Tax practice responsibilities: taxpayer representation in the shadow of preparer discipline.

• Author: Purcell, Thomas J., III

TAX PRACTITIONERS AT TIMES MUST BALANCE client interests and their own professional interests. This issue takes on even greater import when the CPA is representing a client before the IRS. Whether the CPA was the tax return preparer or was engaged as a successor CPA to represent the client in an examination of a return prepared by another professional, the potential exists for imposition of penalties or sanctions against the CPA.

This column primarily concerns engagements by a CPA where the IRS is investigating the client's return preparer for possible sanctions, but the CPA representative was not the return preparer. The preparer needs to be aware of special issues the CPA faces when representing a client regarding a return when the representative also prepared the return. Most of these issues are beyond the scope of this column.

A successor CPA needs to be aware of some common preparer penalty and sanction considerations that may apply as well. The CPA needs not only to represent and advocate on behalf of the taxpayer in the examination but also to prepare the taxpayer for a potential role as a witness in the IRS investigation of the preparer's possible misconduct. Except where otherwise mentioned, this column assumes that the CPA representative did not prepare the return the IRS is examining.

Overview

CPAs are subject to statutory and regulatory oversight as tax preparers. The IRS can subject preparers to penalties under Sec. 6694 and subject preparers and representatives to administrative discipline and sanctions under Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10). Sanctions vary depending on the severity and frequency of a preparer or representative's violations. The IRS may subject tax practitioners who do not meet minimum standards of conduct to disciplinary action, including penalties, reprimand, censure, suspension, or disbarment.

In every IRS examination, the examiner uses a number of fact-finding techniques to inquire into whether the preparer adhered to tax law and procedural requirements. For example, IRS interview questions concerning the preparer cover Circular 230 requirements, such as whether the preparer signed the original return, whether the taxpayer received a copy, and whether the preparer was paid for the services. At the conclusion of every IRS examination, the examiner's work papers need to document whether assessing preparer penalties for the return was considered. All information on the assertion of preparer penalties is separated from the taxpayer's case file (Internal Revenue Manual (IRM) [section]4.10.6.7.4).

Return preparer penalties are a key enforcement vehicle for discipline of noncompliant preparers. The IRS Penalty Handbook (IRM [section]20.1) discusses procedures for assessing preparer penalties for improper tax return preparation and abusive transaction promoters (IRM [section]20.I.6). The examiner must determine whether a separate preparer penalty examination is warranted, and the examiner's group manager must approve the penalty investigation. The IRS implements additional examination procedures if the dual goals of the examination are to review the taxpayer's returns and to examine the former tax return preparer's practices.

Source of Preparer Penalties

Once the IRS establishes a pattern of preparer noncompliance (IRM [section]4.11.51.2), the IRS Return Preparer Program (RPP) allows for broader examination of returns prepared by that particular preparer beyond those of the taxpayer that is also under examination. Noncompliant preparers are primarily identified from information obtained from examiners and their group managers, preparer penalty records, and referrals from other governmental and private entities. An IRS area return preparer coordinator (RPC) maintains files on return preparer activities (IRM [section]4.11.51.3). The IRS can also appoint a steering committee to determine whether there should be further investigation into whether the preparer made widespread and material errors or if the preparer's misconduct was intentional. Another referral source for IRS investigation is Form 14157, Complaint: Tax Return Preparer, which generally is filed by a taxpayer. The decision to examine other tax returns prepared by the same preparer must be approved by the IRS area director (IRM S4.11.51.5).

If a practitioner is suspected of misconduct, the IRS examiner or other parties can also make referrals directly to the IRS Office of Professional Responsibility (OPR). The examiner will also contact the RPC to assist with OPR referral issues (IRM [section]1.25.1.3). OPR will investigate to determine the seriousness of the alleged misconduct and appropriate disciplinary action. OPR also can seek a monetary penalty against the practitioner and, in some circumstances, the practitioner's employer (IRM [section]1.25.1.3).

The Representation Engagement Decide Whether to Accept the Engagement

The first step in any representation is to determine whether to accept the engagement and, if so, to document the representation with an engagement agreement. Should the preparer represent a taxpayer in an IRS audit of the return that he or she prepared? A strict reading of Circular 230, Section 10.29...