The reach of Circular 230
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 affects 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.
The standards in Circular 230 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.
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 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 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 an IRS request for a client’s documents. While violations 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.
For a detailed discussion of the issues in this area, see “Circular 230: Its Day-to-Day Impact on Tax Practices,” by Blaise M. Sonnier, J.D., DBA, in the February 2012 issue of The Tax Adviser.
—Alistair M. Nevius, editor-in-chief
The Tax Adviser
Also look for articles on the following topics in the February 2012 issue of The Tax Adviser:
- A discussion of dischargeability of tax claims in bankruptcy.
- A look at tax planning opportunities through IRA funding decisions.
- An analysis of recent developments affecting partners and partnerships.
The Tax Adviser is the AICPA’s monthly journal of tax planning, trends and techniques. AICPA members can subscribe to The Tax Adviser for a discounted price of $85 per year. Tax Section members can subscribe for a discounted price of $30 per year. Call 800-513-3037 or email taxsection@aicpa.org for a subscription to the magazine or to become a member of the Tax Section.
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