Circular 230: Its Day-to-Day Impact on Tax Practices

By Blaise M. Sonnier, J.D., DBA

Editor: Thomas J. Purcell III

The standards in Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), apply to practitioners who prepare tax returns; correspond and communicate with the IRS relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Service; and render written advice regarding the tax treatment of a transaction, plan, or arrangement. Circular 230 imposes an obligation on practitioners to exercise due diligence in preparing returns or other documents relating to a federal tax matter and in determining the correctness of oral or written representations made by the practitioner to the IRS. If during the course of the engagement the tax practitioner discovers that the client has not complied with the requirements of the Code or has made any error in (or omission from) any return or other document submitted to the IRS, he or she must promptly advise the client of such and advise the client of the consequences of such noncompliance, error, or omission.

In addition, Circular 230 prohibits a tax return preparer from signing a tax return or claim for refund that the practitioner knows or reasonably should know contains a position that lacks a reasonable basis, or is an unreasonable position as described in Sec. 6694(a)(2) relating to preparer penalties for understatements due to unreasonable positions. Circular 230 also prohibits a tax practitioner from signing a tax return that constitutes a willful attempt to understate the tax liability or a reckless or intentional disregard for the rules and regulations described in Sec. 6694(b)(2) relating to preparer penalties for understatements due to willful or reckless conduct. If a practitioner has advised the client with respect to a position or signed a return that is reasonably likely to give rise to a penalty, Circular 230 requires the practitioner to inform the client of the potential for the penalties and of any opportunity to avoid such penalties by disclosure.

In addition to standards of practice commonly associated with the work of a tax practitioner, Circular 230 also regulates the operation of the practitioner’s day-to-day business by regulating his or her marketing and advertising practices, fee arrangements, and client record return policies. Circular 230 also spells out how to handle a request by the IRS for a client’s documents. While the violation of the duties and restrictions relating to these matters can subject the tax practitioner to the same sanctions as the violation of the tax practice standards, they receive relatively less attention. This item discusses standards imposed on tax practitioners related to the day-to-day operation of their practice.

Regulation of Fees and Terms of Engagement

Circular 230 prohibits a practitioner from charging an unconscionable fee in the preparation of a tax return or other engagement relating to a taxpayer’s rights, privileges, or liabilities under the Code or its regulations (Circular 230, §10.27(a)). In addition, a practitioner is generally prohibited from charging a contingent fee for representing a client before the IRS (Circular 230, §10.27(b)). A contingent fee is one based in whole or in part on whether the position taken by the taxpayer is sustained either by the IRS or in litigation. Examples of a contingent fee would be a fee based on a percentage of the refund reported on a return, a percentage of taxes saved, or one that otherwise depends on a specific result attained. A contingent fee would also include any fee arrangement that requires the practitioner to reimburse the client for all or a portion of a fee in the event that a position is challenged by the IRS or not ultimately sustained.

Circular 230, Section 10.27(b)(2), does allow a contingent fee arrangement between the practitioner and taxpayer in certain situations. A practitioner may charge a contingent fee for representing a client in the IRS’s examination or challenge of (1) an original tax return or (2) an amended return or claim for refund filed within 120 days of the taxpayer’s receiving a written notice of examination of, or written challenge to, the original tax return. A practitioner also may charge a contingent fee for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the IRS. In addition, a practitioner may charge a contingent fee for services rendered in connection with any judicial proceeding arising under the Code.

Circular 230 encourages practitioners to adopt best practices in providing advice and preparing or assisting in the preparation of returns and other documents to the IRS (Circular 230, §10.33). Included in the “best practices” described in Circular 230 is communicating clearly with the client the terms of the engagement. The practitioner and the client should have a clear understanding regarding the scope of the advice or assistance to be rendered and the fee structure for the services rendered. This should include a written engagement letter defining the scope and terms of the engagement.

Return of Client Records

Every practitioner has to deal with the nonpaying client that makes a request for the return of records despite failing to pay the fees due for services rendered. In general, Circular 230 requires a practitioner to promptly return at the request of the client any and all records of the client that are necessary for the client to comply with any federal tax obligations (Circular 230, §10.28). The existence of a dispute over fees does not relieve the practitioner of this obligation. However, if applicable state law allows or permits withholding a client’s records in the case of a dispute over fees, the practitioner need only return those records that must be attached to the taxpayer’s return. In this situation, the client must be provided with reasonable access to review and copy those records the client needs to comply with any federal tax obligations.

Circular 230 only requires the return of the client’s records. The practitioner is entitled to withhold from the client any return, claim for refund, schedule, affidavit, appraisal, or any other document prepared by the practitioner if it is being withheld for nonpayment of fees. For purposes of Circular 230, a client’s records are defined to include (1) documents or records obtained by the practitioner from the client or another source that preexisted the representation of the client, (2) materials prepared by the client or a third party at any time and provided to the practitioner relating to the subject matter of the representation, and (3) any return, claim for refund, schedule, affidavit, appraisal, or any other document prepared by the practitioner (or his or her employee or agent) that was presented to the client in a prior engagement if necessary for the client to comply with current federal tax obligations (Circular 230, §10.28(b)).

Regulation of Marketing and Client Solicitation

Circular 230 prohibits a practitioner from using any form of public communication or private solicitation containing a false, fraudulent, or deceptive statement or claim (Circular 230, §10.30(a)). One such communication would be a practitioner’s assertion that he or she can obtain a better result than other professionals because of a personal relationship with IRS agents or being a prior employee of the IRS. A tax practitioner making an uninvited written or oral solicitation related to a federal tax matter must clearly identify the solicitation as such and identify the source of the information used in choosing the recipient. If a practitioner is prohibited by other state or federal law from sending uninvited solicitations to potential clients (e.g., attorneys in some states are prohibited from sending such solicitations), Circular 230 likewise bars such practice by the practitioner.

Circular 230 permits a tax practitioner to publish the availability of a fee schedule and to disseminate the following fee information to the public: (1) the amount of a fixed fee for a specific, routine service, (2) hourly rates, (3) a range of fees for particular services, and (4) the fee charged for an initial consultation (Circular 230, §10.30(b)). If an engagement may result in costs being incurred (e.g., long-distance phone charges, copy charges, filing fees, etc.), any statement of fee information must include a statement disclosing whether the client will be responsible for such costs.

A practitioner can charge no more than the published rates for at least 30 days after the last publication of the fee schedule. A practitioner may communicate fee information in professional lists, telephone directories, print media, mailings, e-mail, facsimile, hand-delivered flyers, radio, television, and any other method. If the practitioner uses radio or television as the medium, the broadcast must be recorded and the practitioner must retain a recording of the actual transmission. Likewise, the practitioner must retain a copy of any direct mail or e-commerce communications along with a list or other description of all persons to whom the communication was mailed or distributed. Circular 230 requires the practitioner to retain a copy of the broadcast or communication for at least 36 months from the date of its last transmission or use (Circular 230, §10.30(c)).

Responding to an IRS Document Request

Tax practitioners will from time to time receive a request from the IRS for a client’s records pertaining to an ongoing examination or litigation. If the document request is lawful and proper, the practitioner is required to promptly submit the records or information requested by the IRS unless he or she believes in good faith and on reasonable grounds that the records or information are privileged (Circular 230, §10.20(a)). If the practitioner believes that only a portion of the documents or information the IRS requested is covered by privilege, the practitioner must produce the remaining documents.

With respect to any documents that the practitioner believes are privileged, it is recommended that the practitioner prepare a privilege log that identifies each such document (e.g., letter by Ms. CPA to Mr. Client dated xx/xx/xxxx) with an explanation of the basis for the claim of privilege for each document (e.g., document contains legal opinion regarding tax consequences of proposed transaction and is protected by attorney-client and/or work-product privilege).

If the practitioner is not in possession or control of documents the IRS requests, the practitioner must notify the requesting IRS officer or employee and provide any information that the practitioner may have regarding the identity of any person the practitioner believes may have possession or control of the requested documents or information (Circular 230, §10.20(a)(2)). Circular 230 also imposes an affirmative duty on the practitioner to make reasonable inquiry of his or her client regarding the identity of any person who may have possession or control of the requested documents or information. However, the practitioner is not required to make inquiry of any other person or to independently verify any information provided by the client regarding the identity of the person who may have possession of the records.


While discussions about Circular 230 usually focus on the standards it imposes relating to tax returns and opinions, the breadth and scope of Circular 230 also regulates the day-to-day business operations of tax practitioners relating to fees, client solicitations, marketing and advertising, and the management of client files and records. A violation of these provisions may subject a practitioner to sanctions, including censure, suspension, or disbarment from practice before the IRS. Therefore, it is important that tax practitioners implement policies and procedures to ensure compliance with these provisions of Circular 230.



Thomas Purcell III is a professor of accounting and professor of law at Creighton University in Omaha, NE. Blaise Sonnier is a professor at Florida International University in Miami, FL. For more information about this article, contact Prof. Sonnier at

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