REG 4 - Professional Responsibilities and Federal Tax Procedures

What is Circular 230?

The rules governing practice before the IRS—who can practice, practitioner duties/restrictions, and discipline.
📋 Think: Circular 230 = "How tax professionals must behave with the IRS."

Who has unlimited representation rights before the IRS?

• Attorneys

• CPAs

• Enrolled Agents (EAs)

🔑 ACA = Attorney, CPA, Agent

What must a practitioner do if they discover a client's tax error or omission?

Tell the client about the error AND its potential consequences.

⚠ The practitioner doesn't just quietly ignore it.

Can a tax practitioner rely on information provided by a client?

Yes, in good faith—no automatic duty to verify everything.

BUT → if information seems incorrect, inconsistent, or incomplete, make reasonable inquiries.

💡 Why? You're not an investigator, but obvious red flags can't be ignored.

When can a practitioner represent clients despite a conflict of interest?

Only if:

1. Practitioner reasonably believes they can competently represent everyone, AND

2. Each affected client gives informed consent, confirmed in writing within 30 days.

📝 Conflict → capable + consent.

Can a practitioner charge contingent fees for IRS matters?

Generally NO, except certain:

• Examination/challenge matters

• Refund claims involving interest/penalties

• Judicial proceedings under the IRC

💡 Why? Tax advice shouldn't be distorted by "I get paid more if your tax result is bigger."

Can a practitioner keep a client's records because the client hasn't paid?

Generally, records necessary for the client to meet federal tax obligations must be promptly returned.

If state law allows records to be retained during a fee dispute → client must still have access to review/copy them.

📂 Tax compliance > fee fight.

What tax position can a preparer generally recommend/sign?

• Undisclosed position → Substantial authority (>40%)

• Disclosed position → Reasonable basis (~20%)

• Tax shelter/reportable transaction → More likely than not (>50%)

Example:
A preparer thinks a client's deduction has only a 30% chance of being upheld.

• If they don't disclose it → ❌ Not enough; needs >40%

• If they disclose it → ✅ 30% exceeds reasonable basis (~20%)

• If it's a tax shelter → ❌ Not enough; needs >50%

🎯 Why? The IRS requires stronger support when you're not telling them about the questionable position. Disclosure lowers the required threshold because the IRS can see and evaluate the position.

What are the preparer penalties for understating tax liability?

• Unreasonable position: greater of $1,000 OR 50% of preparer's income

• Willful/reckless conduct: greater of $5,000 OR 75% of preparer's income

🚨 Worse behavior = much worse penalty.

What basic administrative duties does a tax return preparer have?

Think copy, sign, ID, keep:

• Give taxpayer completed copy

• Sign return

• Include preparer's tax ID/PTIN

• Keep required records for 3 years

Who can suspend or revoke a CPA's actual CPA license?

The state board of accountancy.

The AICPA/state CPA societies cannot suspend or revoke the CPA license.

🏛 Why? The state issues the license → the state controls the license.

What is the basic IRS audit → appeal timeline?

1⃣ IRS audits your return
→ IRS proposes an adjustment, e.g., “You owe $10,000 more tax.”

2⃣ 30-day letter
→ You have 30 days to request an administrative appeal with an IRS appeals officer.
→ This is your chance to settle the disagreement within the IRS.

3⃣ If you don't appeal OR you appeal but still can't agree → 90-day letter
→ This is the official Notice of Deficiency: “We officially say you owe this additional tax.”

4⃣ You have 90 days → petition U.S. Tax Court
→ You can challenge the deficiency without paying it first.

Example:
IRS audits Diana → says she owes another $10K → Diana receives 30-day letter → requests IRS appeal → still disagrees → receives 90-day letter → files with Tax Court without paying the $10K first.

⏰ Remember:
30 = fight it WITHIN the IRS
90 = take the IRS to COURT

💡 Why two stages? The government gives the taxpayer an opportunity to resolve the dispute administratively before taking it to court.

What are the 3 trial-court options after 90-day letter (Notice of Deficiency)?

Court	Pay tax first?	Jury?	Tax-specialist judge?
Tax Court	❌ No	❌ No	✅ Yes
District Court	✅ Yes	✅ Available	❌ Not necessarily
Federal Claims	✅ Yes	❌ No	❌ Not specified as tax expert

Which tax court lets you challenge the IRS WITHOUT paying the tax first?

U.S. Tax Court

• ❌ Don't pay first

• ❌ No jury

• ✅ Judge is a tax expert

• Must petition after receiving the 90-day notice of deficiency

When would a taxpayer choose U.S. District Court?

When the taxpayer pays the disputed tax first, then sues the IRS for a refund.

• ✅ Pay first

• ✅ Jury trial available

• ❌ Judge is not necessarily a tax expert

When would a taxpayer use the U.S. Court of Federal Claims?

Like District Court, the taxpayer must pay the disputed tax first and then sue for a refund.

• ✅ Pay first

• ❌ No jury

• US Nationwide court for monetary claims against the federal government

When is an FBAR (Foreign Bank and Financial Accounts) required?

A U.S. person generally files an FBAR when they have a financial interest/signature authority over foreign financial accounts whose aggregate value exceeds $10,000.

🌎 Foreign accounts + >$10K aggregate = FBAR.

What must a plaintiff prove for CPA negligence?

• Duty

• Breach

• Injury

• Causation

• Damages

💥 Basically: CPA owed me care → screwed up → caused me actual harm.

Actual fraud vs. constructive fraud—what's the key difference?

Actual fraud: CPA knows the statement is false → intentional deception.

Constructive fraud: CPA acts recklessly/grossly negligently without knowing whether it's true or false.

🔥 Actual = KNOWS. Constructive = RECKLESS.

For fraud, liability can extend to anyone who proves the elements, not merely the client.

Who owns a CPA's workpapers, and when can they be disclosed?

The CPA/accounting firm owns the workpapers, not the client.

Generally confidential, but disclosure can be permitted in situations such as:

• Court subpoena

• Defense against client's lawsuit

• Certain professional/quality reviews or investigations

• Prospective purchaser of CPA practice under confidentiality

📁 Client's records ≠ CPA's workpapers.
That's a very testable distinction.

What records are required to substantiate gambling losses?

A contemporaneous diary (recorded at or near the time it happened) of wins/losses + supporting documents like hotel, travel, or credit records.

💡 Why? The IRS wants reliable records, not estimates recreated from memory later.

🎰 Remember: Diary + proof = deductible.

What is an IRS revenue agent?

A revenue agent is an IRS employee who audits taxpayers.

• 🕵 Revenue agent = works FOR the IRS → audits returns

• 📝 Tax return preparer = works for the TAXPAYER → prepares returns

• ⚖ Enrolled agent = represents taxpayers BEFORE the IRS

Why can’t a revenue agent get a PTIN?
A PTIN is for people who prepare federal tax returns for compensation. A revenue agent works for the government, examining those returns—not preparing them for clients.

🔑 Think: Revenue agent = IRS auditor, not taxpayer representative.

What is scienter?

Intent to deceive OR reckless disregard for the truth.

• Required to prove fraud

• If CPA lacked scienter → strong defense against fraud

💡 Think: Did the CPA know/recklessly ignore that it was false?

🔑 Fraud → Scienter

What is privity?

A direct contractual relationship between two parties.

Example:
Client hires CPA → CPA and client have privity.

💡 Why it matters: Privity can limit who can sue a CPA for negligence, but privity is NOT required for fraud.

🔑 Privity = direct contract

What is contributory negligence?

When the person suing was also careless and contributed to their own loss.

Example:
Client ignores obvious errors → later sues CPA for negligence → CPA argues client contributed to the problem.

• ✅ Can be a defense to negligence

• ❌ NOT a defense to fraud

💡 Why? Someone else's carelessness doesn't excuse your intentional/reckless fraud.

🔑 “You were careless too.”

When can a CPA disclose confidential client information WITHOUT the client’s consent?

Generally allowed/required for:

• ⚖ Court-ordered subpoena/summons

• 🔍 Official AICPA/state board investigation

• ✅ Authorized professional/quality review

❌ A regular IRS request/letter is NOT enough — the IRS needs proper legal authority, such as a summons.

💡 Why? Client information is confidential, so an ordinary request doesn't override confidentiality.

🔑 Official/legal demand = disclose. Regular request = don't.

What’s the difference between a Private Letter Ruling (PLR) and a Technical Advice Memorandum (TAM)?

Look at WHO asks + WHEN.

• PLR = Private Letter Ruling → taxpayer asks BEFORE a proposed transaction
  → “If I do this, how will the IRS tax me?”

• TAM = Technical Advice Memorandum → IRS agent asks DURING an audit about a completed transaction
  → “How should we treat what this taxpayer already did?”

✨ Memory trick:
PLR = PLanned transaction
TAM = Transaction Already Made

What tax sources have authority?

1. Internal Revenue Code = tax law

2. Treasury Regulations = official interpretation

3. Revenue Rulings/Procedures = IRS guidance

4. TAM / PLR = specific taxpayer/case; limited authority

5. IRS Publications = ❌ NO authority; informational only

⚠ Big exam trap: IRS Publication = helpful explanation, not support for a tax position.

What is proximate cause in a negligence claim?

Proximate cause = did their mistake actually cause the loss?

The defendant's negligence must have actually caused the plaintiff's loss.

🎯 No connection between mistake → loss = no negligence liability for that loss.