12.1 Circular 230 and tax preparer regulations

Circular 230 sets ethical standards for tax professionals working with the IRS. It covers due diligence, conflicts of interest, and communication rules. These regulations aim to maintain integrity in tax practice and protect taxpayers from unethical behavior.

Tax preparers have varying levels of authority and responsibilities. CPAs, attorneys, and enrolled agents can fully represent clients before the IRS. Non-licensed preparers face more limitations. Understanding these differences helps ensure proper tax preparation and representation.

Scope and Purpose of Circular 230

Regulatory Framework and Applicability

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• Circular 230 governs tax professionals' practice before the Internal Revenue Service (IRS)
• U.S. Department of the Treasury issues these regulations to ensure ethical conduct and maintain high practice standards
• Applies to attorneys, certified public accountants (CPAs), enrolled agents, and other taxpayer representatives
• Covers various aspects of tax practice (due diligence, conflicts of interest, confidentiality)
• Establishes the Office of Professional Responsibility (OPR) within the IRS to enforce regulations and discipline violators
• Extends to all forms of IRS communications (tax return preparation, tax advice, audit representation)

Ethical Standards and Professional Conduct

• Primary purpose maintains high ethical standards among tax professionals
• Ensures practitioners act in the best interest of their clients while complying with tax laws
• Promotes transparency and accuracy in tax-related communications
• Protects taxpayers from incompetent or unethical tax practitioners
• Enhances the integrity of the tax system by promoting compliance and ethical behavior
• Provides guidelines for handling complex situations (conflicting client interests)

Key Provisions of Circular 230

Due Diligence and Best Practices

• Due diligence requirements mandate thorough preparation, approval, and filing of tax returns
• Practitioners must verify correctness of oral or written representations to clients or IRS
• Best practices for tax advisors include clear client communication and fact establishment
• Evaluate reasonableness of assumptions when providing tax advice
• Conduct thorough research on relevant tax laws and regulations
• Document the basis for tax positions and advice given to clients

Ethical Considerations and Client Relations

• Identify and address potential conflicts of interest between practitioner and clients or among multiple clients
• Maintain client confidentiality and understand scope of privileged communications
• Promptly return client records upon request, even with outstanding fees
• Adhere to regulations governing marketing of services and client solicitation
• Provide clear explanations of fees and billing practices to clients
• Obtain informed consent when representing multiple parties with potentially conflicting interests

Written Advice and Communication Standards

• Establish requirements for providing written tax advice
• Consider all relevant facts when offering written opinions
• Avoid relying on unreasonable assumptions in tax advice
• Include appropriate disclaimers and disclosures in written communications
• Clearly state the scope and limitations of any tax opinion or advice
• Provide a balanced assessment of the strengths and weaknesses of tax positions

Penalties for Violating Circular 230

Disciplinary Actions and Professional Consequences

• Censure involves public reprimand issued by IRS, may require specific corrective actions
• Suspension temporarily prohibits practice before IRS for specified period (3 months, 1 year)
• Disbarment permanently prohibits practice before IRS, subject to potential reinstatement
• IRS may refer violations to state licensing boards for additional disciplinary action
• Publication of disciplinary actions damages professional reputation
• Practitioners may face loss of clients and professional standing within the tax community

Legal and Financial Repercussions

• Monetary penalties imposed for specific violations (aiding and abetting tax liability understatement)
• Department of Justice may seek injunctions in severe cases
• Injunctions prevent individuals from preparing tax returns or representing clients before IRS
• Practitioners may face civil lawsuits from clients for malpractice or negligence
• Criminal charges possible for egregious violations (tax fraud, conspiracy)
• Financial costs include legal fees, fines, and potential loss of income due to practice restrictions

Tax Preparers and Their Responsibilities

Licensed Tax Professionals

• Certified Public Accountants (CPAs) represent clients before IRS for all tax matters
• CPAs handle audits, appeals, and collection issues
• Attorneys provide legal advice on tax issues and represent clients for all IRS matters
• Enrolled Agents (EAs) licensed by IRS to represent clients for all tax matters
• Licensed professionals must meet rigorous educational and experience requirements
• Ongoing continuing education mandated to maintain licenses and stay current with tax laws

Non-Licensed Tax Preparers

• Annual Filing Season Program Participants complete IRS-approved continuing education
• These preparers have limited representation rights (initial return preparation)
• Unenrolled preparers prepare tax returns without IRS licensing or enrollment
• No representation rights beyond initial return preparation for unenrolled preparers
• May face restrictions on advertising their services and providing tax advice
• Must clearly disclose their non-licensed status to clients

Varying Levels of Authority and Expertise

• CPAs, attorneys, and EAs have broadest authority to practice before IRS
• Different educational requirements exist for each type of preparer
• Continuing education obligations vary based on preparer classification
• Ethical standards under Circular 230 apply differently to licensed vs. non-licensed preparers
• Scope of practice ranges from comprehensive representation to basic return preparation
• Clients should understand limitations of each preparer type when seeking tax assistance