The tax practitioner's guide to Circular 230.

• Author: Gardner, John C.
• Position: Part 1 - Treasury Department Circular 230

CPAs in tax practice are governed by a complex web of legal, regulatory and professional standards that have increased exponentially since 1976. All tax practitioners must comply with the Code's penalty provisions (e.g., Sec. 6694); additionally, CPAs, enrolled agents and tax attorneys are governed by Treasury Department Circular 230(1) (Circular 230), as amended, which establishes rules governing authority to practice before the Service, identifies the duties and restrictions imposed on practitioners, and sets forth rules regarding IRS disciplinary proceedings. CPA tax practitioners should follow both the guidelines contained in the AICPA Statements on Responsibilities in Tax Practice(2) (SRTPs) and any applicable state legal standards.

This article analyzes selected provisions of Circular 230, including the 1994 amendments, and suggests steps that practitioners(3) can take to avoid its sanctions, which can lead to suspension from practice or disbarment. Practitioners may also be able to prevent tax malpractice claims if they adhere to the provisions of Circular 230 and carefully document client communications

Practice, Solicitation and Fees

* Practice

In addition to specifying the standards used by the IRS to determine eligibility to practice before it, Circular 230 Section 10.2(e) defines "practice" to encompass all matters connected with a presentation to the IRS or any of its officers or employees relating to a client's rights, privileges or liabilities under IRS-administered laws or regulations. Such presentations include preparing and filing necessary documents, corresponding and communicating with the IRS, and representing a client at conferences, hearings and meetings.

"Practice" specifically includes the preparation of returns,(4) the filing of refund claims, the preparation and filing of collection information statements or closing agreements, acting as a client advocate during an IRS examination, and oral or written communications to the IRS in support of a client's return position.(5) However, not all communication with the Service constitutes "practice"; the definition excludes, e.g., furnishing information at the Service's request, appearing before the Service in one's own behalf, and appearing as a witness for a taxpayer.(6)

* Solicitation

The advertising and solicitation provisions of Circular 230 were revised after a series of Supreme Court decisions held that advertising by attorneys was commercial speech protected by the First Amendment.(7) Final regulations issued in September 1992 under Section 10.30 purportedly liberalized the restrictions on advertising and solicitation by eliminating the list of permissible forms of advertising in former Section 10.30(b) and instead subjecting all public communications to the "false, misleading, or deceptive" standard in Section 10.30(a). These regulations now apply to all public communications, including professional listings, the dissemination of fee information, directories, targeted direct mail solicitations and print, radio and television advertising. Since 1992, however, the Supreme Court has decided two Florida cases(8) on advertising by CPAs that cast doubt on the constitutionality of some provisions in Section 10.30. Although the IRS has been in informal contact with the AICPA and the American Bar Association regarding the impact of these cases on Circular 230, Section 10.30 was not modified by the 1994 amendments to Circular 230, nor have revised regulations been proposed.(9)

Section 10.30(a)(1) prohibits public advertisements that are false, fraudulent, unduly influencing, coercive, unfair, misleading or deceptive.(10) Similarly, AICPA Rule of Conduct (RC) 502, Advertising and Other Forms of Solicitation, prohibits CPAs from soliciting clients by using misleading, deceptive or false advertisements, or through coercion, overreaching, or harassing conduct. Claims of expertise or attainment of a professional designation that lack a substantive basis, claims of a "guaranteed refund," references to win-loss ratios in challenges by the IRS, and intimations that the practitioner's prior IRS connections will produce more favorable results for the taxpayer are all examples of misleading or deceptive advertisements.(11) In addition, CPAs are barred from using a misleading firm name,(12) while enrolled agents may not use "certified" when describing their professional designations in advertisements.(13) After the Supreme Court's decision in Ibanez,(14) however, Circular 230's ban on the use of "certified" by enrolled agents may be unconstitutional, unless such use is false, deceptive or misleading.

Targeted direct mail solicitations are now permitted under Section 10.30(a)(2). However, such mailings must be clearly marked as solicitations in capital letters on the envelope and at the top of the mailing's first page. Further, such solicitations must also indicate the source of the information used to select the recipient. Section 10.30(c) indicates that practitioners using direct mail solicitation must retain a copy of the communication, as well as a list of the persons to whom it was distributed, for at least 36 months.

While Section 10.30(a)(2) removed the prior restriction on targeted direct mail solicitations, it still prohibits practitioners from making uninvited solicitations in person or by phone. Uninvited mail solicitations are not prohibited, nor are attempts to solicit new business from current or former clients in a related matter, communications with members of a client's family, or notices to other practitioners indicating an availability to provide professional services. Another recent Supreme Court decision, Edenfield v. Fane,(15) raises questions about the constitutionality of the ban on uninvited solicitations.

In Edenfield, a CPA challenged the Florida Board of Accountancy's (FBA) rule barring direct, in-person uninvited solicitations by CPAs. The FBA claimed that the ban advanced substantial state interests in protecting consumers from fraud or overreaching by CPAs and maintaining CPA independence in auditing a business and attesting to its financial statements. Because the FBA...