On September 26, 2007, the IRS released final and proposed regulations (TD 9359 and REG-138637-07) amending Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers Before the Internal Revenue Service.
The Service published proposed Circular 230 regulations in February 2006 (REG-122380-02). The final regulations contain many changes from the proposed regulations, based on practitioner comments received by the Service. In addition, since the 2006 proposed regulations were issued, the Small Business and Work Opportunity Tax Act, P.L. 110-28 (SBWOTA), was enacted, which made significant changes to the return preparer standards and penalties under Sec. 6694. The final regulations do not address those new standards and increased penalties, but the simultaneously issued proposed regulations intend to conform Circular 230 to the SBWOTA changes.
The final regulations are effective September 26, 2007; the proposed regulations are proposed to be effective for returns filed or advice provided no earlier than January 1, 2008.
Giving Written Advice Is Practice
The American Jobs Creation Act of 2004, P.L. 108-357 (AJCA), amended 31 USC Section 330 (which authorizes the regulation of practice before the Service and under which Circular 230 is promulgated) to allow monetary penalties to be imposed on a practitioner who (1) is incompetent, (2) is disreputable, (3) violates any regulation under 31 USC Section 330, or (4) willfully and knowingly misleads or threatens represented parties or a prospective party with an intent to defraud. Consistent with that, the final regulations provide that practice before the IRS includes rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion (Circular 230 §10.2(a)(4)). Commentators had argued that, 31 USC Section 330 notwithstanding, providing tax advice does not in and of itself constitute practice before the IRS; the Service disagreed and concluded that the rendering of written advice is practice before the IRS subject to Circular 230 when it is provided by a practitioner.
However, the final regulations say that an attorney or CPA is not requiredto file a Form 2848, Power of Attorneyand Declaration of Representative, with the IRS before rendering written advice covered under Circular 230 §10.35, Requirements for Covered Opinions, or §10.37, Requirements for Other Written Advice (Circular 230 §§10.3(a) and (b)). Any other practice before the IRS still requires the attorney or CPA to file Form 2848.
Enrolled Retirement Plan Agents
The final regulations create an “enrolled retirement plan agent” designation for individuals who demonstrate their competency to provide technical services to plan sponsors to maintain the tax-qualified status of their retirement plans (Circular 230 §10.3(e)). The regulations generally limit the practice of enrolled retirement plan agents to representation on issues arising under the following employee plan programs: (1) the Employee Plans Determination Letter program, (2) the Employee Plans Compliance Resolution System, and (3) the Employee Plans Master, Prototype, and Volume Submitter program.
Enrolled retirement plan agents will also be permitted to represent taxpayers in connection with 5300 and 5500 series forms, which are filed by retirement plans and plan sponsors, but not regarding actuarial forms or schedules. They will be subject to a competency examination, a renewal process, and continuing professional education requirements, similar to the current requirements for enrolled agents.
The final regulations set forth the procedures for enrollment and renewal of enrollment for both enrolledagents and enrolled retirement plan agents (Circular 230 §§10.4–10.6).
Limited Practice Before the IRS
The 2006 proposed regulations contained a provision that would have revoked the authorization of unenrolled return preparers to represent a taxpayer during an examination. The final regulations did not adopt this proposed change. Therefore, an individual who is not otherwise a practitioner can represent a taxpayer during an examination if that individual prepared the return for the taxable period under examination (Circular 230 §10.7(c)). This applies only to examinations; unenrolled return preparers may not represent taxpayers before any other IRS office.
The final regulations do prohibit former government employees from appearing before, or communicating with the intent to influence, an employee of Treasury about any rule that they were involved in developing (Circular 230 §10.25). This prohibition lasts for a period of one year after government employment is ended.
One area of concern to the Service is the use of contingent fees for return preparation services, and especially for refund claims or amended returns filed late in the examination process. The IRS feels that contingent fees in these cases exploit the “audit lottery” (i.e., the low probability that any particular return will be audited).
However, the final regulations do permit contingent fee arrangements in other situations. Specifically, the final regulations permit a practitioner to charge a contingent fee for services rendered in connection with the IRS examination of, or challenge to, an original tax return, or an amended return or claim for refund or credit where the amended return or claim for refund or credit was filed within 120 days of the taxpayer’s receiving a written notice of the examination or a written challenge to the original tax return. The final regulations also permit the use of contingent fees for interest and penalty reviews and for services rendered in connection with any judicial proceeding arising under the Code (Circular 230 §10.27(b)).
Because this provision could have an adverse effect on pending or imminent transactions, the new contingent fee rules will apply to fee arrangements entered into after March 26, 2008.
Under the final regulations, if a practitioner has clients with conflicting interests, the practitioner is required to obtain written consent to the representation from each affected client in order to represent the conflicting interests (Circular 230 §10.29).
Incompetence and Disreputable Conduct
The 2006 proposed regulations included “failure to sign a tax return” as a type of disreputable conduct under Circular 230 §10.51, Incompetence and Disreputable Conduct. The Service received complaints that this was inappropriate unless the rule clarified how practitioners should appropriately handle competing duties, including Sec. 6694, relating to a tax return preparer’s understatement of a taxpayer’s liability, and Circular 230 §10.34, Standards for Advising with Respect to Tax Return Positions and for Preparing or Signing Returns. The Service agrees that there might be instances in which the failure to sign a return should not lead to discipline, so the final regulations provide that failure to sign a return is not disreputable conduct if the failure is due to reasonable cause and not to willful neglect (Circular 230 §10.51(a)(14)).
The final regulations allow the director of the Office of Professional Responsibility (OPR) to confer with a practitioner, employer, firm or other entity, or appraiser concerning allegations of misconduct even if a proceeding has not been instituted (Circular 230 §10.61). Commentators suggested that there should be a right to a conference with the OPR, but the Service rejected this suggestion because the OPR’s policy is that it will not deny a first request for a conference.
Service of Complaint and OPR Files
The final regulations provide that within 10 days of serving a complaint, copies of the evidence supporting the complaint must be served on the respondent in any manner provided by regulations (Circular 230 §10.63(d)). Commentators had asked that the regulations require the OPR to furnish evidencenot solely supporting the complaint,but also additional evidence collectedduring the course of investigating the practitioner’s conduct, including any exculpatory evidence. The IRS did not adopt this requirement in the regulations but stated that it intends for the practice of releasing OPR administrative files on request to continue.
The Service says it expects to issue Internal Revenue Manual provisions in the near future on the OPR’s investigation procedures, and it expects that those provisions will formalize the definition of the OPR administrative file and the current practice of providing it to the respondent on request. To ensure that a respondent has access to the evidence in support of the OPR’s position, as well as other evidence included in the investigatory file, the Service is considering how the existing practice relating to the OPR administrative file can be formalized and will consider addressing this issue in future published guidance.
The final regulations provide that the OPR director may file supplemental charges against a practitioner or appraiser by amending the complaint, with the permission of an administrative law judge (ALJ), to reflect additional charges if the practitioner or appraiser is given notice and an opportunity to prepare a defense to the supplemental charges (Circular 230 §10.65). Examples of when this might happen include if it appears the practitioner has falsely and in bad faith denied a material allegation of fact or if it appears the practitioner has knowingly introduced false testimony.
Discovery, Hearings, and Publicity
The final regulations contain a number of revisions to the rules applicable to disciplinary proceedings. They introduce a right to move for summary adjudication of all or part of the legal issues in a controversy (Circular 230 §10.68(a)(2)). They also require a party filing a nondispositive or procedural motion to first contact the other party to determine if the other party has an objection; if it does, the motion must state that (Circular 230 §10.68(a)(3)). ALJs are nowrequired to issue written orders disposing of any motion (Circular 230 §10.68(d)).
The final regulations include rules governing discovery (and limitations on discovery), depositions, and requests for admission (Circular 230 §10.71). They also include new procedural rules for hearings (Circular 230 §10.72).
To provide greater transparency to the disciplinary process, the final regulations provide that reports and decisions of the ALJ and appellate authority will be available for public inspection within 30 days after a decision becomes final, subject to procedures to protect the identities of any third-party taxpayers (Circular 230 §10.72(d)). In response to commentators’ concerns that premature public disclosure could potentially tarnish practitioners’ reputations, the final regulations require that disclosure of the disciplinary decision be delayed until after the decision becomes final.
Administrative Law Judges’ Decisions
The 2006 proposed regulations included a streamlined appeals process for ALJs’ decisions. However, the Service heard many concerns from practitioners about this process. As a result, the final regulations did not adopt the proposed changes, and the rules in Circular 230 §§10.77, Appeal of Decision of Administrative Law Judge, and 10.78, Decision on Review, remain in effect. The finalregulations do require the Service to make an agency decision within 180 days after receipt of an appeal (Circular 230 §10.78).
The final regulations expand the OPR’s authority to institute expedited suspension proceedings against practitioners who advance frivolous or obstructionist positions (after a sanction by a court of competent jurisdiction) (Circular 230 §10.82), despite objections by commentators that this will erode practitioners’ right to due process.
Preparer Standards and Penalties
The proposed regulations, issued simultaneously with the final regulations, are intended to conform Cir-cular 230 to the civil penalty standards for return preparers. The SBWOTA extended the application of the income tax return preparer penalties to all tax return preparers, altered the standards of conduct that must be met to avoid imposition of the penalties for preparing a return that reflects an understatement of liability, and increased applicable penalties.
To conform to the new provisions in the Code, the Service proposes amending Circular 230 §10.34(a) to require that a practitioner may not sign a tax return as a preparer unless the practitioner has a reasonable belief that the tax treatment of each position on the return would more likely than not be sustained on its merits, or that there is a reasonable basis for each position and each position is adequately disclosed to the Service.
Under the proposed rules, a practitioner also may not advise a client to take a position on a tax return or prepare the portion of a tax return on which a position is taken unless (1) the practitioner has a reasonable belief that the position satisfies the more-likely-than-not standard or (2) the position has a reasonable basis and is adequately disclosed to the IRS. The definitions of “more likely than not” and “reasonable basis” under Circular 230 §10.34(e) are proposed to be amended to reflect these changes in accordance with the well-established definitions of these terms in the regulations under Sec. 6662. (See Regs. Secs. 1.6662-4(d)(2) and 1.6662-3(b)(3).)
In order to apply the proposed changes to Circular 230 §10.34 consistently with the transitional relief issued by the Service in Notice 2007-54, the proposed regulations are intended to apply to returns filed or advice provided on or after the date that final regulations are published in the Federal Register, but no earlier than January 1, 2008.
Finally, the final regulations authorize the imposition of a monetary penalty in addition to, or in lieu of, any other sanction, in accordance with AJCA Section 822(a).