IRS questions willfulness standard in Circular 230 proceedings.

• Author: Elgin, Eve

The individual serving as the delegate of the secretary of the Treasury and authorized to decide administrative appeals in Circular 230 cases (the appellate authority) has questioned whether the current approach to determining whether a practitioner has willfully violated Circular 230 is appropriate and has asked parties in subsequent proceedings to address the issue. These comments have generated concerns in the practitioner community in view of the potential severity of Circular 230 sanctions, including suspension or disbarment from practice before the IRS.

This item summarizes the current definition of "willfulness" for purposes of Circular 230 and concludes that the current definition is generally sound. It then recommends that any change to the willfulness standard should result from notice and comment rulemaking rather than a decision by the appellate authority.

Background

Circular 230 is a Treasury regulation prescribing standards of conduct for CPAs, attorneys, enrolled agents, and other practitioners who practice before the IRS (see 31 C.F.R. Part 10). Sanctions for violations of Circular 230 include monetary penalties, public censure, suspension, and disbarment from practice before the IRS. A practitioner accused of a Circular 230 violation usually has a right to a hearing in front of an administrative law judge (ALJ) before any discipline is imposed. Either party may appeal the ALJ's decision to the appellate authority, since it is authorized to decide administrative appeals in Circular 230 cases. Currently, the appellate authority is an assistant division counsel in the IRS Small Business/Self-Employed Division.

In general, a practitioner may be sanctioned under Circular 230 if he or she is shown to:

* Have willfully violated any Circular 230 requirement under Section 10.52(a)(1);

* Be incompetent or disreputable within the meaning of Section 10.51 (which includes various willful acts and other failures); or

* Have recklessly or with gross incompetence violated Circular 230's tax return preparation provisions or written tax advice standards under Section 10.52(a)(2).

Circular 230 does not explain when a practitioner is considered to have willfully violated a provision. The general prohibition against willful violations in Section 10.52(a)(1) appears to have been added in 1958. The 1958 amendments, however, did not address what "willfully" was intended to mean (see 23 Fed. Reg. 9261 (November 29, 1958)). The preamble to the 1984 amendments merely described "willfully" as meaning "knowingly" (see...