Proposed amendments to circular 230.

• Author: Willey, Susan L.
• Position: Part 2 - Tax consultant standards

This part examines Circular 230 proposed Section 10.36 (procedures to ensure compliance) and proposed Subparts C, D, and E, on sanctions, disciplinary proceedings and general provisions. (Practice & Procedures)

EXECUTIVE SUMMARY

* According to the AICPA, the proposed Circular 230 revisions both "significantly expand the potential for violations" and "significantly cut back in basic procedural safeguards."

* Although proposed Section 10.20(b) requires practitioners to produce DOP-requested information, Subpart D does not require the Service to disclose information on which a Circular 230 violation is premised.

* The AICPA foresees an increase in disciplinary proceedings resulting from the proposed expansion of Circular 230, as well as the recently announced IRS restructuring.

In the last issue, Part I of this two-part article discussed proposed amendments to Circular 230 (20) Subpart B, Duties and Restrictions Relating to Practice Before the Internal Revenue Service. Part II, below, examines Circular 230 proposed Section 10.36 (procedures to ensure compliance) and proposed Subparts C, D and E, on sanctions, disciplinary proceedings and general provisions.

Proposed Section 10.36--Procedures to Ensure Compliance

This provision requires practitioners responsible for advising firm clients on tax matters to take "reasonable steps," consistent with their authority, to "make certain" that the firm has "adequate procedures" to ensure compliance with proposed Sections 10.33, 10.34 (21) and 10.35. The Director of Practice (DOP) could not take disciplinary action against a firm practitioner for violating proposed Section 10.36 unless the practitioner acts with recklessness, willfulness or gross incompetence in not taking the reasonable steps required, and he and one or more firm employees, members or associates are "engaged in a pattern or practice of failing to comply" with proposed Sections 10.33, 10.34 and/or 10.35. However, the IRs could discipline a practitioner under proposed Section 10.36(b) if reasonable steps are taken, but the practitioner has "actual knowledge" that a firm member, associate or employee is engaged in a practice or pattern of noncompliance with Sections 10.33-10.35 "and the practitioner, through willfulness, recklessness, or gross incompetence, fails to take prompt action, consistent with his or her authority and responsibility for the firm's practice advising clients regarding matters under Federal tax laws, to correct such pattern or practice."

Practitioner Concerns

The American Bar Association (ABA) Tax Section (22) is concerned that requiring practitioners, consistent with their authority and responsibility for the firm's practice, to "make certain" that firm procedures are adequate to ensure compliance with proposed Sections 10.33, 10.34 and 10.35, implies "a higher level of responsibility than is intended" Accordingly, it recommends that this language be modified to require practitioners to "confirm" (instead of "make certain") that the firm is "complying" with the specified sections, rather than "ensuring compliance." The ABA also recommends that the Service provide guidance as to "adequate procedures" to comply with proposed Sections 10.33-10.35, such as Regs. Sec. 1.6694-2(d)(1)-(5) and Rev. Proc. 80-40. (23) After noting that neither the preamble nor the proposed regulations provide practitioners with guidance, the American College of Tax Counsel (ACTC) (24) also recommends that the Service draft and submit for comment either revenue procedures or other guidance on how proposed Section 10.36 should be implemented. In addition, the ACTC urges the IRS to postpone the effective date of proposed Section 10.36 for at least one year after the final Circular 230 regulations are adopted. The ACTC believes that firms will require this additional time to develop and implement policies and procedures to ensure compliance with proposed Section 10.36's requirements.

Also objecting to proposed Section 10.36, the AICPA Tax Division (25) calls for both the elimination of any reference to Section 10.34 on tax return positions and for the restriction of proposed Section 10.36 to tax shelter opinions. Beyond tax shelter opinions regulated in proposed Sections 10.33 and 10.35, "the AICPA does not accept the notion that a practitioner should be held vicariously responsible for another practitioner's noncompliance with standards prescribed by Circular 230."

The AICPA believes that "indirect accountability" would result in sanctioning a from associated with "offending practitioners," disproportionately harming the firm. Accordingly, the AICPA recommends that proposed Section 10.36 be modified "to (1) clarify that it Will not be invoked against a practitioner without sanctions first being imposed against all practitioners who are alleged to have created a `pattern or practice' of directly violating the specified provisions of Circular 230, and (2) confine its application to a single practitioner within a firm." This single practitioner per firm "should be the individual who is operationally responsible for prescribing procedures to comply with the specified provisions, and who has direct authority to discipline acts of non-compliance of which he or she has actual knowledge."

The AICPA further suggests that the proposed regulation clarify that no practitioner may be sanctioned for noncompliance by another, unless that person "has a level of authority sufficient to directly invoke meaningful disciplinary actions against such persons."

Similar to the ABA and ACTC requests for additional implementation guidance, the AICPA believes that such guidance should provide examples for each type of failure to comply with proposed Section 10.36. Finally, while the ACTC does not endorse the AICPA's "single practitioner per firm" sanction for a violation of proposed Section 10.36, it does believe that "it would be inequitable to impose discipline under proposed Section 10.36(b) upon a practitioner who has not violated Section 10.33, 10.34 or 10.35 unless discipline has been imposed upon those practitioners in the firm who have violated those provisions."

Subparts C, D and E

The Circular 230 proposed revision divides the content of current Subpart C on disciplinary sanctions and procedures into two parts, eliminates current Subpart D on the disqualification of appraisers (by incorporating appraiser rules into those regulating other practitioners) and retains Subpart E's "General Provisions" with little change. Proposed Subpart C is titled "Sanctions for Violations of the Regulations;" proposed Subpart D retains the title from current Subpart C, "Rules Applicable to Disciplinary Proceedings."

Proposed Subpart C--Sanctions for Violation of the Regulations

Proposed Section 10.50: This provision identifies the sanctions facing practitioners and appraisers for violating Circular 230. Proposed Section 10.50(a), in a significant expansion of current Section 10.50, permits the Treasury Secretary to publicly reprimand or censure practitioners (in addition to suspending or disbarring them) after notice and opportunity for hearing. As under the current regulations, practitioners can be sanctioned for incompetence or disreputable conduct, as well as for "willfully and knowingly" misleading or threatening a client (or prospective client) with intent to defraud. In a more subtle change, practitioners would be subject to sanction under proposed Section 10.50(a) for failure to comply with any Circular 230 regulation (rather than their refusal to comply, as under the current regulation). Proposed Section 10.50(b) consolidates the Treasury Secretary's authority to disqualify appraisers assessed a Sec. 6701(a) penalty.

Proposed Section 10.51: Despite the inclusion of incompetence as a basis for sanction in both current and proposed Section 10.50(a), current Section 10.51 refers only to disreputable conduct. Proposed Section 10.51 explicitly includes incompetence as a separate basis for censure, suspension or disbarment of a practitioner from IRS practice. Proposed Section 10.51(1) defines "gross incompetence" to include "conduct that reflects gross indifference, preparation which is grossly inadequate under the circumstances, and a consistent failure to perform obligations to the client."

Specific forms of disreputable conduct are identified in proposed Sections 10.51(a)-(j). While most of the changes to proposed Section 10.51 involve section renumberings or minor grammatical changes, proposed Section 10.51(c) is new. The current regulations define disreputable conduct for which a practitioner may be suspended or disbarred to include any criminal conviction either under Federal revenue laws or involving "dishonesty or breach of trust." Responding to concerns that the current regulation is too narrow, proposed Section 10.51(c) expands the definition to include any Federal or state felony conviction involving conduct that "renders the practitioner unfit to practice" before the IRS.

Proposed Section 10.51(f) modifies current Section 10.51(d), which...