The IRS has updated a key regulation governing the ethical duties of tax practitioners. State licensed attorneys, CPAs, IRS-enrolled agents, enrolled retirement plan agents, enrolled actuaries, and others who practice before the IRS must comply with these requirements.
Circular 230 Updated
As a tax practitioner, you know how complex and dynamic the ethical environment is. Busy practices and numerous pressures can lead to inadvertent ethical violations, so you must always be aware of the standards that apply to you. And it’s not just about the penalties that may be imposed; in the tax profession you have a moral and ethical responsibility to advise clients to the best of your abilities.
The Regulations Governing Practice before the Internal Revenue Service (Treasury Department Circular 230) provides guidance for tax professionals who practice before the IRS regarding statutes and regulations they must comply with to ensure their “fitness to practice” before the IRS. Circular 230, which provides the standards that practitioners must adhere to when advising clients with respect to tax positions and when preparing and signing returns, was revised a few years ago and it now imposes new duties and responsibilities on practitioners who represent taxpayers before the IRS.
Standards for Practice Under Federal Law: Circular 230
As a tax practitioner in the position of representing or advising clients, it is your responsibility to put the well-being of your clients before your own interests. There are two ways to approach this responsibility under Circular 230, according to an article by tax professors at Clemson University.
One relates to signing a tax return as a preparer, and the other is advising a client to take a position. You basically can’t sign a tax return, advise a client to take a position on a return, or prepare a return that contains a position that doesn’t have a realistic possibility of being sustained on its merits. A tax return is considered to have met this standard, known as REPOS, under Circular 230 if the position has a one-in-three or greater likelihood of being sustained on its merits according to someone knowledgeable in tax law after a reasonable analysis of the law and facts. This means that you are responsible for ensuring your client has a reasonable position on his or her tax return and is in line with tax laws.
Apart from not signing or preparing returns that don’t meet the REPOS standards for clients, you are also required to advise clients of the penalties that may apply to a position in a tax return and inform them of any opportunity to avoid the penalty through adequate disclosure. You must also inform clients of the requirements of adequate disclosure to avoid the accuracy-related penalty under Internal Revenue Code Section 6662.
Best Practices for Tax Practitioners
Tax practitioners are not perfect, the IRC is complex, and current ambiguity and uncertainty in tax laws under the new administration make it even harder to avoid ethical violations. Luckily, there are some best practices you can keep in mind as you practice in this new and uncertain tax environment.
Here are some best practices that Circular 230 sets out for tax practitioners, according to the Clemson professors:
- Communicate clearly with clients and outline the terms and expectations of client engagement so that you get an understanding of the client’s expected purpose for and use of advice, and an understanding of the scope of the advice or assistance rendered
- Establish relevant facts, evaluate the reasonableness of any assumptions and representations under applicable law or judicial doctrines before filing, making submissions, giving oral or written opinions in connection to federal tax matters or before giving advice to clients
- Ensure ongoing awareness of well-established judicial doctrines and any changes affecting these, as well as current judicial decisions that establish new doctrines or impact existing requirements
- Advise clients clearly regarding the import of your conclusion and provide information for the client to avoid accuracy-related penalties
- Ensure you act fairly and with integrity in practicing before the IRS
In the event of unresolved conflict of interest, you must discontinue your representation of a taxpayer. As per the IRS, common scenarios where conflicts of interest may arise include when the practitioner represents both taxpayers during a tax examination of a jointly filed return by clients who were formerly married and now separated or divorced, or when representation is hampered by the practitioner’s self-interest.
Preparer Penalties Under Circular 230
The Office of Professional Responsibility (OPR), which is responsible for interpreting and applying Circular 230, has oversight of enforcement in matters relating to practitioner misconduct. According to the OPR, practitioners that willfully understate tax liability must be referred to OPR. Other penalties or sanctions that must be referred to OPR mandatorily include promoting abusive tax shelters, aiding and abetting understatement of a tax liability, injunction of a tax return preparer and injunction of specified conduct relating to tax shelters and reportable transactions.
If you are found to be in violation of your ethical duties in regards to a taxpayer’s rights, privileges or liabilities under IRS regulations, you can be publicly reprimanded or censured, suspended from anywhere between one to 59 months, and can even be disbarred for five years under Circular 230. In addition, you may be penalized up to the gross income derived or to be derived from the unethical conduct that led to the penalty.
Avoid IRS Penalties and Ensure Due Diligence with Ethical Standards
Understanding your duties as well as potential areas where conflicts of interest may arise during your practice is critical. To learn how to better avoid violating your ethical duties under these regulations, join tax attorney Robert E. McKenzie in “IRS Circular 230 Tax Ethics,” a webinar with Eli Financial. Robert provides information on the standards and penalties that apply under Circular 230, conflicts of interest that may arise, due diligence and best practices you can implement to avoid problems with the IRS.