Integrating Circular 230 into the Tax Curriculum

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

Editor: Annette Nellen, J.D., CPA

In 2010 and 2011, the IRS released new requirements for individuals who want to prepare or assist in the preparation of tax returns for compensation. Since many accounting majors will be involved in tax preparation during internships or post-college careers, the basics of the new IRS return preparer program and its related changes to rules of conduct should be covered in accounting majors’ required tax courses. This column reviews the recent changes, including those made to Circular 230 as part of this initiative. Circular 230 covers rules of conduct for those who practice before the IRS, which includes preparing returns and assisting clients with IRS examinations, appeals, and collection matters.

Circular 230 is crucial to tax education because it forms the ethical standards of tax practice. Students who plan to become tax practitioners must become well acquainted with Circular 230 along with the underlying laws and regulations governing tax practice.

Accounting majors often intend to become CPAs. CPAs and attorneys are bound by codes of conduct set by licensing bodies that in some cases are more stringent than the Circular 230 requirements for tax preparers. Circular 230 provides ethical guidance for all tax preparers. CPAs, attorneys, and enrolled agents (EAs) who are in good standing with the IRS are authorized to provide any tax-related services to clients, assuming that the CPA, attorney, or EA is competent to perform those services. CPAs and attorneys must file a declaration that their professional status is current and state that they are authorized to represent the client to practice before the IRS. The IRS grants EA status based on a three-part examination and subsequent continuing education requirements.

Accounting majors who do not plan to become CPAs, but who want to engage in tax work, may choose to become EAs. Accounting majors could also choose to obtain the new registered tax return preparer (RTRP) designation.

New Regulations Affecting Circular 230

Regulations governing the practice of representatives before the IRS are included in a single document: Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10).

In 2010 and 2011, Treasury issued four Treasury decisions (T.D.s) affecting Circular 230. All became effective on or before August 2, 2011:

  1. T.D. 9501 requires preparers to furnish a preparer tax identification number (PTIN) on tax returns and claims for refund of tax filed after December 31, 2010. This requirement is designed to help ensure preparers are competent and trustworthy. This T.D. also introduces a new category of preparer, the RTRP. The IRS supplemented this T.D. with Notice 2011-45, which contains additional information on the RTRP designation. The IRS also provided additional guidance on PTIN eligibility in Notice 2011-6, which includes limited exceptions to the rules on who may obtain PTINs that are relevant to this column: It extends PTIN eligibility to individuals who are employed at a law firm, certified public accounting firm, or other recognized firm of the tax return preparers who sign the tax return or claim for refund that the individual works on. The individual must still pass the requisite tax compliance check and suitability check when such checks become available.
  2. T.D. 9503 imposes a $64.25 fee to apply for a PTIN (with an annual renewal fee of $63). The individual liable for the application or renewal fee is the individual applying for and renewing a PTIN.
  3. T.D. 9523 provides supplemental information about the PTIN fee requirements in response to comments from the practitioner community.
  4. T.D. 9527 includes a wide range of revisions to Circular 230 relating to the new PTIN and RTRP rules and the statutory changes that have been made over the last few years to the standards for return preparers.

While all these revisions are important, this column focuses only on a few of the changes. Tax educators who wish to explore the Circular 230 revisions in more detail may find it useful to refer to our article in the January 2012 issue of The Tax Adviser (“2010–2011 Revisions to Circular 230,” 43 The Tax Adviser 42 (January 2012)).

Circular 230 Effects on Student Interns

The revisions to Circular 230 have a profound impact on all preparers including compensated student interns who prepare all or substantially all of a tax return or claim for refund, even if the intern is not the person who signs as the preparer (a supervised preparer). Supervised preparers need to provide a supervisor’s PTIN when applying for or renewing their PTIN. While present IRS guidance is clear that an individual may have only one PTIN, the matter of whether the PTIN, once obtained, is “portable” is not addressed. We phoned the IRS PTIN help line June 9, 2011, and the representative confirmed that the PTIN goes with the individual who obtained it if that individual changes employers.

Practice Before the IRS

Students must understand the linkage between ethical standards of tax practice, preparer penalties, and other sanctions for violating tax laws and regulations. Tax preparers serve several functions addressed in Circular 230: preparing and filing documents; corresponding and communicating with the IRS; representing taxpayers before the IRS; and rendering oral and written advice to taxpayers on tax positions and plans, entities, or arrangements with a tax potential or tax-avoidance potential.

Attorneys, CPAs, and EAs are permitted to perform all tax services for clients so long as the practitioner is in good standing, actively licensed, and professionally competent to perform the services, and thus they have no need to become an RTRP. To become an RTRP, a practitioner must pass an IRS competency exam and meet continuing education requirements. Tax practice by individuals with the RTRP designation is restricted. Generally, an RTRP may represent clients before the IRS only if it is an examination matter and the RTRP prepared the return under examination. RTRPs may not represent these clients in collection and appeals matters. An overview of tax return preparer requirements for the above classifications is available on the IRS website. Additional information on the different categories of return preparers and links to relevant guidance can be found in Nellen, “Yet More Paid-Return Preparer Categories!AICPA Tax Insider (January 13, 2011).

Diligence as to Accuracy

Section 10.22 of Circular 230 imposes requirements on the practitioner with respect to accuracy-related diligence: in preparing or assisting, or approving and filing any documents relating to IRS matters; in determining the accuracy of oral or written representations by the practitioner in any IRS matters; and in determining the accuracy of oral or written representations by the practitioner to his or her clients relating to IRS matters of the client. It is presumed, except as discussed in Sections 10.34, 10.35, and 10.37, that the practitioner will have exercised due diligence if the practitioner relies on the work of another person. To fulfill this presumption the practitioner must exercise reasonable care in engaging, supervising, training, and evaluating that person, taking into consideration the relationship between the practitioner and that person.

In an October 2010 article in The Tax Adviser, the authors suggested that due diligence in tax preparation is the diligence or care that a reasonable preparer would use under the same circumstances (Milford and Swails, “Tax Return Due Diligence: Basic Considerations,” 41 The Tax Adviser 690 (October 2010)). The article poses four questions that illustrate the application of due diligence in tax preparation:

  1. Did the preparer apply the law appropriately to the facts?
  2. Did the preparer have all the relevant facts?
  3. What effort is required of a reasonable and prudent preparer to obtain the pertinent facts?
  4. What should the preparer document in the client’s file?

In the illustrative example below, students are given the opportunity to assess the extent to which the practitioner exercised due diligence.

There are some differences between the accountant’s obligation to exercise due care in all engagements and the tax practitioner’s obligation to exercise due diligence in accordance with Circular 230. Due care is the fifth principle of the AICPA Code of Professional Conduct . Knowledge and diligence are common components of due care. Performing professional engagements that require expertise or time that a CPA does not possess violates the principle of due care. How due care is practiced also differs with the nature of the professional service. Due care involves acting for someone else’s benefit or to someone else’s specifications. Because CPAs rarely know exactly who will be the ultimate user of their audits, reviews, and attestations, due care consists of exercising diligence in following the appropriate professional standards. Professional standards, not client specifications, constitute the basis for these services. (See Colson, “Professional Responsibilities: Due Care.” 74(7) CPA Journal 88 (July 2004).)

The IRS has set specific criteria to establish compliance with the due-diligence standard for some items, such as the earned income tax credit (Sec. 6695(g) and Form 8867, Paid Preparer’s Earned Income Credit Checklist). There are no explicit guidelines for other areas; however, communication with the client is always important. As an illustration, consider the following scenario.

Example 1: A , the sole shareholder of a retail store taxed as a C corporation, spends $75,000 remodeling her home and directly pays the costs using the corporate checking account. The cost is placed on the corporation’s books as a leasehold improvement. Each year, the tax preparer comes to the store to gather information to prepare the tax return and observes no changes or improvements in the store. The preparer’s due-diligence obligations include asking A about the leasehold improvements, as she has conflicting information about this item.

Tax Positions and Related Compliance Standards

When a practitioner prepares a tax return or renders advice to a tax client, each position taken or recommended by the practitioner must meet the relevant threshold in Circular 230. The expectation is that a tax preparer who has documented evidence of compliance with each relevant standard should successfully avoid penalties and other sanctions under Circular 230. The following discussion outlines the tax preparer’s risks.

Preparers who fail to comply with Circular 230 will likely be subject to penalties and possibly other sanctions in the following three circumstances (among others), if they advise a client to:

  • Not file a required tax return or other tax document or submit returns or documents with the intent to delay or impede the IRS.
  • File a frivolous tax return or other required tax document or to take any other frivolous tax position.
  • File a tax return or other required tax document that contains or omits information in a manner that demonstrates intentional disregard of a rule or regulation without also submitting evidence of a good-faith challenge to the rule or regulation.

The tax preparer has also failed to comply with Circular 230 and will likely be subject to penalties and possibly other sanctions if he or she advises a client to take a position on a return or a document that does not meet the applicable tax reporting standard. The three standards, ranked from lowest to highest, are:

Reasonable basis: Reasonable basis is the minimum standard for all tax advice and for preparation of all tax returns and other required tax documents to avoid a penalty under Sec. 6694. If a return position is reasonably based on at least one relevant and persuasive authority cited, the return position will generally satisfy this standard. Regs. Sec. 1.6662-4(d)(3)(iii) includes a lengthy list of such authorities. For purposes of Sec. 6694, the reasonable-basis standard applies only if the relevant tax position taken is disclosed on the return or document so that the IRS is aware of a potential issue. Disclosure, itself, or a failure to disclose is not a part of the more ethically based Circular 230, which provides that a practitioner is subject to discipline if he or she recommends (or knowingly reports) a tax position that is unreasonable (Circular 230, §10.34). That is, the Office of Professional Responsibility (OPR), which enforces Circular 230, is not interested in parsing whether a practitioner failed to meet the substantial-authority confidence threshold, even if the position is not disclosed. The trade-off is that Circular 230 comes into play even when there is no understatement of tax (which is not the case for the Sec. 6694 penalty).

Substantial authority: Substantial authority for the tax treatment of an item exists only if the weight of the tax authorities (Internal Revenue Code, Treasury regulations, court cases, etc.) supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment (Regs. Sec. 1.6662-4(d)). All authorities relevant to the tax treatment of an item, including the authorities contrary to the treatment, are taken into account in determining whether substantial authority exists. This standard may be measured as a greater than 40% likelihood of being sustained on its merits.

More likely than not: More likely than not is “the standard that is met when there is a greater than 50-percent likelihood of the position being upheld” (Regs. Sec. 1.6662-4(d)(2)). This is the standard for tax shelters (Sec. 6694) and reportable transactions, both of which are beyond the scope of this column.

Sample Exercise for Students

Example 2: The taxpayer, B , is the sole owner of a C corporation. B wishes to sell the entity and contracts with a firm for a $50,000 fee to determine the fair value of the entity and to assist in finding a buyer to purchase the stock. To maintain confidentiality, B pays the fee from his personal checking account. B instructs the corporation’s bookkeeper to reimburse him for the $50,000 fee and to charge it to advertising expense. The entity’s total revenue is approximately $2 million for the year and prior year, while profit before tax is approximately $150,000 this year and $190,000 the prior year. B has adjusted gross income of $270,000. The $50,000 reimbursement from the corporation was not reported on B’s personal tax return. B’s external CPA prepares both the corporation’s return and B’s personal return. The CPA was aware of the potential sale of the business but was not informed about the $50,000 fee or reimbursement. The returns are all timely filed.

Students may benefit from researching and answering the following questions. A more detailed suggestion for the solution is available online.

  1. Are tax return preparers covered under Circular 230? Yes.
  2. Has the preparer exercised due diligence in preparation of the individual and corporate tax returns in this case? Probably not. Advertising expense is a corporation tax return listed item. Given the large advertising expense relative to the corporation’s total revenue, the preparer probably should have questioned this item while preparing the corporation’s tax return. In addition, it may be larger than in prior years. That questioning may have led the preparer to include the amount on the taxpayer’s personal tax return as a constructive dividend, not deductible by the corporation. A tax preparer should inquire about or review related-party transactions when preparing the return. For their own protection, preparers need to document the communication made with the client and relied on while preparing the return.
  3. What preparer behaviors or other actions may trigger penalties and other sanctions under Circular 230? The failure to exercise due care in representing the taxpayer before the IRS, including failure to exercise due diligence in preparing the return, could expose the preparer to penalties and/or sanctions.
  4. Is the tax preparer in this example exposed to Circular 230 penalties and other sanctions as a result of preparing income tax returns for the shareholder and/or the C corporation? This depends on IRS interpretations.
  5. Are taxpayers covered under Circular 230? Not directly. Tax preparers are covered. Apart from Circular 230, tax law allows the IRS to collect unpaid tax, interest, and penalties from taxpayers when tax liability is understated on a tax return.


This column is intended to assist tax educators in preparing their students for tax internships, full-time employment in tax, and for the Uniform CPA Examination. Circular 230 is a compilation of regulations applicable to paid tax return preparers and provides ethical guidance for all individuals and firms within its scope. It is easily accessible (free) and searchable. Furthermore, it serves as a good introduction for undergraduate accounting students who are learning the rules of conduct relevant for tax work and how the IRS designates and regulates paid tax return preparers.




Annette Nellen is a professor in the Department of Accounting and Finance at San José State University in San José, CA. She is a former member of the AICPA Tax Division’s Tax Executive Committee and is a current member of the Tax Division’s Individual Income Tax Technical Resource Panel. 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 column, please contact Prof. Maas at

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