Circular 230 Revisions Finalized

The Treasury Department issued final regulations amending a number of Circular 230 standards, including sections on conflicts of interest, contingent fees, conduct for which practitioners may be sanctioned and publicity of disciplinary hearings. Most of the changes became effective upon their issuance on Sept. 26.

The final regulations concerning conflicts of interest continue to allow clients to waive otherwise lawful conflicts, but the requirements have been tightened. Each affected client must waive the conflict and give informed consent, confirmed in writing within 30 days.

Although several commentators had criticized a proposal to curtail the use of contingent fees, the Treasury Department attempted to strike a balance on this issue. The final regulations allow contingent fees for services rendered in connection with an IRS examination of (1) original returns or (2) amended returns and refund claims filed within 120 days of a notice of examination or written challenge by the IRS. Contingent fees also are allowed for interest and penalty analyses and for services in connection with a judicial proceeding. These provisions apply to fee arrangements entered into after March 26, 2008.

Several commentators had questioned the appropriateness of making a practitioner’s willful failure to sign a tax return a sanctionable offense under section 10.50. In response, the Treasury Department included a reasonable-cause exception.

The final regulations also made a concession to concerns about public disclosure of pending disciplinary proceedings. Reports and decisions will be made publicly available only after a final decision of an administrative law judge or appellate authority. Proposed regulations would have opened all hearings, reports, evidence and decisions to the public.

The final regulations did not update Circular 230 to correspond to amendments to IRC section 6694 passed by Congress last spring that raised the standard for preparers from a realistic possibility an undisclosed position would be sustained upon examination to a reasonable belief that the position would “more likely than not” be sustained. But the Treasury Department reserved subsections of section 10.34 and issued proposed regulations for that purpose.