The tax practitioner's guide to Circular 230.

• Author: Gardner, John C.
• Position: Part 2 - Treasury Dept Circular 230

The first part of this article, in the November issue, addressed practice, solicitation, and fee issues under Treasury Department Circular 230 (Circular 230), due diligence and the Sec. 6694 realistic possibility standard. This part discusses disreputable conduct under Circular 230, other Circular 230 rules of practice and referrals to the IRS Director of Practice (Director).

Disreputable Conduct

Attorneys, CPAs and enrolled agents who engage in "disreputable conduct" may be suspended or disbarred from practice before the IRS. Although Circular 230 does not define disreputable conduct, Section 10.51(a)-(j) provides a nonexclusive list of examples of disreputable conduct likely to result in disbarment or suspension.(38) Section 10.51(j), which relates to false opinions, was the only form of disreputable conduct modified by the 1994 amendments to Circular 230. Section 10.51(j), added to Circular 230 in 1984 to enable the IRS to enforce the regulations on tax shelter opinions in Section 10.33, prohibits giving false opinions knowingly, recklessly or through gross incompetence, or through a pattern of providing incompetent opinions on questions arising under the Federal tax laws. Even the IRS is unclear whether Section 10.51(j) is limited to tax shelter opinions or whether it may apply to other tax-related opinions.(39)

After identifying several types of false opinions, Section 10.51(j) defines both reckless conduct and gross incompetence; reckless conduct is defined as "a highly unreasonable omission or misrepresentation involving an extreme departure from the standards of ordinary care that a practitioner should observe under the circumstances."(40) Thus, the definition of reckless conduct for Section 10.51(j) purposes appears to be limited to giving false opinions.

In contrast, the definition of gross incompetence was not modified by the 1994 amendments, nor was its application limited to the giving of false tax shelter opinions. "Gross incompetence" is conduct that reflects gross indifference, preparation grossly inadequate under the circumstances, or a consistent failure to perform obligations to the client. In ascertaining whether a practitioner has violated Section 10.51(j) knowingly, recklessly or through gross incompetence, the Service will take into account a practitioner's pattern of conduct.

A Section 10.51(a) criminal conviction for violation of the Federal revenue laws, as well as any offense involving dishonesty or breach of trust, is also disreputable conduct for Circular 230 purposes. So is the suspension or disbarment of an attorney, CPA, public accountant or actuary from practice by a state authority or Federal court, agency, board or other Federal body. Such a suspension or disbarment triggers Section 10.51(g),(41) and typically results in a consent suspension from further practice before the Service.(42)

* Failure to file or pay

A practitioner who fails to file his, or a client's, tax return by the due date may violate Section 10.51(d). Because the IRS assumes that all practitioners are aware of filing requirements, a failure to file is presumed to be willful.(43) However, whether a practitioner's nonfiling is evidence of egregious misconduct under Section 10.51 sufficient to justify suspension or disbarment from practice depends on the facts and circumstances. When nonfiling results in a reprimand rather than a suspension or disbarment, the IRS monitors the practitioner's filing of required returns for five years and warns him that further nonfiling will result in more severe sanctions.

The IRS will respond to inquiries from law and accounting firms seeking verification that their associates or employees have filed all required returns. Fact-of-filing information requests are made on Form 8821, Tax Information Authorization, and require the employee's consent. Firms may view this step as necessary to verify that an employee's disreputable conduct under Section 10.51(d) does not taint the firm, because a firm that practices before the IRS cannot employ anyone under suspension or disbarment.(44)

A willful failure to pay income or employment taxes also constitutes disreputable conduct in violation of Section 10.51(d). To establish a willful failure to pay, the Director must demonstrate that the practitioner had both the duty and the resources to pay the...