008.1 My colleagues tell me (it's my experience as well) that Circular 230 requirements have increased the cost of tax opinions almost tenfold.
No doubt the feds have nothing but good intentions. Problem is, it puts wealth advisors busy representing clients in tax matters in the position of, at the same time, representing the government's interests. Each of us has to decide whether regulators are creating a system that endangers or violates the attorney-client privilege.
No one has expressed the dilemma better than Bernard J. Wolfman, James P. Holden and Deborah H. Schenk, authors of the most recent edition of Ethical Problems in Federal Tax Practice.2 These able and insightful writers say that in the tax area, “[t]he system is the government who administers the tax laws. Although the client has the right to manage his affairs so as to minimize tax liabilities, the higher duty toward the system that a lawyer holds as an advisor is the result of two issues; namely, one, the government is not represented when this planning occurs and therefore needs to be protected in some other manner, and, two, the government does not have resources available to administer the tax laws and is therefore at a disadvantage.”
The authors also observe that, as of 2001, the last year for which relevant numbers are reported, the gap between the tax that was reported and the tax that should have been reported is about $345 billion dollars. We know from news reports that the Treasury Department is experiencing a dramatic reduction in personnel and therefore has taken to relying upon third parties to police the tax system.
In effect, we the wealth advisors — attorneys, accountants, financial planners, trust professionals and insurance professionals — are being deputized to extend the government's reach and help fulfill a perceived need to patch up the crumbling voluntary reporting tax system. Notwithstanding the sympathy we all have for the government's plight, there must be another, better answer than pitting us against our own clients.
All estate-planning professionals will do their best to carry buckets of water on both shoulders. And to be sure we do, the government stands ready to impose some fairly severe monetary and other penalties if we do not comply. On the other hand, we always must serve our clients' interests. Our very livelihoods are at stake. So, too, is our professional integrity.
- David A. Handler, “Circular 230 Clamp Down,” Trusts & Estates, November 2007, at p. 14.
- Bernard J. Wolfman, James P. Holden and Deborah H. Schenk, Ethical Problems in Federal Tax Practice, 3rd ed., Aspen Publishers, New York, December 1995.
Roy M. Adams is a name partner in New York's Constantine Cannon LLP, Roy M. Adams and Associates PLLC. He's also chair of the Trusts & Estates editorial advisory board