2007 Circular 230 Revisions

Robert E. McKenzie, Esq.

Arnstein & Lehr LLP

 

The United States Internal Revenue Service Sept. 26 issued final rules (T.D. 9359)making a host of changes to controversial regulations governing tax practice under Circular 230, among them allowing contingent fees under limited circumstances and slightly modifying rules requiring disclosure of conflicts of interest.

 

Practice Before the Internal Revenue Service

On October 22, 2004, the President signed the Jobs Act. Section 822(b) of the Act amends section 330 of title 31 of the United States Code by adding a provision that recognizes the Secretary’s authority to impose standards for written advice rendered with respect to any entity, transaction plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion. Accordingly, §10.2(d) has been modified to clarify that the rendering of this written advice is practice before the IRS subject to Circular 230 when it is provided by a practitioner.

 

Contingent Fees 10.27

IRS said it will now allow contingency fees for services in connection with an original tax return, or an amended return or claim for refund or credit filed within 120 days after the taxpayer receives written notice of an audit or a written challenge to the original return. Contingent fees also will be permitted for interest and penalty reviews "because there is no exploitation of the audit lottery in these situations as they are generally completed on a post-audit basis," IRS said.

 

The contingent fee exception for interest and penalty reviews also revolved around timing, IRS said, since these reviews are usually completed after an audit. Finally, the final regulations adopt the original proposal that allows a practitioner to charge a contingent fee for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code. To eliminate any adverse impact that the adoption of these final regulations could have on pending or imminent transactions, IRS said the language on contingent fees will apply to arrangements entered into after March 26, 2008.

 

Conflicting Interests 10.29

Section 10.29 of the regulations prohibits a practitioner from representing conflicting interests before the IRS, except with the express consent of all directly interested parties after full disclosure. Section 10.29 of the revised regulations clarifies that a practitioner is required to obtain consents in writing from each affected client in order to represent the conflicting interests. The written consent may vary in form. The practitioner may prepare a letter to the client outlining the conflict, as well as the possible implications of the conflict, and submit the letter to the client for the client to countersign. A verbal consent followed by a confirming letter written by the practitioner will suffice if the client also signs the letter. Confirmation now can be made "within a reasonable period after the informed consent," but in no event later than 30 days In general, the countersigning requirement is "appropriate to protect taxpayer interests and protect settlements from future collateral attack," IRS said. The government said it did not intend to crack down on minor technical violations in this area "when there is little or no injury to a client, the public, or tax administration." .

 

Enrolled Retirement Plan Agents 10.3(e)

The final rules also created a new "enrolled retirement plan agent" (ERPA) designation. The proposed rules had asked for comments on a recommendation that individuals providing technical services to retirement plan sponsors to maintain the tax-qualified status of their plans be authorized to practice. The final rules established, under Section 10.3(e), the ERPA designation for certain programs in the Employee Plans Division, including:

 

. determination letters,

 

. compliance resolution, and

 

. master and prototype and volume submitter programs.

 

ERPAs "also are permitted to represent taxpayers generally with respect to IRS forms under the 5300 and 5500 series, which are filed by retirement plans and plan sponsors, but not with respect to actuarial forms or schedules," IRS and Treasury said. To be enrolled as an ERPA, an individual who has not engaged in misconduct would have to pass a written examination given by the Office of Professional Responsibility. The designation also would be available to certain former IRS employees with technical knowledge who have not engaged in misconduct. Under the final rules, ERPAs must re-enroll every three years and receive 72 hours of continuing professional education credits and six hours of ethics education during the enrollment cycle. The education and ethics credits must be taken each year in the three-year cycle.

 

Standards With Respect to Tax Returns and Documents, Affidavits and Other Papers 10.34

Section 10.34 sets forth standards applicable to advice with respect to tax return positions and applicable to preparing or signing returns. Section 10.34 of the proposed regulations sets forth standards applicable to practitioners who advise clients with respect to documents, affidavits and other papers submitted to the IRS. The final regulations also provide separate standards for papers that take a position with respect to Federal tax matters and standards for advising a client to file papers involving procedural or factual matters. Under the regulations, a practitioner may not advise a client to take a position on a submission to the IRS unless the position is not frivolous. A practitioner also may not advise a client to submit a document to the IRS that is meant primarily for delay; is frivolous or groundless; or contains or omits information in a manner that demonstrates an intentional disregard of a rule or regulation. With regard to factual matters, a practitioner advising a client to take a position on a tax return, document, affidavit or other paper submitted to the Internal Revenue Service, or preparing or signing a tax return as a preparer, generally may rely in good faith without verification upon information furnished by the client.  The practitioner may not, however, ignore the implications of information furnished to, or actually known by, the practitioner, and must make reasonable inquiries if the information as furnished appears to be incorrect, inconsistent with an important fact or another factual assumption, or incomplete. These standards supplement the existing requirement in §10.22 that practitioners exercise due diligence in preparing, or assisting in the preparation of, tax returns and other documents relating to IRS matters. §10.34 is applicable to tax returns, documents, affidavits and other papers filed on or after September 26, 2007.

 

Sanctions 10.50

In accordance with section 822(a) of the Jobs Act, §10.50 authorizes the Secretary to impose a monetary penalty against a practitioner if the practitioner is shown to be incompetent or disreputable, fails to comply with any regulation in part 10, or with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client. Under the regulations, the monetary penalty may be imposed in addition to, or in lieu of, any other sanction. If a practitioner acts on behalf of the practitioner’s employer, firm or other entity and the employer, firm or other entity knew or should have known of the practitioner’s conduct, the Secretary may impose a monetary penalty on the employer, firm or other entity. The Treasury Department and the IRS have issued procedures relating to the imposition of the monetary penalty through separate published guidance. Amount of penalty.  The amount of the penalty shall not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty. Any monetary penalty imposed on a practitioner under this paragraph may be in addition to or in lieu of any suspension, disbarment or censure and may be in addition to a penalty imposed on an employer, firm or other entity. Any monetary penalty imposed on an employer, firm or other entity may be in addition to or in lieu of penalties imposed under this section. The sanctions imposed by this section shall take into account all relevant facts and circumstances.  The regulations also contain conforming amendments to other provisions relating to sanctions.

 

Incompetence and Disreputable Conduct 10.51

Many commentators supported expanding the definition of disreputable conduct to specifically include the willful failure of a practitioner who is a tax return preparer to sign a return. Section 10.51 of the regulations defines disreputable conduct for which a practitioner may be sanctioned. Section 10.51 of the final regulations modifies the definition of disreputable conduct to include willful failure to sign a tax return prepared by the practitioner. The definition of disreputable conduct also includes the disclosure or use of returns or return information by practitioners in a manner not authorized by the Code, a court of competent jurisdiction, or an administrative law judge in a proceeding instituted under section 10.60.

 

Violations Subject to Sanction 10.52 

A practitioner may be sanctioned under §10.50 if the practitioner--

(1)  Willfully violates any of the regulations  contained in this part; or

  (2) Recklessly or through gross incompetence (within the meaning of §10.51(a)(13)) violates §§10.34, 10.35, 10.36 or 10.37.

This section is applicable to conduct occurring on or after September 26, 2007.

 

Supplemental Charges 10.65

Section 10.65 of the final regulations provides that the Director may file supplemental charges against a practitioner by amending the complaint to reflect the additional charges if the practitioner is given notice and an opportunity to prepare a defense to the supplemental charges.

 

Publicity of Disciplinary Proceedings 10.72

Previously, disciplinary proceedings brought pursuant to Circular 230 are closed to the public unless the Administrative Law Judge granted a practitioner’s request that the proceedings be public. The final regulations amend §10.72(d) to provide that all reports and decisions including any reports and decisions of the Administrative Law Judge, under are public and open to inspection within 30 days after the agency’s decision becomes final.

 

The Administrative Law Judge may grant a request by a practitioner or appraiser that all the pleadings and evidence of the disciplinary proceeding be made available for inspection where the parties stipulate in advance to adopt the protective measures.   

 

Expedited Suspension 10.82

Section 10.82 of the regulations authorizes the Director of the Office of Professional Responsibility to suspend immediately a practitioner who has engaged in certain conduct. The regulations extend the expedited process to practitioners who, within five years of the date a complaint instituting a proceeding:

 (1) Has had a license to practice as an attorney, certified public accountant, or actuary suspended or revoked for cause (not including failure to pay a professional licensing fee) by any authority or court, agency, body, or board described in §10.51(a)(10).

(2) Has, irrespective of whether an appeal has been taken, been convicted of any crime under title 26 of the United States Code, any crime involving dishonesty or breach of trust, or any felony for which the conduct involved renders the practitioner unfit to practice before the Internal Revenue Service.

(3) Has violated conditions imposed on the practitioner pursuant to §10.79(d).

(4) Has been sanctioned by a court of competent jurisdiction, whether in a civil or criminal proceeding (including suits for injunctive relief), relating to any taxpayer’s tax liability or relating to the practitioner’s own tax liability, for--

(i) Instituting or maintaining proceedings primarily for delay;

(ii) Advancing frivolous or groundless arguments; or

(iii) Failing to pursue available administrative remedies.