Tax practitioner responsibilities expand under Circular 230.

• Author: Szabo, Magda B.

Since the early 1920s, Circular 230 has embodied the rules of practice that set out the U.S. Treasury's standards of conduct for federally authorized tax practitioners.

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As of June 21, the regulations are no longer limited in their application to representation before the IRS concerning a tax-payer's rights, privileges or liabilities, and preparing documents filed before the IRS. Circular 230 now also addresses the federal tax advice that practitioners provide to clients. These regulations are enforced by the newly renamed and expanded Office of Professional Responsibility, currently headed by former Justice Department prosecutor, Cono Namorato.

Significance of Circular 230

The objective of Circular 230 is to promote ethical conduct in federal tax matters. Practitioners should review these rules in conjunction with the tax shelter rules relative to reportable transactions, material advisers and promoters. Newly enacted penalty provisions under the American Jobs Creation Act of 2004 (AJCA 2004), combined with recent revisions to Circular 230, increase the risk of tax-related penalty exposure.

Historical sanctions for violation of Circular 230 included censure, suspension and disbarment. The AJCA 2004 has added monetary penalties for the violation of Circular 230 provisions and authorization for injunctive relief. (1) While much attention is being given to recently adopted amendments, pre-existing Circular 230 provisions should not be ignored.

Previously the IRS required that tax practitioners exercise due diligence in all filings. This included reliance on the work of others, such as subordinates. (2) A practitioner may not sign a tax return unless a conclusion is reached that there is a realistic possibility of the filing positions in the return being sustained (defined as a one in three or greater likelihood).

In preparing a return, a practitioner should inform a client of all reasonably possible penalties that could be incurred. (3) There is no obligation to independently verify information provided by a client, but the practitioner is admonished to inquire when the client's information is suspect.

A conflict of interest proscription exists, which requires securing written waivers, when representing clients before the IRS whose interests are potentially in conflict. A prohibition from soliciting tax work based on false, fraudulent or misleading statements also exists. (4)

A practitioner may not notarize documents for matters filed before the IRS when employed as counsel, attorney or agent, and maybe not charge "unconscionable fees" for services. (5) Effective June 21, stringent new rules have been added that go beyond guidelines for conduct directly involving matters before the IRS. They address written tax advice ("covered opinions") rendered by a Circular 230 practitioner.

The first set of new rules details "best practices," which are not mandatory. Set forth in 31 CFR 10.33, these rules state that practitioners should provide clients with the highest quality of representation and adhere to "best practices" including:

1. Communicating clearly with the client regarding form and scope of advice or service

2. Arriving at conclusions supported by law and facts

3. Advising the client of any issues involving accuracy related penalties (6)

4. Acting fairly and with integrity.

   Major Changes

   The most sweeping and controversial changes apply to "covered opinions." (7)

   A "covered opinion" is any federal tax advice issued in writing (including e-mail) (8) concerning any listed...