2010–2011 Revisions to Circular 230

By John C. Gardner, Ph.D., CPA; Joseph Kastantin, CPA, MBA; and William E. Maas, J.D., CPA

 

EXECUTIVE
SUMMARY

 

  • The reach of Circular 230, which prescribes who may practice before the IRS, has been greatly expanded by recent regulations and the creation of a new category of practitioner, the registered tax return preparer.
  • All practitioners subject to Circular 230 are now required to obtain and use a preparer tax identification number (PTIN) when preparing tax returns or refund claims for compensation.
  • Circular 230, Section 10.34, on standards for tax return preparation, has been revised to more closely mirror the standards in Sec. 6694, and it provides three standards of conduct practitioners must adhere to.
  • Circular 230, Section 10.36(b), requires practitioners to take reasonable steps to ensure they have adequate procedures in place to ensure compliance with Circular 230 and will require practitioners to assess their quality-control practices.

This article focuses primarily on the Circular 230 1 tax preparer penalties and other sanctions as well as the regulations governing practice before the IRS that were revised by T.D. 9527, effective August 2, 2011. Circular 230 prescribes who may practice before the IRS. Previously, Circular 230 covered practitioners such as attorneys, certified public accountants, enrolled agents, enrolled actuaries, and enrolled retirement plan agents. T.D. 9501 introduced a new category of practitioner: registered tax return preparer.

T.D. 9501 specifies that all individual who for compensation prepare tax returns or refund claims filed after December 31, 2010, must obtain and use a valid preparer tax identification number (PTIN). T.D. 9501 and T.D. 9527 greatly increase in the number of individuals and entities that will be covered by Circular 230. The preamble to T.D. 9501 noted that the IRS expected approximately 1.2 million preparers to apply for a PTIN, and on November 8, 2011, an IRS official reported that the Service had received 745,000 applications. 2 The PTIN requirement applies to all categories of practitioners listed above who are tax return preparers.

The final regulations issued in T.D. 9527 involve significant revisions of Circular 230 as part of the regulatory regime involving tax preparation. The thrust of these regulations begins with the recognition that a penalty regime already exists under Sec. 6694 (for tax preparers) and Sec. 6662 (for taxpayers). The regulatory changes to Section 10.34 of Circular 230 are significant because, while they generally follow the tax return preparer regulations under Sec. 6694 and related regulations as well as other primary sources, the IRS has modified some of the language in Circular 230.

Tax Practice Standards

During the past 25 years, the U.S. tax system has undergone fundamental changes. The complexity of the Internal Revenue Code has dramatically increased since the tax reforms of 1986, which lowered marginal tax rates and somewhat simplified the Code itself. Subsequent legislation and related regulations have increased the system’s complexity by adding overlapping provisions that affect both businesses and individuals.

Efforts to revise the penalty administration for both taxpayers and preparers have increased in the past 25 years. Taxpayers have been subject to heightened penalty exposure under Sec. 6662 and related regulations. A preparer should review the tax return position standards for both undisclosed and disclosed tax return positions under the accuracy-related penalty sections of Sec. 6662. Sec. 6662A extends the accuracy-related penalty to listed and reportable transactions.

Secs. 6662 and 6694 now require the same standards for either an undisclosed or a disclosed tax return position. The phrase “tax return position” is not defined in the Code. However, the AICPA’s Statements on Standards for Tax Services provide a definition of tax return position for the Institute’s members. SSTS No. 1, 3 paragraph 1a, states in part that “a tax return position is (i) a position reflected on a tax return on which a member has specifically advised a taxpayer or (ii) a position about which a member has knowledge of all material facts and, on the basis of those facts, has concluded whether the position is appropriate.” This definition, while enforceable for AICPA members, may also have legal authority in liability cases and under particular state statutes. CPA tax practitioners who advise a client about a tax return position must follow Sec. 6694 (and related administrative pronouncements) in their recommendations to clients.

An undisclosed tax return position, according to Sec. 6694(a)(2), is considered unreasonable unless there is or was substantial authority for the position. Notice 2009-5 4 states that substantial authority has the same meaning as in Regs. Sec. 1.6662-4(d)(2), which is applicable to taxpayers under the accuracy-related penalty regulations. The analysis outlined in Regs. Sec. 1.6662-4(d)(3)(i) for determining whether substantial authority exists is also applicable to Sec. 6694. Additionally, the list of authorities that may be used for purposes of Sec. 6662 is also applicable to preparers under Sec. 6694(a)(2). A tax return preparer is considered to have met the standards of Sec. 6694(a)(2)(A) if the preparer relies in good faith and without verification on the advice of another tax return preparer, adviser, or other party. Regs. Sec. 1.6694-(2)(e)(5) sets forth the factors used in evaluating a return preparer’s good-faith reliance on the advice of another.

Disclosed tax return positions that are reported on Forms 8275 or 8275R (in the case of positions contrary to a regulation) are considered reasonable if there is a reasonable basis for the position as provided under Sec. 6662(d)(2)(B)(ii)(1). According to Regs. Sec. 1.6662-3(b)(3), “[r]easonable basis is a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper.” A disclosed position does not include a tax shelter position as defined under Sec. 6662(d)(2)(C)(ii) or reportable transactions described in Sec. 6662A. Any tax shelter or reportable transactions only will be considered reasonable if the return position would more likely than not be sustained on its merits. Practitioners should also note that Notice 2009-5 does not apply to Sec. 6662A. Sec. 6662A has a two-level penalty provision for understatements arising from reportable transactions: a 20% additional penalty for disclosed positions and a 30% additional penalty for undisclosed positions. CPA tax preparers should review Notice 2009-5 and the regulations cited therein for further details about the return preparer rules. The rules in the notice also have provisions that apply to both signing and nonsigning preparers.

CPA tax practitioners should also review the Statements on Standards for Tax Services Nos. 1–7 (with special emphasis on SSTSs No. 1 and No. 7 for tax return positions and client communications). Members who practice at various juris dictional levels should be aware that the SSTSs apply to all jurisdictions. According to SSTS No. 1, paragraph 5(a), if a taxing authority does not have any written standards for recommending a tax return position or preparing or signing a tax return, or if the taxing authority’s standards are lower than the default position (the realistic-possibility standard), a member should not recommend a tax return position or sign or prepare a return “unless the member has a good-faith belief that the position has at least a realistic possibility of being sustained administratively or judicially on its merits if challenged.” (Note that the realistic-possibility standard no longer appears in Circular 230.) Members should thus determine what particular standards are imposed by the applicable taxing authority and comply with them when preparing and signing a tax return or recommending a tax return position if the standards are higher than the realistic possibility standard. Notwithstanding this rule, SSTS No. 1, paragraph 5(b), allows a member to prepare or sign a tax return or recommend a tax return position if he or she concludes that there is a reasonable basis for the position and the position is appropriately disclosed.

CPAs should also review the discussion contained in SSTS No. 1 regarding responsibilities to their clients regarding advice about penalties, not playing the audit lottery, and ways to avoid penalties through disclosure. It is also important to note that the AICPA Tax Executive Committee finalized the replacements for SSTS Interpretations 1-1 and 1-2 in August 2011 (and they were effective January 1, 2012).

Regs. Affecting Circular 230 Practitioners

The recent revisions to Circular 230 to reflect the new PTIN and registered return preparer rules and the statutory changes to the standards for return preparers were included in T.D. 9527. However, three other recent Treasury Decisions that affect Circular 230, T.D. 9501, 5 T.D. 9503, 6 and T.D. 9523, 7 are first discussed below.

T.D. 9501

Circular 230, Section 10.3, prescribes who may practice before the IRS. Section 10.2(4) defines the phrase “practice before the Internal Revenue Service.” This phrase currently encompasses activities of practitioners such as attorneys, CPAs, enrolled agents, enrolled actuaries, and enrolled retirement plan agents. T.D. 9501 introduces a new category of practitioners: registered tax return preparer. Registered tax return preparers, together with enrolled actuaries and enrolled retirement plan agents, are restricted with respect to the activities they can engage in while practicing before the IRS.

Under T.D. 9501 all individuals who for compensation prepare tax returns or refund claims filed after December 31, 2010, must obtain and use a valid preparer tax identification number (PTIN). IRS Notice 2011-6 8 identifies certain exemptions from the PTIN requirements. The PTIN requirement applies to all categories of practitioners listed above who are tax return preparers.

Presently, attorneys, CPAs, enrolled agents, enrolled actuaries, and enrolled retirement plan agents would be exempted from the additional competency testing and education-related requirements. 9 Specific guidance for the additional education-related requirements has not yet been issued.

T.D. 9503 and T.D. 9523

T.D. 9503 specifies the fees to apply for and to periodically renew a PTIN. T.D. 9523 was issued to address concerns from commentators about redundancies with respect to fees and other application, renewal, and record-keeping requirements. T.D. 9523 eliminates some of these redundancies for enrolled agents and enrolled retirement plan agents.

Sanctions for Violations of Circular 230

The expansion of the group of practitioners governed by Circular 230 is significant because practitioners subject to Circular 230 are subject to sanctions for violations. Potential penalties for violations of Circular 230 are contained in subpart C, Sanctions for Violation of the Regulations. Sanctions include monetary penalties, letters of admonishment, suspension, and disbarment. Section 10.50(a) provides that the secretary of the Treasury or delegate may censure, suspend, or disbar a practitioner after the practitioner has received notice and the practitioner has an opportunity for a proceeding. Sanctions may be imposed if the practitioner is shown to be incompetent or disreputable with the meaning of Section 10.51; fails to comply with any regulation in Circular 230 under the prohibited conduct standards of Section 10.52; or with the intent to defraud, knowingly and willfully misleads or threatens a client or prospective client. A censure is a public reprimand issued by the Office of Professional Responsibility (OPR).

Changes to Circular 230 and Commentary

The AICPA’s Tax Division submitted a letter, dated October 7, 2010, 10 commenting on regulations proposed in August 2010. 11 Many others also commented on the proposed regulations. The regulations made significant revisions to Circular 230, Sections 10.30, 10.34(a), 10.36, and 10.51. The regulatory changes to Section 10.34 of Circular 230 are significant because, while they generally follow the tax return preparer regulations under Sec. 6694 and related regulations as well as other primary sources, some language has been modified. The AICPA’s comments raised many concerns, but the IRS addressed only a few of those in the final regulations.

Section 10.34

Changes to paragraphs 10.34(a)(1)(i) and (ii) outline the standards for tax return preparation. A practitioner may not recklessly, willfully, or through gross incompetence sign a tax return or refund claim, advise a client to take a position on a claim for refund or a tax return, or prepare a portion of a return or refund claim that the practitioner knows or reasonably should have known contains a tax return position that lacks a reasonable basis. Furthermore, such tax return position, advice, or preparation may not involve an unreasonable position, as described in Sec. 6694(a)(2), related regulations, or other published guidance.

Additionally, Sections 10.34(a)(1)(i) and (a)(1)(ii) state that a willful attempt by any practitioner to understate tax liability or that involves a reckless or intentional disregard of rules or regulations described in Sec. 6694(b)(2) (including the related regulations or other published guidance) violates Section 10.34(a). Section 10.34(a)(ii)(C)(2) states that a pattern of conduct is a factor that will be taken into account in determining whether a practitioner has acted recklessly, willfully, or through gross incompetence.

T.D. 9527 notes that the changes to Section 10.34 of Circular 230 closely mirror the Sec. 6694 civil penalty standards with only minor differences. First, the final changes provide that a tax position on a return or refund claim must always meet the minimum reasonable basis standard described in Sec. 6694(a)(2). Additionally, Notice 2009-5 applies in determining whether the tax return preparer took an unreasonable position to the extent that it applies to the return preparer for Sec. 6694 purposes.

The preamble to the proposed regulations 12 stated that there is no exception to Section 10.34(a) similar to Sec. 6694(d), which provides that the IRS must refund or abate a preparer penalty any time there is a final administrative or judicial determination that no tax liability understatement exists. Therefore, a practitioner may still be sanctioned under Section 10.34(a) for a tax position on a refund claim or tax return even though other positions on the return or refund claim might eliminate the understatement.

Second, some commentators on the proposed Section 10.34 regulations were concerned that a violation of Sec. 6694 would automatically translate into a Section 10.34 violation. T.D. 9527 clearly stresses that, if a Sec. 6694 penalty is assessed and the practitioner is referred to OPR for possible discipline under Circular 230, an independent determination regarding whether the practitioner has engaged in reckless, willful, or grossly incompetent conduct under Section 10.34(a) will be made prior to the institution of a disciplinary hearing or the imposition of sanctions. Therefore, a practitioner who is liable for a Sec. 6694 penalty will not be automatically subject to discipline under Section 10.34(a).

According to the IRS, other commentators recommended that the final Section 10.34 regulations adopt the reasonable-basis standard as the appropriate tax return position standard under Section 10.34 rather than the civil penalty standard under Sec. 6694(a). These commentators also requested clarification that would provide that a practitioner is not subject to discipline under Section 10.34(a) if the practitioner fails to disclose a position on a return or refund claim for which there is a reasonable basis. These comments were not adopted. Treasury and the IRS continue to believe that a practitioner is acting unethically in violating the civil penalty standards under Sec. 6694(a), including when a reasonable basis for a position on a return or refund claim exists but the practitioner does not adequately disclose the position within the meaning of Regs. Sec. 1.6694-2(d)(3) through willful, reckless, or grossly incompetent conduct. Thus, final Sections 10.34(a)(1)(i) and (a)(1)(ii) provide three independent practitioner conduct standards, and a violation of any one of these standards can subject the practitioner to discipline under Section 10.34(a).

American Bar Association Comments

The American Bar Association (ABA) Section of Taxation made comments dated December 7, 2010, on the proposed changes to Circular 230. 13 The ABA indicated that the change in Section 10.51 provides three new instances of incompetent and disreputable conduct: “[w]ill fully failing to file on magnetic or other electronic media a tax return prepared by the practitioner when the practitioner is required to do so by the Federal tax laws, unless the failure is due to reasonable cause and not due to willful neglect”; “[w]illfully preparing all or substantially all of, or signing, a tax return or claim for refund when the practitioner does not possess a current or otherwise valid preparer tax identification number or other prescribed identifying number”; and “[w]illfully representing a taxpayer before an officer or employee of the Internal Revenue Service, unless the practitioner is authorized to do so pursuant to this part.” The ABA states:

[T]he term “willfully” is interpreted differently under some provisions of the Code. For example, under the responsible officer penalty, section 6672, the term is applied to knowing conduct, without any determination of knowledge of the law. Under other provisions, such as section 7206(2), which makes it a crime to willfully prepare or assist in preparing a false tax return, the term “willfully” requires evidence of an intentional violation of “a known legal duty.” Thus, the Service is required in the latter situation to establish that the preparer knew he or she was violating the law. Competent preparers might occasionally fail to identify obscure regulations contrary to their position. Occasional, unintentional violations might be considered “disreputable conduct” if a liberal definition of “willfulness” is applied.

Thus, according to the ABA “willfulness should be subject to a re[s]trained interpretation, requiring notice of a violation, failure to self-correct and a continuing pattern of misconduct.”

The OPR has issued “Guidance on Restrictions During Suspension and Disbarment,” 14 to inform practitioners who have been suspended or disbarred from practice before the IRS about specific restrictions that are imposed upon their professional conduct while subject to these restrictions, as well as upon their conduct with respect to others with whom they may deal. Examples of these restrictions include the preparation or filing of documents or other correspondence or communication with the IRS. Practitioners are also prohibited from rendering written advice with respect to any transaction, plan, arrangement, or entity “having a potential for tax avoidance or evasion.”

AICPA Comments

In the AICPA’s comments dated October 7, 2010, the Institute said it wanted to ensure consistency of terms such as “willfully, recklessly, or through gross incompetence” and the definitions thereof. The AICPA recommended that the proposed standards be both further defined and limited in scope. As an example, Section 10.52 defines reckless behavior and gross incompetence by reference to Section 10.51(a)(13), while Section 10.34 referes to Sec. 6694(b)(2) and the related regulations. The AICPA is concerned the two definitions may not be consistent or that the examples in Reg. Sec. 1.6694-3 may not reflect a pattern of behavior that should be subject to sanction under Circular 230.

The two examples in the regulations given for “Willful, reckless or intentional disregard” both state the preparer “knowingly” acted. 15 Therefore, one could argue the examples do not adequately define “reckless or gross incompetence” if the practitioner in the example acted with knowledge. The AICPA is also concerned the OPR may be considering changing the definition of “willfulness” historically applied by the OPR.

The AICPA also wants “tax shelter” to be clearly defined using an objective test. The Code defines a tax shelter to include a partnership or other entity, any investment plan or arrangement, or any other plan or arrangement “if a significant purpose of such partnership, entity, plan or arrangement is the avoidance or evasion of federal income tax”; yet the term “significant purpose” is not defined in the Code or regulations. By incorporating Sec. 6694, relating to unreasonable positions on tax shelters, into Section 10.34 of Circular 230, the “significant purpose” definition becomes an issue. A broad definition of “significant purpose” could bring some ordinary transactions under the tax shelter umbrella putting tax practitioners at unknowing risk.

Tax practitioners need to be able to clearly determine what conduct may result in a sanction or penalty. Notice 2009-5, which provides interim relief to mitigate preparer penalties relating to tax shelters, may not apply to Section 10.34(a). The AICPA recommended that Section 10.34(a) incorporate the position that a practitioner may be disciplined for willfully, recklessly, or through gross incompetence failing to meet preparer penalty standards under Sec. 6694, or, at a minimum, clarify that Notice 2009-5 should apply in determining if a practitioner has satisfied the standards in Section 10.34(a).

Substantial Authority

Practitioners should examine various sources to ascertain whether substantial authority under Section 10.34 can be established. Regs. Sec. 1.6662-4(d)(3)(iv)(C) outlines the sources that can be used to establish substantial authority. Several key court cases should also be reviewed to ascertain what standards courts have used in determining the circumstances under which the substantial-authority standard has been held to be met. For example, in Wise, 16 the Tax Court held that the taxpayer’s reliance upon one case from the Eleventh Circuit was sufficient, even though four other circuit court decisions plus several Tax Court cases were contrary to the Eleventh Circuit’s decision (and supported the IRS position). Similarly, practitioners may want to review Osteen , 17 which provides commentary on both factual and legal analysis.

The area of reportable transactions and tax shelters may end up being particularly complex under the more-likely-than-not (MLTN) standard, especially if there is a line of cases that leads to results contrary to a position that a practitioner recommends or that a taxpayer wants to take on a return. It will be necessary to ascertain whether the MLTN standard is met and, if the amount of the proposed tax return position is material, practitioners may want to obtain a review of their proposed conclusions and should be careful that they are also in compliance with the standards of Section 10.35, which outlines the required standards for tax opinions.

One of the most critical issues for practitioners under Section 10.34 will be interpreting whether substantial authority (as defined in Sec. 6662 and related regulations) exists for undisclosed tax return positions. This issue will be somewhat more difficult due to the existence of several interpretations of what constitutes substantial authority at the circuit court level. There is variance, since five appellate courts have addressed whether substantial authority exists depending upon the facts and circumstances of a particular case. 18 The differing opinions of the circuits must also be coupled with the standards in Section 10.34, which would require that a practitioner may not recklessly, willfully, or through gross incompetence sign a refund claim or a tax return if the practitioner knows or reasonably should know the claim or tax return contains a position that either lacks a reasonable basis (with disclosure) or is an unreasonable position under Sec. 6694(a)(2). These standards also apply to advice to a client to take a position on a tax return or refund claim or to prepare a part of a claim for refund or tax return that does not meet the standards of Sec. 6694.

What constitutes a “pattern” needs to be defined. For example, would a partnership return with 65 Schedules K-1 having the same error constitute a pattern? This potentially could subject to discipline any practitioner who endorses a return position that is likely, by objective measure, to lose in court. As to the practitioner’s mental state, whether a reasonable person could believe that the position would succeed would be irrelevant—what would matter would be whether the practitioner at issue acted willfully, recklessly, or with gross incompetence.

Section 10.36(b)

Section 10.36(b) of Circular 230 states that any practitioner who has (or practitioners who share or have) principal authority and responsibility for overseeing a firm’s tax return preparation practice, refund claims, and other documents filed with the IRS must take reasonable steps to ensure that the firm has adequate procedures in effect for purposes of Circular 230 compliance. The individual or practitioners who have or share this principal authority will be subject to discipline under Section 10.36 if, through willfulness, recklessness, or gross incompetence, reasonable steps are not taken to ensure that the firm has adequate procedures in place to ensure compliance with Circular 230. These procedures must affect all members, associates, and employees of the firm. Discipline will be imposed if one or more of the members, employees, or those associated with the firm are engaged in or have engaged in a pattern of practice within the firm of failing to comply with Circular 230.

Section 10.36(b)(2) adds that discipline may be imposed on the management group or individual with principal authority who actually knows or should know that one or more of these individuals (e.g., employees or individuals) does not comply with Circular 230 and, through recklessness, willfulness, or gross incompetence, fails to take prompt action to correct the noncompliance. Treasury and the IRS believe that expanding Section 10.36 to require firm procedures for tax return preparation services, along with preexisting application to covered opinions under Section 10.35 will encourage firms to self-regulate and will help ensure compliance. Firm responsibility is a critical factor in ensuring high-quality representation and advice for taxpayers.

The AICPA in its comments said it wants a better understanding of what will be considered reasonable steps in establishing adequate procedures of ensuring compliance, and the AICPA wants firm size and scope of tax practice to be considered in determining what steps are reasonable. Particularly in large firms, there may be multiple individuals who have authority and responsibility under Circular 230, thus the AICPA wants a concrete definition of who will be viewed as having principal authority and responsibility for “a firm’s practice of preparing tax returns, claims for refund, or other documents.” In light of the expansion of the scope of Section 10.36 to those overseeing a firm’s practice of preparing tax returns, claims for refund, or other documents for submission to the IRS, the AICPA requested clarification and examples of what constitutes “other documents for submission” to the IRS.

The ABA in its comments noted that the amendments to Section 10.36 are “intended to expand the compliance related procedures to include tax return preparation activities.” The regulations provide that

[a]ny practitioner who has (or practitioners who have or share) principal authority and responsibility for overseeing a firm’s practice of preparing tax returns, claims for refund, or other documents for submission to the Internal Revenue Service must take reasonable steps to insure that the firm has adequate procedures in effect for all members, associates, and employees for purposes of complying with Circular 230.

The ABA believes nonsigning preparers will, under the regulations, be subject to Circular 230 through the cross-reference to Sec. 7701(a)(36) and Regs. Sec. 301.7701-15 in Circular 230, Section 10.2(a)(8). Under that definition, someone who prepares “substantially all” of the return is a preparer subject to Circular 230 registration requirements and sanctions.

Sections 10.50 and 10.51

Section 10.50 provides that the IRS has the authority to accept a practitioner’s offer of consent to be sanctioned rather than continuing or instituting a proceeding under Section 10.60(a). T.D. 9527 states that this change to Section 10.50 was designed to clarify any ambiguity with respect to the IRS’s authority to accept an offer of consent, since certain stakeholders had expressed concerns about whether such authority existed due to the fact that an earlier revision to Circular 230 had eliminated a provision that was similar to the revision in the new Section 10.50 regulations.

Section 10.51 defines disreputable conduct under Circular 230. New Section 10.51(a)(16) defines disreputable conduct to include willfully failing to file on electronic or magnetic media a tax return prepared by the practitioner, where the practitioner is required to do so by federal tax laws. An exception exists when the failure is due to reasonable cause and not to willful neglect. New Section 10.51(a)(17) states that disreputable conduct involves willfully preparing all or substantially all of, or signing, a refund claim or tax return when a practitioner does not possess a current or otherwise valid tax identification number or other prescribed identifying number. Finally, Section 10.51(a)(18) adds that disreputable conduct includes willfully representing a client before an IRS employee or officer unless the practitioner is authorized to do so pursuant to this part.

Conclusion

The AICPA, among other commentators, recommended that the final regulations adopt the reasonable-basis standard as the appropriate return position standard under Section 10.34(a) rather than the civil penalty standards of substantial authority and reasonable basis with adequate disclosure in Sec. 6694(a). T.D. 9527’s preamble responds that Treasury believes that a practitioner acts unethically in violating the civil penalty standards under Sec. 6694(a) when there is a reasonable basis for a position on a return or claim for refund, but the practitioner does not adequately disclose the position through willful, reckless, or grossly incompetent conduct. The final version of Sections 10.34(a)(1)(i) and (a)(1)(ii) provide three independent standards of practitioner conduct. A practitioner who fails to satisfy any one of these standards is subject to discipline under Section 10.34(a).

Section 10.36 requires firm procedures for tax return preparation practice. This change is added to the extant similar requirement for advice on covered opinions. This addition will require firms to reassess their quality-control practices for all aspects of tax practice. In some ways the requirement parallels the requirements for quality control in audits, both for issuers and nonissuers. The matter of tax practice quality control—including taking “reasonable steps”—which is standard to all tax practice procedures, is amplified in Section 10.51(a)(16), regarding failure to file certain tax returns electronically as required by regulation. Commentators thought this procedural failure should not be held to the same standard as more critical elements of Section 10.51(a). In T.D. 9527, the IRS justified the inclusion of the electronic return filing requirement by simply stating that the IRS cannot permit tax return preparers to intentionally disregard the internal revenue laws and continue to practice before the IRS. Practitioners and firms that are not experienced in tax practice quality control and formal engagement documentation are well advised to refer to other sources for practical guidance. The AICPA Statements on Standards of Tax Services (SSTS) Nos. 1–7 provide additional guidance for tax preparers who are AICPA members.

The addition of a new practitioner category of registered tax return preparer dramatically increases the number of individuals and firms that must now comply with Circular 230. The scope of applicability of Circular 230 has increased by approximately two times as the result of amendments included in T.D.s 9501, 9503, 9523, and 9527. This fact alone would be daunting for many practitioners and their firms. Add to this the enhanced preparer penalty regime introduced by T.D. 9527, and the authors predict that practitioners and their firms will find it necessary to significantly reassess the quality-control aspects of tax practice.

The final regulations, together with additional guidance and commentary by the IRS, partially mitigate concerns about preparer penalties and other sanctions that the OPR potentially could impose in addition to extant penalties and sanctions. However, there remains considerable uncertainty as to the extent of those penalties and sanctions and the precise meaning of certain terminology. Many of the references to OPR included in the proposed regulations were eliminated in the final regulations, perhaps because of the creation of the new IRS Return Preparer Office, which has been given the task of overseeing the regulation of return preparers.

 

Authors’ note: The authors would like to thank Mr. Kip Dellinger for his technical assistance.

Footnotes

1 Treasury Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers Before the Internal Revenue Service (31 C.F.R. Part 10).

2 David Williams, director of the IRS Return Preparer Office, speaking at the AICPA’s National Tax Conference, Washington, DC (November 8, 2011).

3 SSTS No. 1, Tax Return Positions.

4 Notice 2009-5, 2009-1 C.B. 309.

5 T.D. 9501, 75 Fed. Reg. 60309 (September 30, 2010).

6 T.D. 9503, 75 Fed. Reg. 60316 (September 30, 2010).

7 T.D. 9523, 76 Fed. Reg. 21805 (April 19, 2011).

8 Notice 2011-6, 2011-3 I.R.B. 315.

9 T.D. 9527.

10 AICPA, “Comments on Proposed Regulations, REG-138637-07, Relating to Regulations Governing Practice Before the Internal Revenue Service” (October 7, 2010).

11 REG-138637-07, released August 23, 2010.

12 Id.

13 American Bar Ass’n, “Comments on Circular 230 Sections 10.2, 10.3, 10.4, 10.5, 10.6, 10.30 and 10.34” (December 7, 2010).

14 IRS Office of Professional Resp., “Guidance on Restrictions During Suspension and Disbarment from Practice Before the Internal Revenue Service” (August 2011).

15 Regs. Sec. 1.6694-3(d), Examples 1 and 2.

16 Wise, T.C. Memo 1997-135.

17 Osteen , 62 F.3d 356 ( 11th Cir . 1995).

18 See Cook and Brooks, “Determining Whether Substantial Authority Exists in Facts and Circumstances Cases,” 111:3 J. Tax’n 173–180 (September 2009).

 

EditorNotes

John Gardner is a professor emeritus, Joseph Kastantin is an associate professor, and William Maas is an assistant professor at the University of Wisconsin–La Crosse in La Crosse, WI. For more information about this article, please contact Prof. Gardner at gardner.john@uwlax.edu.

Newsletter Articles

SPONSORED REPORT

Year-End Tax Planning and What’s New for 2016

A look at year-end tax planning strategies for individuals and businesses, as well as recent federal tax law changes affecting this year’s tax returns.

PRACTICE MANAGEMENT

CPAs Contend With Tax ID Theft

Tax-related identity theft fraud remains a widespread problem that is often difficult for victims and their tax preparers to correct.