Taxpayer Representation in the Shadow of Preparer Discipline

By Robert A. Mathers, J.D., CPA/ABV/PFS, and Kristine R. Wolbach, CPA

Editor: Thomas J. Purcell III, CPA, J.D., Ph.D.

Tax practitioners at times must balance client interests and their own professional interests. This issue takes on even greater import when the CPA is representing a client before the IRS. Whether the CPA was the tax return preparer or was engaged as a successor CPA to represent the client in an examination of a return prepared by another professional, the potential exists for imposition of penalties or sanctions against the CPA.

This column primarily concerns engagements by a CPA where the IRS is investigating the client’s return preparer for possible sanctions, but the CPA representative was not the return preparer. The preparer needs to be aware of special issues the CPA faces when representing a client regarding a return when the representative also prepared the return. Most of these issues are beyond the scope of this column.

A successor CPA needs to be aware of some common preparer penalty and sanction considerations that may apply as well. The CPA needs not only to represent and advocate on behalf of the taxpayer in the examination but also to prepare the taxpayer for a potential role as a witness in the IRS investigation of the preparer’s possible misconduct. Except where otherwise mentioned, this column assumes that the CPA representative did not prepare the return the IRS is examining.


CPAs are subject to statutory and regulatory oversight as tax preparers. The IRS can subject preparers to penalties under Sec. 6694 and subject preparers and representatives to administrative discipline and sanctions under Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10). Sanctions vary depending on the severity and frequency of a preparer or representative’s violations. The IRS may subject tax practitioners who do not meet minimum standards of conduct to disciplinary action, including penalties, reprimand, censure, suspension, or disbarment.

In every IRS examination, the examiner uses a number of fact-finding techniques to inquire into whether the preparer adhered to tax law and procedural requirements. For example, IRS interview questions concerning the preparer cover Circular 230 requirements, such as whether the preparer signed the original return, whether the taxpayer received a copy, and whether the preparer was paid for the services. At the conclusion of every IRS examination, the examiner’s work papers need to document whether assessing preparer penalties for the return was considered. All information on the assertion of preparer penalties is separated from the taxpayer’s case file (Internal Revenue Manual (IRM) §

Return preparer penalties are a key enforcement vehicle for discipline of noncompliant preparers. The IRS Penalty Handbook (IRM §20.1) discusses procedures for assessing preparer penalties for improper tax return preparation and abusive transaction promoters (IRM §20.1.6). The examiner must determine whether a separate preparer penalty examination is warranted, and the examiner’s group manager must approve the penalty investigation. The IRS implements additional examination procedures if the dual goals of the examination are to review the taxpayer’s returns and to examine the former tax return preparer’s practices.

Source of Preparer Penalties

Once the IRS establishes a pattern of preparer noncompliance (IRM §, the IRS Return Preparer Program (RPP) allows for broader examination of returns prepared by that particular preparer beyond those of the taxpayer that is also under examination. Noncompli ant preparers are primarily identified from information obtained from examiners and their group managers, preparer penalty records, and referrals from other governmental and private entities. An IRS area return preparer coordinator (RPC) maintains files on return preparer activities (IRM § The IRS can also appoint a steering committee to determine whether there should be further investigation into whether the preparer made widespread and material errors or if the preparer’s misconduct was intentional. Another referral source for IRS investigation is Form 14157, Complaint: Tax Return Preparer, which generally is filed by a taxpayer. The decision to examine other tax returns prepared by the same preparer must be approved by the IRS area director (IRM §

If a practitioner is suspected of misconduct, the IRS examiner or other parties can also make referrals directly to the IRS Office of Professional Responsibility (OPR). The examiner will also contact the RPC to assist with OPR referral issues (IRM § OPR will investigate to determine the seriousness of the alleged misconduct and appropriate disciplinary action. OPR also can seek a monetary penalty against the practitioner and, in some circumstances, the practitioner’s employer (IRM §

The Representation Engagement

Decide Whether to Accept the Engagement

The first step in any representation is to determine whether to accept the engagement and, if so, to document the representation with an engagement agreement. Should the preparer represent a taxpayer in an IRS audit of the return that he or she prepared? A strict reading of Circular 230, Section 10.29, indicates that this could cause a conflict of interest that would cause OPR to inquire into a violation of this provision:

[A] practitioner shall not represent a client . . . if the representation involves a conflict of interest . . . [or] the representation . . . will be materially limited by . . . a personal interest of the practitioner.

This is further supported by Statement on Standards for Tax Services (SSTS) No. 6, Knowledge of Error: Return Preparation and Administrative Proceedings, paragraph 10. However, this strict interpretation does not take into consideration many other factors associated with the representation and could cause absurd results (see Horwitz, “Conflicts of Interest: IRS Rules Differ From AICPA Professional Standards,” 42 The Tax Adviser 776 (November 2011)).

Circular 230’s conflict-of-interest rule and the CPA’s responsibilities under the SSTS need to be assessed each time a CPA considers an advocacy role with a client. As a best practice, a CPA who was also the preparer should err on the side of caution.

If the CPA is not also the preparer, additional considerations arise. The successor CPA representative needs to interview the taxpayer to determine whether the client meets the firm criteria for acceptance. The original return may have been incompetently prepared, and the client needs to understand that there may be audit adjustments. If the return has many deficiencies, the representative CPA may be placed in a position of proposing audit changes to correct gross errors or omissions. If the client does not approve of this approach, the representative CPA may need to decline the engagement (see SSTS No. 6, ¶¶4 and 6).

If the client interview leads the representative CPA to believe that the taxpayer may have known and approved of the preparation of a grossly inaccurate return that could result in allegations of fraud or other criminal misconduct, the representative CPA should consider referring the client to a tax attorney (see SSTS No. 6, ¶11). A CPA has limited rights to privileged communication with the taxpayer, and this should be discussed and explained in the client engagement letter (see Sec. 7525), even if the representative was not also the preparer.

The representative CPA’s engagement letter should outline the scope and terms of the representation. The AICPA provides a sample tax examination engagement letter as part of its portfolio of practice management forms on the AICPA website. The sample AICPA letter states that it is in the taxpayer’s best interest not to talk directly to the examining agent, and that the client will refer any attempts by the IRS to contact the client directly to the authorized representative. The engagement letter may need to be modified to conform to a specific situation. For instance, it may be in the taxpayer’s best interests to limit any conversation with the original preparer, especially if the IRS may assert preparer penalties.

Define Representation Goals

Representing a taxpayer before the IRS requires the CPA to set clear goals from the outset. Sometimes the representative is far along in the engagement before the specter of a preparer penalty arises. Other times, the representative can identify it as an issue at the outset and can address it in the engagement letter.

For example, a focused IRS audit of a taxpayer who deducted 50% of his adjusted gross income as a charitable deduction might not at first raise any red flags for a preparer penalty. However, as the representative builds a case to advocate the position taken on the return for the taxpayer, he or she may learn that the preparer failed to make disclosures associated with the more-likely-than-not standard required under Circular 230 or failed to withdraw from an insistent client. The preparer also may have failed to follow SSTS No. 3, Certain Procedural Aspects of Preparing Returns , paragraph 2, which requires the preparer to make further inquiries as to the deduction. If the representative faces a situation where the taxpayer could have never substantiated the deduction, then damage control becomes a primary representation goal. One way the representative can protect a client from a penalty assessment is by building a reasonable-cause defense, which could result in flipping the preparer penalty switch to the “on” position.

In the other extreme, a representative’s client may admit to a failure to report income or other indiscretions of a criminal nature, immediately triggering the question of why the preparer failed to take actions necessary to stop this from happening in the first place. In such a situation, the representative can quickly set as a primary goal of the representation to apply the necessary resources to keep the examination at a civil exam level. This may require the cooperation of the preparer, who may also be under investigation for the preparer penalty.

In either of these extremes, the goal of the representation is not to punish the preparer but rather to advocate the best result for the client, following all the applicable regulations and rules of professional responsibility. However, the IRS examiner’s goal may be different. Often, the IRS examiner is looking to the taxpayer as a fountain of information to make a case against the preparer.

“Self-Prepared” Returns

A CPA may be engaged to represent a taxpayer in the examination of a return that the taxpayer maintains was self-prepared. It may seem at first that a self-prepared tax return should not have the shadow of a preparer penalty associated with it. However, the term “preparer” is not just limited to the signing preparer evidenced in the signature block of the return. Attorneys, CPAs, enrolled agents, enrolled retirement plan agents, registered tax return preparers, and other persons representing taxpayers before the IRS fall within the scope of Circular 230, Section 10.0. A self-prepared return under examination may still be subject to IRS inquiry into who assisted the taxpayer in preparing it (Circular 230, §10.8(c)).

Techniques for Conducting the Engagement

While many of the techniques for advocating on behalf of client interests are not affected by the threat or potential threat of a preparer penalty, the following techniques may take on some unique nuances when a CPA who is not also the preparer represents a client:

Establishing representation: As with any client representation, Forms 2848, Power of Attorney and Declaration of Representative , and 8821, Tax Information Authorization , are used to formally position the practitioner and the practitioner’s firm as the taxpayer’s representatives. In addition, serious consideration should be given to employing an engagement letter that clearly specifies the scope of the practitioner’s representation. In cases where there is reason to believe the preparer penalty may be asserted, a privity-of-contract clause in the engagement agreement can clearly distinguish subsequent representation responsibilities from those of the return preparer. It may be advisable to obtain a retainer for this service. The first client meeting, conducted properly, may take several hours, particularly if conflicts of interest need to be addressed.

Form 2848 instructions allow a representative’s power of attorney to extend to tax periods up to three years beyond the current year. Because of issues associated with potential carryforwards, good practice suggests that up to three years should be included, depending on the scope of the examination. The theory is that the examination scope may be increased, depending upon information the IRS learns from the preparer that the client may or may not have known. The IRM contains excellent references to terms that are prohibited (e.g., “all years”) and allowable for specifying the tax issues being faced by the taxpayer.

Additional care must be taken in completing line 6 of Form 2848 if there is potential for a preparer penalty and the client wants to revoke any previous power of attorney the preparer might have for the client’s returns. Line 6 automatically revokes all prior powers of attorney, including those granted to individuals within the same firm. An opt-out box, if checked, retains existing powers of attorney. (Form 2848 further requires attaching copies of previous powers of attorney that are to remain in effect.) Retaining existing powers of attorney may be problematic for the current representative, depending on who holds the prior powers. By ascertaining who holds any prior powers and consciously choosing whether to check the box, representatives can clarify their rights and responsibilities as well as avoid the potential embarrassment of inadvertently revoking authorizations of members of the same firm.

Other potential conflicts of interest may be present. Line 5 of Form 2848 enables the client and representative to address these issues. Of special concern is the ability to accept or negotiate refund checks.

Responding to document requests: Most of the time, the flow of information between the representative and the IRS is controlled through the use of written document requests. However, some nuances are important to consider if the preparer penalty is, or is likely to be, asserted. The first issue is the relevance of the document requests. While the IRS is entitled to obtain information relevant to completing its examination of the taxpayer’s return, it is tempting for the examiner to use the taxpayer’s return as a fishing expedition to obtain facts in asserting potential preparer penalties. As a result, information not relevant to the taxpayer’s return may be included in a document request. To deal with requests for superfluous information, the representative may need to communicate with the examiner’s supervisor or file Form 911, Request for Taxpayer Advocate Service Assistance .

Verbal requests for information create problems and opportunities for misunderstanding. A representative should ask the examiner to always use written document requests.

Interviews: While the IRS is entitled to obtain information from the taxpayer about the issues under consideration, it does not have carte blanche access to the taxpayer for unrelated information. In a preparer investigation, a taxpayer interview is often used in conjunction with an affidavit to make a preliminary determination of the scope of the preparer’s responsibility associated with the return being examined. The authors are aware of at least one situation in which the initial contact with the examiner by the representative led to the examiner’s insisting that the taxpayer attend the initial interview. In this instance, the examiner was traveling hundreds of miles for the examination.

However, Sec. 7521(c) states that examiners “may not require a taxpayer to accompany the representative in the absence of an administrative summons.” (Sec. 7602 specifically authorizes the IRS to issue three types of summonses for: (1) documentary data, such as books and records; (2) testimony of a person; and (3) testimony of third parties. While different from other forms of summonses, the IRS summons is one way the IRS can ensure enforcement without direct judicial oversight.) The IRM specifies that examiners cannot require the taxpayer’s presence at the initial interview (IRM § In this instance, a compromise was worked out without a summons, whereby the representative met with the examiner without the taxpayer. After that initial meeting, the taxpayer was produced for the interview, and no summons was issued.

When it becomes apparent that the preparer is under IRS investigation for Circular 230 violations, the following approaches should be considered with respect to conducting taxpayer interviews:

  • One compromise may be to grant the taxpayer interview, but after the representative’s initial meeting with the examiner. This allows the books and records to be examined without the taxpayer present.
  • Another option might be to allow an interview with the taxpayer without a summons, to allow the taxpayer to answer preparer-related questions but not to answer specific return examination questions. In this instance, the representative needs to be prepared to end the interview if the questions stray from the preparer-related questions. If a compromise cannot be reached, the taxpayer representative has a duty to protect the client by not allowing a taxpayer interview unless the examiner can produce a summons.
  • Sec. 7521(b)(2) says that if the taxpayer clearly states to an IRS employee at any time during any interview (other than an interview initiated by an administrative summons) that the taxpayer wishes to consult with an attorney or other authorized representative, the employee must suspend the interview. The representative must be alert to the possibility that the taxpayer may need to consult with an attorney during an interview.
  • It is possible at a meeting that an examiner may coerce the taxpayer to sign an IRS-prepared questionnaire in the form of an affidavit (presumably impugning the preparer) without advance notice. Prior to allowing the taxpayer to sign, the representative should request a copy of the affidavit for the taxpayer to consider the consequences of the answers and to consult an attorney if appropriate. The taxpayer should not comment on the affidavit in the examiner’s presence. The IRM advises that if an affidavit is used, the IRS is to request that the taxpayer examine and sign the document. If the taxpayer refuses to sign, then the examiner is to insert a notation that the statement or affidavit was true and correct but that the taxpayer refused to sign it (IRM §

In the authors’ experience, some of the following questions have been used:

  • After the return was completed, did you ask any questions regarding the return?
  • After the return was completed, did the preparer explain to you what was on the return? If so, what was said?
  • When you initially met with the preparer, what discussion took place?
  • How did you choose the preparer (advertisement, friend, church member, etc.)? Please specify which paper, friend, or name of church.
  • What did the preparer specifically tell you to do to prepare for the examination?

The answers to the foregoing questions could become problematic in a representation engagement for a taxpayer’s (1) own case before the IRS or (2) defense for any retaliatory action the preparer may bring if the affidavit is not absolutely correct. A preparer whose involvement in the preparation of an income tax return for a client is mischaracterized by false statements about the nature of that preparation engagement may have a cause of action against the publisher of that false statement under various tort actions of libel, slander, trade disparagement, etc., assuming that all of the elements of that cause of action are provable.

The representative should be aware that while the examiner inquiries may be designed to elicit responses regarding the former preparer, the taxpayer’s responses may describe the representative’s statements.

This type of questioning by examiners should be distinguished from the types of protected activities promoted by a recent memorandum for Taxpayer Advocate Service (TAS) employees (TAS-13-0212-008 (2/7/12)). In it, the TAS stated that, when preparers are suspected of fraud, a TAS case advocate should secure written statements from the taxpayer to identify information such as the bank account to which a portion of a refund was deposited where that account did not belong to the taxpayer (see also IRM §13.1.10).

Another question arises regarding recording interviews. Taxpayers have the right to record the interview, as long as 10 days’ advance notice is given to the examiner. The taxpayer may make a recording of any in-person interview using the taxpayer’s own equipment. As a practical consideration, however, the IRS will also have the right to record the interview if a proper request is made of the taxpayer. This is a rarely used technique, but it is something to consider if questions may be asked that are superfluous to the underlying return.

Freedom of Information Act requests: During the examination, it is well-known that information document requests (IDRs) are used to determine the taxpayer’s reliability and cooperation. However, it is less well-known that Form 9984, Examining Officer’s Activity Record, is used by the examiner to record information requested from the taxpayer and contacts to and from the taxpayer, third parties, and the representative. Although Form 9984 is an internal IRS document, it can be discovered by filing a Freedom of Information Act (FOIA) request (5 U.S.C. §552; see the IRS’s Freedom of Information webpage). In situations where a preparer penalty is suspected, representatives should maintain an independent contact sheet to record attempts to contact the examiner or others at the IRS. Included in the information recorded should be the date, time, and name of the IRS employee with whom the conversation took place and a summary of the conversation. This information may be needed in situations where the representative thinks the information that the IRS is gathering may be mischaracterized to assert or support penalties or sanctions against the preparer and are outside the scope of the taxpayer’s return examination.

In these situations, however, the examination record may not be complete until after the examination is completed. T herefore, at the end of each meeting with an examining agent, the representative may need to request a copy of the examination work papers and/or computer worksheets generated. This not only accelerates the discovery of the interpretation of the facts but also helps to shorten delays that are inherent in formal FOIA requests.

The taxpayer has a right to all information used in determining the tax liability. The representative can ask for a copy of the examiner’s work papers. The IRS does not need to turn over any work papers to the representative that may involve reprisal against another person or jeopardize a pending criminal investigation (IRM §


CPAs may be called on to represent taxpayers in an IRS examination where the preparer might be at risk for sanctions. To effectively represent the taxpayer, the CPA representative needs to consider the unique nuances of the representation that may be motivated by the preparer penalty assertion. When the representative is not also the preparer, the representative must focus on the client’s best interests in all phases of the representation, which means the representative’s actions and decisions may not be in the preparer’s best interests. In such a situation, a CPA can follow the best practices presented in this column.


Thomas Purcell is a professor of accounting at Creighton University in Omaha, Neb. Robert Mathers is an attorney/CPA with the law firm Davis & Kuelthau SC in Milwaukee and Fox Valley, Wis. Kristine Wolbach is with McDirmid, Mikkelsen & Secrest PS in Spokane, Wash. Prof. Purcell, Mr. Mathers, and Ms. Wolbach are members of the AICPA Tax Practice Responsibilities Committee. For more information about this column, contact Mr. Mathers at or Ms. Wolbach at


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