Circular 230

Circular 230 prescribes the rules governing practice before the U.S. Internal Revenue Service (IRS). These rules also require attorneys, Certified Public Accountants (CPAs), Enrolled Agents, and others preparing tax returns and giving tax advice to do certain things, and prohibit certain things. Penalties may be applied for noncompliance.

Applicability

Anyone can prepare a tax return or give tax advice. U.S. rules currently do not impose educational, experience, or licensure requirements on tax advisers.^[1] However, IRS rules published as Circular 230^[2] impose certain standards of professional conduct on all persons preparing returns or giving tax advice for compensation.^[3] The rules prohibit certain actions and require certain other actions for each such person with respect to return preparation and tax advice.

Representing clients

In general, only attorneys, CPAs, enrolled agents, or enrolled actuaries or enrolled retirement plan agents may represent clients in proceedings before the IRS.^[4] Representing clients includes all communication with the IRS in regarding client matters without the client present. Exceptions permit family members to represent each other, employees to represent their employer, officers to represent corporations, and certain other representation.^[5]

Key prohibited actions

Circular 230 contains rules of conduct in preparing tax returns.^[6] Persons preparing tax returns must not:

• Take a position on a tax return unless there is a realistic possibility of the position being sustained on its merits. Frivolous tax return positions are prohibited.
• Unreasonably delay prompt disposition of any matter before the IRS.
• Charge a fee for preparing an original return contingent on the outcome of any position. (However, contingent fees are allowed for amended returns and positions under examination or judicial proceeding.)
• Charge the client an "unconscionable fee" for representation.
• Represent clients with conflicting interests.
• Solicit business using false statements.
• Cash IRS checks to a client for whom the return was prepared.

Key required actions for preparers

Persons preparing returns or giving tax advice must:

• Disclose on returns all nonfrivolous tax positions whose disclosure is required to avoid penalties.^[7]
• Return records to clients.
• Sign all tax returns they prepare.
• Provide clients a copy of tax returns.
• Advise clients promptly of errors or omissions of the preparer or client in any tax matter with respect to which the preparer is retained.
• Submit records, etc., requested by the IRS in a timely manner.
• Exercise due diligence and use best practices of the profession.^[8]

Requirements for tax advice

In addition to the above, those giving tax advice must follow certain procedural rules in giving the advice.^[9] Tax advice may consist of a "covered opinion," other written tax advice, or oral advice. No standards are provided for oral advice. Written tax advice must not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others. It must consider all relevant facts and law.

Covered opinion

A taxpayer may rely on a covered opinion by a licensed or enrolled tax adviser to avoid certain penalties. A covered opinion includes any written tax advice not otherwise disclaimed in the advice, with certain exceptions. The disclaimer must prominently state that the advice was not "intended or written by the practitioner to be used, and that it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer."^[10]

Specific standards apply to a covered opinion. These standards include:

• the extent to which a practitioner must gather facts and to which facts and assumptions may be relied upon, and
• the depth of legal analysis required,
• a requirement to apply the law to the facts,
• a requirement to consider all applicable law,
• a requirement to conclude as to each significant Federal tax issue, and
• required disclosures.

Sanctions

Tax preparers and advisers who violate Circular 230 may be subject to penalties. These include monetary penalties as well as potential suspension from practice before the IRS.^[11] The rules also provide procedures for disciplinary proceedings.

References

1. ^ Note, however, that all 50 states and the District of Columbia have laws which require licensure for those attesting to financial statements, purporting to be CPAs, giving legal advice, or purporting to be attorneys. Rules vary by state.
2. ^ 31 CFR 10. References hereafter to sections of Circular 230 are also references to parts of these regulations.
3. ^ See 26 CFR 1.6065-1(b)(1) and Rev. Rul. 84-3, 1984-1 C.B. 264 for a definition of paid preparers subject to these rules.
4. ^ Circular 230 part 10.3
5. ^ Circular 230 part 10.7.
6. ^ Willis, Hoffman, et al, South-Western Federal Taxation, 2009 edition page 26-22. ISBN 978-0-324-66052-4. Circular 230 part 10.20 through 10.34.
7. ^ This includes positions contrary to any published guidance or regulation, as well as positions for which there is less than a "reasonable basis." See Form 8275 and Form 8275-R.
8. ^ Circular 230 part 10.33 defines best practices, with examples.
9. ^ Circular 230 sections 10.35 and 10.37
10. ^ Circular 230 part 10.35(b)(4)(ii)], page 22. This requirement has led most professional firms to include a similar statement in all written communications about tax matters.
11. ^ Circular 230 part 10.50 et seq.