PROFESSIONAL ETHICS IN TAX PREPARATION TREASURY DEPARTMENT CIRCULAR 230 REVIEW PRACTITIONER PENALTIES REVISION JULY 2015

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1 PROFESSIONAL ETHICS IN TAX PREPARATION TREASURY DEPARTMENT CIRCULAR 230 REVIEW PRACTITIONER PENALTIES REVISION JULY 2015 Parts of this publication were provided from information furnished by the Internal Revenue Service. This publication is provided with the understanding that the publisher is not engaged in rendering accounting or legal service.

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3 INTRODUCTION The Professional Ethics in Tax Preparation self-study course is approved by California Tax Education Council #1022-CE-0010 and Internal Revenue Service #KJPF4-E S. The course is recommended to provide continuing education totaling 2 CE hours of ethics. In accordance with Circular 230, section 10.6, CE hours are granted based upon 50 minutes equaling one CE hour. The course is self-taught by the student. Advance preparation is not required. The program level is basic and is designed to help you maintain and/or improve your professional skills in ethics. The correspondence course for Enrolled Agents, Oregon Tax Consultants, Oregon Tax Preparers, and California Registered Tax Preparers reviews: - Practitioner Penalties - Treasury Department Circular 230 (Revised ) Income tax professionals should review text materials prior to taking the open book test. There are two interacting Review Tests to total 6 review questions in the text followed by an explanation of the answers to test your understanding of the materials. The review questions are scored but not graded. The last section of the text has the final examination composed of 10 multiple choice questions. Each question has only one answer. A passing score of 70% is required to receive your Certificate of Completion. After completing the test, the test will be graded. Upon receiving a passing score of 70%, you will be able to print your certificate. An additional test will be available if you do not achieve a passing score. We will notify IRS for Enrolled Agents, California Registered Tax Preparers, Oregon Tax Consultants, and Oregon Tax Preparers, and CTEC for California Registered Tax Preparers.

4 TABLE OF CONTENTS Paid Tax Return Preparer 1 Income Tax Preparer s Penalties U.S. Code: Title 26, Section 6694 Understatement Due To Unrealistic Position Willful or Reckless Conduct Extension of Period of Collection Where Preparer Pays 15% of Penalty 2 Abatement of Penalty Where Taxpayer s Liability Not Understated Criminal Penalties Paid Tax Preparer Client Audit Form 8867, Paid Preparer s Earned Income Credit Checklist 3 Estate Tax Return Preparer s Penalties IRS Audit Small Business and Work Opportunity Tax Act of 2007 Civil Penalties Filing Late Fraud Combined Penalties 4 Accuracy-Related Penalty Frivolous Return Failure to Supply Social Security Number Understatement of Liabilities Defined Return Over 60 Days Late Failure to Sign a Return Failure to Provide a Copy of the Return to the Taxpayer 5 Failure to Retain a Copy or List of the Tax Return Negotiation of the Client s Check Paying Tax Late Rules Governing Authority to Practice Who May Practice Term and Renewal of Status Duties and Restrictions Related to Practice Before the 9 Internal Revenue Service Information to be Furnished Knowledge of Client s Omission Diligence as to Accuracy Prompt Disposition of Pending Matters Assistance from or to Disbarred or Suspended Persons and Former Internal Revenue Service Employees Practice by Former Government Employees, Their Partners, and Their Associates Notaries Fees Return of Client s Records Conflicting Interests First Interactive Review Questions 15 Interactive Review Answers Solicitation Negotiation of Taxpayer s Checks Practice of Law Standards With Respect to Tax Returns and Documents, Affidavits, and Other Papers Sanctions for Violation of the Regulations 19

5 10.50 Sanctions Incompetence and Disreputable Conduct Violation of Regulations Receipt of Information Concerning Practitioner. Rules Applicable to Disciplinary Proceedings Institution of Proceedings Conferences Contents of Complaint Service of Complaint; Service and Filing of Other Papers Answer; Default Supplemental Charges Reply to Answer Proof; Variance; Amendment of Pleadings Motions and Requests Administrative Law Judge Hearings Evidence Transcript Proposed Findings and Conclusions Decisions of Administrative Law Judge Appeal of Decisions of Administrative Law Judge Decisions on review Effects of Disbarment, Suspension, or Censure Notice of Disbarment, Suspension. Censure, or Disqualification Petition for Reinstatement. General Provisions Records Second Interactive Review Questions 30 Interactive Review Answers 31

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7 PAID TAX PREPARER If you are paid to prepare a tax return for a client you shall do the following: - Sign the return manually, use a mechanical device, or computer software program. - Date the return. - Check the self-employed box in the Paid Preparer s Use Only space on the return. - PTIN (preparer tax identification number) is required for income taxes prepared for a fee. - Write your employer identification number - Print your firm's name or your name - Print your address including zip code - Give your client a copy of the return for their records - Keep a copy of the return for your records for four years A tax preparer should not sign a tax return that was prepared without charge to the client. INCOME TAX PREPARER S PENALTIES Review of U.S. Code: Title 26, Section Understatement of Taxpayer s Liability by Income Tax Preparer. Understatement due to Unrealistic Positions If any part of any understatement of liability to any income tax return or claim for refund is due to a position for which there was not a realistic possibility of being sustained by its merits, the income tax preparer of the tax return or claim knew (or should have known) of such position, and such position was not disclosed or was frivolous, the income tax preparer shall pay a penalty of $1,000 or 50% of the income derived by the tax return preparer with respect to the return or claim. The penalty will be abated if the tax preparer can demonstrate that there was reasonable cause for the understatement and the income tax preparer acted in good faith. Review A tax preparer that prepares income taxes for a fee shall receive a penalty, the greater of $1,000 or 50% of the income received by the preparer, for a prepared return unless s/he can demonstrate that s/he acted in good faith if there was an understatement of liability due to taking an unrealistic position, or the tax preparer should have know that the tax position was unrealistic, or the position was not disclosed, or was frivolous. Willful or Reckless Conduct The income tax preparer shall pay a penalty if any part of an understatement of liability to any income tax return or claim for refund that he or she prepared is due to willful attempt to understate the liability for tax or to any reckless or intentional disregard of rules or regulations by the income tax preparer. The penalty to the tax preparer is the greater of $5,000 or 50% of the income derived by the tax preparer. If the tax preparer paid a penalty for understatement due to unrealistic position on the income tax return, the amount paid for this penalty will be reduced from the penalty for willful or reckless conduct. Review A tax preparer that prepares income taxes for a fee shall receive a penalty the greater of $5,000 or 50% of the fee received. The penalty will be reduced by $1,000 if penalized for understatement due to unrealistic positions if the tax preparer intentionally disregarded IRS rules or regulations or willfully understated the taxpayer s liabilities. 1

8 Extension of Period of Collection Where Preparer Pays 15 Percent of Penalty If within 30 days after the day on which notice and demand of any penalty due to understatement due to unrealistic positions or willful or reckless conduct is made against an income tax return preparer, and the preparer pays an amount which is not less than 15 percent of the amount of such penalty and files a claim for refund of the amount paid, no levy or proceeding in court for the collection of the remainder of such penalty shall be made, begun, or prosecuted until the final resolution of a proceeding begun as provided. Preparer must bring suit in district court to determine his/her liability for penalty. If, within 30 days after the day on which his/her claim for refund of any partial payment of any penalty due to unrealistic positions or willful or reckless conduct is denied, and the income tax preparer fails to begin a proceeding in the appropriate United States district court for the determination of his liability, the balance of the penalty is to be paid. Review A tax preparer that receives an understatement of liability penalty and pays at least 15% of the penalty within 30 days and files a claim for refund will not be required to pay the remaining penalty until the proceeding has been resolved in the proper court. The tax preparer must file a suit in district court to determine his/her liability. If the tax preparer s refund claim is denied s/he has 30 days to begin a proceeding in the proper court for determination of the liability, otherwise the remainder of the penalty is to be paid. Abatement of Penalty Where Taxpayer s Liability Not Understated If at any time there is a final administrative determination or a final judicial decision that there was no understatement of liability in the case of any return or claim for refund with respect to which a penalty under subsection (a) or (b) has been assessed, such assessment shall be abated, and if any portion of such penalty has been paid the amount so paid shall be refunded to the person who made such payment as an overpayment of tax without regard to any period of limitations which, but for this subsection, would apply to the making of such refund. Review If it is determined by IRS that the tax preparer did not understate the taxpayer s liability, the tax preparer, or person that paid the penalty, will receive a refund of any monies paid to IRS as a penalty. Understatement of Liability Defined The term understatement of liability means any understatement of the net amount payable with respect to any tax imposed by subtitle (a) or any overstatement of the net amount creditable or refundable with respect to any such tax. Except as otherwise provided in subsection (d), the determination of whether or not there is an understatement of liability shall be made without regard to any administrative or judicial action involving the taxpayer. Review Understatement of liability means an understatement by the tax preparer of the amount the taxpayer owes IRS or an overstatement by the tax preparer of a taxpayer s credits or income tax refund which will understates the taxpayer s liability. Penalty for understatement of liability by a tax preparer can be made by IRS even if the taxpayer does not receive judicial or administrative action by the IRS. 2

9 Form 8867, Paid Preparer s Earned Income Credit Checklist Paid tax preparers must meet due diligence requirements in determining the taxpayer s eligibility to claim earned income credit and the amount of the credit. Form 8867 is to be submitted with the tax return. Failure to include the form could result in a $500 tax preparer penalty. The name of the tax preparer that determined the taxpayer s eligibility, and his/her PTIN must be entered on the tax form even if the tax preparer is not the signing preparer. The tax preparer is required to keep a copy of Form 8867 for three years from the latter of the due date of the tax return or the date the return was filed, the date the tax return was given to the taxpayer for his or her signature, or if you did not sign the tax return as the preparer, the date you submitted the tax return to the person signing the tax return as the preparer. These records may be kept electronically or on paper. In Rev. Procedure IRS describes guidance for maintaining records in electronic storage and hardcopy... ESTATE TAX RETURN PREPARER PENALTIES Estate tax return preparers, who prepare any return or claim for refund which reflects an understatement of tax liability due to willful or reckless conduct are subject to a penalty of $5,000 or 50% of the income from (or income to be derived from), whichever is greater, for the preparation of each such return. IRS AUDIT When the IRS audits a tax return that was prepared by a paid tax preparer and finds that the paid tax preparer was not following federal tax laws, the IRS may audit a sampling of other tax returns prepared by the paid tax preparer. If there are tax related issues with the audits, the IRS may assess penalties to the paid tax preparer. Small Business and Work Opportunity Tax Act of 2007 The Small Business and Work Opportunity Tax Act of 2007 changed the standards of conduct for return preparers and increased the amount of penalties. Penalties have increased to $1,000 per return or 50% of the tax return preparer s fee, whichever is greater. If the action by the tax preparer is willful or reckless, the penalty is the greater of $5,000 or 50% of the tax return preparer fee. CIVIL PENALTIES If your client does not file his/her tax return and pay the required tax by the due date, s/he may have to pay a penalty. Penalties may also be assessed if your client substantially understates their tax, understates a reportable transaction, files a frivolous return, or fails to supply his/her SSN or individual taxpayer identification number. If your client provides fraudulent information on their return, s/he may have to pay a civil fraud penalty. FILING LATE If your client does not file their tax return by the due date (including extensions), s/he may have to pay a failure-to-file penalty. The penalty is usually 5% for each month or part of a month that the return is late, but not more than 25%. FRAUD If your client s failure to file is due to fraud, the penalty is 15% for each month or part of a month that his/her tax return is late, up to a maximum of 75%. RETURN OVER 60 DAYS LATE If your client files his/her tax return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax. Your client will not be 3

10 required to pay the penalty if s/he can show that s/he failed to file on time because of a reasonable cause and not because of willful neglect. PAYING TAX LATE Your client will have to pay a failure-to-pay penalty of ½ of 1% (.50%) of his/her unpaid tax for each month, or part of a month, after the due date that the tax is not paid. The penalty does not apply during the automatic six month extension if your client paid at least 90% of his/her actual tax liability on or before the due date of the return and pays the balance when they file the return. This penalty cannot be more than 25% of your client s unpaid tax. Your client will not have to pay the penalty if s/he can show that they had a good reason for not paying their tax on time. COMBINED PENALTIES If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5% (or 15% if by fraud) failure-to-file penalty is reduced by the failure-to-pay penalty. If your client files his/her tax return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100% of the unpaid tax. ACCURACY-RELATED PENALTY An accuracy-related penalty may be assessed your client if s/he underpays their tax because: - S/he shows negligence or disregard of the rules or regulations, or - S/he substantially understates their income tax. The penalty is equal to 20% of the underpayment. A substantial understatement of income tax occurs if the understatement is more than the larger of 10% of the correct tax or $5,000. FRIVOLOUS RETURN Your client may have to pay a penalty of $5,000 if s/he files a frivolous return. A frivolous return is one that does not include enough information to figure the correct tax. FAILURE TO SUPPLY SOCIAL SECURITY NUMBER If your client does not include his/her SSN where required on a return, statement, or other document, s/he will be subject to a penalty of $50 for each failure. CRIMINAL PENALTIES Your client may be subject to criminal prosecution for actions such as: - Tax evasion, - Willful failure to file a tax return, supply information, or pay any tax due, - Fraud and false statements, or - Preparing and filing a fraudulent return. Understatement of Liability Defined Understatement of liability means an understatement by the tax preparer of the amount the taxpayer owes IRS or an overstatement by the tax preparer of a taxpayer s credits or income tax refund which will understates the taxpayer s liability. Penalty for understatement of liability by a tax preparer can be made by IRS even if the taxpayer does not receive judicial or administrative action by the IRS. Failure to Sign a Return The penalty is $50 for each return where the paid tax return preparer failed to sign the return. The maximum penalty will not exceed $25,000 in a calendar year. 4

11 Failure to Provide a Copy of the Return to the Taxpayer The penalty is $50 for each return where the paid tax return preparer failed to provide a copy of the tax return to his or her client. The maximum penalty will not exceed $25,000 in a calendar year. Failure to Retain a Copy or List of the Tax Return The penalty is $50 for each return where the paid tax return preparer failed to retain a copy or list of the tax return or claim. The maximum penalty will not exceed $25,000 in a return season. Negotiation of Client s Refund Check The penalty is $500 to any paid tax return preparer who endorses or negotiates any tax return refund check issued to a taxpayer. POWER OF ATTORNEY AND DECLARATION OF REPRESENTATIVE FORM 2848 PURPOSE OF FORM A power of attorney, Form 2848, must be filed by your client if s/he wants you to represent him/her on his/her behalf before the Internal Revenue Service. A firm, organization, or partnership may not be designated to represent a client. An individual must be named. Your client's signature on Form 2848 will authorize you to perform any act you can perform in your client's behalf before the IRS. You are not authorized the power to sign tax returns for your client except for limited situations. These situations for the taxpayer only include disease or injury, continuous absence from the U.S. for a period of at least 60 days prior to the date required by law for filing the return, or permission is requested of and granted by the IRS for other good cause. Other powers granted include the following: - Executing waivers and offers of waivers of restrictions on assessment or collection of deficiencies in tax - Executing waivers of notice of disallowance of a claim for credit or refund - Executing consents extending the statutory period for assessment or collection of taxes - Executing closing agreements under section 7121, and delegating authority, or substituting another representative INCLUDING ADDITIONAL POWER If your client wants to delegate additional power for you as his/ her representative these additional powers must be listed. EXCLUDING POWERS If your client wants to exclude powers, s/he must list the powers to be excluded in the blank space provided. FILING THE POWER OF ATTORNEY Generally, mail or fax Form 2848 directly to the IRS Accounts Management Center based upon the state where your client lives. If the Form 2848 is for a specific use, mail or fax it to the office handling the specific matter. POWER OF ATTORNEY REVOCATION If your client wants to revoke an existing power of attorney, send a copy of the previous executed power of attorney to the IRS office based upon your client s place of residence. Write 5

12 REVOKE across the top of the form. Your client must sign the form under the original signature. If your client cannot find a copy of the original power of attorney send a signed statement to the office of IRS where your client filed the earlier power of attorney listing the name and address of each representative whose authority is being revoked. REVIEW AND EXCERPTS FROM CIRCULAR 230 RULES GOVERNING AUTHORITY TO PRACTICE Review Includes Attorneys, CPAs, and Enrolled Agents WHO MAY PRACTICE. Any attorney who is not currently under suspension or disbarment from practice before the Internal Revenue Service may practice before the Internal Revenue Service by filing with the Internal Revenue Service a written declaration that he or she is currently qualified as an attorney and is authorized to represent the party or parties on whose behalf he or she acts. Any certified public accountant who is not currently under suspension or disbarment from practice before the Internal Revenue Service may practice before the Internal Revenue Service by filing with the Internal Revenue Service a written declaration that he or she is currently qualified as a certified public accountant and is authorized to represent the party or parties on whose behalf he or she acts. Any enrolled agent who is not currently under suspension or disbarment from practice before the Internal Revenue Service may practice before the Internal Revenue Service. Review Any attorney, CPA, or EA that is not under suspension or disbarment from practice before the IRS may practice before the IRS by filing a declaration that s/he is authorized to represent the taxpayer(s) before the IRS TERM AND RENEWAL OF STATUS Enrollment or registration card or certificate. The Internal Revenue Service will issue to each individual whose application to practice before the Internal Revenue Service is approved an enrollment or registration card. Each card or certificate will be valid for the period stated on the card or certificate. An enrolled agent may not practice before the Internal Revenue Service if his or her card or certificate is not current or otherwise valid. Each individual authorized to practice before the Internal Revenue Service as an enrolled agent will be accorded active enrollment or registration status subject to renewal of enrollment. Enrolled agents must renew their status with the Internal Revenue Service to maintain eligibility to practice before the Internal Revenue Service. Failure by an individual to receive notification from the Internal Revenue Service of the renewal requirement will not be justification for the individual s failure to satisfy this requirement. A reasonable nonrefundable fee may be charged for each application for renewal filed. Forms required for renewal may be obtained by sending a written request to the address specified by the Internal Revenue Service. 6

13 In order to qualify for renewal as an enrolled agent, an individual must certify, in the manner prescribed by the Internal Revenue Service, that the individual has satisfied the requisite number of continuing education hours. Each Enrolled Agent that has been approved to practice before the IRS will receive an enrollment or registration card that is subject to renewal for a nonrefundable fee. To qualify for renewal an individual must certify that s/he meets the required number of CE hours. Forms required for renewal may be obtained from the IRS. The enrollment year is January 1 to December 31 of each year of an enrollment cycle. The enrollment cycle is the three successive enrollment years prior to the required date of renewal. Enrolled Agent Renewal Requirements A minimum of 72 hours of continuing education credit including six hours of ethics or professional conduct must be completed during each enrollment cycle. A minimum of 16 hours of continuing education credit, including 2 hours of ethics or professional conduct, must be completed in each year of an enrollment cycle. An individual who receives initial enrollment during an enrollment cycle must complete two hours of qualifying continuing education credit for each month enrolled during the enrollment cycle. Enrollment for any part of a month is considered enrollment for the entire month. An individual who receives initial enrollment during an enrollment cycle must complete two hours of ethics or professional conduct for each enrollment year during the enrollment cycle. Enrollment for any part of an enrollment year is considered enrollment for the entire year. EXAMPLE Henry Jacob was approved to practice as an enrolled agent on May 1, Henry is required to complete 16 hours of continuing education in The 16 hours of continuing education must include 2 hours of Ethics to meet the 2 hours Ethics annual requirement. Continuing Education for Enrolled Agents To qualify for continuing education credit for an enrolled agent, a course of learning must be a qualifying program designed to enhance professional knowledge in Federal taxation or Federal tax related matters including accounting, taxation, or ethics. The course must be conducted by an IRS approved provider. A formal program qualifies as a continuing education programs if it: - Requires attendance and provides a certificate of completion. - Requires that the program be conducted by a qualified instructor or discussion leader - Provides or requires a written outline, textbook, or suitable electronic educational materials. Correspondence or Individual Study Programs Qualifying continuing education programs include correspondence or individual study programs and taped programs that are conducted by approved continuing education providers and completed on an individual basis by the enrolled individual. The allowable credit hours for such programs will be measured on a basis comparable to the measurement of a seminar or course for credit in an accredited educational institution. These programs qualify as continuing education programs if it: - Requires registration of the participants by the provider; 7

14 - Provides a means for measuring completion by the participants (a written examination), including the issuance of a certificate of completion by the provider. Successful completion of a course will be measured with a final examination requiring a minimum score of 70% - Provides a written outline, textbook, or suitable electronic educational materials CE Credit for Serving as an Instructor, Discussion Leader or Speaker. One hour of continuing education credit will be awarded for each contact hour completed as an instructor, discussion leader, or speaker at an educational program that meets the continuing education requirements of this section. A maximum of two hours of continuing education credit will be awarded for actual subject preparation time for each contact hour completed as an instructor, discussion leader, or speaker at such programs. It is the responsibility of the individual claiming such credit to maintain records to verify preparation time. The maximum continuing education credit for instruction and preparation may not exceed six hours annually for enrolled agents. Measurement of CE Hours All continuing education programs will be measured in terms of contact hours. The shortest recognized program will be one contact hour. A contact hour is 50 minutes of continuous participation in a program. Credit is granted only for a full contact hour. For example, a program lasting more than 50 minutes but less than 100 minutes will count as one contact hour. Individual segments at continuous conferences and conventions will be considered one total program. For example, two 90-minute segments (180 minutes) at a continuous conference will count as three contact hours. Two 100-minute segments (200 minutes) at a continuous conference will count as four contact hours. Self-study correspondence courses are to meet the same standards. A 90 minute self-study correspondence course will count as one continuing education (CE) hour. A 1,000 minute self-study correspondence course will qualify for 20 continuing education hours. CE Recordkeeping Each individual applying for renewal must retain for a period of four years following the date of renewal the information required with regard to qualifying continuing professional education credit hours. - Name of the sponsoring organization - Location of the program - Title of the program and description of its content - Written outlines, course syllabus, textbook, and/or electronic materials provided or required for the course - Dates of attendance - CE hours claimed - Name(s) of the instructor(s), discussion leader(s), or speaker(s), certificate of completion and/or signed statement of the hours of attendance obtained from the sponsor. To receive continuing education credit for service completed as an instructor, discussion leader, or speaker, the following information must be maintained for a period of three years following the date of renewal of enrollment. - Name of the sponsoring organization - Location of the program - Title of the program and description of its content - Dates of the program - CE hours claimed. 8

15 CE Reporting Requirements for IRS Provider Compliance The Internal Revenue Service approved provider is required to report each course completed by any tax professional that has a Preparer Tax Identification Number (PTIN). The provider reports the person s name, PTIN, course completed successfully (70% minimum score on a self-study final examination), date of completion, and continuing or contact education hours on the IRS secured website for IRS approved providers ( DUTIES AND RESTRICTIONS RELATING TO PRACTICE BEFORE THE INTERNAL REVENUE SERVICE INFORMATION TO BE FURNISHED. A practitioner must promptly submit records or information in any matter before the Internal Revenue Service unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged, upon receiving a proper and lawful request by an authorized officer or employee of the Internal Revenue Service, The practitioner must promptly notify the requesting Internal Revenue Service officer or employee and the practitioner must provide any information that the practitioner has regarding the identity of any person who the practitioner believes may have possession or control of the requested records or information when the requested records or information are not in the possession or control of the practitioner or the practitioner s client. The practitioner must make reasonable inquiry of his or her client regarding the identity of any person who may have possession or control of the requested records or information, but the practitioner is not required to make inquiry of any other person or independently verify any information provided by the practitioner s client regarding the identity of such persons. When a proper and lawful request for information concerning an inquiry into an alleged violation of the regulations in this part, is made by a duly authorized officer or employee of the Internal Revenue Service, a practitioner must provide any information s/he has concerning the alleged violation and testify regarding this information in any proceeding instituted under this part, unless s/he believes in good faith and on reasonable grounds the information is privileged. Interference with a proper and lawful request for records or information. A practitioner may not interfere, or attempt to interfere, with any proper and lawful effort by the Internal Revenue Service, its officers or employees, or the Director of Practice, or his or her employees, to obtain any record or information unless the practitioner believes in good faith and on reasonable grounds that the record or information is privileged. Review A practitioner must submit records or information requested by the IRS unless the practitioner believes that the records or information are privileged. If the requested information is not in control by the practitioner, s/he must provide any information that the practitioner has regarding the identity of any person who the practitioner believes may have possession or control of the requested information. The practitioner must only make reasonable inquiry to his/her client regarding the identity of any person who may have control of the requested information. When a proper request is made by a duly authorized officer or employee of the IRS, a practitioner must provide any information that s/he has concerning the alleged violation and testify regarding this information in any proceeding resulting from this request. A practitioner may not interfere or attempt to interfere with any proper and lawful effort by the IRS KNOWLEDGE OF CLIENT S OMISSION. A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the 9

16 United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulation of such noncompliance, error, or omission. Review The practitioner must advise his or her client of the consequences as provided under the Code and regulation of such noncompliance, error, or omission. EXAMPLE Ms. Moody hired Bob, a practitioner, to prepare her Federal income tax return for While gathering information to prepare the return, Bob discovered that Ms. Moody failed to file Federal income tax returns for the 2012 and 2013 tax years. Circular 230 requires that Bob promptly advise Ms. Moody that she did not comply with the Internal Revenue laws by failing to file Federal income tax returns for the 2012 and 2013 tax years. Bob is not required to notify the Internal Revenue Service of Ms. Moody s noncompliance of filing 2012 and 2013 tax returns. EXAMPLE Amy Larsen is a CPA who is representing Joe & Betty Jones before the Wage and Investment Division of the Internal Revenue Service. The Service is questioning Joe & Betty on contributions that were listed on their 2013 Form While reviewing the documentation provided by Joe & Betty, Amy discovers contributions that were made to a non-qualified organization. Amy must advise Joe & Betty promptly of the omission and the consequences provided by the Internal Revenue Code and Regulations for such omission DILIGENCE AS TO ACCURACY. A practitioner must exercise due diligence: In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters; In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the Internal Revenue Service. Except as provided in 10.34, and 10.37, a practitioner will be presumed to have exercised due diligence for purposes of this section if the practitioner relies on the work product of another person and the practitioner used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person. Review Diligence is defined as the degree of attention or care expected of a person in a given situation. A practitioner must exercise due diligence in preparing or assisting in the preparation of filing papers related to IRS matters, determining the correctness of his/her oral or written representation to the Department of the Treasury or to his/her clients, and is assumed to exercise due diligence when relying on the work product of another person. 10

17 10.23 PROMPT DISPOSITION OF PENDING MATTERS. A practitioner may not unreasonably delay the prompt disposition of any pending matter before the Internal Revenue Service ASSISTANCE FROM OR TO DISBARRED OR SUSPENDED PERSONS AND FORMER INTERNAL REVENUE SERVICE EMPLOYEES. A practitioner may not, knowingly and directly or indirectly: Accept assistance from or assist any person who is under disbarment or suspension from practice before the Internal Revenue Service if the assistance relates to a matter or matters constituting practice before the Internal Revenue Service. Accept assistance from any former government employee where the provisions of or any Federal law would be violated. Review A practitioner may not accept assistance from or assist anyone who is disbarred or suspended from practice before the IRS. EXAMPLE Jose Fernandez is an approved income tax practitioner. His business is expanding and he hires Steven Grant to help him prepare to represent Mr. Kendall, a client who is being audited regarding a tax shelter before the Internal Revenue Service. Jose is becomes aware that Steven is currently under disbarment from the IRS. Jose may not accept assistance in the preparation of Mr. Kendall s defense before the Internal Revenue Service PRACTICE BY FORMER GOVERNMENT EMPLOYEES, THEIR PARTNERS AND THEIR ASSOCIATES. No former Government employee may, subsequent to his/her Government employment, represent anyone in any matter administered by the Internal Revenue Service if the representation would violate any laws of the United States. No former Government employee who personally and substantially participated in a particular matter involving specific parties may, subsequent to Government employment represent or knowingly assist, in that particular matter, any person who is a specific party to that particular matter. A former Government employee who within a period of one year prior to the termination of Government employment had official responsibility for a transaction may not, within two years after his/her Government employment is ended, represent or knowingly assist in that transaction any person who is or was a specific party to that transaction. No former Government employee may, within one year after his/her Government employment is ended, appear before any employee of the Treasury Department in connection with the publication, withdrawal, amendment, modification, or interpretation of a rule of which the former Government employee participated or for which, within a period of one year prior to the termination of his/her Government employment, s/he had official responsibility. No member of a firm of which a former Government employee is a member may represent or knowingly assist a person who was or is a specific party in any transaction with respect to which the above restrictions apply to the former Government employee, in that transaction, unless the firm isolates the former Government employee in such a way to ensure that the former Government employee cannot assist in the representation. 11

18 Review Former government employees and their partners or employees may not represent anyone in any matter administered by the IRS if the representation would violate any other laws of the U.S.; represent anyone that was a specific party to any matter that the former government employee substantially participated; represent for a period of two years after termination of employment with the government anyone that was a specific party to any matter that the former government employee substantially participated in one year prior to termination as a government employee; communicate with an employee of the Treasury Department in connection with a publication, withdrawal, amendment, or modification of a rule that the former government employee previously participated prior to one year before his/her termination as a government employee, within one year after his/her termination, unless the former government employee is appearing on his/her own behalf NOTARIES. A practitioner may not take acknowledgments, administer oaths, certify papers, or perform any official act as a notary public with respect to any matter administered by the Internal Revenue Service and for which he or she is employed as counsel, attorney, or agent, or in which he or she may be in any way interested FEES. A practitioner may not charge an unconscionable fee for representing a client in connection with any matter before the Internal Revenue Service. A practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service except as follows: A practitioner may charge a contingent fee for services rendered in connection with the Service s examination of, or challenge to: - An original tax return; or - An amended return or claim for refund or credit where the amended or claim for refund or credit was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return. A practitioner may charge a contingent fee for services provided in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service. A practitioner may charge a contingent fee for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code. EXAMPLE Kenneth Hampton is an enrolled agent practicing in Austin, TX. Mr. Hampton is preparing to represent Joan Harris before IRS with an Offer In Compromise. Joan owes IRS $25,000 and Kenneth is prepared to charge Joan $15,000 for his service. Mr. Hampton may not charge Joan this inflated fee if the normal fee would be between $2,000 and $3,000. Definitions Contingent Fees A contingent fee is any fee that is based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the Internal Revenue Service or is sustained either by the Internal Revenue Service or in litigation. A contingent fee includes any arrangement in which the practitioner will reimburse the client for all or a portion of the client s fee in the event that a position taken on a tax return or other filing 12

19 is challenged by the Internal Revenue Service or is not sustained, whether pursuant to an indemnity agreement, a guarantee, rescission rights, or any other arrangement with a similar effect. Matters before the Internal Revenue Service include tax planning and advice, preparing or filing or assisting in preparing or filing returns or claims for refund or credit. Also included are all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. These presentations include preparing and filing documents, corresponding and communicating with the Internal Revenue Service, rendering written advice with respect to any entity, transaction, plan or arrangement, and representing a client at conferences, hearings, and meetings RETURN OF CLIENT S RECORDS. In general, a practitioner must, at the request of a client, promptly return any and all records of the client that are necessary for the client to comply with his or her Federal tax obligations. The practitioner may retain copies of the records returned to a client. The existence of a dispute over fees generally does not relieve the practitioner of his or her responsibility under this section. Nevertheless, if applicable state law allows or permits the retention of a client s records by a practitioner in the case of a dispute over fees for services rendered, the practitioner need only return those records that must be attached to the taxpayer s return. The practitioner, however, must provide the client with reasonable access to review and copy any additional records of the client retained by the practitioner under state law that are necessary for the client to comply with his or her Federal tax obligations. For purposes of this section--records of the client include all documents or written or electronic materials provided to the practitioner, or obtained by the practitioner in the course of the practitioner s representation of the client, that preexisted the retention of the practitioner by the client. The term also includes materials that were prepared by the client or a third party (not including an employee or agent of the practitioner) at any time and provided to the practitioner with respect to the subject matter of the representation. The term also includes any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner or his or her employee or agent, that was presented to the client with respect to a prior representation if such document is necessary for the taxpayer to comply with his or her current Federal tax obligations. The term does not include any return, claim for refund, schedule, affidavit, appraisal or any other document prepared by the practitioner s firm, employees or agents if the practitioner is withholding such document pending the client s performance of its contractual obligation to pay fees with respect to such document. Review At the request of a client, a practitioner must promptly return any and all records of the client that are necessary for the client to comply with his/her Federal tax obligations. Copies of the records may be retained by the practitioner. If state laws allows in a dispute over fees for services provided by the practitioner, the practitioner is only required to return to the client those records that must be attached to the income tax return CONFLICTING INTERESTS. (a) Except as provided by paragraph (b) of this section, a practitioner shall not represent a client in his or her practice before the Internal Revenue Service if the representation involves a conflict of interest. A conflict of interest exists if: 13

20 (1) The representation of one client will be directly adverse to another client; or (2) There is a significant risk that the representation of one or more clients will be materially limited by the practitioner s responsibilities to another client, a former client or a third person or by a personal interest of the practitioner. (b) Notwithstanding the existence of a conflict of interest under paragraph (a) of this section the practitioner may represent a client if: (1) The practitioner reasonably believes that the practitioner will be able to provide competent and diligent representation to each affected client; (2) The representation is not prohibited by law; (3) Each affected client waives the conflict of interest and in writing by each affected client, at the time the existence of the conflict of interest is known by the practitioner. The confirmation may be made within a reasonable time after the informed consent, but in no event later than 30 days. (c) Copies of the written consents must be retained by the practitioner for at least 36 months from the date of the conclusion of the representation of the affected clients and the written consents must be provided to any officer or employee of the Internal Revenue Service on request. EXAMPLE Robert Willow, a practitioner, represents his brother Joe Willow and Joe s business partner Bill Tilton. Joe Willow and Bill Tilton are equal shareholders in the J&B Corporation. The Internal Revenue Service examined the corporation and determined that one of the shareholders committed fraud, but could not determine which partner was guilty. Robert must advise Joe & Bill that he cannot represent them because there is a conflict of interest. 14

21 FIRST INTERACTIVE REVIEW QUESTIONS 15

22 FIRST INTERACTIVE REVIEW ANSWERS 16

23 10.30 SOLICITATION. A practitioner may not, with respect to any Internal Revenue Service matter, in any way use or participate in the use of any form of public communication or private solicitation containing a false, fraudulent, or coercive statement or claim, or a misleading or deceptive statement or claim. Enrolled Agent may not use the term certified or imply an employer/employee relationship with the Internal Revenue Service. Examples of acceptable descriptions for enrolled agents are enrolled to represent taxpayers before the Internal Revenue Service, enrolled to represent taxpayers before the Internal Revenue Service, and admitted to practice before the Internal Revenue Service. Certified to practice before the Internal Revenue Service is not acceptable. A practitioner may not make, directly or indirectly, an uninvited written or oral solicitation of employment in matters related to the Internal Revenue Service if the solicitation violates Federal or State law or other applicable rules. Attorneys are precluded from making a solicitation that is prohibited by conduct rules applicable to all attorneys in their State(s) of licensure. Any lawful solicitation made by or on behalf of a practitioner eligible to practice before the Internal Revenue Service must clearly identify the solicitation as such and, if applicable, identify the source of information used in choosing the recipient. EXAMPLE Linda, a practitioner, wanted to have Fay as a new client. Without invitation, Linda approached Fay at a local fitness spa and explained how she could assist her in her federal tax matters and would like to have Fay as a client. Linda is in violation of the solicitation regulation set forth in Treasury Department Circular No Fee information. A practitioner may publish the availability of a written schedule of fees and distribute the following fee information- - Fixed fees for specific routine services. - Hourly rates. - Range of fees for particular services. - Fee charged for an initial consultation. - Any statement of fee information concerning matters in which costs may be incurred must include a statement disclosing whether clients will be responsible for such costs. A practitioner may charge no more that the rate(s) published for at least 30 calendar days after the last date on which the schedule of fees was published. Communication of fee information Fee information may be communicated in professional lists, telephone directories, print media, mailings, electronic mail, facsimile, hand delivered flyers, radio, television, and any other method. The method chosen, however, must not cause the communication to become untruthful, deceptive, or otherwise in violation of this part. A practitioner may not persist in attempting to contact a prospective client if the prospective client has made it known to the practitioner that he or she does not desire to be solicited. In the case of radio and television broadcasting, the broadcast must be recorded and the practitioner must retain a recording of the actual transmission. In the case of direct mail and e-commerce communications, the practitioner must retain a copy of the actual communication, along with a list or other description of persons to whom the communication was mailed or otherwise distributed. The copy must be retained by the practitioner for a period of at least 36 months from the date of the last transmission or use. 17