R4: Circular 230 & Professional Responsibilities

Circular 230

IRS publication titled “Regulations Governing Practice before the IRS”; addresses:

1. rules governing the authority to practice before the IRS

2. duties & restrictions relating to practice before the IRS

3. sanctions for violations of the regulations

4. rules applicable to disciplinary proceedings

_______, ________, and ________ have unlimited representation rights.

attorneys, CPAs, & enrolled agents

information to be furnished to the IRS

• Practitioner may withhold information or records from the IRS they believe in good faith and on reasonable grounds to be privileged.

• If practitioner doesn’t possess the IRS-requested info but knows who does, they must inform the IRS.

knowledge of client ommission

any preparer who knows of a client’s noncompliance with tax law must advise the client of the error(s) & the potential consequences

diligence as to accuracy

paid preparer must exercise due diligence in preparing, approving, & filing tax returns.

*presumed to have exercised due diligence when they rely on the product of another person

prompt disposition of pending matters

no practitioner may unreasonably delay any matter before the IRS

assistance from or to disbarred/suspended persons & former IRS employees

no practitioner can knowingly accept help from or assist any person who is under disbarment or suspended from practice

practice by former government employees, their partners, & their associates

• no member of a firm where a former government employee works can represent a taxpayer where a conflict of interest may exist

notary

practitioner may not act as a notary

fees

practitioner may not charge unconscionable fees in connection with any matter before the IRS

• contingent fees only allowed when:

  • IRS examination of/challenge to an original tax return

  • claim solely for a refund of interest and/or penalties

  • judicial proceeding arising under the IRS

return of client’s records

practitioner must (at the request of the client) promptly return any & all client records; preparer may retain copies

conflicts of interest

practitioner may not represent a client if it involves a conflict of interest unless all 3 are present:

• practitioner believes they can competently represent each client

• no state/federal law prohibits such representation

• each affected client waives the conflict of interest in writing

solicitation & advertising

• practitioners may not advertise falsely

• must honor written schedule of fees for the 30-day period following the day the fees were published

• retain records/documentation of digital & paper ads for 36 months

negotiation of taxpayer check

practitioner may not endorse or negotiate any refund check issued to a client

practice of law

Circular 230 may not be construed as authorizing persons not members of the bar to practice law

best practices for tax advisors

• communicating w/ client regarding the terms of the engagement

• establishing facts & arriving at your conclusions based on facts (due diligence!)

• advising the client about the importance of the conclusions reached

• acting fairly & with integrity in practice

• taking reasonable steps to ensure that all members of the firm follow procedures consistent with the above points

standards with respect to tax returns & documents

• preparer cannot willfully or recklessly sign a return or advise a client to take a tax position that the preparer knows is unreasonable

• cannot encourage a client to submit frivolous documentation, act in a way to delay the IRS, or omit information willingly

• prepared must advise clients of “reasonably likely” penalties

practitioner’s reliance on information furnished by client

• generally a prepared may rely “in good faith without verification” upon information given by the client

• if information is contradictory that cannot be ignored, preparer must make reasonable inquiries

written advice

• must be reasonable factual & legal assumptions

• must not rely on the probability of not getting caught

• consider all relevant facts & circumstances

federal tax matters

any matter concerning the application or interpretation of:

• a revenue provision of the IRS

• any provision of law impacting a person’s obligations under the internal revenue laws & regulations

• any other law or regulation administered by the IRS

reliance on the advice of others

preparer may only rely on the advice of another person if the advice was reasonable & the reliance is in good faith considering all facts & circumstances

potential failures to comply w/ Circular 230

• individual fails to have adequate procedures, there is a pattern of noncompliance, & this occurs through willfulness, recklessness, or gross incompetence

• individual fails to ensure the procedures for compliance are followed

• individual knows or should know of a pattern of noncompliance & fails to take prompt action to correct the noncompliance

sanctions for violations of the regulations

the Secretary of the Treasury may publicly reprimand, suspend, or disbar any practitioner from practice if they:

• are shown to be incompetent or disreputable

• fail to comply with Circular 230

• willfully & knowingly mislead or threaten a client with intent to defraud

petition for reinstatement if disbarred from practice

minimum 5 years wait

tax return preparer

any person who prepares for compensation, or who employs 1 or more persons to prepare for compensation, any tax return required under the IRC

*you must have a PTIN to be a preparer

signing tax return preparer

preparer who has the primary responsibility for the accuracy of the return

non-signing tax return preparer

any preparer who is not signing a tax return but who prepares all or a substantial portion of the return (ME!)

authority for purposes of determining tax treatment of items

1. Internal Revenue Code

2. US Treasury Department

3. court cases

4. congressional intent as reflected in committee reports

disregard

any careless reckless, or intentional disregard of rules or regulations

listed transaction (AKA tax shelter)

a reportable transaction which is the same as/similar to a transaction specifically identified by the Secretary of the US Treasury Department as a tax avoidance transaction

reportable transaction

any transaction with respect to which information is required to be included with a return due to its potential for tax evasion or avoidance

negligence

• any failure by the preparer to make a reasonable attempt to comply with the provisions of the internal revenue laws

• failure by the taxpayer to keep adequate books and records

reasonable basis standard

• >20% chance of having stance upheld

• relatively high standard of tax reporting

• disclosed position

substantial authority standard

• >40% chance of having stance upheld

• objective standard involving an analysis of the law & application of the law to relevant facts

• regardless of disclosure

more-likely-than-not standard

• >50% chance of having stance upheld

unreasonable position

A position is deemed unreasonable unless:

• reasonable basis for a disclosed position exists (>20%)

• substantial authority for the position, regardless of disclosure, exists (<40%)

• it is reasonable to believe that a tax shelter or reportable transaction position would meet the more-likely-than-not standard (>50%)

tax return preparer penalties for unethical behavior

1. failure to provide copy of return to taxpayer

2. failure to sign return

3. failure to furnish PTIN

4. failure to properly retain records (3 yrs)

5. failure to file correct information returns

6. negotiation of IRS refund check

7. failure to be diligent in determining a client’s eligibility for certain tax benefits

other tax return preparer penalties

• aiding & abetting understatement of tax liability (IRS has burden of proof)

• wrongful disclosure and/or use of tax return information except:

  • disclosures pursuant to an enforceable subpoena

  • allowable uses (preparation of state & local tax returns & preparation of declaration of estimated tax)

  • consent of client

  • disclosures & uses permitted by the US Treasury regulations for peer reviews

Most commonly tested issues regarding tax liability rules:

• endorsing & cashing refund checks (never allowed)

• preparing returns that understated tax liability

• disclosure of tax return information

state boards of accountancy

• sole power to license, revoke, or suspend licenses

• requirements for licensure vary by state but they all require completion of the CPA exam

categories of misconduct for the state board

1. misconduct while performing accounting services (negligence, fraud, etc)

2. misconduct outside accounting services (intoxication, drug use)

3. criminal conviction

-board must find it more likely than not that the accountant’s actions constituted professional misconduct

*due process required

5 penalties a state board can impose

1. Suspension or revocation of license

2. Monetary fine

3. Reprimand or censure

4. Probation

5. Requirement for more CPE

AICPA

• membership is voluntary

• cannot suspend or revoke a CPA license but your membership can be suspended or terminated

IRS disciplinary actions

• criminal and/or civil penalties

• proof is beyond a reasonable doubt and burden of proof is on the government

SEC penalties

• SEC may suspend or revoke an accountant’s right to practice before the SEC

• may impose fines