Practitioners Take Note: Now Is A Good Time For A Circular 230 Refresher

Introduction

There is often a tendency to assume that the Department of the Treasury's Circular No. 2301 ("Circular 230") pertains solely to preparing tax returns, tax opinions or dealing with the IRS. Further, the conventional wisdom is that a violation Circular 2302 must mean that a practitioner engaged in some sort of outrageous behavior. However, the reach of this ethical code is far greater than one might think and a violation can occur in many more situations than practitioners might otherwise expect.

In August 2011, the Department of Treasury made a number of revisions to Circular 230. A common theme of many of these changes is an increase in the breadth of the application of Circular 230. Henceforth, more practitioners will find themselves grappling with Circular 230 compliance issues.

A violation of Circular 230 is a serious matter. Practitioners who engage in sanctionable conduct may be subject to private reprimand, public censure, suspension or disbarment.3 Practitioners and their firms may also face monetary penalties.4 Historically, public discipline for violating Circular 230 usually involved obvious misconduct such as one's own failure to file tax returns or pay tax or the conviction of a criminal offense. In the future, we expect to see more cases that pertain to alleged "bad tax practice" such as a lack of due diligence, failure to give sound tax advice, conflicts of interest or other issues that indicate a tax practitioner's lack of fitness to practice before the IRS. As the reach of Circular 230 continues to grow, now is a good time to review its key provisions.

Who is Subject to Circular 230?

Circular 230 applies to those who "practice before the IRS." Practice before the IRS comprehends all matters connected with a practitioner's presentation to the IRS with respect to a taxpayer's rights, privileges or liabilities under the tax law, including:

1. preparing or filing documents, correspondence and communicating with the IRS;

2. rendering written advice with respect to an entity plan or arrangement that has a potential for tax avoidance or evasion; and

3. representing a client at IRS conferences and hearings.5

   Under this broad definition of "practice" the mere preparation of a document can bring an individual within the grasp of Circular 230, regardless of whether the document is actually submitted to the IRS. For example, preparing tax planning documents generally constitutes practice before the IRS and subjects the tax planner to the duties and obligations contained in Circular 230.

   Circular 230 authorizes attorneys, CPAs and enrolled agents to practice before the IRS.6 Further, enrolled actuaries, enrolled retirement plan agents, registered return preparers and selected individuals (e.g., an officer of a corporation) have limited authority to practice before the IRS.7

   Any individual who is compensated for preparing or assisting with the preparation of all or substantially all of a tax return or refund claim is subject to Circular 230's duties and restrictions.8 That individual is also subject to sanction for violating the requirements of Circular 230.9

   What it means to "assist in the preparation of" or what is "substantially all" of a document or return is not entirely clear. However, by expanding the application of Circular 230 to more individuals and activities, the Treasury is signaling its intent to apply Circular 230 in a broad manner. Any individual, who for compensation, assists in the preparation of any document pertaining to a taxpayer's tax liability would be wise to assume that Circular 230 could apply to that individual.

   The broad grasp of Circular 230 does not stop at individual practitioners. If an individual who is subject to possible sanction under Circular 230 acts on behalf of an employer, firm or other entity, that employer, firm or entity is subject to possible sanction if it knew or reasonably should have known of the actionable conduct.10 In theory, this could lead to sanctions against not only law firms, accounting firms and return preparation firms, but any organization that employs an individual who assists in the preparation of federal tax returns or related documents.

   When is Conduct Sanctionable?

   Generally, a practitioner may be sanctioned if the practitioner (1) is incompetent or disreputable; (2) acting with a specific mental state or competency standard (i.e., willful, reckless or gross incompetence) fails to comply with key provisions of Circular 230; or (3) intentionally misleads a client so as to defraud that client.11

   Incompetent or disreputable conduct includes a criminal conviction, evading or attempting to evade taxes, providing false or misleading information, providing a false opinion, bribing or intimidating IRS employees, misappropriating client funds, misleading potential clients about qualifications or access to special treatment, assisting or advising a client to violate tax laws, misusing tax return information and aiding or abetting another to improperly practice before the IRS.12

   Sanctionable conduct also includes the loss or suspension of a professional license, willfully failing to sign a return and contemptuous conduct including using "abusive language" against IRS employees. Failure to e-file, practicing without a PTIN and representing a taxpayer without proper authorization also subjects a practitioner to sanction.13

   If a practitioner subject to sanction acted on behalf of a firm or business, that firm or business is potentially subject to sanction.14 Further, practitioners with authority and responsibility for providing advice or preparing returns must implement procedures so as to ensure that all individuals in their firm comply with Circular 230. If the supervising practitioner does not implement such procedures, that practitioner is subject to possible sanction.15

   The Office of Professional Responsibility (OPR) makes an initial determination of whether a practitioner has violated Circular 230. It may then propose disciplinary actions (the OPR does not actually impose a sanction; it recommends action, which the practitioner may dispute). The practitioner may consent to the proposed sanction. Or, if practitioner does not consent to the sanction, the IRS may institute a proceeding before an administrative law judge.16

   Critical Rules

   A brief discussion of some of the more signifi cant provisions of Circular 230 follows.

   1. Failure to Obtain PTIN (§ 10.8(a))

      Many tax practitioners have chafed under the requirement that they obtain a Preparer Tax Identification Number (PTIN). They note that attorneys and CPAs already have their own competency tests and licensing requirements. However, the PTIN rules are here to stay.

      Any individual, who for compensation, prepares or assists in the preparation of all or substantially all of a tax return or claim for refund must have a PTIN. 17 Generally, one must be a licensed attorney, Certified Public Accountant, Enrolled Agent or Registered Return Preparer to obtain a PTIN (unless otherwise prescribed by the IRS).18

      Failure to comply with Circular 230's PTIN requirements is an ethical violation that could result in sanction.19 When a practitioner provides tax advice, that advice is generally intended to assist in the preparation of a tax return. Therefore anyone who provides tax advice should consider whether obtaining a PTIN is necessary.

   2. Procedures to Ensure Circular 230 Compliance (§ 10.36)

      Practitioners in a position of authority must do more than ensure their...