Part 3 - Representation, Practices & Procedures - Units 1 & 2 - Content

Question 1

Circular 230

Answer 1

• Issues of ethics, practice, and representation are dealt with in detail in Treasury Department Circular No. 230, Regulations Governing Practice before the Internal Revenue Service.
• All practitioners who represent taxpayers before the IRS are subject to the rules and regulations set forth in Circular 230.
• Tax preparers serve an important role in the U.S. tax system, as they prepare approximately 60% of all tax returns filed.

Question 2

Federal Tax Law

Answer 2

• The Internal Revenue Code (IRC) is the main body of tax law of the United States. The IRC is enacted by Congress and published as Title 26, the Internal Revenue Code of the United States Code. Not all tax law is located in Title 26, however.
• Other tax law is promulgated by individual states, cities, and municipalities. FBARs and most international financial reporting laws are promulgated the Bank Secrecy Act, a provision of Title 31.
• In 2003, The Financial Crimes and Enforcement Network (FinCEN) delegated enforcement authority regarding the FBAR to the Internal Revenue Service (IRS).

Question 3

Federal vs. State Law

Answer 3

• The IRS Enrolled Agent exam deals only with federal laws and not with the laws of any individual state or municipality. However, there are some state laws that directly affect federal tax reporting. An example of this would be community property laws, which determine how much income each spouse is required to report on a separate return.

Question 4

3 Branches of Government

Answer 4

• Tax law is determined by all three branches of our federal government, although the legislative branch (Congress) has the primary function of originating tax laws. The executive branch (the president) is responsible for income tax regulations, revenue rulings, and revenue procedures. The judicial branch is responsible for court decisions. The U.S. courts also have the responsibility for determining whether or not a particular tax law is unconstitutional.

Question 5

IRS Documents & Guidance

Answer 5

• The Internal Revenue Service is the federal agency that enforces tax law. In other words, the IRS is the “collection arm” for the U.S. Treasury Department, which is responsible for paying various government expenses.
• The Internal Revenue Service administers the Internal Revenue Code enacted by Congress. The IRS itself does not enact any tax statute—that is the job of the U.S. Congress. The IRS takes the specifics of the laws ratified by Congress and translates them into the detailed regulations, rules, and procedures. The IRS produces several kinds of documents that provide guidance to taxpayers, including the following:
  
  • Treasury Regulations
  • Revenue Rulings
  • Revenue Procedures
  • Private letter rulings
  • Technical advice memoranda (also called “TAMs”)
  • IRS notices

Question 6

Primary Authority

Answer 6

• The primary authority for any tax position is the Internal Revenue Code. Primary authority also consists of decisions by the U.S. Supreme Court and international tax treaties. Other sources of “substantial authority” include the following:
  
  • Temporary and final regulations,
  • Court cases,
  • Administrative pronouncements, and
  • Congressional intent as reflected in committee reports.
• Note that “substantial authority” does not include official IRS publications or IRS form instructions. Many IRS publications are not updated every year, and reliance on IRS publications does not constitute substantial authority for purposes of avoiding understatement penalties.
• However, the IRS announced in October 2021 that all future frequently asked questions (FAQs) posted on irs.gov would be issued as a Fact Sheet as part of an IRS press release. By doing this, these FAQs can constitute authority for a tax return position.

Question 7

Treasury Regulations

Answer 7

• Treasury regulations are the U.S. Treasury Department’s official interpretations of the Internal Revenue Code. The IRC authorizes the Secretary of the Treasury to “prescribe all needful rules and regulations for enforcement” of the code. All regulations are written by the IRS’s Office of the Chief Counsel and approved by the U.S. Treasury Secretary.
• The courts give weight to Treasury regulations and will generally uphold the regulations so long as the IRS’s interpretation is reasonable and does not contradict any provisions in the IRC.
• Treasury regulations are published in the Federal Register.
• After publication in the Federal Register, regulations are organized by subject matter and codified in a separate publication called the Code of Federal Regulations (CFR). The three types of Treasury regulations are:
  1. Legislative Regulations,
  2. Interpretive Regulations, and
  3. Procedural Regulations.

Question 8

IRS Regulations

Answer 8

• Legislative regulations are created when Congress expressly delegates the authority to the Treasury secretary or the commissioner of the IRS to provide the requirements for a specific provision of the IRC.
• A legislative regulation has a higher degree of authority than an interpretive regulation. In general, legislative regulations carry the same authority as the law itself. However, a legislative regulation may be overturned if any of the following conflicts apply:
  
  • It is outside the power delegated to the U.S. Treasury.
  • It conflicts with a specific statute.
  • It is deemed unreasonable by the courts.

Question 9

Interpretive & Procedural Regulations

Answer 9

• Interpretive regulations are issued under the IRS’s general authority to interpret the IRC. An interpretive regulation only explains the meaning of a portion of the code. Unlike a legislative regulation, there is no grant of authority for the promulgation of an interpretive regulation, so these regulations may be challenged on the grounds that they do not reflect Congressional intent.
• Procedural regulations concern the administrative provisions of the code and are issued by the commissioner of the IRS and not the Secretary of the Treasury. They often concern minor issues, such as when notices should be sent to employees or how to file certain IRS forms.

Question 10

IRS Regulations

Answer 10

• The IRS is bound by its regulations, but the courts are not. Official regulations have the force of law, unless they are overly broad in relation to the statute or are deemed unconstitutional by the courts.
• U.S. Treasury regulations are authorized by law, but U.S. courts are not obligated to follow any of the IRS’s administrative interpretations.

Question 11

Classification of Treasury Regulations

Answer 11

• Regulations are further classified as proposed, temporary, or final:
• Proposed regulations are open to commentary from the public. Various versions of proposed regulations may be issued and withdrawn before a final regulation is issued.
• Temporary regulations may remain in effect for three years. They are used to provide immediate guidance to the public and IRS employees prior to publishing final regulations. Temporary regulations are effective immediately upon publication in the Federal Register.
• Final regulations are issued when a regulation becomes an official Treasury decision. Final regulations are effective immediately upon publication in the Federal Register. They are the highest authority issued by the Treasury Department. Final regulations have the effect of law.

Question 12

Revenue Rulings & Revenue Procedures

Answer 12

• The IRS issues revenue rulings and revenue procedures to inform and guide taxpayers. A revenue ruling typically states the IRS position, while a revenue procedure provides instructions concerning that position.
• The national office of the IRS issues revenue rulings, which are published in the Internal Revenue Bulletin and the Federal Register.
• A revenue ruling is not binding in Tax Court or any other U.S. court. However, revenue rulings can be used by taxpayers as guidance to avoid certain accuracy-related IRS penalties.
• The numbering system for revenue rulings corresponds to the year the ruling was issued. Thus, for example, revenue ruling 2024-1 was the first revenue ruling issued in 2024.

Question 13

Technical Advice Memorandum (TAM)

Answer 13

• A TAM is written guidance furnished by the IRS Office of Chief Counsel upon the request of an IRS director. A TAM is issued in response to a technical or procedural question that develops during:
  
  • The examination of a taxpayer’s return
  • Consideration of a taxpayer’s claim for refund or credit
  • A request for a determination letter
  • Processing and considering non-docketed cases in an Appeals office
• Technical advice memoranda are issued only on closed transactions and provide the interpretation of proper application of tax laws, tax treaties, regulations, revenue rulings, or other precedents.

Question 14

Example: TAM

Answer 14

• Example: Valley Dairy Farm, Inc. is a farming corporation with 55 employees. The company usually gives its employees a holiday ham at the end of the year. Because of dietary restrictions, some of the employees requested gift certificates instead of a holiday ham. During the year, the business provided a holiday gift certificate with a face value of thirty-five dollars that was redeemable at several local grocery stores. Valley Dairy Farm excluded the value of the gift certificate from the employee’s wages, and deducted the full amount as a business expense, arguing that it was a de minimis fringe benefit under Code §132. The IRS disagreed and determined that the gift certificates were essentially “cash equivalents,” and not excludable from the employee’s gross income. The full amounts of the gift certificates were taxable as wages to the employees, and subject to payroll taxes for both the employer and the employee (example based on TAM-108577-04).

Question 15

Private Letter Ruling (PLR)

Answer 15

• A taxpayer who has a specific question regarding tax law may request a private letter ruling (PLR) from the IRS. A PLR is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer’s specific case. It is issued to communicate the tax consequences of a particular transaction before the transaction is consummated or before the taxpayer’s return is filed.
• A PLR is legally binding on the IRS, but only if the taxpayer fully and accurately described the proposed transaction in the request and carried out the transaction as described. In addition, it is only binding on the IRS for the particular taxpayer who requested the ruling.
• PLRs are made public after the taxpayer’s private, identifiable information has been redacted (removed or blacked out). A private letter ruling is not free. The minimum fee for a PLR range from $10,000 and up (per request).

Question 16

Example: PLR

Answer 16

• Example: Robert is permanently disabled. On March 1, Robert inherits a traditional IRA when his elderly father dies. Because Robert is disabled, he is eligible for public benefit programs, such as Medicaid. Robert does not want to risk losing Medicaid or his other state disability benefits, so his financial advisor suggests that he transfer the inherited IRA funds into a special needs trust of which he will be the beneficiary. The financial advisor recommends that Robert request a Private Letter Ruling from the IRS before initiating the transfer to make sure there would be no unintended Federal tax consequences to Robert. The IRS rules favorably, holding in the PLR that if the inherited IRA is transferred to a special needs trust, the transfer would neither trigger a taxable event nor be considered a gift to the trust. (scenario based on PLR 201116005).

Question 17

Internal Revenue Manual

Answer 17

• The Internal Revenue Manual (IRM) is the single official compilation of policies, delegated authorities, procedures, instructions, and guidelines relating to the organization, functions, administration, and operations of the IRS. It is primarily used by IRS employees to guide them in all facets of operations.
• The manual currently includes sections on the processing of tax submissions, examinations, collection, and appeals. Criminal investigations, legal advice, and litigation in the courts are also included in the manual. The IRM is public information and can be searched and read directly on the IRS website.

Question 18

IRS Forms & Publications

Answer 18

• The IRS disseminates information to both taxpayers and preparers through its official publications. For example, Publication 17 covers the general rules for filing a federal income tax return for individuals. Publication 17 supplements information contained in the tax form instruction booklet and explains the law in more detail, so it is an important document for taxpayers who prepare their own income tax returns.
• Although the information in publications is drawn from the Internal Revenue Code, Treasury regulations, and other primary sources of authority, publications themselves are not considered to have substantial authority. Taxpayers and preparers may not rely on guidance issued by IRS publications to avoid accuracy-related penalties.
• Example: Alvan Bobrow took $65,000 out of a traditional IRA account, intending to replace that money within 60 days, in order to have the transaction treated as an indirect IRA rollover, rather than a taxable distribution. Just before the sixty-day rollover deadline elapsed, Alvan took another distribution from a second IRA, (IRA-2), and placed those funds into IRA-1. Alvan’s tax return was later chosen for audit and his second purported rollover was invalidated under the once-per-year indirect rollover rule. The taxpayer had relied on information in IRS Publication 590, but the information in the publication was incorrect at the time. The court determined that the publication did not provide substantial authority for Mr. Bobrow’s position. Mr. Bobrow lost his case. See Bobrow v. Commissioner (T.C. Memo 2014 21)
• Note: In Bobrow v. Commissioner, the U.S. Tax Court judge presiding over the case famously declared, “Taxpayers rely on IRS guidance at their own peril.” Judge Joseph W. Nega wrote that IRS guidance was not “binding precedent” or “sufficient authority” to excuse the taxpayer from penalties. The IRS later revised the publication at issue.

Question 19

FOIA Requests

Answer 19

• The Freedom of Information Act (FOIA) is a law designed to ensure public access to U.S. government records. Upon written request, federal agencies, including the IRS, are required to disclose requested records, unless they can be withheld under certain exceptions allowed in the FOIA. Under the terms of the act, agencies may charge reasonable fees for searching, reviewing, and copying records that have been requested.
• All IRS records are subject to FOIA requests. However, FOIA does not require the IRS to release all documents that are subject to FOIA requests. The IRS may withhold information pursuant to exemptions contained in the FOIA statute. The exemptions protect against the disclosure of information that would harm: national security, the privacy of individuals, the proprietary interests of business, the functioning of the government, and other important recognized interests. Exclusions involve especially sensitive law enforcement records related to criminal, FBI, counterintelligence, and international terrorism investigations.
• The IRS generally has 20 business days to say whether it will comply with an FOIA request. When a request is denied, the IRS must give the reason for denial and explain the right to appeal to the head of the agency.
• Note: There is a type of FOIA request specific to tax preparers, which is covered in Unit 3, Authorizations and Disclosures.

Question 20

IRS Divisions

Answer 20

• The IRS has four main operating divisions. These are:

1. Large Business & International Division (LB&I): This division serves corporations, including S corporations, and partnerships, with assets in excess of $10 million. This is the division of the IRS that audits large corporate taxpayers and partnerships, including publicly traded companies like Ford, Apple, Coca-Cola, etc.
2. Small Business/Self-Employed Division (SB/SE): This division serves small corporations and partnerships with assets less than $10 million; filers of gift, estate, excise, employment, and fiduciary returns; individuals filing an individual Federal income tax return with accompanying Schedule C, Schedule E, Schedule F, Form 2106, Employee Business Expenses.
3. Wage and Investment Division: This division serves individuals with wage and investment income only (not including international tax returns) filing an individual Federal income tax return without accompanying Schedule C, E, or F.
4. Tax-Exempt and Government Entities Division: This division serves three distinct taxpayer segments: employee plans (including IRAs), exempt organizations, and government entities.

Question 21

Taxpayer Advocate Service

Answer 21

• The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose goal is to help taxpayers resolve problems with the IRS. A taxpayer may be eligible for TAS assistance when he or she is facing a number of different situations involving economic harm or significant delays in resolving a tax issue.
• The Taxpayer Advocate Service is free and confidential and is available for businesses as well as individuals. The quickest contact method is by fax, but a taxpayer may also submit Form 911, Request for Taxpayer Advocate Service Assistance.

Question 22

Practice Before the IRS

Answer 22

• “Practice before the IRS” includes all matters connected with a presentation before the IRS, or relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the IRS. Representation, or “practice before the IRS,” is defined in Publication 947, Practice Before the IRS and Power of Attorney. Practice before the IRS includes:
  
  • Corresponding and communicating with the IRS
  • Representing a taxpayer at conferences, hearings, or meetings with the IRS
  • Preparing and filing documents with the IRS
  • Providing written advice that has a potential for tax avoidance or evasion
• U.S. citizenship is not required to practice before the IRS.
• Example: Anika is a CPA. Her client, Samuel, has a large tax debt. Samuel does not wish to communicate directly with the IRS, but he wants to set up an installment agreement. Anika has Samuel sign Form 2848, giving her power of attorney, and calls the IRS on his behalf to set up the installment agreement for him. This action is considered practice before the IRS.

Question 23

Court Cases

Answer 23

• Loving v. IRS (2014)
• Steele v. United States (2017), held that the IRS did not have the authority to charge a user fee for their issuance or renewal of PTINS. (plaintiffs: Adam Steele, Brittany Montrois)
• The PTIN Case was reversed on appeal, however Montrois, No. 17-5204 D.C. Cir. (2019).

Question 24

Loving v. IRS

Answer 24

• In a significant loss for the IRS, the U.S. Court of Appeals for the District of Columbia upheld a lower court’s decision that the IRS did not possess the legal authority to regulate tax return preparers. The issue centered on whether the “practice of representatives” included the mere preparation of tax returns. The appeals court ruled it did not, and the IRS chose not to appeal the decision. This means that tax return preparation, in and of itself, does not constitute “practice before the IRS” under current law.

Question 25

Not Practice Before the IRS

Answer 25

• Actions That Are Not Practice Before the IRS
• “Practice before the IRS” does not include:
  1. Representation of taxpayers before the U.S. Tax Court: The Tax Court has its own rules of practice and its own rules regarding admission to practice.
  2. Merely appearing as a witness for the taxpayer: In general, individuals who are not practitioners may appear before the IRS as witnesses—but they may not advocate for the taxpayer.
  3. The preparation of a tax return.* Preparers do not practice before the IRS when they simply assist in the preparation of tax returns.

Question 26

Sexton v. Hawkins

Answer 26

• Because of the landmark Loving case, preparing and signing tax returns is not practice before the IRS. Sexton v. Hawkins, U.S. District Court of Nevada, Case No. 2:13-cv-00893.
• James Sexton was previously a lawyer disbarred in South Carolina. In 2005, Sexton pleaded guilty to four counts of felony mail fraud and one count of money laundering.

Question 27

Enrolled Practitioners

Answer 27

• The following individuals may represent taxpayers and practice before the IRS by virtue of their licensing:

1. Attorneys: An attorney who is a member in good standing of the bar of any state, possession, territory, commonwealth, or of the District of Columbia.
2. Certified Public Accountants (CPAs): A CPA who is duly qualified to practice as a CPA in any state, possession, territory, commonwealth, or the District of Columbia.
3. Enrolled Agents (EAs): An Enrolled Agent in active status may represent clients before any office of the IRS. Like attorneys and CPAs, EAs are unrestricted as to which taxpayers they can represent and what types of tax matters they can handle.
4. Enrolled Actuaries: The practice of an individual enrolled as an actuary by the Joint Board for the Enrollment of Actuaries is limited to certain Internal Revenue Code sections that relate to his area of expertise, principally those sections governing employee retirement plans.
5. Enrolled Retirement Plan Agents (ERPAs): The practice of an enrolled retirement plan agent is limited to certain Internal Revenue Code sections that relate to his area of expertise, principally those sections governing employee retirement plans.

• Only attorneys, CPAs, and EAs have unlimited rights to represent taxpayers before the IRS.

Question 28

OPR vs. RPO

Answer 28

• The IRS Office of Professional Responsibility (OPR) has responsibility for matters related to practitioner conduct, discipline, disciplinary proceedings, and sanctions.
• The Return Preparer Office (RPO) is responsible for the issuance of PTINs, acting on applications for enrollment and administering AFSP testing and continuing education for designated groups.

Question 29

Annual Filing Season Program (AFSP)

Answer 29

• The IRS replaced its now-defunct RTRP program with the voluntary Annual Filing Season Program (AFSP) program. Non credentialed return preparers can elect to voluntarily demonstrate completion of basic filing season tax preparation and other tax law training by participating in the program.
• The AFSP program is designed to encourage competence and education among unenrolled tax preparers. To receive an annual “record of completion,” a preparer must normally have:
  
  • A minimum of 18 hours of continuing education from an IRS-approved continuing education provider, including a six-hour “Annual Federal Tax Refresher” (AFTR) course.
  • Passed a knowledge-based comprehension test administered by the CPE provider at the end of the AFTR course.
  • A current preparer tax identification number (PTIN).
  • Consented to the “duties and restrictions relating to practice before the IRS” in Circular 230. This consent gives the IRS the authority to regulate those individuals who receive the record of completion.
• Circular 230 has not yet been updated to include all the information for the IRS’s new AFSP program, which is designed to replace the now-defunct RTRP program.

Question 30

Exempt Individuals

Answer 30

• Certain individuals may obtain the AFSP Record of Completion without taking the annual refresher tax course and exam, assuming they took at least fifteen hours of qualifying continuing education courses during the year. The following unenrolled preparers are exempt from the AFSP “annual refresher” course:

1. State-based return preparer program participants: Return preparers who are active registrants of state-level programs, such as: Oregon Board of Tax Practitioners, California Tax Education Council, and/or Maryland State Board of Individual Tax Preparers.
2. SEE Part I Test-Passers: Tax practitioners who have passed the Special Enrollment Exam Part I within the past two years.
3. VITA/TCPE volunteers: VITA volunteers who are quality reviewers, instructors, and return preparers with active PTINs.
4. Other accredited tax-focused credential holders: The Accreditation Council for Accountancy and Taxation’s Accredited Business Accountant/Advisor (ABA) and Accredited Tax Preparer (ATP) programs.

Question 31

Unenrolled Preparers

Answer 31

• Individuals who prepare tax returns for other taxpayers but who are not EAs, CPAs, attorneys, ERPAs, or enrolled actuaries are called “unenrolled preparers.” In general, unenrolled preparers have only limited practice rights before the IRS.
• Unenrolled tax return preparers that have current AFSP certificates may represent taxpayers in a limited capacity, and only during an IRS examination of the taxable year or period covered by the tax return or claim of refund they themselves prepared and signed.
• Unenrolled tax return preparers cannot do any of the following:
  
  • Represent taxpayers before appeals officers, revenue officers, counsel, or similar officers or employees of the IRS or Department of Treasury
  • Execute closing agreements
  • Extend the statutory period for tax assessments or collection of tax
  • Execute waivers
  • Execute claims for refund
  • Sign any document on behalf of a taxpayer
• Example: Wilfred is an unenrolled tax preparer, and he does not hold any formal licensing or have an AFSP certificate. Wilfred’s client, Hester, is now being audited by the IRS. The IRS is examining Hester’s most recent tax return. Wilfred prepared the tax return. However, since Wilfred is not an enrolled practitioner and does not have an AFSP certificate, he may not represent Hester before the IRS. Wilfred must refer Hester to an enrolled practitioner if she wishes to be represented.
• Example: Zelma is an unenrolled tax preparer but has her AFSP certificate. She has always prepared tax returns for her client, Simon. On February 1, 2023, Simon receives an audit notice from the IRS for his prior year return, which Zelma prepared. Zelma can represent Simon before the IRS and respond to the notice, because she has a current AFSP certificate, and she prepared the return.

Question 32

Rules for Limited Practice

Answer 32

• Other individuals who are not practitioners may represent taxpayers before the IRS because of a special relationship with the taxpayer, without having prepared the tax return in question.

1. An individual (self-representation): An individual may always represent himself or herself before the IRS. Disbarred practitioners are also allowed to represent family members, or act as fiduciaries for an estate or trust if they are appointed by the court.
2. A family member: An individual may represent members of their immediate family. Family members include a spouse, child, parent, brother, or sister of the individual.
3. An officer: A bona fide officer of a corporation (including a parent, subsidiary, or affiliated corporation), association, organized group, or governmental agency may represent its corporation, association, organized group, or governmental agency before the IRS.
4. A partner: A general partner may represent the partnership before the IRS.
5. An employee: A regular full-time employee can represent his or her employer. An employer can be an individual, partnership, corporation, association, trust, receivership, guardianship, estate, or organized group; or a governmental unit, agency, or authority.
6. A fiduciary: A fiduciary (trustee, executor, personal representative, administrator, receiver, or guardian) is considered to be the taxpayer and not a representative of the taxpayer.
7. Authorization for Special Appearances: In rare circumstances, the Commissioner of the IRS or a delegate will authorize a person who is not otherwise eligible to practice before the IRS to represent another person for a particular matter. The request is made to the Office of Professional Responsibility (OPR). If granted, the written consent will detail the specific circumstances related to the appearance.

• Example: Nicolette is a full-time payroll bookkeeper for her employer, Green Lawn Landscaping. The IRS sent her employer a notice regarding some delinquent payroll tax returns. Nicolette may file Form 2848, Power of Attorney and Declaration of Representative, and speak with the IRS on her employer’s behalf. Even though Nicolette is not an enrolled preparer, she may represent Green Lawn Landscaping before the IRS because of the employee-employer relationship.
• Example: Milton was named the executor of his mother’s estate after she passed away. He is not an accountant or a tax professional, but Milton is allowed to represent his mother’s estate before every level of the IRS because he is the fiduciary for her estate.
• Example: Reynaldo’s mother is being audited by the IRS. Reynaldo is an accountant who works as a controller for a manufacturing firm, but he is not a CPA or an enrolled agent. He does not have a PTIN because he does not prepare tax returns for compensation. He does prepare his mother’s return, but he does not charge her for doing so. Even though Reynaldo is not enrolled to practice before the IRS, he is allowed to represent his mother because of their family relationship.

Question 33

Persons Ineligible to Practice before the IRS

Answer 33

• Corporations, associations, partnerships, and others that are not individuals also are not eligible to practice before the IRS.
• Even if named in a power of attorney as a representative, an individual will not be recognized if he or she has lost his eligibility to practice before the IRS.
• Reasons for losing eligibility include suspension or disbarment by the OPR, being placed in inactive retirement status, and not meeting the requirements for renewal of enrollment, such as continuing professional education.

Question 34

PTIN Requirements

Answer 34

• The PTIN is a nine-digit number that preparers must use when they prepare and sign a tax return or claim for refund. The use of a PTIN is mandatory on all federal tax returns and claims for refund prepared by paid tax preparers.
• The PTIN requirement applies to all Enrolled Agents and many attorneys and CPAs. Attorneys and CPAs do not need to obtain PTINs if they do not prepare federal tax returns.
• Example: Trudy is a licensed attorney who specializes in employment law. She does not prepare tax returns for compensation. During the year, Trudy is hired by Jonathan, a business owner who wants to contest a negative worker classification audit by the IRS. The IRS determined that Jonathan was improperly classifying his employees as independent contractors in order to avoid paying payroll taxes, but Johnathan vehemently disagrees. Jonathan has already received a Notice of Deficiency from the IRS, so Trudy files a petition in U.S. Tax Court on his behalf, and she will also represent him before the Tax Court if the case goes to trial. Although Trudy is representing her client in court in an IRS-related matter, she is not required to obtain a PTIN, because she does not prepare tax returns.

Question 35

Return Not Prepared for Compensation

Answer 35

• An individual who prepares a tax return with no agreement for compensation is not considered a tax return preparer for IRS purposes. This is true even if the individual receives a gift or a favor in return.
• The agreement for compensation is the deciding factor as to whether the IRS considers an individual a tax return preparer.
• Example: Melanie is a retired CPA who only prepares tax returns for her close family members. She does not charge her family to prepare their tax returns. Sometimes, a family member will give Melanie a gift in return. This year, her sister gave her home-baked cookies, and her niece gave her a sweater. However, Melanie did not ask for any presents or expect them. She is not a tax return preparer for IRS purposes, and she is not required to obtain a PTIN.

Question 36

Not Required to Have a PTIN

Answer 36

• An individual is not considered an income tax return preparer and would not be required to obtain a PTIN in the following instances:
• A person who gives an opinion about events that have not happened (such as tax advice for a business that has not been created).
• A person who furnishes typing, copying, or mechanical assistance.
• A person who prepares the return of his or her employer (or of an officer or employee of the employer) by whom the person is regularly and continuously employed.
• A fiduciary who prepares a tax return for a trust or estate.
• An unpaid volunteer who provides tax assistance under Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCPE) programs.
• An employee of the IRS who performs official duties by preparing a tax return for a taxpayer who requests it.

Question 37

PTIN vs. EFIN

Answer 37

• Do not confuse a PTIN with an EFIN, electronic filing identification number. An EFIN is a number issued by the IRS to individuals who have been approved as authorized IRS e-file providers. Although most tax preparers must use IRS e file, some preparers are ineligible for the e-file program. Currently, the IRS e-file program does not accept foreign preparers without Social Security numbers who live and work abroad. These preparers must still obtain a PTIN, but they are not required to e-file their clients’ returns since they are not eligible for an EFIN.

Question 38

Enrolled Agent Licensing

Answer 38

1. EA Exam Track
   
   • Achieve passing scores on all three parts of the SEE.
   • File Form 23, Application for Enrollment to Practice before the Internal Revenue Service
   • Pass a background check conducted by the IRS.
2. Previous Experience Track
   - For the second track, an EA candidate must possess a minimum of five years of past service with the IRS and technical experience as outlined in Circular 230. The application must be made within three years from the date the employee left the IRS. Factors considered with this second track are the length and scope of employment and the recommendation of the superior officer.
   - The applicant then must:
   
   • Apply for enrollment on Form 23.
   • Pass a background check, which includes a tax compliance and suitability check.

Question 39

Denial of Enrollment

Answer 39

• Any individual who is involved in disreputable or criminal conduct is subject to disciplinary action or denial of enrollment. Disreputable acts alone may be grounds for denial of enrollment, even after the candidate has passed the EA exam.
• Failure to timely file tax returns or to pay one’s taxes may also be grounds for the Return Preparer Office to deny any application for enrollment.
• The RPO must inform the applicant of the reason he or she is denied enrollment. The applicant may file a written appeal within 30 days from the date of the notice. The appeal must be filed along with the candidate’s reasoning why the enrollment application should be accepted.
• Example: Sheldon passed all three parts of the EA exam and filed Form 23, requesting enrollment. Because he had failed to file numerous tax returns in the past, his application was denied. Sheldon filed an appeal with the OPR, explaining he had failed to file on time because he had been seriously injured years ago. He attached supporting evidence, including copies of medical bills and a letter from his doctor. Sheldon also provided evidence that all his tax returns had been properly filed after his recovery. The OPR accepted Sheldon’s appeal and granted him enrollment.

Question 40

EA Renewals

Answer 40

• Enrolled agents must renew their enrollment status every three years.
• The three successive enrollment years preceding the effective date of renewal is referred to as the IRS enrollment cycle. Applications for renewal of enrollment must be submitted between November 1 and January 31, prior to April 1 of the year that the next enrollment cycle begins.
• The last digit of a practitioner’s Social Security number determines when he or she must renew enrollment.
• EAs who do not have an SSN (such as foreign preparers who work overseas) must use the “7, 8, or 9” renewal schedule. As part of the renewal process, the IRS will check the practitioner’s filing history to verify that he or she has filed and paid all federal taxes on time.

Question 41

CE for Enrolled Agents

Answer 41

• During each three-year enrollment cycle, an EA must complete 72 hours of continuing education credit. A minimum of 16 hours, including two hours of ethics or professional conduct, must be completed during each enrollment year.
• The initial CPE Requirements for EAs in their first enrollment cycle are:
  
  • 2 hours of CPE for every single month
  • 2 hours of ethics annually (no exceptions)
• When an EA’s new three-year enrollment cycle begins, the practitioner will be required to satisfy the full 72-hour continuing education credit requirement.

Question 42

IRS Power of Attorney

Answer 42

• A power of attorney (POA) is a taxpayer’s written authorization for an individual to act on the taxpayer’s behalf in tax matters. The power of attorney gives an eligible individual, which includes all practitioners, the ability to represent a taxpayer before the IRS. Often, this occurs when a taxpayer wants to be represented at a conference with the IRS or to have a written response prepared and filed with the IRS.
• When a taxpayer wishes to use a representative, he or she should fill out and sign Form 2848, Power of Attorney and Declaration of Representative. In doing so, the taxpayer authorizes a specific individual or individuals to receive confidential tax information and to perform the actions detailed on the form. Up to four representatives can be authorized per form.
• On Form 2848, a representative must attest that he or she is subject to the regulations of Circular 230, governing practice before the IRS. This attestation gives the Office of Professional Responsibility the authority to regulate unenrolled tax preparers who use the form.

Question 43

Form 2848

Answer 43

• On Form 2848, the taxpayer describes the tax matters the representative is authorized to handle, the time periods allowed, and the specific acts that are authorized or not authorized. A separate Form 2848 must be completed for each taxpayer who wishes representation; even joint filers must submit separate Forms 2848.
• The types of tax and dates of a Form 2848 must be specific. The IRS will reject Forms 2848 with general references such as “all years” or “all taxes.” In preparing the form, any tax years or periods that have already ended may be listed under “tax matters.” For future tax periods, the period specified is limited to no later than three years after the date the POA is received by the IRS.
• A representative must be eligible to practice before the IRS in order to sign Form 2848, and the duty may not be delegated to an employee. A practitioner must provide their PTIN and use their own name as the representative, rather than the name of their business.

Question 44

Form 2848: Unenrolled Preparers

Answer 44

• Unenrolled individuals may also be authorized to represent a taxpayer under Form 2848, if specifically permitted in very limited circumstances (such as a family member representing a taxpayer, an executor representing an estate, or an unenrolled tax return preparer who has an AFSP certificate and prepared the specific tax return at issue).
• Example: Beatriz is an enrolled agent who operates Remit Tax Service, Inc. She has multiple employees working for her, but she is the only enrolled practitioner in the office. When Beatriz prepares a Form 2848 for a client, she must represent her client as an individual. She must list her name on the Form 2848, not the name of her company. Since Beatriz is the only enrolled practitioner in the firm, only she is granted permission to represent her client. Her corporation and other employees of her firm are not.
• Example: Christopher is an unenrolled tax preparer. He has a PTIN, but he does not participate in the IRS’s Annual Filing Season Program, and only prepares about 25 tax returns every year for family and close friends. In most circumstances, Christopher would not be able to represent a taxpayer before the IRS. However, his friend Dorothea died during the year, and Christopher is named as the executor of her estate in Dorothea’s will. The estate received an audit notice. Christopher may file a Form 2848 and represent Dorothea’s estate before all levels of the IRS. He will have full representation rights for the estate, because he is the estate’s executor.

Question 45

Durable Power of Attorney

Answer 45

• The IRS will accept a non-IRS power of attorney, such as a durable power of attorney, but it must contain all of the information included on a standard Form 2848.
• A signed and dated statement made by the representative should also be attached to the non-IRS power of attorney. The statement is signed under penalties of perjury.
• Note: An IRS power of attorney is terminated if the taxpayer becomes incapacitated or incompetent. A durable power of attorney is not subject to a time limit and will continue in force after the incapacitation or incompetency of the individual. It is terminated upon the death of the individual. An ordinary power of attorney is automatically revoked if the person who made it is found to be incompetent, but a durable power of attorney can only be revoked by the person who made it, and while that person is mentally competent.

Question 46

Revocation or Withdrawal of a POA

Answer 46

• A power of attorney is valid until revoked by the taxpayer or until the representative withdraws from representation. If the taxpayer is revoking a power of attorney, the taxpayer must write “REVOKE” across the top of the first page with his or her signature and the date below it.
• If the representative is withdrawing from representation, he or she must write “WITHDRAW” across the top of the first page with their signature and the date below it.
• The revocation or withdrawal must be mailed or faxed to the IRS. It must clearly indicate the applicable tax matters and periods.

Question 47

Online Accounts

Answer 47

• Tax practitioners can also now submit the Form 2848 and 8821 online and withdraw them online through a Tax Pro Account.
• More information is available here: https://www.irs.gov/submit-power-of-attor
  ney-and-tax-information-authorizations
• Example: Karen is an EA who had an IRS power of attorney for her former client, Lenny. Karen fired Lenny for nonpayment, but she continued to receive IRS notices on his behalf. Karen writes “WITHDRAW” on the POA and submits it to the IRS, notifying the IRS that she no longer represents Lenny.

Question 48

Automatic Revocations

Answer 48

• If a new power of attorney is filed for the same issue, any previous power of attorney will automatically be revoked. For instance, if a taxpayer changes their tax representative and the new representative files a power of attorney on behalf of the taxpayer, the previous one on record will be rescinded.
• However, a taxpayer can specifically request that the old power of attorney remains active when a newer power of attorney is filed.
• Example: Successful entrepreneur, Tony Jones, is being audited by the IRS. Tony hires Violet Smith, a tax attorney, to handle his audit and signs a power of attorney (POA), allowing her to represent him before the IRS. However, Tony quickly became dissatisfied with her services. He felt that Violet was not proactive enough in communicating what was happening during the audit. Tony fires Violet, terminating their engagement. A few days later, Tony hires Sameer, an enrolled agent, as his new representative. Sameer files a new POA for Tony. The filing of this new POA automatically rescinds the previous POA that listed Violet as Tony’s representative. Sameer now has full authority over Tony’s tax affairs and will take over the representation of his case.

Question 49

Tax Information Authorization, Form 8821

Answer 49

• Form 8821, Tax Information Authorization (TIA), authorizes any individual, corporation, firm, organization, or partnership to inspect or receive confidential information for the type of tax and periods listed. Any third party may be designated to receive tax information.
• Form 8821 is used by tax return preparers, employers, banks, and other institutions to receive financial information on behalf of an individual or a business. It is only a disclosure form, so it does not give an individual authority to represent a taxpayer before the IRS.
• Similar to a POA form, Form 8821 requires the taxpayer to list the type of tax, the tax form number, the year or periods the authorization covers, and the specific tax matters that apply. Any prior tax years may be specified, but only future tax periods ending no later than three years after the date Form 8821 is received by the IRS are recognized.

Question 50

Other Authorizations

Answer 50

• Third Party Designee: Designate a person on your tax form to discuss that specific tax return and year with the IRS.
  
  • This authorization allows the IRS to discuss the processing of a taxpayer’s current tax return, including the status of refunds, with whomever the taxpayer specifies. The authorization automatically expires on the due date of the next tax return.
  • A taxpayer can choose a third-party designee by checking the “yes” box on their tax return, which is why it is known as “Checkbox” authority.
• Oral Disclosure: This authorizes the IRS to disclose tax information to a person they bring into a phone conversation or meeting with the IRS about a specific tax issue.
• A third-party authorization is when a taxpayer authorizes an individual (usually their tax return preparer) to communicate with the IRS on their behalf.
• Example: Tyler named his EA, Vicky, as his third-party designee on his tax return. A few months after filing his return, Tyler still had not received his refund. He asked Vicky if she could check the status of his refund. Vicky called the IRS and was given the information over the phone because she was listed as a third-party designee on Tyler’s return. No further authorization was necessary for Vicky to receive this confidential taxpayer information. This third-party designee authorization is only temporary and will expire automatically the following year.

Question 51

Power of Attorney Not Required

Answer 51

• If a third party is not representing a taxpayer before the IRS, a power of attorney is not required. This would include preparation of a taxpayer’s income tax return. The following situations also do not require a power of attorney:
  
  • Providing information to the IRS
  • Authorizing the disclosure of tax return information through Form 8821, Tax Information Authorization, or other written or oral disclosure consent
  • Allowing the IRS to discuss return information with a third party via the checkbox provided on a tax return or other document
  • Allowing a tax matters partner to perform acts for a partnership
  • Allowing the IRS to discuss tax return information with a fiduciary or an executor

Question 52

CAF Number

Answer 52

• The centralized authorization file (CAF) is the IRS’s computer database that contains information regarding the authorizations that taxpayers have given representatives for their accounts.
• When a power of attorney or disclosure authorization document is submitted to the IRS, it is processed for inclusion in the CAF.
• The issuance of a CAF number does not indicate that a person is either recognized or authorized to practice before the IRS. It merely confirms that a centralized file has been established for the representative under that number.
• Having a CAF number also enables the IRS to automatically send copies of notices and other IRS communications to a representative.

Question 53

Privacy of Taxpayer Information (§7216)

Answer 53

• The IRS has enacted strict privacy regulations designed to give taxpayers more control over their personal information and tax records. The regulations limit tax professionals’ use and disclosure of client information and explain precise and limited exceptions in which disclosure is permitted.
• Note: Internal Revenue Code §7216 is a criminal tax provision enacted by Congress that prohibits tax return preparers from knowingly or recklessly disclosing or using tax return information. A preparer may be fined a monetary penalty or imprisoned up to one year, or both, for each violation of §7216.
• There is also an additional civil penalty for each improper disclosure or use of taxpayer information, outlined in IRC §6713.
• However, unlike §7216, this code section does not require that the disclosure be “knowing or reckless.” This means that even an accidental disclosure of sensitive taxpayer information may cause the practitioner to be subject to a penalty.

Question 54

Allowable Disclosures

Answer 54

• In certain circumstances, a preparer may disclose information to a second taxpayer who appears on a tax return. The preparer may disclose return information obtained from the first taxpayer if:
  
  • The second taxpayer is related to the first taxpayer.
  • The first taxpayer’s interest is not adverse to the second taxpayer’s interest.
  • The first taxpayer has not prohibited the disclosure.
• A taxpayer is considered related to another taxpayer in any of the following relationships:
  
  • A spouse of another
  • Minor child and parent
  • Grandchild and grandparent
  • A general partner in a partnership
  • Trust or estate and the beneficiary
  • A corporation and shareholder
  • Members of a controlled group of corporations
• Example: Cherise is an enrolled agent. She prepares tax returns for Gary and his son, Timothy, who is 17 years old and still a minor. Gary claims his son, Timothy, on his tax return, but Timothy also has a part-time job after school, so he also has a filing requirement. Since Gary and Timothy are a parent and minor child, Cherise can share information between them.
• Example: David is an enrolled agent. His client, Gustavo, has a 19-year-old daughter named Lydia. Gustavo has always claimed Lydia on his tax returns, but in January, Lydia gets into a big fight with her father, and she moves out of the home. Lydia gets a job and moves into a shared apartment with some roommates. Lydia wants David to help her prepare her own returns and asks him not to share any of her information with her estranged father. David assures Lydia of the privacy of her information and agrees to prepare her return. A few weeks later, Gustavo comes into David’s office and demands information about his daughter’s return, because he still wants to claim her as a dependent. Gustavo also wants to see a copy of his daughter’s Form W-2 so he can obtain her new address and contact information. David refuses to share any of this information with Gustavo, because even though Gustavo and Lydia are related persons, (1) Lydia has specifically requested that her information not be shared, and (2) Lydia’s interest is adverse to Gustavo’s interest. Therefore, any disclosure that David makes about Lydia’s tax information would be prohibited by law.

Question 55

Disclosures to a Fiduciary

Answer 55

• Example: Tonya is an enrolled agent. She has always prepared the tax returns for her long-time client, Larry Jones. On February 16, Larry Jones died. Larry’s daughter, Mariah, is named the executor of her late father’s estate. Mariah has a certified copy of her letters testamentary from the courts, which allows her to perform the necessary actions to gather and assess all the assets of the estate. Mariah asks Tonya for copies of her father’s tax returns, because she needs the information to prepare his final return as well as the tax return for the estate. After reviewing the letters testamentary and verifying that Mariah is the fiduciary of Larry’s estate, Tonya may share information regarding Larry’s tax returns.
• NOTE: A “Letter of Testamentary” is a document granted to the Executor of an estate by the probate court. This document gives the executor (or administrator) the legal ability to reach out to a financial institution like banks, mortgage lenders, creditors, and other relevant parties in order to act on behalf an estate.

Question 56

Disclosure Consent Not Required

Answer 56

• A tax return preparer is not required to obtain disclosure consent from a client if the disclosure is made for any of the following reasons:
  
  • A court order or subpoena issued by any court of record, whether at the federal, state, or local level. The required information must be clearly identified in the document (subpoena or court order) in order for a preparer to disclose information.
  • An administrative order, demand, summons, or subpoena that is issued by any federal agency (such as the IRS), a state agency, or commission charged under the laws of the state with licensing, registration, or regulation of tax return preparers.
  • To report a crime to proper authorities. Even if the preparer is mistaken and no crime has occurred, he or she will not be subject to sanctions if he or she makes the disclosure in good faith.
  • For purposes of peer reviews.
  • A preparer may disclose private client information to their attorney or to an employee of the IRS, in connection with an IRS investigation of the preparer.

Question 57

Limited Confidentiality Privilege

Answer 57

• Under IRC §7525, enrolled practitioners and their clients are granted limited rights of confidentiality protection. This Federally Authorized Tax Practitioner Confidentiality Privilege (FATP) applies to attorneys, CPAs, Enrolled Agents, enrolled actuaries, and certain other individuals allowed to practice before the IRS.
• The confidentiality protection applies to communications that would be considered privileged if they were between the taxpayer and an attorney and that relate to:
  
  • Noncriminal tax matters before the IRS, or
  • Noncriminal tax proceedings brought in federal court by or against the United States.
• This confidentiality privilege cannot be used with any agency other than the IRS. For example, an Enrolled Agent cannot assert the federal confidentiality privilege with any state taxing agency. The confidentiality privilege does not apply:
  
  • In criminal tax matters
  • To any written communications regarding the promotion of a tax shelter
  • In state tax proceedings
  • To the general preparation of tax returns

Question 58

Certified Acceptance Agents (CAA)

Answer 58

• A Certified Acceptance Agent (CAA) is a person or an entity who, pursuant to a written agreement with the IRS, is authorized to assist individuals and other foreign persons who do not qualify for a Social Security Number but who still need a Taxpayer Identification Number to file a Form 1040.
• Certified Acceptance agents can authenticate a passport and birth certificate for dependents to request an ITIN.
• These steps need to be taken by all new applicants:
  
  • Complete Form 13551, Application to Participate in the IRS Acceptance Agent Program.
  • Complete the Mandatory Acceptance Agent training.
  • Complete forensic training and submit the certificate of completion to the IRS.
• Starting in 2024, the IRS no longer accepts paper applications of Form 13551, Application to Participate in the IRS Acceptance Agent Program. All applicants must now use IRS e-Services and upload all required documents through the CAA upload tool.
• Example: Elena, an enrolled agent, wants to expand her practice offerings by becoming a Certified Acceptance Agent (CAA), so she can help individuals without Social Security Numbers (SSNs) obtain Taxpayer Identification Numbers (TINs). She applies to the CAA program and is accepted. Elena’s new client, Alzira Gutierrez, recently moved to the United States and needs an Individual Taxpayer Identification Number (ITIN) to file her taxes. Elena assists Alzira with filling out Form W-7. Elena reviews and submits the form and required documentation on Alzira’s behalf, along with her tax return, to the special address for the IRS’s ITIN Unit. A few weeks later, Alzira receives her ITIN from the IRS. Elena celebrates this milestone and looks forward to helping more clients obtain their ITINs in the future.

Question 59

Circular 230

Answer 59

• Circular 230 is broken into four main subparts:
  
  • Authority to practice
  • Duties and restrictions relating to practice
  • Sanctions for violations
  • Disciplinary procedures

Question 60

Diligence as to Accuracy §10.22

Answer 60

• Central to the Circular 230 regulations is the mandate for practitioners to exercise due diligence when preparing or assisting in preparing, approving, and filing of returns, documents, affidavits, and other papers relating to IRS matters.

Question 61

Reliance on Others

Answer 61

• A practitioner will be presumed to have exercised due diligence if he or she relies on the work product of another person (as long as the information does not seem inconsistent or incomplete).
• Example: Blanca is an enrolled agent. During the year, a new client, Clayton, comes to her to prepare his return. Clayton is self-employed. Blanca asks to see his prior year return, which she examines for accuracy. The return was prepared by another tax practitioner, and it includes a depreciation schedule for Clayton’s business assets. The schedule appears correct, and the listed items are reasonable. Blanca may use the depreciation schedule as a reference, even though she did not prepare it herself.

Question 62

Best Practices §10.33

Answer 62

• Circular 230 explains the broad concept of best practices. Practitioners must provide clients with the highest quality representation concerning federal tax matters by adhering to best practices in providing advice and in preparing documents or information for the IRS.
• Practitioners who oversee a firm’s practice should take reasonable steps to ensure that the firm’s procedures for all employees are consistent with best practices. Best practices include the following:
  
  • Communicating clearly with the client regarding the terms of the engagement.
  • Establishing the facts, determining which facts are relevant, evaluating the reasonableness of any assumptions, relating the applicable law to the relevant facts and arriving at a conclusion supported by the law and the facts.
  • Advising the client of the conclusions reached and the impact of the advice rendered; for example, advising whether a taxpayer may avoid accuracy-related penalties if he or she relies on the advice provided.
  • Acting fairly and with integrity in practice before the IRS.

Question 63

Competence §10.35

Answer 63

• This provision of Circular 230 states that a practitioner must be competent to engage in practice before the IRS.
• “Competence” is defined as having the appropriate level of knowledge, skill, thoroughness, and preparation for the specific matter related to a client’s engagement.
• Circular 230 says a practitioner can become competent in various ways, including consulting with experts in the relevant area or studying the relevant law.
• Example: Chantelle is an enrolled agent who has many years of experience in preparing partnership tax returns. She takes continuing education classes related to changes in partnership law, and consults with another tax professional in her office on a particularly complex partnership return. Also, during the year, a longtime client whose mother has died asks Chantelle to handle the estate tax returns for him. Chantelle rarely handles estate tax matters and does not have time to research the law sufficiently to handle this case, so she refers the estate return to a tax attorney who specializes in estate tax law. Chantelle has fulfilled her Circular 230 obligations related to §10.35.

Question 64

Knowledge of Client’s Omission §10.21

Answer 64

• A practitioner who knows their client has not complied with the revenue laws or who has made an error or omission on their tax return has the responsibility to advise the client promptly of the noncompliance, error, or omission, as well as its consequences.
• The practitioner is not responsible for correcting the noncompliance once he or she has notified the client of the issue, or for notifying the IRS of a client’s noncompliance.
• The §10.21 obligations are not limited to practitioners preparing returns, so the discovery of an error in the course of a tax consulting or advisory engagement will also trigger its requirements.
• Example: Daniel is an EA with a new client, Laura, who has self-prepared her own returns in the past. Daniel notices that Laura has been claiming head of household status on her tax returns, but she does not qualify for this status, because she does not have a qualifying dependent. Daniel is required to promptly notify Laura of the error and tell her the consequences of not correcting the error. However, Daniel is not required to amend Laura’s prior-year tax returns to correct the error. Nor is he required to notify the IRS of her claim of incorrect status.
• Example: Cynthia is an EA who takes over another tax return preparer’s practice. She discovers that the previous preparer has been taking section 179 deductions on assets that do not qualify for this treatment. Cynthia must notify her clients of the errors and the consequences of not correcting the errors. She is not required to correct the errors.

Question 65

Conflicts of Interest §10.29

Answer 65

• Conflicts of interest are common, especially when it comes to divorce. There are special rules that apply to tax practitioners with regards to conflicts of interest between two clients. If there is a potential conflict of interest, the practitioner must disclose the conflict and be given the opportunity to disclose all material facts. A practitioner will have a conflict of interest if:
  
  • The representation of one client will be directly adverse to another client; or
  • There is a significant risk that the representation of one or more clients will be materially limited by the practitioner’s responsibilities to another client, a former client, a third person, or by a personal interest of the practitioner.
• A practitioner may represent a client when a conflict of interest exists if:
  
  • The practitioner reasonably believes that he or she will be able to provide competent and diligent representation to each affected client;
  • The representation is not prohibited by law; and
  • Each affected client waives the conflict of interest and gives informed consent, confirmed in writing, within 30 days after giving any non-written informed consent to the tax practitioner.
  • The written consent must be retained for at least 36 months from the date representation ends and must be given to any officer or employee of the IRS, if requested. At a minimum, the consent should adequately describe the nature of the conflict and the parties the practitioner represents.
• Example: Arthur and Damian are business partners. Sherry is an enrolled agent who prepares both their partnership return, as well as their individual returns. Later in the year, Arthur and Damian have a major argument about the direction of the business. Arthur calls Sherry and tells her that he is going to dissolve the partnership. Sherry must prepare a conflict-of-interest waiver for Arthur and Damian, as well as the partnership itself, if she plans to keep them both as her clients.
• Example: Janessa is an EA who prepares tax returns for Bernadette and Elmer, a married couple. In the current year, Bernadette and Elmer go through a contentious divorce, and Janessa believes there is potential for conflict of interest relating to the services she would provide each of them. She prepares a written statement explaining the potential conflict of interest and reviews it with her clients. Bernadette and Elmer still want Janessa to prepare their returns, and Janessa determines that she will be able to represent each fairly and competently. She has both Bernadette and Elmer sign the statement that waives the conflict and gives their consent for her to prepare their individual tax returns. Janessa must retain the record of their consent for at least 36 months after she last represents either party.

Question 66

IRS Information Requests §10.20

Answer 66

• Under Circular 230, §10.20, when the IRS requests information, a practitioner must comply and submit records promptly.
• If the requested information or records are not in the practitioner’s possession, the preparer must advise the requesting IRS officer and provide any information the practitioner may have, regarding the identity of the person who may have possession or control of the requested information or records. The practitioner must also make a “reasonable inquiry” of the client, regarding the location of the requested records.
• However, a practitioner is not required to make an inquiry of any other person or to verify any information furnished by a client. Further, the practitioner is not required to contact any third party who might have possession of the records.
• A practitioner may not interfere with any lawful effort by the IRS to obtain any record or information unless he or she believes in good faith and on reasonable grounds that the record or information is privileged under IRC §7525 or if the practitioner believes, in good faith, that the request is of doubtful legality.
• Example: Mrs. Jones is an IRS revenue agent. She submitted a lawful records request to Howell, an enrolled agent, for accounting records relating to a former client who is currently under IRS investigation. However, earlier in the year, Howell had fired his client for nonpayment and also returned his client’s records. Howell contacts Mrs. Jones, promptly notifying the IRS officer that he no longer has possession of his former client’s records. Howell tells Mrs. Jones that he attempted to contact his former client, but the phone number was disconnected. Howell is not required to contact any third parties to discover the location of the requested records. Therefore, Howell has fulfilled his obligations under §10.20.

Question 67

Return of Client Records §10.28

Answer 67

• The practitioner must, at the request of a client, promptly return any and all records that are necessary for the client to comply with his federal tax obligations. A practitioner is required to return a client’s original records upon request, whether or not the practitioner’s fees have been paid. Client records include:
  
  • All documents a client provided to a practitioner that pre-existed their business engagement.
  • Any materials that were prepared by the client or a third party that were provided to the practitioner relating to the subject matter of the representation.
  • Any document prepared by the practitioner that was presented to the client relating to a prior representation if such document is necessary for the taxpayer to comply with his or her current federal tax obligations.
• Client records generally do not include the practitioner’s work product. However, they may include any work product that the client has already paid for, such as a completed copy of a tax return. Client records do not include any return, claim for refund, schedule, affidavit, appraisal, or any other document prepared by the practitioner if the preparer is withholding these documents pending the client’s payment of fees.
• A client must be given reasonable access to review and copy any additional records retained by the practitioner that are necessary for the client to comply with their federal tax obligations. The practitioner may retain copies of all the records returned to a client.
• Example: Carol’s business client, Alpine Snow Resort, Inc., has been slow to pay in the past, so Carol asks the owner of the business to pay for the tax returns when he picks them up. The president of Alpine Snow becomes furious and refuses to pay Carol’s invoice. He demands the tax returns anyway. Carol must return the corporation’s original records, but she is not required to give away any work product that the owner has not yet paid for.

Question 68

Copies of Tax Returns

Answer 68

• Under IRC §6107, tax return preparers are required to give a completed copy of a tax return or claim for refund no later than the time the return or claim is presented for the taxpayer’s signature. The copy can be in any media, including electronic media.
• Preparers are required to keep copies of all returns they have prepared or retain a list of clients and tax returns prepared. At a minimum, the list must contain the taxpayer’s name, taxpayer identification number, tax year, and the type of return prepared.
• Note: This provision has existed for decades, before scanners and copy machines were commonplace. Long ago, tax professionals would often just keep a list of returns prepared. In modern times, most preparers keep scanned, digital, or hard copies of client tax returns rather than simply a list of the returns prepared.
• The copies of tax returns or the lists must be retained for at least three years after the close of the return period.

Question 69

Practitioner Fees §10.27

Answer 69

• The IRS prohibits practitioners from charging “unconscionable fees.” Although that term has not been defined, it is generally believed to refer to fees that the courts would consider grossly disproportionate in relation to the services provided.
• The IRS has traditionally held that a practitioner may not charge a contingent fee (for example, a fee determined as a percentage of the taxpayer’s refund) for preparing an original tax return. A contingent fee might also include a fee that is based on a percentage of the taxes saved or one that depends on a specific result.
• However, in July 2014, a U.S. district court ruled that the IRS lacked statutory authority to regulate contingent fee arrangements for the preparation and filing of ordinary refund claims (refund claims after the taxpayer has filed a return but before the IRS has started an audit of the return).
• The opinion in Ridgely v. Lew was issued in July 2014. In November, 2018, the IRS Advisory Council (IRSAC) issued a public report recommending that legislation be enacted to overturn the results in Loving and Ridgely by expressly affirming the Treasury Department’s authority under 31 U.S.C. §330 to regulate paid tax return preparers. At the time of this book’s printing, no such legislation had been passed. The IRS does not plan to appeal the Ridgely decision, but they have not acquiesced to the case, either.
• Link to Ridgely v. Lew case docs: https://www.govinfo.gov/content/pkg/USCOURTS-dcd-1_12-cv-00565/pdf/USCOUR
  TS-dcd-1_12-cv-00565-1.pdf

Question 70

Contingent Fees

Answer 70

• Note: At the time of this book’s printing, the IRS had not issued a public comment on the issue of contingent fees specifically, so test-takers should be aware that if they encounter an exam question about the topic of contingent fees, they should proceed with caution.
• Notwithstanding the general limitation that applies to contingent fees, a practitioner is allowed to charge a contingent fee in limited circumstances under Circular 230, including:
  
  • Representation during the examination of an original tax return, or
  • During the examination of an amended return or claim for refund, if the amended return or claim for refund was filed within 120 days of the taxpayer receiving a written notice of examination or a written challenge to the original tax return.
  • Services rendered in connection with a refund claim for credit or a refund filed in conjunction with a penalty or interest charge assessed by the IRS.
  • Services rendered in connection with any judicial proceeding arising under the IRC.

Question 71

Advertising Restrictions §10.30

Answer 71

• A practitioner may not use any form of advertising that contains false, deceptive, or coercive information, or that is in violation of IRS regulations. In describing their professional designation, enrolled agents may not use the term “certified” or imply any type of employment relationship with the IRS.
• Examples of acceptable descriptions for EAs are “enrolled to represent taxpayers before the Internal Revenue Service,” “enrolled to practice before the Internal Revenue Service,” and “admitted to practice before the Internal Revenue Service.”
• Solicitation Restrictions: A practitioner may, in certain circumstances, solicit his or her professional services. The solicitation may not violate federal or state law, or other applicable rules (such as attorneys who are bound to conduct guidelines in their particular states). A practitioner may not continue to contact a prospective client who has communicated that he or she does not wish to be solicited.
• Mail Advertising: Mail advertising is allowed, but a solicitation must be clearly labeled as such and, if applicable, the source of information used in choosing the recipient must be identified. In the case of direct mail and e-commerce communications, the practitioner must retain a copy of the communication, for at least 36 months.
• Advertising and communications must not be misleading, deceptive, or in violation of IRS regulations.
• Example: Juliana is a newly licensed enrolled agent that wants to attract as many new clients as possible. She runs a flashy commercial ad on a local news station that she can settle any client’s back tax debt for “pennies on the dollar” and she also states that every new client has a chance to win a lavish Hawaiian Cruise. In reality, there is no cruise, and Juliana’s commercial also misleadingly inflated the chances of tax relief. Her commercial was merely a fabricated incentive to get new clients. This is false advertising that is purposely misleading. Juliana can be subject to penalties as well as potential suspension or even disbarment.

Question 72

Published Fee Schedules

Answer 72

• Fee Information: A practitioner may publish and advertise a fee schedule. A practitioner must adhere to the published fee schedule for at least 30 calendar days after it is last published. Fee information may be published in newspapers, mailings, websites, email, or by any other method. A practitioner may charge based on the following:
  
  • Fixed fees for specific routine services.
  • Hourly rates.
  • A range of fees for particular services.
  • A fee for an initial consultation.
• When advertising fees on radio or television, the broadcast must be recorded, and the practitioner must retain a copy of the recording for at least 36 months from the date of the last transmission or use. Practitioners who are authorized e-Service providers may use the IRS e-file logo. Tax practitioners are specifically prohibited from using official IRS insignia.
• Practitioners who are authorized e-Service providers may use the IRS e-file logo. Tax practitioners are specifically prohibited from using official IRS insignia. See slides.
• Example: Lorena is an EA who publishes an advertisement in her local newspaper. The ad includes a published fee schedule for preparing certain tax return forms at deeply discounted rates. Lorena is inundated with calls and decides that the ad was a mistake. Regardless, she must adhere to the published fee schedule for at least 30 days after it was published.
• Example: Jermaine is an EA who pays for a radio commercial about his services. He also mentions average prices for tax preparation. The advertisement plays for four months during the tax season. Jermaine must keep a copy of the radio commercial for at least 36 months from the last date that the commercial aired.

Question 73

Negotiation of Taxpayer Refund Checks §10.31

Answer 73

• A practitioner must not endorse or negotiate (cash) a refund check issued to the taxpayer. For example, a practitioner cannot use Form 8888, Allocation of Refund (Including Savings Bond Purchases), to enter their own bank account in order to obtain payment for their tax preparation fee.
• Circular 230 states that this provision applies to any practitioner, not just to one who prepares tax returns. It also expands the scope of “endorse or otherwise negotiate any check” to state that negotiation of a taxpayer check includes accepting or directing payment by any method, including electronically or via direct deposit or wire transfer.
• Form 8888 instructions state that entering an account in someone else’s name, such as a preparer’s, will cause the direct deposit request to be rejected and the taxpayer to be sent a paper check instead. A preparer could also be subject to a penalty under IRC §6695(f).
• Example: McKinley is an enrolled agent with a new client, Donna, who will receive a $500 refund on her tax return. Donna has not yet paid McKinley’s tax return preparation fee, and she doesn’t have the money to pay the fee up-front, so McKinley enters his own bank account number, rather than Donna’s, on Form 8888. McKinley plans to take his $200 fee from the refund and give Donna the remaining $300. However, directing a taxpayer’s refund into the preparer’s bank account is expressly forbidden, and McKinley could be subject to a preparer penalty for improper negotiation of Donna’s refund.

Question 74

Other Prohibited Acts

Answer 74

• No Delay Tactics Allowed §10.23: A practitioner must not unreasonably delay the prompt disposition of any matter before the IRS.
• Example: Dan is an enrolled agent who is representing his client, Melissa, in an IRS examination. Melissa owes a lot of money to the IRS but has no intention of paying her bill. She tells Dan to delay the IRS as much as possible so she can transfer assets to her family members in order to escape any garnishments or levies. Dan agrees, and he repeatedly rescheduled appointments with an IRS revenue agent in an attempt to delay proceedings. Dan also delays furnishing certain documents that the IRS has requested, and when he does provide them, the records are incomplete. Not only Dan’s actions are in violation of Circular 230, but there could be criminal exposure for such actions.
• No Employment of Disbarred or Suspended Persons §10.24: A practitioner may not knowingly employ a person or accept assistance from a person who has been disbarred or suspended from practice. This restriction applies even if the duties of the disbarred or suspended person would not include actual preparation of tax returns.
• Example: Joseph is an enrolled agent who owns a popular tax franchise, Tax Busters, Inc. Joseph has several tax preparers working for him, including an enrolled agent named Maribelle. During the year, Maribelle is caught forging checks, and she is convicted of a felony. She is later disbarred by the Office of Professional Responsibility. Joseph must terminate Maribelle’s employment, because he cannot knowingly employ a person who has been disbarred or suspended from practice.
• Performance as a Notary §10.26: A practitioner who is a notary public and is employed as counsel, attorney, or agent in a matter before the IRS or who has a material interest in the matter cannot engage in any notary activities related to that matter.
• Note: This does not mean that an enrolled practitioner is prohibited from being a notary. An enrolled practitioner cannot notarize a document for a taxpayer if he is representing the same taxpayer before the IRS. This follows the laws for most states, where a notary public generally cannot notarize a document that he is a party to in some way.

Question 75

Signature Requirements

Answer 75

• Preparer Signature and PTIN: A paid preparer is required to sign the tax return and fill out the preparer areas of the form, which must include the preparer’s PTIN. The preparer’s declaration statement is signed under penalties of perjury. The preparer must sign the return after it is completed but before it is presented to the taxpayer for signature. The preparer can sign original returns, amended returns, or requests for filing extensions by rubber stamp, mechanical device (such as a signature pen), or computer software program.
• Taxpayer Signature: Regardless of whether a paid preparer or someone else has prepared a return, a taxpayer must sign his or her own return, affirming it is correct under penalties of perjury. A taxpayer is legally responsible for the accuracy of every item on the return. A paper filed return is required to have a “wet signature” or an original signature.
• More Than One Preparer: If the original preparer is unavailable for signature, another preparer must review the entire preparation of the return or claim and then must manually sign it. For purposes of the signature requirement, the preparer with primary responsibility for the overall accuracy of the return or claim is considered the “preparer,” if more than one preparer is involved. The other preparers do not have to be disclosed on the return.
• Example: Henry is 75 years old and prefers to prepare his own return on paper in order to save on the cost of software. His return is very simple, as he only has Social Security income and some interest income from a certificate of deposit. Henry downloads the Form 1040-SR directly from the IRS website and prints it out, then fills out the form with a ballpoint pen. He signs the return with an original “wet signature” and mails it in.

Question 76

Requirements for Written Tax Advice §10.37

Answer 76

• The definition of “written advice” has been expanded to encompass almost anything in writing, including email, text, or any other type of electronic communication, on any federal tax matter. A practitioner must:
  
  • Base the written advice on reasonable factual and legal assumptions.
  • Consider all relevant facts and circumstances that he or she knows (or reasonably should know).
  • Use reasonable efforts to identify and ascertain the facts relevant to written advice on each federal tax matter.
  • Not rely upon representations, statements, findings, or agreements of the taxpayer or any other person if reliance on them would be unreasonable.
  • Relate applicable law and authority to facts.

Question 77

No “Audit Lottery”

Answer 77

• When issuing written advice, a practitioner cannot take into consideration the chances that a tax return may or may not be audited, or that a particular matter may or may not be raised during an audit. This is called the “audit lottery” and this type of advice is forbidden.
• Example: Randy is an enrolled agent. Randy’s client, Paulette, asks him what the odds are that the IRS will audit certain deductions she wants to claim on her Schedule C. Randy’s response is that the IRS audits only about 2% of these types of tax returns, so the risk is worth taking, although the law is unsettled about whether the deductions are allowable. In the tax return he prepares, Randy includes the questionable deductions. Randy is playing the “audit lottery,” which is in violation of Circular 230. This type of practitioner advice is specifically prohibited by the IRS.

Question 78

Standards for Tax Returns and Documents (§10.34)

Answer 78

• A practitioner may not willfully sign a tax return or claim for refund that he or she knows (or reasonably should know) contains a position that:
  
  • Lacks a reasonable basis.
  • Is an unreasonable position as described in IRC §6694(a)(2).
  • Is a willful attempt by the practitioner to understate the liability for tax or reflects a reckless or intentional disregard of rules or regulations.

Question 79

Tax Position Definitions

Answer 79

1. More Likely Than Not: There is a greater than 50% likelihood that the tax treatment will be upheld if the IRS challenges it. If a preparer is unsure that a position meets this standard, he or she may generally avoid penalties by disclosing the position on the return. However, a disclosure statement will not protect the preparer if the position is patently frivolous.
2. Substantial Authority: Weight of authorities in support of a position is substantial in relation to the weight of authorities in opposition to the position, a position with a realistic possibility of success.
3. Reasonable Basis: This is the minimum standard for all tax advice and preparation of tax returns. The IRS defines it this way: “Reasonable basis is a relatively high standard of tax reporting that is significantly higher than not frivolous or not patently improper. The reasonable basis standard is not satisfied by a return position that is merely arguable”. The precise likelihood that a reasonable basis position will be upheld on its merits is not defined in Circular 230. For purposes of avoiding §6694 penalties, the reasonable-basis standard applies only if the relevant tax position is disclosed on the return or document so that the IRS is aware of a potential issue.
4. Unreasonable Position: In general, this is an undisclosed position with no substantial authority.
5. Frivolous position: Patently improper with no reasonable basis.

• Adequate and appropriate disclosure can be made by using Form 8275, Disclosure Statement, which allows a preparer to disclose positions that do not have substantial authority, but still have a reasonable basis, assuming the position is not otherwise already disclosed on the return.

Question 80

Frivolous Positions

Answer 80

• A practitioner must not knowingly sign a frivolous return. A frivolous position is defined as one that the practitioner knows is in bad faith and is improper.
• Example: Heidi is a tax preparer who prepares a Form 1040 for her client, Herman, showing $95,000 of wages and the appropriate tax due. Six months later, on behalf of the same client, she files an amended return, showing zero income, and requesting a full refund of the income taxes paid. Herman attaches a signed statement to the return saying that “filing taxes is completely voluntary, and that he is a sovereign citizen and not subject to income tax.” The amended return is considered frivolous. Heidi signs the return as the preparer, because Herman offered her a nice fee if she would prepare the return for him and sign it, believing it would add legitimacy to his frivolous tax position. The IRS flags the return and sends a notice, advising that the position reflected on the amended return was frivolous. The IRS can assert a penalty against Herman, as well as Heidi, for the frivolous tax position (based on the U.S. Tax Court case: Kestin, 153 T.C. No. 2).

Question 81

Disclosure Statements

Answer 81

• Circular 230 §10.34 specifies the use of disclosure statements in certain instances. A tax return that requires a disclosure to the IRS must include Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement.
• Form 8275 is used by taxpayers and preparers to disclose items or positions on a tax return that are not otherwise adequately disclosed. It is primarily used to avoid accuracy-related penalties so long as the return position has a reasonable basis, and the taxpayer (and preparer) acted in good faith in taking the position.
• Form 8275 cannot be used to avoid the portion of the accuracy-related penalty attributable to certain types of misconduct, including the following:
  
  • Negligence.
  • Disregard of regulations.
  • Any substantial understatement of income tax on a tax shelter item.
• A disclosure statement cannot be used by a preparer to avoid penalties if the position has no reasonable basis. Form 8275 is used for most disclosure matters. Form 8275-R is only used in very limited circumstances when a taxpayer takes a position that runs contrary to Treasury regulations.
• Example: Rochelle is an enrolled agent. She prepares a tax return for her client, John, who is a self-employed carpenter. John would like to take an aggressive tax position in order to deduct a large travel expense, which may not have been deductible as a business expense. This large deduction on the return did not have a reasonable basis and was not disclosed. John’s return is later selected for audit, and the entire deduction is disallowed. Rochelle may be liable for a preparer penalty, and John may be liable for an accuracy-related penalty.
• Example: Hazel is an EA with a client who has a very complex tax situation. She notices that the IRS publications reflect one position, but there is a recent court case that may allow a more favorable position for her client. There are also two other similar cases being litigated, but the outcome of those cases is currently unknown. Hazel believes that the position has a 30% chance of prevailing on its merits. Hazel thinks that the client’s position has a reasonable basis and decides to disclose the position on the tax return. Even though the position is contrary to the IRS’s current position, Hazel may take the position on the return, so long as it is disclosed. She must file Form 8275 along with the tax return stating the position and referencing the court case or any other basis she has for the position.

Question 82

Disclosure Example: Using the Session Method

Answer 82

• The IRS Chief Counsel released guidance on the “session method” in Advice Memorandum 2008-011, which allows taxpayers to track gambling winnings and losses by each gambling session, and the net income of each session is reported as the total income on the face of the tax return.
• If the taxpayer uses the “session method” then they should generally include Form 8275, Disclosure statement with their return.
• Link to Office of Chief Counsel Internal Revenue Service Memorandum/ guidance:
• https://www.irs.gov/pub/irs-utl/am2008011.pdf

Question 83

Advising Clients on Potential Penalties

Answer 83

• A practitioner is required to inform a client of any penalties that are reasonably likely to apply to a position taken on a tax return if:
  
  • The practitioner advised the client concerning the position, or
  • The practitioner prepared or signed the tax return.
  • The practitioner must also inform the client of any opportunity to avoid penalties by disclosing the position and the requirements for adequate disclosure. This rule applies even if the practitioner is not subject to an IRC penalty related to the position, or the document or tax return submitted.

Question 84

Reliance on Client’s Information

Answer 84

• When preparing income tax returns, a practitioner is not required to verify all the information furnished by his or her clients. In general, a practitioner:
  
  • May rely on, in good faith the information that a client provides.
  • Should not ignore the implications of the information.
  • Should make reasonable inquiries if the information appears to be incorrect, inconsistent, or incomplete.
• Example: Shane is an EA who conducts an interview with his new client, Tameka. She states she made a $50,000 charitable contribution of valuable artwork. However, this is not true, and Shane fails to make reasonable inquiries to Tameka about the contribution. He does not ask about the existence of a qualified appraisal, and he does not complete an IRS-required substantiation form. Shane includes the deduction for the charitable contribution on Tameka’s tax return, which results in an understatement of tax liability. Tameka’s return is later audited, and the charitable deduction is disallowed. Shane is in violation of §10.34 and would be subject to a preparer penalty for his negligence.
• Example: Oleg is an enrolled agent, and his client’s name is Carmen. Carmen wants to claim her 5-year-old niece, Sofia, on her tax return, and claim EITC and the CTC. Carmen tells Oleg that Sofia lived with her all year. However, Oleg prepared the return for Sofia’s parents last week, and he knows that Sofia lived with her parents all year. In preparing Carmen’s return, Oleg cannot ignore what he knows about Sofia’s residency.

Question 85

Reporting Requirements for Tax Shelter Activities

Answer 85

• There are certain types of tax shelter activities that must be reported to the IRS. A reportable transaction, also sometimes called a listed transaction, is one that the IRS has determined has the potential for tax avoidance or evasion.
• The rules for reportable transactions apply to all individuals and entities (including trusts, estates, partnerships, and corporations).
• Form 8886, Reportable Transaction Disclosure Statement, must be attached to a taxpayer’s return for any year that he or she participates in a tax shelter. A separate statement must be filed for each reportable transaction.

Question 86

Tax Shelter Penalties

Answer 86

• In addition to a 30% understatement of tax penalty, a civil penalty of 75% of the reduction of tax associated with the reportable transaction may be imposed.
• Even with proper disclosure, taxpayers may still be subject to a penalty on the understatement of tax.
• Abusive tax shelters and abusive trust schemes will try to hide the true ownership of assets and income or to disguise the substance of transactions. When the IRS identifies a promoter of an abusive trust or an abusive tax shelter, the IRS will request a list of the promoter’s clients through legal means, such as a judicial subpoena.
• Example: Alexander participated in a Guam Trust that was aggressively marketed primarily to wealthy individuals. The scheme was later deemed by the IRS to be an abusive tax shelter transaction. Alexander did not disclose his participation in the tax shelter. Alexander may be liable for a penalty of 75% of the tax he underpaid as a result of the tax scheme. In addition, he may also be liable for criminal penalties.

Question 87

Firm Compliance Procedures §10.36

Answer 87

• A practitioner who oversees a firm’s practice must ensure adequate procedures are in place for every member, associate, or employee to comply with the requirements specified in Circular 230.
• A tax firm owner who does not take reasonable steps to ensure the firm has adequate procedures in place to comply with Circular 230 requirements may face disciplinary action. The practitioner may also be subject to sanctions if they know of other firm members who are engaging in a pattern of noncompliance and fail to take prompt action to correct the noncompliance.
• Example: Blaine and William are both CPAs, and they are partners in an accounting practice and prepare hundreds of tax returns every year. After reviewing a few business returns that William has prepared, Blaine thinks that his business partner, William, might be advising his clients to take credits for which they do not qualify. Blaine decides to say nothing and does not confront William about his suspicions. If the firm is later audited by the IRS, Blaine may be sanctioned by the IRS for William’s negligent or reckless actions.

Question 88

Due Diligence Requirements

Answer 88

• Each year, tax preparers complete more than half of the tax returns claiming the Child Tax Credit (CTC), Additional Child Tax Credit (ACTC), Earned Income Credit (EITC) and/or the American Opportunity Tax Credit (AOTC). The IRS estimates that one in four of these claims is incorrect, which results in billions of dollars paid out in erroneous refunds each year.
• The due diligence rules for these credits are more stringent than they were in previous years. This is because both the number of individuals claiming these refundable credits and the number of erroneous claims is high. Paid preparers must meet four due diligence requirements on returns with these claims or face possible penalties. Employers may also be penalized for an employee’s failure to exercise due diligence.

Question 89

Four Due Diligence Requirements

Answer 89

• There are four due diligence requirements for each EITC, CTC/ACTC/ODC, AOTC and/or HOH filing status claim prepared. A preparer is required to:

1. Complete and submit Form 8867, Paid Preparer’s Due Diligence Checklist, for each EITC, CTC/ACTC/ODC, AOTC and/or HOH filing status claim prepared.
2. Complete and keep all worksheets used to compute the credit
3. Apply the knowledge requirement: must be knowledgeable, and not know (or have reason to know) any information used to determine a client’s eligibility for, or the amount of the refundable credit is incorrect.
4. Recordkeeping requirement: the preparer must keep required records for each claim.

Question 90

Requirement #1

Answer 90

• Requirement #1: Form 8867, Paid Preparer’s Due Diligence Checklist
• Form 8867, Paid Preparer’s Due Diligence Checklist, includes several mandatory questions that preparers must ask taxpayers in order to comply with due diligence requirements. A Form 8867 must be completed for each EITC, CTC/ACTC/ODC, AOTC and/or HOH filing status claim prepared, every year, without exception.
• Form 8867 is also used by a preparer to identify the documents that the taxpayer provided and that the preparer used to determine credit eligibility. In determining the residency of qualifying children, a preparer must specify whether he relied upon documents such as school, medical, or social service records. In determining the disability of a qualifying child, a preparer must indicate whether he or she relied upon documents such as a statement from a doctor, other health care provider, or social services agency.
• Example: Collin is an EA. His new client, Delia, 62, wants to take a dependency exemption for her son, Ernest, who is 32. She also wants to claim the Earned Income Tax Credit and the Dependent Care Credit for her son. Since Ernest is beyond the normal age limit for these credits, Collin makes reasonable inquiries, and Delia produces a doctor’s statement that says Ernest is severely disabled and incapable of self-care. Therefore, Delia may claim her son as a dependent, and the credits will be allowed regardless of Ernest’s age. Collin has fulfilled his due diligence requirements by conducting a thorough interview with his client, including asking enough questions to understand an individual tax situation, documenting the answers and seeking appropriate supporting evidence. He completes his due diligence requirements by submitting Form 8867 to the IRS.

Question 91

Requirement #2

Answer 91

• Requirement #2: Compute the Credits on the Required Worksheets
• Most tax preparation software will compute these credits automatically on worksheets within the actual software program, but the IRS emphasizes that using software is not a substitute for knowledge of the law. The tax preparer must complete the appropriate refundable credit worksheets from the instructions for Form 1040 (or complete documents with the same information).
• The worksheets show what to consider in the computation. The preparer must retain the records showing how he or she did the computations.

Question 92

Requirement #3

Answer 92

• Requirement #3: Apply the Knowledge Requirement
• IRS regulations specify due diligence requirements and set a “performance standard” for the knowledge requirement for all EITC, CTC/ACTC, ODC, AOTC and HOH returns: what a reasonable and well-informed tax return preparer, knowledgeable in the law, would do.
• The IRS assesses more than 90% of all due diligence penalties for failure to comply with the knowledge requirement. Under the “knowledge requirement,” a preparer must:
  
  • Apply a common-sense standard to the information provided by the client.
  • Evaluate whether the information is complete and gather any missing facts.
  • Determine if the information is consistent; recognize contradictory statements and statements the preparer knows are not true.
  • Conduct a thorough, in-depth interview with every client, every year.
  • Ask enough questions to reasonably know the return is correct and complete.
  • Document in the file any questions the preparer asks, the client’s responses.

Question 93

Requirement #4

Answer 93

• Requirement #4: Preparer Recordkeeping Compliance Requirements
• A preparer must retain the following records for each claim:
  
  • Form 8867, Paid Preparer’s Due Diligence Checklist
  • The applicable worksheet(s) for EITC, CTC/ACTC, ODC and AOTC claimed on the return.
  • Any documents or other written proof relied on to complete the Form 8867 or to determine eligibility for any refundable credit or, if applicable, to the taxpayer’s eligibility for Head of Household filing status.
  • A record of how, when, and from whom the information the preparer obtained to prepare the tax return as well as a record of any additional questions the preparer asked to determine eligibility for and the amount of the credits and the client’s answers.

Question 94

Due Diligence Preparer Penalty

Answer 94

• The penalty for failure to meet the due diligence requirements on tax returns containing EITC, CTC/ACTC/ODC, the AOTC, and/or HOH status filed is now $600 per failure.

Question 95

Penalties for Failure to Exercise Due Diligence

Answer 95

• If the IRS examines a taxpayer’s return and disallows all or part of an EITC, AOTC, CTC/ACTC, ODC or Head of Household claim on a return, the taxpayer:
• Must pay back the amount in error with interest,
• May need to file Form 8862, Information To Claim Certain Credits After Disallowance
  
  • Cannot claim the credit for the next two years if the IRS determines the error is because of reckless or intentional disregard of the rules, or
  • Cannot claim the credits for the next ten years if the IRS determines the error is because of fraud.

Question 96

Recordkeeping Requirements and Penalties

Answer 96

• Recordkeeping requirements may be tested on all three parts of the EA exam, with Part 3 focusing primarily on substantiation and record retention for preparers.
• Records that clearly demonstrate income, expenses, and basis should be retained, but tax law generally does not require that specific types of records to be kept.
• A taxpayer should keep all relevant records as long as they may be needed for the administration of any provision of the Internal Revenue Code.

Question 97

Supporting Documents

Answer 97

• In addition, depending on the type of tax return being prepared, a preparer may need to see the following types of supporting documentation:
  
  • Financial documents: Canceled checks, bank statements, credit card statements, receipts, brokerage records.
  • Legal documents: Birth certificates, divorce decrees, lawsuit settlements.
  • Business entity supporting documents: Partnership agreement, corporate bylaws, corporate minutes.
  • Expense records: Mileage logs; receipts for business expenses such as travel, meals, and lodging; and receipts and written acknowledgments from charitable organizations, particularly for non-cash contributions and expenses of $250 or more.
• For a taxpayer to deduct travel, gift, transportation, charitable, employee, and other expenses, he or she must be able to substantiate those expenses. A taxpayer cannot deduct amounts that are estimates. A written record, including one prepared on a computer, generally is required to be considered adequate.

Question 98

Property Records

Answer 98

• Property Records: Records relating to the basis of property should be retained as long as they may be material to any tax return involving the property. The basis of property is material until the statute of limitations expires for the tax year an asset is sold or otherwise disposed of. A taxpayer must keep these records to figure the asset’s basis, as well as any depreciation, amortization, or depletion deductions.

Question 99

Employment Tax Records

Answer 99

• Employment Tax Records: A business is required to retain payroll and employment tax records for at least four years after the tax becomes due or is paid, whichever is later. This rule also applies to businesses that employ tax preparers.
• https://www.irs.gov/businesses/small-businesses-selfemployed/employment-tax-recordkeeping
• Example: Shantel is an EA who employs five other tax preparers in her tax preparation franchise. Shantel has six employees working for the franchise. One employee is a full-time receptionist, and the other five employees are full-time preparers. Shantel is required to keep the employment tax records relating to her employees for at least four years.

Question 100

The Statute of Limitations

Answer 100

• For assessment of tax owed, this period is generally three years from the date a return was due or is filed, whichever is later.
• For filing a claim for credit or refund, the period to make a claim is generally three years from the date the return was filed, or two years from the date the tax was paid, whichever is later.
• If the return was filed prior to the original due date, the three-year statute of limitations starts as of the original due date of the return. If the return was filed on extension, the three-year period starts when the return was received by the IRS.

Question 101

Refund Statute: Example

Answer 101

• Example: Maddie is a delinquent filer and has not filed a tax return for many years. On January 30, 2024, she hires Timothy, an enrolled agent, to prepare her delinquent tax returns, for tax years 2018 through 2022. Timothy will also prepare Maddie’s 2023 tax return, which is not delinquent. With Maddie’s authorization, Timothy prepares and files all these returns before April 15, 2024. Each of Maddie’s returns show an overpayment of taxes, because Maddie always had enough withheld from her paychecks to cover her income tax. However, she will receive refunds only for tax years 2020 through 2023, because those are the years still open under the three-year refund statute. Maddie will not receive refunds for her older tax returns, because the refund statute has expired for those years (unless an exception to the refund statute applies).

Question 102

Penalty for Substantial Understatement

Answer 102

• For individual taxpayers, an understatement is considered substantial if it is more than the larger of:
  
  • 10% of the correct tax, or
  • $5,000.
• This means that, if the understatement shown on the return is more than 10% of the correct tax or greater than $5,000 for individuals, it is considered a “substantial” understatement.
• Example: Jennifer prepares her own tax return using online software. She makes a mistake and claims an adjustment to income for a self-employed retirement contribution, but she forgot to make the contribution by the deadline. The correct amount of tax on Jennifer’s return should have been $9,000, but Jennifer’s return only reported tax of $3,000. The IRS disallows the erroneous contribution deduction. The substantial understatement penalty would apply to Jennifer’s return, because the $6,000 shortfall is more than $5,000, which is the greater of the two thresholds.

Question 103

Penalty for Valuation Misstatement

Answer 103

• A valuation misstatement can be either “substantial” [IRC § 6662(e)] or “gross” [IRC § 6662(h)].

1.“Substantial” valuation misstatements are subject to a 20% penalty.
2.“Gross” valuation misstatements are subject to a 40% penalty.

• The substantial valuation misstatement penalty generally applies when a taxpayer incorrectly reports an asset’s value or its adjusted basis on a tax return; the value or basis is overstated by at least 150% of the correct value; and which results in an underpayment of tax of at least $5,000 (the threshold is $10,000 for most C corporations).
• The penalty jumps to 40% of the net understatement of tax if the taxpayer claims a value for property on a tax return that is 200% or more of the correct amount. This is known as a gross valuation misstatement.
• If the understatement is due to fraud, the penalty jumps to 75% of understatement
• Example: Gary donated a conservation easement to a charitable trust. On his federal income tax return for that year, Gary valued his donation at $900,000 and claimed a large charitable contribution deduction. For the next three years, Gary claimed a carryover of charitable contribution deductions related to the conservation easement. The IRS later audits Gary’s tax returns and determined that he didn’t meet the legal requirements for his charitable contribution. Gary cannot produce a qualified appraisal of the property that he donated. The IRS deems that the actual value of Gary’s donation was $45,000. The actual value of the donation was far less than what was reported, and in Gary’s case, the error is more than 200% of the asset’s value. The IRS disallows the deduction and assesses a 40% penalty against Gary for the gross valuation misstatement.

Question 104

Fraud Penalties

Answer 104

• If there is any underpayment of tax due to fraud, a penalty of 75% of the underpayment will be assessed against the taxpayer. In the case of a joint return, the penalty will apply to both spouses only if some part of the underpayment is due to the fraud of each spouse. Examples of tax fraud include:
  
  • Filing a false tax return
  • Hiding or transferring assets or income
  • Claiming false deductions
  • Keeping a second set of books
  • Failure to deposit receipts to business accounts
  • Covering up sources of receipts or deliberately omitting income
• Note: Negligence or simple ignorance of the law does not constitute fraud. The IRS characterizes fraud as a deliberate action for the purpose of “deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events, or make things seem other than what they are.”

Question 105

Frivolous Tax Return Penalty

Answer 105

• Frivolous Tax Return Penalty (§6702): A frivolous tax return is one that does not include enough information to figure the correct tax, or that contains information clearly showing that the tax reported is substantially incorrect.
• A taxpayer faces a penalty of $5,000 if he or she files a frivolous tax return or other frivolous submissions. This penalty is in addition to any other penalties provided by law. Frivolous submissions include tax protester arguments, such as contentions that filing of a tax return or payment of income tax is voluntary; that only foreign-source income is taxable; or that a taxpayer is not a citizen of the United States and thus not subject to federal income tax.
• A taxpayer may face a penalty of up to $25,000 if the taxpayer makes frivolous arguments in the U.S. Tax Court.

Question 106

Alteration of the Jurat

Answer 106

• Frivolous submissions also include taxpayers who alter or strike out the preprinted language above the space provided for a signature. This declaration is called the jurat. Civil penalties for altering a jurat may include:
  
  • A $5,000 penalty imposed under §6702;
  • Additional penalties for failure to file a return, failure to pay the tax owed, and fraudulent failure to file a return under §6651.

Question 107

Trust Fund Recovery Penalty (TFRP)

Answer 107

• The trust fund recovery penalty involves the income and Social Security taxes an employer withholds from the wages of employees. These taxes are called trust fund taxes because they are held in trust on behalf of employees until they are remitted to the government. Sometimes, business owners neglect to remit these taxes to the IRS.
• A trust fund recovery penalty equal to 100% of the amount of unpaid trust fund taxes can be assessed against anyone who is considered a “responsible person” in the business. This may include corporate officers, directors, stockholders, and rank-and-file employees.

Question 108

Penalties Imposed on the Tax Practitioner

Answer 108

• Study Tip: Specific penalties may be imposed on preparers and these are frequently tested on Part 3 of the EA exam. Although it is not generally necessary to memorize the IRC section numbers, test-takers should be familiar with each of the penalties and the penalty amounts listed in the PassKey study guide.
• See IRS website for complete listing of preparer penalties:
• https://www.irs.gov/payments/tax-preparer-penalties#penalties

Question 109

OPR’s Jurisdiction

Answer 109

• The following are subject to Circular 230 jurisdiction, and thus to OPR oversight:
  
  • State licensed attorneys and CPAs.
  • Enrolled agents, enrolled retirement plan agents, and enrolled actuaries.
  • Appraisers: persons providing appraisals used in connection with tax matters (such as valuing estate and gift assets).
  • Unlicensed individuals who represent taxpayers before the IRS examination division, IRS customer service, and Taxpayer Advocate Service in connection with returns they prepared and signed.
  • Preparers who give written advice that has the potential for tax avoidance or evasion.
  • Any preparer submitting a power of attorney in connection with limited representation or special authorization to practice before the IRS.

Question 110

Referrals to OPR

Answer 110

• OPR states that common reasons for referral include:
  
  • Inaccurate or unreasonable entries/omissions on tax returns
  • A lack of due diligence exercised by the practitioner
  • Cashing, diverting, or splitting a taxpayer’s refund by electronic or other means
  • Patterns of misconduct involving multiple years, multiple clients, or unprofessional conduct demonstrated to multiple IRS employees
  • Potential conflict of interest situations, such as the representation of both spouses (or ex-spouses) who have a joint tax liability
• A taxpayer may file a complaint against a tax return preparer by using Form 14157, Return Preparer Complaint, and submitting it to the Return Preparer Office, which will undertake an initial investigation before referring a case to the OPR. Anonymous complaints are allowed.
• Example: Ms. Rowena Smith is an IRS auditor who is examining a taxpayer’s tax return. Ms. Smith discovers that the taxpayer has participated in an abusive tax shelter, and this was not disclosed on the tax return. When she asks the taxpayer about it, the taxpayer is bewildered and states that the tax shelter was suggested to him by his tax attorney, who also prepared the tax return currently under audit. Ms. Smith checks the preparer section of the taxpayer’s return, and writes down the tax attorney’s name, address, and PTIN. She is required to file a written report to the OPR.

Question 111

Practitioner Misconduct

Answer 111

• There are four broad categories of practitioner misconduct, all of which may be reasons for the OPR to initiate disciplinary action against a tax professional:
  
  • Misconduct while representing a taxpayer
  • Misconduct related to the practitioner’s own return
  • Giving a false opinion knowingly, recklessly, or through gross incompetence
  • Misconduct not directly involving IRS representation (such as conviction of a criminal act)

Question 112

Misconduct While Representing a Taxpayer

Answer 112

• Misconduct while representing a taxpayer: This involves any unethical or illegal actions taken by a tax professional while representing a client before the IRS. For example, a tax professional might provide false information to the IRS or attempt to unduly influence an IRS officer.
• Example: Erick, a tax attorney, is representing his client, Mr. Lewis, before the IRS. Under pressure to resolve the audit in his client’s favor, Erick decides to take an unethical approach. Erick offers a bribe to the IRS examiner, Ms. Walker, who is handling the case. Being an ethical officer, Ms. Walker immediately recognizes this as an attempt at undue influence and reports it to the Office of Professional Responsibility. OPR immediately initiates disciplinary action against Erick, resulting in penalties and even potential disbarment.
• Example: Laverne is an enrolled agent. She has been preparing tax returns for compensation for over ten years but has filed her own returns late multiple times. She completely stops filing her own returns and does not file for three years in a row. The Office of Professional Responsibility sends multiple notices which Laverne ignores. OPR initiates disciplinary action against Laverne for misconduct related to her own returns.
• Example: Milton is a CPA who prepares tax returns for compensation. In May, Milton is convicted of felony wire fraud in a multimillion-dollar real estate scheme. OPR initiates expedited disbarment proceedings against Milton after his conviction. A month later, Milton is disbarred from practice before the Internal Revenue Service.

Question 113

Disciplinary Sanctions

Answer 113

• The OPR may impose a wide range of sanctions upon practitioners and other preparers who are subject to Circular 230 jurisdiction:

1. Reprimand: A reprimand is the least severe sanction. It is a private letter from the director of the OPR, stating the practitioner has committed some kind of misconduct under Circular 230. Although the issuance of a reprimand is kept private, it stays on a practitioner’s record.
2. Censure: Censure is a public reprimand, with the practitioner’s name published in the Internal Revenue Bulletin. The facts of the case that triggered the censure are not published. Unlike disbarment or suspension, censure generally does not prevent a practitioner from representing taxpayers before the IRS.
3. Suspension from Practice before the IRS: An individual who is suspended is not eligible to represent taxpayers before the IRS during the term of the suspension. Suspensions may be imposed for a period of one to 60 months (five years).
4. Disbarment from Practice before the IRS: An individual who is disbarred is not eligible to represent taxpayers before the IRS. Disbarment lasts a minimum of five years, and Circular 230 requires the practitioner to demonstrate that they have regained fitness to practice before the IRS before they may be reinstated. As a result of suspension or disbarment, the practitioner will have the matter that caused the disbarment or suspension published in the Internal Revenue Bulletin.
5. Monetary Penalty: A monetary penalty may be imposed on an individual or a firm, or both, and can be in addition to any censure, suspension, or disbarment. The amount of the penalty may be up to the gross income derived, or to be derived, from the conduct that triggered the penalty.

• Example: Neal is a CPA whose personal tax returns were audited by the IRS. The audit found he was improperly claiming numerous personal expenses as business deductions, and he had not timely filed his own tax returns. Even though no misconduct was discovered that related to his clients, Neal was suspended from practice by the OPR for a period of three years. The Internal Revenue Bulletin listed his name, length of time of the suspension, and personal tax compliance issues as the reasons for the disciplinary action.

Question 114

Official Complaint Process

Answer 114

• When a formal complaint is issued against a practitioner, the complaint must:
  
  • Name the respondent.
  • Provide a clear and concise description of the facts.
  • Be signed by the director of the OPR.
  • Describe the type of sanction.
  • If a suspension is sought, the duration must be specified.
• The complaint may be served to the practitioner in the following ways: certified mail; first-class mail if returned undelivered by certified mail; private delivery service; in person; or by leaving the complaint at the office of the practitioner. Electronic delivery, such as email, is not a valid means of serving a complaint.
• The complaint must specify a date by which the practitioner is required to respond, which must be at least 30 days after it is served. Within ten days of serving the complaint, copies of the evidence against the practitioner must also be served.

Question 115

Practitioner Response

Answer 115

• When a practitioner responds to a complaint, they are expected to specifically admit or deny each allegation, or state that they do not have enough information to know whether it is true or false. The practitioner cannot deny a material allegation in the complaint when he or she knows it to be true. If the practitioner fails to respond to a complaint, it constitutes an admission of guilt, and sanctions may be imposed without a hearing.
• After a practitioner responds to a complaint, a hearing will be scheduled for an administrative law judge to hear the evidence and decide whether the OPR has proven its case.
• Note: To prevail in a disciplinary action involving suspension or disbarment, the OPR must prove by “clear and convincing evidence” that the practitioner willfully violated one or more provisions of Circular 230. “Willful” is defined as a voluntary, intentional violation of a known legal duty.
• Example: The Office of Professional Responsibility (OPR) receives a referral from the State Bar of California about a tax attorney named Randy Jenkins. The referral alleges that Randy has been involved in a securities fraud scheme, where he knowingly prepared and filed fraudulent corporate tax returns. OPR initiates an investigation and sends a complaint to Randy outlining the allegations against him. The complaint requires Randy to either admit or deny each claim. However, Randy fails to respond to the complaint within the stipulated time. In accordance with OPR’s rules, Randy’s failure to respond is treated as an admission of the allegations made against him in the complaint. OPR proceeds with disciplinary action without a formal hearing. Randy is subsequently disbarred from practicing before the IRS, and his case is also referred to the Department of Justice for possible criminal prosecution.

Question 116

Disciplinary Hearing

Answer 116

• During a hearing, the practitioner may appear in person or be represented by an attorney or another practitioner. The OPR may be represented by an attorney or by another IRS employee assigned to the case. Within 180 days of the conclusion of a hearing, the administrative law judge must enter a decision.
• If there is no appeal, the decision by the administrative law judge becomes final. However, either party—the OPR or the practitioner—may appeal the judge’s decision with the Treasury Appellate Authority within 30 days. The Treasury Appellate Authority will receive briefs and render what is known as the “Final Agency Decision.”
• For the OPR, this decision is final, but the practitioner may contest the Final Agency Decision in a U.S. district court. The judge will review the findings from the administrative law hearing but will only set aside the decision if it is considered arbitrary or capricious, contrary to law, or an abuse of discretion.
• A practitioner who has been disbarred may petition the OPR for reinstatement after five years. The OPR may reinstate the practitioner if it determines that his or her conduct is not likely to be in violation of regulations and if granting the reinstatement is not contrary to the public interest.

Question 117

Prohibited Actions

Answer 117

• A disbarred or suspended practitioner may not:
  
  • Prepare or file documents or other correspondence with the IRS. However, as a result of the Loving case, disbarred and suspended practitioners are eligible to prepare and file tax returns for compensation.
  • Render written advice with respect to any entity, transaction, plan, or arrangement having the potential for tax avoidance or evasion.
  • Represent a client at conferences, hearings, and meetings.
  • Execute waivers, consents, or closing agreements; receive a taxpayer’s refund check; or sign a tax return on behalf of a taxpayer.
  • File powers of attorney with the IRS.
  • Accept assistance from another person (or request assistance) or assist another person (or offer assistance) if the assistance relates to a matter constituting practice before the IRS or enlist another person for purposes of practicing before the IRS.
  • State or imply that he or she is eligible to practice before the IRS.
• However, a disbarred or suspended individual is still allowed to:
  
  • Represent themselves in any matter.
  • Prepare tax returns for clients for compensation (due to the outcome of the Loving case).
  • Appear before the IRS as a trustee, receiver, guardian, administrator, executor, or other fiduciary if duly qualified/authorized under the law of the relevant jurisdiction.
  • Appear as a witness for a taxpayer.
  • Furnish information at the request of the IRS or any of its officers or employees.
  • Receive IRS information pursuant to a valid tax information authorization. However, simply receiving this information does not entitle a disbarred or suspended preparer from practicing before the IRS on behalf of that taxpayer.
• Example: Bartlett is an attorney who was disbarred for criminal wire fraud. Bartlett can no longer give tax advice or represent clients before the IRS. However, he is the legal guardian of his disabled adult daughter, Camilla. Bartlett is the fiduciary of Camilla’s qualified disability trust. Despite the fact that he is disbarred, he may still represent his daughter (as her legal guardian) and the trust (as the trust’s fiduciary) before the IRS.
• Example: Adrianne is an enrolled agent who prepares tax returns and owns her own firm. During the year she hires another enrolled agent named Emery as an employee. Emery comes under investigation by the Office of Professional Responsibility during the year. Emery is later disbarred for financial fraud and loses his EA license. Adrianne must dismiss Emery as her employee. She cannot accept assistance from, or employ, a disbarred practitioner.