Regulations governing practice before the IRS

Question 1

Circular 230

Answer 1

Circular 230 contains the IRS’s rules of practice governing CPAs and others who practice before the agency. The government may censure, fine, suspend, or disbar tax advisors from practice before the IRS if they violate Circular 230’s standards of conduct. “Practicing” entails primarily preparing and filing documents, and communicating and meeting with IRS representatives on behalf of a taxpayer.

Question 2

Circular 230 Subpart A

Answer 2

Subpart A of Circular 230 sets forth rules governing authority to practice before the IRS. Most importantly, Section 10.3 provides that “[a]ny certified public accountant who is not currently under suspension or disbarment from practice before the Internal Revenue Service may practice before the Internal Revenue Service by filing with the Internal Revenue Service a written declaration that he or she is currently qualified as a certified public accountant and is authorized to represent the party or parties.”

Question 3

Who may practice before the IRS?

Answer 3

As long as they are not under suspension or disbarment:
Attorneys
CPAs
Enrolled agents
Enrolled actuaries (enrolled by the Joint Board for the Enrollment of Actuaries), but their practice is generally limited to issues related to qualified retirement plans
Enrolled retirement plan agents, but their practice is limited to issues related to employee plans and to IRS forms in the 5300 and 5500 series

Question 4

Practice before the IRS

Answer 4

1. Practice before the IRS includes all matters connected with a presentation to the IRS or any of its officers or employees related to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the IRS.
2. These presentations include, but are not limited to:
   Preparing documents
   Filing documents
   Corresponding and communicating with the IRS
   Rendering written advice with regard to transactions having a potential for tax avoidance or evasion
   Representing a client at conferences, hearings, and meetings
3. A power of attorney (Form 2848) is required for an individual to represent a taxpayer before the IRS.

Question 5

Circular 230 Subpart B

Answer 5

Subpart B of Circular 230 contains the substantive rules that govern tax practitioners, including CPAs.

Question 6

Circular 230 Subpart C

Answer 6

Sanctions for violations

Question 7

Circular 230 Subpart d

Answer 7

contains procedural rules for disciplinary proceedings.

Question 8

Furnishing information

Answer 8

A practitioner must promptly submit to the IRS any records or information that its agents and officers request properly and lawfully, “unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.” In other words, Section 10.20 requires prompt cooperation with all IRS requests for information.

Question 9

Client’s omission

Answer 9

What if you learn that your client has not complied with the laws or made an error or omission on a tax return? Consistent with AICPA ethics guidelines, Section 10.21 requires the practitioner to promptly notify the client of the error and its potential consequences, but the practitioner need not notify the IRS of the error and may not do so without the client’s permission.

Question 10

Due diligence and Reliance on others

Answer 10

Due Diligence and Reliance on Others—Practitioners must exercise due diligence in all aspects of their tax practice, including preparing tax returns and making representations to the IRS. Section 10.22 allows a practitioner to rely on the work product of others, if the practitioner used reasonable care in engaging, supervising, training, and evaluating them, although Sections 10.34 and 10.37 contain a couple of slight limitations on this reliance.

Question 11

Delays

Answer 11

Practitioners may not unreasonably delay the prompt disposition of any matters before the Service. Stalling tactics are strongly discouraged by Section 10.23.

Question 12

Assistance from the disbarred

Answer 12

Section 10.24 provides that a practitioner should not knowingly accept even indirect assistance from any person disbarred or suspended from practice by the IRS.

Question 13

Practice by former IRS agents

Answer 13

Therefore, Section 10.25 contains extensive rules meant to prevent conflicts of interest, such as IRS employees going into private practice and working on cases they had knowledge of when they worked for the government

Question 14

Notaries

Answer 14

Therefore, Section 10.25 contains extensive rules meant to prevent conflicts of interest, such as IRS employees going into private practice and working on cases they had knowledge of when they worked for the government

Question 15

unconscionable fees

Answer 15

No practitioner may charge an unconscionable fee for representing a client before the IRS.

Question 16

contingent fees

Answer 16

The rest of Section 10.27 relates to contingent fees, providing that a practitioner may not charge a contingent fee for providing services before the IRS, with three exceptions. A contingent fee may be charged:

1. For services rendered in connection with an IRS examination or challenge to either (i) an original tax return or (ii) an amended return or claim for refund when they were filed within 120 days of receiving a written notice of examination or written challenge to the original exam
2. Where a claim for refund is filed solely in connection with determination of statutory interest or penalties
3. When the accountant is representing the client in judicial proceedings

Question 17

Return of client records

Answer 17

Section 10.28 instructs the practitioner to promptly return any and all records needed for the client to comply with federal tax obligations. The practitioner may keep a copy. The rule specifies that the existence of a fee dispute does not change this obligation but recognizes that if applicable state law permits retention in the case of a fee dispute, the practitioner need return only those records that must be attached to the taxpayer’s return. However, the rule further provides that the practitioner “must provide the client with reasonable access to review and copy any additional records of the client retained by the practitioner under state law that are necessary for the client to comply with his or her Federal tax obligations.” The rule broadly defines “records of the client,” but states that“ [t]he term does not include any return, claim for refund, schedule, affidavit, appraisal or other document prepared by the practitioner . . . if the practitioner is withholding such documents pending the client’s performance of its contractual obligation to pay fees with respect to such document.”

Question 18

Conflicts of interest

Answer 18

Conflicts of Interest—Section 10.29 provides that practitioners should not represent a client before the IRS if to do so would create a conflict of interest.
Such a conflict exists if the representation of one client would be adverse to that of another, or if there is a significant risk that the representation of one client would be materially limited by the practitioner’s responsibilities to another client.
Notwithstanding the existence of a conflict of interest, however, practitioners may represent a client if they:
Reasonably believe that they can provide competent and diligent representation to the client;
The representation is not prohibited by law; and
The affected client gives informed consent in writing. Practitioners should keep the consents on file for at least three years, although they need not do so in their advertisements. Unsolicited e-mails and letters are permissible. Although it is not expressly forbidden, practitioners should not guarantee refunds.

Question 19

Best practices for tax advisers

Answer 19

Section 10.33 sets forth best practices for tax advisers, including:
Communicating clearly with the client regarding the terms of the engagement, including the purpose, use, scope, and form of the advice
Establishing the facts, determining which facts are relevant, evaluating the reasonableness of assumptions or representations, relating the applicable law to the relevant facts, and arriving at a conclusion supported by the law and the facts
Advising the client regarding the import of the conclusions reached, including whether taxpayers may avoid accuracy-related penalties if they rely on the advice;
Acting fairly and with integrity when practicing before the IRS
Exercising any firm supervisory powers to ensure that firm employees act in accordance with best practices

Question 20

Tax return standards

Answer 20

Section 10.34 instructs practitioners not to willfully, recklessly, or through gross incompetence sign a tax return or claim for refund that the practitioner knows or reasonably should know contains a position that: (1) lacks a reasonable basis; (2) is an unreasonable position as defined by the Internal Revenue Code (Section 6694(a)(2)); or (3) is a willful attempt to understate the tax liability or a reckless or intentional disregard of IRC rules. Nor should a practitioner advise a client to take such unreasonable positions.
Additionally, practitioners should not advise clients to take “frivolous” positions on documents filed with the IRS.
Practitioners must inform clients of penalties reasonably likely to be imposed with respect to positions taken.
Practitioners may generally rely in good faith on information provided by their clients but may not ignore inconsistent information in their personal knowledge or other red flags that might appear.

Question 21

compliance procedures

Answer 21

Compliance procedures—Section 10.36 provides that practitioners who have or share principal authority and responsibility for overseeing a firm’s tax practice may be sanctioned if they either (a) willfully, recklessly, or through gross incompetence fail to take reasonable steps to assure that the firm has adequate procedures in place to ensure that all members and employees are complying with Circular 230 or (b) know or should know that a member or employee is not complying with Circular 230, but through willfulness, recklessness, or gross incompetence fail to take prompt corrective action. The obvious purpose of this provision is to prevent those officials at the top of an accounting firm from placing all the blame for inappropriate tax shelter or other activity on lower-ranking members of the firm. The provision is an exception to Section 10.22’s provision that allows a practitioner to rely on the work product of others if the practitioner used reasonable care in engaging, supervising, training, and evaluating them.

Question 22

Penalties and procedures

Answer 22

Subpart C of Circular 230 sets forth the rules and penalties for disciplinary proceedings.
As a general notion, Circular 230 authorizes the IRS to punish any tax professional who is incompetent, disreputable, violates the Treasury Department’s rules of practice or with intent to defraud willfully and knowingly misleads or threatens the person being represented.
Section 10.50 empowers the IRS to impose a monetary penalty on practitioners who have violated practice rules. The maximum penalty equals 100% of the gross income derived from the conduct and may be added to other penalties, such as suspensions and censures. It may also be added to the 50% penalty of gross income authorized by 26 U.S.C. Section 6694, meaning that the penalty could theoretically be up to 150% of the income derived from an engagement.
Section 10.51 lists numerous acts of incompetence or disreputable conduct that are sanctionable under Section 10.50, including:
Conviction of any crime under federal tax laws
Conviction of any crime involving dishonesty or breach of trust
Conviction of any state or federal felony that would render one unfit to practice before the IRS
Giving false or misleading information to tax officials
Soliciting employment in violation of Section 10.30
Willfully evading taxes
Being disbarred or suspended from practice as a CPA or an attorney;
Contemptuous conduct before the IRS