Tax practice responsibilities: Circular 230: its day-to-day impact on tax practices.

• Author: Purcell, Thomas J., III

The standards in Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), apply to practitioners who prepare tax returns; correspond and communicate with the IRS relating to a taxpayer's rights, privileges, or liabilities under laws or regulations administered by the Service; and render written advice regarding the tax treatment of a transaction, plan, or arrangement. Circular 230 imposes an obligation on practitioners to exercise due diligence in preparing returns or other documents relating to a federal tax matter and in determining the correctness of oral or written representations made by the practitioner to the IRS. If during the course of the engagement the tax practitioner discovers that the client has not complied with the requirements of the Code or has made any error in (or omission from) any return or other document submitted to the IRS, he or she must promptly advise the client of such and advise the client of the consequences of such noncompliance, error, or omission.

In addition, Circular 230 prohibits a tax return preparer from signing a tax return or claim for refund that the practitioner knows or reasonably should know contains a position that lacks a reasonable basis, or is an unreasonable position as described in Sec. 6694(a) (2) relating to preparer penalties for understatements due to unreasonable positions. Circular 230 also prohibits a tax practitioner from signing a tax return that constitutes a willful attempt to understate the tax liability or a reckless or intentional disregard for the rules and regulations described in Sec. 6694(b)(2) relating to preparer penalties for understatements due to willful or reckless conduct. If a practitioner has advised the client with respect to a position or signed a return that is reasonably likely to give rise to a penalty, Circular 230 requires the practitioner to inform the client of the potential for the penalties and of any opportunity to avoid such penalties by disclosure.

In addition to standards or practice commonly associated with the work of a tax practitioner, Circular 230 also regulates the operation of the practitioner's day-to-day business by regulating his or her marketing and advertising practices, fee arrangements, and client record return policies. Circular 230 also spells out how to handle a request by the IRS for a client's documents. While the violation of the duties and restrictions relating to these matters can subject the tax practitioner to the same sanctions as the violation of the tax practice standards, they receive relatively less attention. This item discusses standards imposed on tax...