Circular 230: professional responsibility for tax practitioners - Professional Standards

California CPA, Nov, 2003 by Evelyn Elgin

How do we keep standards of professionalism alive and well in the tax community? In the past, the IRS' Office of the Director of Practice lacked the resources to effectively pursue potential ethical violations by some tax professionals.

But the landscape has changed with the creation of the Office of Professional Responsibility, which has significant additional staffing and funding to more aggressively pursue problem practitioners.

As the oversight of licensed tax practitioners increases, we need to know what is expected of us to comply with the law and retain our ability to represent taxpayers before the IRS.

I recently participated in a panel discussion on Tax Talk Today, a monthly online broadcast co-sponsored by the IRS, with Steve Whitlock, the deputy director of the IRS Office of Professional Responsibility, and Frank Degan and Bill Parrish, two professionals with extensive experience in tax matters.

Together, we discussed the standards of practice for tax practitioners, the role of the newly organized office in protecting those standards and some difficult ethical situations that tax professionals may face.

CIRCULAR 230

Our focus was Circular 230, a U.S. Treasury Department regulation administered by the Office of Professional Responsibility. Although various versions of the Circular have been in effect for a while, the Circular was significantly revised and strengthened in July 2002.

Circular 230 governs practice before the IRS by CPAs, attorneys, enrolled agents and enrolled actuaries. The Office of Professional Responsibility may only discipline individual practitioners, not their firms. Sanctions for violating the Circular include a private reprimand, censure, suspension or disbarment from practice before the IRS.

Panelists said the Circular highlights the need for practitioners to exercise due diligence in their practice before the IRS. This includes carefully preparing tax returns and other documents which may involve reasonable reliance on the work of others--such as schedule K-1s prepared by others--relating to IRS matters.

As another example, tax professionals are obligated to inform a client of an error or omission on the client's tax return and the consequences of such an error under the Internal Revenue Code and Treasury regulations. If we, as tax professionals, fail to alert clients to errors, they may underpay their taxes and lose an opportunity to correct such mistakes without penalties.

Another area of concern is inappropriate retention of client records. This can occur when a client fails to pay for services rendered, and the tax professional holds on to those files for reimbursement purposes. Under the Circular, a practitioner generally must return requested client records that are necessary for the client to comply with its federal tax obligations.

The panel also considered the meaning of "disreputable conduct" under the Circular. We discussed an example of disreputable conduct involving a tax practitioner who prepared false income tax returns. The returns inflated the taxpayers' incomes, so that the taxpayers could more easily obtain mortgages. The mortgage company made loans based on the inflated incomes and many of the taxpayers defaulted on the loans. The mortgage company reported the practitioner to the Office of Professional Responsibility. The practitioner consented to an indefinite suspension after receiving a formal complaint.

Of course, practitioners may engage in disreputable conduct by failing to keep their own houses in order. Historically, a key area of discipline under Circular 230 has been the failure of practitioners to timely file their own tax returns and pay their own taxes.

The IRS is publishing anonymous summaries of closed disciplinary cases to help practitioners understand their responsibilities and provide increased transparency and accountability for the Office of Professional Responsibility. Circular 230 can be accessed at www.taxtalktoday.tv/index.fm?pgname=10.57.

Practitioners accused of wrongdoing can explain their conduct before the Office of Professional Responsibility. Most cases are resolved through consent, but if the office and practitioner cannot reach agreement, the practitioner may take the case before an administrative law judge and further appeal an adverse ALJ decision to the Treasury and ultimately a district court.

STAY TUNED

As many practitioners feel their way through the latest rules, more changes are coming. Government officials have suggested that changes to Circular 230 in such areas as contingent fees and possibly tax opinions may be proposed as early as this fall.

Evelyn Elgin is a principal in KPMG's Department of Professional Practice-Tax. She has worked for the U.S. Treasury's Office of Tax Policy, where she helped draft amendments to Circular 230.