Practice management implications of Circular 230 proposed regulations.

• Author: Bukofsky, Ward M.

On Oct. 8, 1992, the IRS released proposed amendments to the Circular 230 regulations governing standards of practice before the IRS. While these amendments generally conform IRS practice standards to those of the AICPA, certain differences remain that could have tax practice management implications.

Due diligence standard

Circular 230 has adopted the same "realistic possibility" standard that appears in Regs. Sec. 1.6694-2(b) dealing with preparer penalties. Under this standard, unless a position is adequately disclosed on the return, a practitioner may not advise with respect to tax return positions, or sign a return as a preparer, unless he determines that there is a "realistic possibility of the position being sustained on its merits," without consideration of the likelihood of an audit.

This standard is virtually identical to the AICPA standard of practice (Statement on Responsibilities in Tax Practice No. 1) except that, in determining whether a realistic possibility exists, Circular 230 and Regs. Sec. 1.6694-2(b) do not allow the practitioner to rely on treatises, articles in recognized tax periodicals, or other similar reference tools and sources of tax analysis commonly used by tax advisers and return preparers.

Therefore, a practitioner could be exposed to preparer penalties under Sec. 6694 and disciplinary action under Circular 230 despite the fact that he has adhered to the professional guidelines promulgated by the AICPA. At first glance, it may appear that this difference in standards and the potential ramifications are more academic than practical since a preparer penalty under Sec. 6694 is only $250, and a violation of the Circular 230 standard must be "willful, reckless, or the result of gross incompetence" before disbarment from IRS practice will be considered.

However, what is often overlooked is the reliance that will likely be placed on these standards by judges and juries - based on expert testimony - in civil litigation against a practitioner for alleged malpractice. For example, if a situation arises in which a position recommended by a CPA is not upheld, and the CPA's files show that his recommendation relied solely on the opinion of a well-respected commentator or colleague, plaintiff's counsel will undoubtedly find an expert to opine that, because such reliance did not rise to the standard set by the Service, the practitioner engaged in malpractice, despite the fact that the AICPA standard was met. Even if the CPA...