A review of the revised disciplinary process under Circular 230.

• Author: Gardner, John C.
• Position: For tax preparers

EXECUTIVE SUMMARY

* Circular 230 outlines the duties and restrictions relating to practice before the IRS and the rules regarding disciplinary proceedings for violations. Final regulations issued in 2007 made many changes to Circular 230.

* A practitioner charged by the Office of Professional Responsibility with a violation of Circular 230 is entitled to a hearing before an administrative law judge; if the practitioner or the OPR is not satisfied with the decision, it can be appealed to the Secretary of the Treasury and subsequently to the federal courts.

* A practitioner who has been found guilty of violating Circular 230 may be censured, suspended, or disbarred from practice before the IRS. Monetary penalties can be assessed in addition to or instead of these sanctions.

* A disbarred practitioner may petition for reinstatement to practice before the IRS five years after the date of his or her disbarment.

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Tax practice in the United States and internationally by CPAs has become one of the most complicated and ambiguous areas of accounting in the past 25 years. CPA tax practitioners have had to confront numerous tax law changes ranging from the estate and gift area to complex new provisions regulating tax evasion and avoidance transactions. Tax practitioners have also seen major revisions in tax penalty legislation and increases in other enforcement efforts due to a tax gap of approximately $345 billion annually. (1)

Of note are recent changes to regulations found in Circular 230, (2) which regulates tax practice before the IRS for attorneys, CPAs, and enrolled agents. Circular 230 outlines the duties and restrictions relating to practice before the IRS and the rules regarding disciplinary proceedings for Circular 230 violations. In the American Jobs Creation Act of 2004, P.L. 108-357 (AJCA), Congress granted the IRS's Office of Professional Responsibility (OPR) the authority to impose monetary penalties on tax practitioners, their employers, or entities for which they act. (3)

Further complexity in tax practice responsibilities occurred throughout 2007. Final Circular 230 regulations became effective September 27, 2007 (TD 9359), (Proposed regulations had been released in February 2006.) (4) These final regulations, discussed below, contain not only revisions to the procedural and penalty sections of Circular 230 but also revisions to the duties section, including new provisions on contingency fees and conflict-of-interest requirements.

Other major changes occurred in federal law that also will affect tax practitioners. Under the Small Business and Work Opportunity Tax Act of 2007, P.L. 110-28 (SBWOTA), enacted on May 25, 2007, a new level of return preparer penalties under Sec. 6694(a) was established for tax returns prepared after that date.The new penalties cover both signing and nonsigning preparers (under Sec. 7701(a)(36)) of all tax returns (including claims for refunds and amended returns) such as gift and estate tax returns, employment and excise tax returns, and generation-skipping transfer tax returns. Sec. 6694(a), as amended, increases the penalty from $250 to the greater of $1,000 or 50% of the income that the preparer would derive (or to be derived) from the claim or tax return for which the penalty was imposed.

In addition, the tax return preparation standard for nondisclosed tax return positions was increased from the "realistic possibility of being sustained on the merits" under prior Sec. 6694(a) to "more likely than not to be sustained on its merits." Further, disclosed tax return positions under Sec. 6694(a) will now have to meet a "reasonable basis" standard for the position rather than the "non-frivolous" standard under prior Sec. 6694(a). In Notice 2007-54 the Service has issued some transitional relief from the new provisions.

Caution: Practitioners should check Notice 2007-54, which contains details on income tax returns, claims for refunds, and amended returns, as well as rules on the expanded list of returns (e.g., gift and estate tax returns) that are now covered. (5)

Treasury and the IRS issued Notice 2008-13 on December 31, 2007, providing guidance on the implementation of the revised provisions of Sec. 6694 as well as the related definitional provisions of Sec. 7701(a) (36). The notice announces the intent of Treasury and the Service to revise the "regulatory scheme governing tax return preparer penalties, which has remained substantially unchanged since the late 1970's." This notice contains excellent discussion of the Service's current position on Sec. 6694, along with a series of examples that are useful for illustrating the notice's provisions. A deadline for completion of the announced regulatory project is set for the end of 2008.

One early commentary provides an excellent review of the notice as well as a pithy discussion of the relationship between substantial authority under Sec. 6662 of the accuracy-related penalties for taxpayers and revised Sec. 6694 for preparers. (6) Notice 2008-12 provides further guidance regarding the tax return preparer signature requirements, and Notice 2008-11 clarifies the transitional relief outlined in Notice 2007-54, discussed above. Practitioners are encouraged to review these notices and to watch for further developments in this critical area of practice.

In addition to the passage of SBWOTA, proposed regulations under Circular 230 [section] 10.34, establishing the more-likely-than-not standard, were released on September 26, 2007. (7) The proposed regulations followed the revised language in new Sec. 6694(a), enacted in May 2007. Two commentators have already expressed concern that the changes to Sec. 6694(a) and the proposed changes to Circular 230 [section] 10.34 will affect practitioners' ability to serve as advocates for their clients. (8) The AICPA also has organized a task force that is working with Treasury and the Service to develop further guidance on these new regulations.

This article briefly reviews the changes to Circular 230 and presents a roadmap of the disciplinary process under [section][section] 10.50-10.89. These sections cover the procedural rights and practices that exist once the OPP, contacts a practitioner. The discussions are based on Circular 230 and the amendments found in the preamble to the regulations (TD 9359).

Background

Regulations, published as Circular 230 (31 CFR Part 10), govern practice before the IRS. Section 10.2(d) states that practice before the IRS encompasses all matters connected with a presentation to the Service, its employees, or officers that relate "to a taxpayer's rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service." The presentations include (but are not limited to) preparing and filing documents, communicating and corresponding with the IRS, and representing a client at hearings, conferences, and meetings. In addition, written tax advice is considered practice under [section] 10.2(a)(4).

Relevant required duties of practitioners governed by Circular 230 relate to knowledge of a client's omission of information, diligence as to accuracy, and adherence to standards and requirements covering tax return positions, covered opinions, and other written tax advice. Other aspects, such as contingency fees, advertising, and conflicts of interest, although not directly related to the technical areas of tax compliance and planning, may lead to sanctions under Circular 230 if practitioners violate them. (9)

A variety of professional standards guides the conduct of tax practitioners. (10) Along with Treasury's standards of professional conduct found in Circular 230, the AICPA Code of Professional Conduct and Statements on Responsibilities in Tax Practice provide standards for CPAs. Attorneys follow professional standards of conduct found in the Model Code of Professional Responsibility and the Model Rules of Professional Conduct.

Typically, state licensing boards enforce these standards at the state level. CPAs and attorneys who fail to adhere to the standards could face disciplinary action, which includes loss of their state licenses to practice. Federal courts also have the power to discipline members of their bar separately from the disciplinary procedures of state courts (11) and to prescribe rules for professional conduct. (12)

The OPR's Enforcement Unit is responsible for disciplining tax practitioners under Circular 230. Violation of Circular 230 regulations can lead to disciplinary actions or sanctions that include censuring, suspending, or disbarring CPAs from practice before the IRS (13) along with imposing monetary penalties against both CPAs and their firms.

The past effectiveness of Circular 230's disciplinary rules has been questioned. Lack of enforcement, partly due to lack of staffing in the OPR, which resulted in a decrease of referrals, is one factor identified as undermining its effectiveness. (14) Increased OPR staffing and changes in disciplinary processes aim to make Circular 230 more responsive. In addition, monetary penalties are viewed as giving the OPR a "new level of effectiveness." (15) During the government's fiscal year 2006 (which ended on September 30, 2006), the OPR suspended or disbarred 79 practitioners, gave reprimands to 7 others, used expedited suspension of 193 practitioners under the provisions of Circular 230, and closed 456 cases without sanctions. (16)

Overview of the Disciplinary Process

The final regulations modifying Circular 230 changed aspects of the disciplinary process for tax practitioners. While the structure is largely intact--involving an agency investigation, a hearing, and both administrative and judicial review, including the use of administrative law judges (ALJs)--the process underwent significant revisions.

Under the Circular 230 process, referrals come to the OPR from three sources: the IRS, the public, or a tax practitioner. Once the OPR receives a...