New rules govern practice before the IRS.

• Author: Messier, Susan G.

The highly publicized accounting scandals of 2002, such as Enron, WorldCom, and Global Crossing, along with revelations about tax shelter abuses, have had wide-reaching financial effects on investors and the economy. Actions of some unscrupulous tax return preparers have further exacerbated the problem. In response, stricter controls and additional guidance for tax practitioners were issued during 2007, including Notice 2007-39 and the Small Business and Work Opportunity Tax Act of 2007, P. L. 110-28 (SBWOTA). Higher standards will be required in taking tax return positions, and significantly higher penalties will apply to a much broader range of return types. These standards and penalties apply to all paid tax return preparers, including attorneys, CPAs, enrolled agents, and all others who prepare tax returns for a fee.

Regulation of Practitioners Prior to 2007

The Secretary of the Treasury is authorized, under 31 USC Section 330, to regulate practice before the Treasury Department. Those regulations were published in 31 CFR, Subtitle A, Part 10, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers Before the Internal Revenue Service (Circular 230), which regulates practice before the IRK The provisions of Circular 230 are administered by the IRS Office of Professional Responsibility.

Treasury decisions: TD 9165 adopted proposed regulations (REG-122379-02) on December 20, 2004. The preamble to the proposed regulations states:

The tax system is best served when the public has confidence in the honesty and integrity of the professionals providing tax advice. To restore, promote, and maintain the public's confidence in those individuals and firms, these final regulations set forth best practices applicable to all tax advisors. These regulations also provide mandatory requirements for practitioners who provide covered opinions. The scope of these regulations is limited to practice before the IRS.

TD 9201 provided additional clarification of TD 9165, effective May 19, 2005.

Circular 230: The current version of Circular 230 has been updated to reflect changes made by the American Jobs Creation Act of 2004, R L. 108-357 (AJCA). Subpart B of Circular 230 contains information on the duties and restrictions that relate to practice before the IRS, including guidance on knowledge of a client's noncompliance, error, or omission (Section 10.21) and with respect to tax return positions (Section 10.34). Section 10.34(a) explains the "realistic possibility standard" that was in effect until the enactment of the SBWOTA, discussed later in this item. Section 10.34(b) requires that a practitioner who advises on a tax return position or who prepares or signs a return as the preparer must inform the client of (1) the penalties reasonably likely to apply to the client for taking that position, (2) any opportunity to avoid those penalties by disclosure, if relevant, and (3) the requirements for adequate disclosure.

On February 8, 2006, the IRS issued proposed regulations containing...