CPA REG: Circular 230 - Rules for Tax Practitioners

Circular 230 for the CPA REG Exam

Treasury Department Circular 230 (31 CFR Part 10) governs the practice of attorneys, CPAs, enrolled agents, and other authorized individuals before the Internal Revenue Service. Understanding Circular 230 is critical for the REG exam, as it appears in both the tax and ethics portions of the exam. The rules establish duties, restrictions, and sanctions for tax practitioners.

Who Is Covered

Circular 230 applies to practitioners authorized to practice before the IRS, including attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and registered tax return preparers (with limited practice rights). Practice before the IRS encompasses all matters connected with presentations to the IRS, including preparing and filing documents, corresponding with the IRS, rendering written advice, and representing clients at conferences, hearings, and meetings.

Duties and Restrictions

Practitioners must exercise due diligence in preparing or assisting in the preparation of returns, documents, and affidavits. They must not unreasonably delay the prompt disposition of any matter before the IRS. A practitioner must not charge an unconscionable fee. Contingent fees are prohibited for preparing an original tax return, but are permitted for amended returns claiming refunds, IRS examination or challenge of an original return, interest and penalty claims, and judicial proceedings.

A practitioner must not sign a return or advise a client to take a position on a return unless there is a reasonable basis for the position. If the position is not disclosed, it must meet the substantial authority standard. If the position is disclosed on the return, it must meet the reasonable basis standard (a lower threshold). For tax shelters and reportable transactions, the position must meet the more-likely-than-not standard (greater than 50% likelihood of success). A practitioner must advise clients of penalties that may apply and the opportunity to avoid penalties through disclosure.

Return of Client Records

A practitioner must return all client records upon request, regardless of any fee dispute. Client records include documents provided by the client that are necessary for the client to comply with federal tax obligations. However, a practitioner may retain copies of client records and may retain work product until fees are paid, provided that state law permits such retention and the retention does not prevent the client from meeting compliance obligations.

Conflicts of Interest

A practitioner must not represent a client before the IRS if the representation involves a conflict of interest. A conflict exists when the representation of one client will be directly adverse to another client, or when there is a significant risk that the representation will be materially limited by the practitioner's responsibilities to another client, a former client, a third person, or the practitioner's own interests. A practitioner may represent clients despite a conflict if the practitioner reasonably believes they can provide competent and diligent representation, the representation is not prohibited by law, each affected client gives informed consent confirmed in writing within 30 days.

Standards for Written Advice

When providing written advice, a practitioner must not base the advice on unreasonable factual or legal assumptions, must not unreasonably rely on representations or statements of the taxpayer or others, must consider all relevant facts known to the practitioner, and must not take into account the possibility that a return will not be audited or that an issue will not be raised on audit. The practitioner must use reasonable efforts to identify and ascertain relevant facts and must relate applicable law to those facts.

Written advice that is prominently marked as preliminary or limited in scope, or that relates to a position not likely to be challenged, may be subject to less rigorous standards, but the practitioner must still act in good faith and exercise reasonable diligence.

Sanctions and Disciplinary Proceedings

The Office of Professional Responsibility (OPR) has exclusive authority for disciplinary matters under Circular 230. Sanctions for violations include censure (a public reprimand), suspension from practice before the IRS, disbarment from practice before the IRS, and monetary penalties. Incompetence and disreputable conduct that may result in sanctions include conviction of certain crimes, giving false or misleading information to the IRS, willfully failing to file tax returns, misappropriating client funds, and providing false opinions.

Disciplinary proceedings are initiated by filing a complaint with an administrative law judge. The practitioner has the right to a hearing and may appeal to the Secretary of the Treasury or their delegate. During the pendency of a disciplinary proceeding, the practitioner's authority to practice is not suspended unless there is a finding of immediate threat to the public interest.

Best Practices

Circular 230 Section 10.33 describes best practices for tax advisors (though this section is aspirational rather than enforceable). Best practices include communicating clearly with clients regarding engagement terms, establishing the relevant facts and evaluating the reasonableness of assumptions, arriving at conclusions supported by law and facts, advising clients of the import of conclusions, and acting fairly and with integrity in practice before the IRS.

Exam Tips

• Undisclosed positions require substantial authority; disclosed positions require reasonable basis
• Tax shelter positions require more-likely-than-not standard
• Client records must be returned regardless of fee disputes
• Contingent fees are prohibited for original returns but allowed for refund claims and exam challenges
• Conflicts of interest require written informed consent from all parties within 30 days
• Sanctions range from censure to disbarment, imposed by the Office of Professional Responsibility