The RPO, OPR, and Circular 230

The past two years have been extremely hectic and perhaps disconcerting for tax return preparers and other tax professionals. During the 2011 and 2012 filing seasons, the IRS has phased in the preparer mandate for e-filing of individual, trust, and estate tax returns. The mandate has contributed to the Service’s success in increasing the e-filing rate to 79%. To top that off, the IRS established the Return Preparer Office (RPO) in 2010 by naming David R. Williams the director in charge of the new post.

Commissioner Douglas Shulman made the RPO responsible for administering the preparer tax identification number (PTIN) process and the programs involving enrolled agents (EAs), registered tax return preparers (RTRPs), and other enrolled professionals. For example, the RPO is responsible for testing, continuing education, and renewal procedures for the EA and RTRP programs.

The IRS released final regulations (T.D. 9527) on May 31, 2011, making amendments to Circular 230, effective August 2, 2011, that (in part) accommodate the IRS’s internal structural changes by providing the commissioner authority to delegate necessary duties to appropriate IRS offices. While these amendments validate Shulman’s transfer of certain responsibilities to the RPO that were previously under the direction of the IRS Office of Professional Responsibility (OPR), the OPR will continue to enforce the provisions under Circular 230 relating to practitioner conduct and discipline. According to the preamble to T.D. 9527, the OPR “will continue to carry out its mission to interpret and apply the standards of practice for tax professionals in a fair and equitable manner. . . . [A] strong enforcement regime is a key component to increased oversight of the tax return preparer industry.”

OPR Independence and Authority

OPR Director Karen Hawkins has made public speeches in recent months highlighting the need for the OPR to maintain its independence or distance from the commissioner’s tax enforcement responsibilities. In effect, Hawkins wants to avoid what she views as a potential conflict of interest with the IRS’s enforcement functions. The tax press has reported that practitioners believe disciplinary authority should reside with the OPR, in contrast to the RPO, which is part of the commissioner’s office.

Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), spells out the scope of the OPR’s disciplinary authority. Persons who may practice before the IRS include CPAs, attorneys, EAs, RTRPs, and certain others. Those persons who practice before the IRS are subject to the OPR’s disciplinary authority. Circular 230, Section 10.2(a)(4), defines practice as comprehending “all matters connected with a presentation to the Internal Revenue Service. . . . Such presentations include, but are not limited to, preparing documents; filing documents; [and] corresponding and communicating with the [IRS].”

While a number of individuals may have passed a competency examination and thereby received the RTRP designation by press time, it is important to stress that even persons with PTINs who are not RTRPs can be subject to the OPR’s disciplinary oversight. For a CPA firm, this could include those persons who are considered nonsigning preparers for PTIN purposes and under the supervision of a CPA.

Circular 230 is divided into five subparts: (1) rules governing the authority to practice; (2) duties and restrictions relating to practice; (3) sanctions for violation of the regulations; (4) rules applicable to disciplinary proceedings; and (5) general provisions. To gain an appreciation of the types of cases that might come before the OPR, CPAs and other tax professionals are strongly advised to review the section involving the duties and restrictions relating to practice before the IRS.

In an IRS webinar on December 14, 2011, Hawkins stated that most referrals to the OPR come from the IRS’s operating divisions and involve professionals who have allegedly violated Circular 230, Sections 10.22 (diligence as to accuracy) and 10.34 (standards with respect to tax returns and documents). Hawkins also stated that, while the case referrals generally do not mention Section 10.29 (conflicts of interest), her office will look for potential conflicts of interest that might be observable from a review of the case file. Often, conflicts of interest can arise from circumstances such as divorce or separation.

According to Hawkins, if the IRS examination or enforcement personnel believe a practitioner has been “sloppy” in his or tax return preparation, the IRS examiner can assert a preparer penalty. On the other hand, when the OPR receives a referral, it is required to let the practitioner know about the referral and provide him or her with an opportunity to respond or explain the situation. To propose a sanction under Circular 230, the OPR looks for a pattern of infractions by the practitioner. Hawkins has stated that practitioner remorse and a demonstration of rehabilitation can often go a long way toward a recommendation for a lesser sanction.

Once the OPR has developed a case against a practitioner based on a referral, it can negotiate the type of discipline or sanction that it believes is warranted. However, the OPR cannot unilaterally impose a sanction against a practitioner. The practitioner can agree with the OPR’s position or negotiate with the office regarding the appropriate sanction, or the practitioner can refuse to negotiate or settle. If the practitioner refuses to settle, the OPR has authority to file a complaint against the practitioner using the administrative hearing process. In most instances, the practitioner will attempt to negotiate and settle.

While this column strives to provide AICPA members with a general overview of the RPO and the OPR, the AICPA will also keep CPAs apprised of developments in these two critical IRS offices as the Service continues to roll out and implement the RTRP program and other initiatives.