General Information

Circular 230 presents the rules and regulations that govern the standards of professional practice before the Internal Revenue Service (IRS). Practice in respect to Circular 230 widely covers all issues connected or associated with presentations to the IRS, its employees or officers and relates to taxpayers’ privileges, rights or liabilities under regulations and laws stipulated by the IRS. Additionally, Circular 230 imposes defined ministerial requirements on any practitioner’s qualification to be able to practice before the IRS. These include a requirement that a practitioner who represents another person before the IRS must acquire a Preparer Tax Identification Number (PTIN) and submit a written declaration authorizing him/her to act on behalf of the other party (Nevius).

While the scrutiny of Circular 230 is focused on its standards relating to opinions and tax returns, scope and breath of Circular 230 also impacts daily business activities and operations of practitioners that relate to client solicitations, fees, advertising and marketing, and management of client’s records and files. Moreover, a violation of Circular 230 provisions may expose a practitioner to sanctions and penalties, including disbarment, suspension or censure to practice before the IRS (“IRS Finalizes Circular 230 Regulations”). In light of this, it is critical that practitioners implement procedures and policies aimed at ensuring compliance with the provisions of Circular 230.

Circular 230 presents standards that apply to practitioners who communicate and correspond with the Internal Revenue Service concerning a taxpayer’s privileges, liabilities or rights. These are as per the regulations and laws stipulated by the service, and may include preparing tax returns, rendering written consultation or advice with regard to the treatment of a transaction, arrangement or plans. As such, Circular 230 obligates practitioners to ensure that due diligence is observed while preparing tax returns or documents that relate to a federal tax issue and the determination of the authenticity or accuracy of written or oral submissions a practitioner makes to the IRS (Goller 41).

Therefore, Circular 230 is applicable to professionals, individuals and institutions who practice before the Internal Revenue Service (Whitlock). This entails comprehension of all issues related to practitioners’ submissions to the IRS with respect to a taxpayer’s privileges, liabilities or rights under the law. These include the preparation and filing of tax returns and documents, communication and correspondence with the IRS, provision of written advice or directions relating to an entity arrangement or plan for tax evasion or avoidance, and acting on behalf of a client at IRS hearings and conferences.

Prohibitions of Circular 230

Circular 230 prohibits preparers of tax returns from signing a claim for refund or a tax return if they know that its contents lack reasonable basis (Nevius). Additionally, Circular 230 prohibits a tax practitioner from authorizing or signing a tax return constituting a willful endeavor at understating the tax liability or intentional and reckless disregard for the regulations and rules as stipulated by the IRS. In the event that a practitioner advises a client regarding a signed return or position that there is reason to believe it will give rise to a penalty, the practitioner is required under Circular 230 to inform the client about the potential penalties and the availability of an opportunity to prevent such penalties through disclosure (“IRS Finalizes Circular 230 Regulations”).

In addition to standards applicable to practices associated with the execution of a tax practitioners work, Circular 230 also coordinates practitioner’s daily business operations through the regulation of advertising and marketing practices, arrangement of applicable fees and return policies of client’s records. Circular 230 dictates the methods of handling IRS requisition for the client’s documents (“IRS Finalizes Circular 230 Regulations”). While the violation of restrictions and duties in relation to these issues can expose the tax payer to similar sanctions as those that follow violation of tax practice standards, the former are given relatively little attention.

Under the provisions of Circular 230, a practitioner is liable to sanctions if he/she is disreputable or incompetent, acting with a defined competency standard or mental state, which may be reckless, willful or grossly incompetent, and fails to conform to critical provisions of Circular 230 (Goller 42). Additionally, a practitioner may be liable in the event that he/she intentionally misguides a client with the purpose of defrauding the said client. Disreputable or incompetent conduct entails the provision of misleading or false information and opinions; attempts to evade or avoid taxes, criminal convictions; intimidating or bribing IRS officers; misappropriation of clients finances; misleading potential and current clients concerning qualifications or access to distinguished treatment; advising and assisting a client in violating tax laws; misapplication of information on tax returns; and abetting or aiding another person wrongly to practice before the IRS (Goller 42). Moreover, sanctionable conduct includes the suspension or loss of a professional authority or license, willful failure of signing a tax return and condescending conduct such as abusive treatment of IRS officers.

In the event that a practitioner practices without appropriate PTIN, fails to e-file, and represents a client without adequate authorization, he/she is subject to the imposition of sanctions. As such, businesses or firms which are represented by a practitioner who is subjected to sanctions are also potentially liable to sanctions (Goller 42). Furthermore, where practitioners have the responsibility and authority to provide advice or prepare file-able returns, they must implement measures and procedures aimed at ensuring that all employees in their firm comply with the provisions and requirements presented in Circular 230. Hence, a supervising practitioner who fails to implement such measures and procedures is subject to potential sanctions, as determined by the Office of Professional Responsibility (OPR) (Goller 42). While the OPR does not impose sanctions on offending practitioners, it proposes and recommends disciplinary actions against respective sanctionable practitioners, which the latter are free to dispute. A practitioner subjected to sanctions may consent to the stipulated sanction or may not consent; thus, the IRS introduces a proceeding before a judge.

Requirements for Tax Preparers

Preparers of tax returns are required to register through the acquisition of a Preparer Tax Identification Number (PTIN) and must pass tax suitability and compliance checks (“IRS Finalizes Circular 230 Regulations”). Those tax preparers who lack federal authorization as tax practitioners are required to pass an examination testing their competency and meet requirements of continuing education. Practitioners who have federal authorization include attorneys, CPAs and enrolled agents (“IRS Finalizes Circular 230 Regulations”). The requirements for a practitioner to become a registered preparer of tax returns or a progressive provider of education are stipulated in the final regulations of Circular 230.

Preparers of tax returns who are registered are also required to observe all applicable rules as pertaining to the solicitation and advertising. These also include amendments according to which persons who are registered tax return preparers and represent themselves in any compensated advertisement entailing television, print and radio have to incorporate in such broadcasts a statement indicating that the IRS does not endorse or recommend any defined tax return preparer.

Circular 230 Changes

Changes and revisions that have been proposed to be included in Circular 230 address various areas and are aimed at improving its suitability for practical issues. These entail defined competency requirements and virtual directives that firms, firm tax management and practitioners initiate and account for as well as quality control procedures and processes within practices of varied magnitude (Dellinger). This includes a defined prohibition of tax practitioner’s acceptance of a taxpayer’s refund by any given means such as electronic transaction payments.

Additionally, significant changes governing written tax advice given to clients and other persons who may rely on such advice have been proposed to be incorporated into the provisions of Circular 230. As such, repealing of the opinion provisions which are covered in sec. 10.35, and expansion and revision of other provisions entailing written advice as indicated in sec. 10.37 of Circular 230 will be required in order to address comprehensively the standards of written advice to relevant parties such as clients (Dellinger). This will facilitate elimination of a needed feature of electronic mail which notifies clients that they need not rely on electronic mail communication to protect themselves from the penalties imposed under Internal Revenue Code (Whitlock).

The proposed changes provide for expedited disbarment or suspension protocols in cases where practitioners have repeatedly failed to comply with their tax filing responsibilities.  In essence, on the basis of a show cause directive, the IRS has the authority to suspend tax practitioners in the event that they fail to timely file tax returns and consequently have failed to comply with filing rules and regulations for a minimum of four out of five years prior to initiating the process of expedited procedures. Significantly, the proposed changes stipulate that the Office of Professional Responsibility (OPR) should have the exclusive duty to discipline practitioners. Hence, it elucidates the exclusive mandate of the Office of Planning and Research in the engagement of actual disciplining of practitioners; therefore, it should eliminate the concerns of tax practitioners who perceive that the Return Preparer Office may potentially share control with OPR in matters of disciplinary authority.

Conclusion

In light of the far reaching applications of Circular 230, it is critical that tax practitioners appreciate and understand the essential requirements of such an ethical code. Under the Circular 230 provisions, conduct that a significant number of people may not regard as outrageous or extreme is prohibited. Circular 230 spells out regulations and rules aimed at ensuring compliance with the prescribed tax practices. Failure to conform to these regulations and rules may have adverse consequences for the responsible party. Any practitioner who requires clarification should seek it to avoid the infringement of their ethical obligations and subsequent impacts on themselves and their clients.