2011 Registered Tax Preparer Ethics Supplement Supplemental... · specifications provide guidance...

2011 Registered Tax Preparer

Ethics Supplement

Registered Tax Preparer Ethics Supplement i © 2011 NATP

Mission Statement NATP is a partner for all tax professionals in helping them achieve business success through education, resources, and other services pertinent to the tax preparation business.

Who We Are Members of the National Association of Tax Professionals (NATP) work at offices that assist over 11 million taxpayers with tax preparation and planning. NATP is a nonprofit professional association founded in 1979 that provides professional education, tax research, and products to its members. The national headquarters, located in Appleton, WI, currently employs 47 staff members and 22 instructors.

NATP exists to serve professionals who work in all areas of tax practice and has more than 20,500 members nationwide. Members include accountants, attorneys, certified public accountants, enrolled agents, financial planners, and individual tax preparers. The average NATP member has been in the tax business for over 20 years and holds a tax/financial designation and/or a college degree. Learn more at www.natptax.com.

Our Commitment to You This text has been prepared with due diligence; however, the possibility of mechanical or human error does exist. Any known corrections for this text will be posted on NATP’s website at www.natptax.com. The text is not intended to address every situation that may arise. Consult additional sources of information, as needed, to determine the solution of tax questions.

This publication is designed to provide accurate and authoritative information on the subject matter covered. It is presented with the understanding that the National Association of Tax Professionals is not engaged in rendering legal or accounting services.

ii Registered Tax Preparer Ethics Supplement © 2011 NATP

COPYRIGHT ©2011. The National Association of Tax Professionals (NATP), Appleton, WI. Reprinting any part of this text without written permission from NATP is prohibited.

Registered Tax Preparer Ethics Supplement iii © 2011 NATP

Course Description On August 31, 2011, the IRS released specifications for the competency exam individuals must pass to become a Registered Tax Return Preparer (RTRP). These test specifications provide guidance on the content of the RTRP exam, and modify the original list of tax forms that were to be covered on the exam. Consequently, the RTRP test will focus on the ethical responsibilities of federal tax return preparers and the completion of Form 1040 series along with the basic related schedules and forms.

This supplemental information focuses on ethics as well as a few topics that were not originally covered in the NATP Registered Tax Preparer Exam Review Course.

Objectives Upon completion of this supplement, the tax prefoessional will:

Know the rules and regulations that apply to tax return preparers.

Be familiar with tax return preparer penalties.

Know E-file procedures.

Be familiar with ethics and Circular 230.

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Registered Tax Preparer Ethics Supplement v © 2011 NATP

Table of Contents PRACTICES AND PROCEDURES .................................................................................. 1

TAX RETURN PREPARER DEFINED ........................................................................... 1 Exceptions ................................................................................................ 2 Return or Claim for Refund ......................................................................... 2 Substantial Portion of Return ....................................................................... 3 Not Substantial — De Minimis Rule ............................................................... 4

RULES THAT APPLY TO ALL PREPARERS .................................................................... 4 Signature of Preparer ................................................................................. 4 Furnish Identifying Number (PTIN) ............................................................... 5 Furnish Copy to Taxpayer ........................................................................... 6 Retain a Copy ........................................................................................... 6

EIC DUE DILIGENCE REQUIREMENTS ....................................................................... 7 Knowledge ............................................................................................... 7

PREPARER’S UNDERSTATEMENT OF TAXPAYER’S LIABILITY ............................................... 9 Understatement Due to Unreasonable Position ............................................... 9 Understatement Due to Willful or Reckless Conduct ....................................... 13

DISCLOSURE OR USE PENALTIES ........................................................................... 14 IRC 6713 — Wrongful Disclosure or Use ....................................................... 14 IRC 7216 — Knowing or Reckless Disclosure or Use ....................................... 15

SAFEGUARDING TAXPAYER INFORMATION ................................................................. 22 DISCLOSURE AUTHORIZATIONS ............................................................................ 23

Form 8821 .............................................................................................. 23 Power of Attorney (POA), Form 2848 ........................................................... 23

E-FILE PROCEDURES ......................................................................................... 24 Self-select PIN ......................................................................................... 25 Practitioner PIN ........................................................................................ 25 IRS e-file Signature Authorization ............................................................... 25 Submitting the Return ............................................................................... 26 Record Keeping ........................................................................................ 27

REVIEW QUESTIONS ......................................................................................... 29 REVIEW ANSWERS ........................................................................................... 32

ETHICS AND CIRCULAR 230 ................................................................................... 35 OVERVIEW OF CIRCULAR 230 .............................................................................. 35 PRACTICE BEFORE THE IRS ................................................................................. 36 INDIVIDUALS WHO MAY PRACTICE ........................................................................ 36

Attorneys ................................................................................................ 36 Certified Public Accountants (CPA) .............................................................. 37 Enrolled Agents (EA) ................................................................................. 37 Registered Tax Return Preparers ................................................................. 37 Enrolled Actuaries ..................................................................................... 38 Enrolled Retirement Plan Agents ................................................................. 38 Taxpayers ............................................................................................... 38 Limited Practice ........................................................................................ 38 Others .................................................................................................... 39

INFORMATION TO BE FURNISHED §10.20 ................................................................ 39 CLIENT OMISSION §10.21 ................................................................................. 41 DILIGENCE AS TO ACCURACY §10.22 ..................................................................... 42 PROMPT DISPOSITION OF PENDING MATTERS §10.23 .................................................. 42

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ASSISTANCE FROM OR TO DISBARRED OR SUSPENDED PERSONS AND FORMER IRS EMPLOYEES

§10.24 ....................................................................................................... 42 FEES §10.27 ................................................................................................ 43 RETURN OF CLIENT’S RECORDS §10.28 .................................................................. 44 CONFLICTING INTERESTS §10.29 ......................................................................... 44 SOLICITATION §10.30 ...................................................................................... 45

Advertising and Solicitation ........................................................................ 45 Fee Information ....................................................................................... 46 Communication of Fee Information ............................................................. 46 Improper Associations ............................................................................... 46

NEGOTIATING A CHECK §10.31 ........................................................................... 47 STANDARDS WITH RESPECT TO TAX RETURNS AND DOCUMENTS, AFFIDAVITS, AND OTHER PAPERS §10.34 ..................................................................................... 47

Tax Returns ............................................................................................. 47 Documents, Affidavits and Other Papers ...................................................... 48 Advising Clients on Potential Penalties ......................................................... 48 Relying on Information Furnished by Clients ................................................. 48

PROCEDURES TO ENSURE COMPLIANCE §10.36 ......................................................... 49 INCOMPETENCE AND DISREPUTABLE CONDUCT §10.51 ................................................. 49

Sanctions §§10.50 and 10.52 ..................................................................... 51 REVIEW QUESTIONS ......................................................................................... 53 REVIEW ANSWERS ........................................................................................... 55

INDEX ............................................................................................................. 57

Registered Tax Preparer Ethics Supplement 1 © 2011 NATP

PRACTICES AND PROCEDURES

OBJECTIVES: Upon completion of this section, the tax professional will be able to:

Identify a tax return preparer.

Explain the rules that apply to tax return preparers and the penalties for failure to follow such rules.

Discuss IRS e-file procedures.

TAX RETURN PREPARER DEFINED Section 7701(a)(36)(A) defines a “tax return preparer” as any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of, any tax return or claim for refund.

Reg. §301.7701-15 states that included in the definition of a tax return preparer are the following individuals:

A signing tax return preparer who has the primary responsibility for the overall substantive accuracy of the preparation of such return or claim for refund [Reg. §301.7701-15(b)(1)].

A nonsigning tax return preparer who renders advice (written or oral) to a taxpayer (or to another tax return preparer) on a position that is directly relevant to the determination of the existence, characterization, or amount of an entry on a return that constitutes a substantial portion of the return [Reg. §301.7701-15(b)(2) and (b)(3)].

A person who furnishes to a taxpayer, or another preparer, sufficient information and advice so that completion of the return is largely a mechanical or clerical matter [Reg. §301.7701-15(c)].

A person who prepares a return or claim for refund outside the United States is a tax return preparer, regardless of nationality, residence, or location of the place of business, if the person otherwise satisfies the definition of tax return preparer [Reg. §301.7701-15(e)].

Example: Craig, an attorney in a law firm, provides legal advice to a high income taxpayer regarding a completed transaction. The advice provided by Craig is directly relevant to the determination of an entry on the taxpayer’s return, and this advice leads to a position or entry that constitutes a substantial portion of the return. Craig, however, does not prepare any other portion of the taxpayer’s return and is not the signing tax return preparer of this return. Craig is considered a nonsigning tax return preparer.

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At the present time, a person is a tax return preparer without regard to educational qualifications and professional status requirements [Reg. §301.7701-15(d)].

Note: As a result of the definition of a tax return preparer, a return can actually have more than one tax return preparer.

EXCEPTIONS Under §7701(a)(36)(B) and Reg. §301.7701-15(f), a person shall not be considered a tax return preparer merely because that person does any of the following:

Furnishes typing, reproducing, or other mechanical assistance.

Prepares a return or claim for refund of the employer (or of an officer or employee of the employer) by whom he or she is regularly and continuously employed.

As a fiduciary preparing a return or claim for refund in his or her capacity as a fiduciary.

Prepares a claim for refund for a taxpayer in response to any notice of deficiency issued to such taxpayer, or in response to any waiver of restriction after the beginning of an audit of such taxpayer or another taxpayer if a determination in such audit of such other taxpayer, directly or indirectly, affects the tax liability of such taxpayer.

Prepares a return or claim for refund for a taxpayer with no agreement for compensation, even if the person receives an insubstantial gift or favor.

Performs official duties as an official or employee of the Internal Revenue Service.

Provides tax assistance under a Volunteer Income Tax Assistance (VITA) program, tax counseling for the elderly (TCE), or at a qualified Low-Income Taxpayer Clinic (LITC).

RETURN OR CLAIM FOR REFUND To further understand the general definition of who is considered a tax return preparer under IRS regulations, it is important to know what constitutes a return or claim for refund.

For returns filed before 2009, a return or claim for refund included the following:

An individual or corporate income tax return, or a fiduciary income tax return for a trust or estate.

A regulated investment company undistributed capital gains tax return.

A return of a charitable remainder trust.

A return by a transferor of stock or securities to a foreign corporation, foreign trust, or foreign partnership.

A partnership or S corporation return of income.


The Small Business and Work Opportunity Tax Act of 2007 expanded the definition of returns to include:

Estate tax returns.

Gift tax returns.

Miscellaneous excise tax returns.

Employment tax returns. Final Reg. §301.7701-15(b)(4) provides that a return or claim for refund is a return filed by or on behalf of a taxpayer reporting the taxpayer’s tax liability and only includes a return identified in published guidance in the Internal Revenue Bulletin (IRB). A return also includes any information return or other document identified in published guidance in the IRB that reports information that is or may be reported on another taxpayer’s return and that constitutes a substantial portion of the taxpayer’s return.

Note: See Rev. Proc. 2009-11 for a list of all returns and claims for refund for purposes of the preparer penalties under §6694 and §6695(b). The tax returns are grouped into different categories including income tax returns, estate and gift tax returns, employment tax returns, miscellaneous excise tax returns, etc. To view Rev. Proc. 2009-11 go to http://www.natptax.com Tax Knowledge Center, Federal Tax Information, IRS Tax Resources, Resource Type = Revenue Procedures.

SUBSTANTIAL PORTION OF RETURN Only a person who prepares all or a substantial portion of a return or claim for refund is considered to be a preparer of the return or claim for refund [Reg. §301.7701-15(b)(3)(i)].

A person, who renders advice that is directly relevant to the determination of the existence, characterization, or amount of an entry on a return or claim for refund, is regarded as having prepared that entry. Whether a schedule, entry, or other portion of a return or claim for refund is a substantial portion is determined based upon whether the person knows, or reasonably should know, that the tax attributable to such schedule, entry, or other portion of a return is a substantial portion of the tax required to be shown on the return. A single tax entry could constitute a substantial portion of the tax required to be shown on the return.

The following factors are considered when determining whether an entry, schedule, or other portion of a return is a substantial portion:

The size and complexity of the item relative to the taxpayer’s gross income.

The size of the understatement attributable to the item compared to the taxpayer’s reported tax liability.


NOT SUBSTANTIAL — DE MINIMIS RULE With respect to a nonsigning tax return preparer, the schedule, entry, or other portion of the return or claim for refund is not considered to be a substantial portion if it involves amounts of gross income, deductions, or credits that are:

Less than $10,000.

Less than $400,000 and also less than 20% of the gross income (or adjusted gross income if the taxpayer is an individual) as shown on the return or claim for refund [Reg. §301.7701-15(b)(3)(ii)(A)].

Note: The de minimis rule does not apply to signing tax return preparers [Reg. §301.7701-15(b)(3)(ii)(C)].

If more than one schedule, entry or other portion is involved, they shall be aggregated in applying the above rule [Reg. §301.7701-15(b)(3)(ii)(B)].

Example: For some reason, Patty Professional was asked by Tom Taxpayer to prepare only part of his return. She prepared his Schedule B, reporting $4,000 in dividend income and also gave him advice regarding his charitable contributions of $1,500. Patty is not considered a tax return preparer for Tom. The amount she assisted with ($4,000 + $1,500 = $5,500) is less than $10,000, so it is not a substantial portion of the return. However, if Patty prepared all of Tom’s tax return she would be considered a tax return preparer.

RULES THAT APPLY TO ALL PREPARERS SIGNATURE OF PREPARER Reg. §1.6695-1(b) requires an individual who is a signing tax return preparer to sign the paper return or claim for refund after it is completed and before it is presented to the taxpayer for signature.

If the signing tax return preparer is unavailable for signature, another tax return preparer shall review the entire preparation of the return or claim for refund, and then sign the return or claim for refund.

If more than one tax return preparer is involved in the preparation of the return or claim for refund, the individual tax return preparer who has the primary responsibility for the overall substantive accuracy of the return or claim for refund is considered to be the signing tax return preparer [Reg. §301.7701-15(b)(1)].


Instead of manually signing the tax return, tax return preparers can sign original returns, amended returns, and requests for filing extensions by means of a rubber stamp, mechanical device, or computer software. These alternative methods of signing must include either a facsimile of the preparer’s signature or the preparer’s printed name (Notice 2004-54). The return presented to the client can contain a photocopy of the original signature.

In the case of electronically signed tax returns, the signing tax return preparer does not need to sign the tax return before giving a completed copy of the return to the taxpayer. However, the signing tax return preparer must furnish all of the information that is transmitted as the electronically signed tax return to the taxpayer contemporaneously with furnishing Form 8879, IRS e-file Signature Authorization [Reg. §1.6695-1(b)(2)].

Electronic return originators (EROs) can sign the form using a rubber stamp, mechanical device (such as a signature pen), or computer software program (Notice 2007-79).

FAILURE TO SIGN PENALTY

If a tax return preparer fails to sign the tax return as required, the preparer will be assessed a $50 penalty per failure, up to a maximum of $25,000 per calendar year [§6695(b)].

FURNISH IDENTIFYING NUMBER (PTIN) Reg. §1.6109-2(a) requires a signing tax return preparer to furnish his or her identifying number on any tax return filed by such preparer.

For returns filed before January 1, 2011, the identifying number can be the tax return preparer’s social security number (SSN) or a preparer tax identification number (PTIN).

For returns filed after December 31, 2010, all tax return preparers must use a PTIN as their identifying number [Reg. §1.6109-2(d)].

Note: To obtain a PTIN, either file Form W-12, IRS Paid Preparer Tax Identification Number (PTIN) Application, or go online at http://www.irs.gov/taxpros/article/0,,id=210909,00.html.

FAILURE TO FURNISH PTIN PENALTY

If a tax return preparer fails to furnish the preparer’s identifying number, the preparer will be assessed a penalty of $50 per failure, up to a maximum of $25,000 per calendar year [§6695(c)].


FURNISH COPY TO TAXPAYER Reg. §1.6107-1(a)(1) requires a signing tax return preparer of any tax return or claim for refund to furnish a completed copy of the original return or claim for refund to the taxpayer (or nontaxable entity) not later than the time the original return or claim for refund is presented for the signature of the taxpayer (or nontaxable entity).

The copy can be in any media, including electronic media, that is acceptable to both the taxpayer and the tax return preparer.

In the case of an electronically filed return, a complete copy of the original return or claim for refund consists of the electronic portion of the return or claim for refund, including all schedules, forms, pdf attachments, and jurats, that was filed with the IRS [Reg. §1.6107-1(a)(2)].

FAILURE TO FURNISH COPY PENALTY

If a tax return preparer fails to furnish a copy of the tax return to the taxpayer as required, the preparer will be assessed a penalty of $50 per failure, up to a maximum of $25,000 per calendar year [§6695(a)].

RETAIN A COPY Reg. §1.6107-1(b) requires a signing tax return preparer to retain a copy or record of all returns prepared. To comply with this requirement, the preparer must:

Retain a completed copy of the return or claim for refund, or retain a record, by list, card file, or otherwise of the name, taxpayer identification number, and taxable year of the taxpayer (or nontaxable entity) for whom the return or claim for refund was prepared and the type of return or claim for refund prepared.

Retain a record of the name of the individual tax return preparer required to sign the return or claim for refund. A record is considered to be retained if the preparer retains a copy of the return, or maintains a list, card file, or otherwise, for each return or claim for refund presented to the taxpayer (or nontaxable entity).

Make the copy or record of returns and claims for refund and record of the individuals required to sign available for inspection upon request by the IRS.

Retain and make available for inspection all the records described above for the three-year period following the close of the return period during which the return or claim for refund was presented for signature.

FAILURE TO RETAIN COPY PENALTY

If a tax return preparer fails to retain a copy or list as required, the preparer will be assessed a penalty of $50 per failure, up to a maximum of $25,000 per calendar year [§6695(d)].


EIC DUE DILIGENCE REQUIREMENTS A tax return preparer who fails to comply with the due diligence requirements with respect to determining a taxpayer’s eligibility for, or amount of, the earned income credit (EIC) is subject to a $100 penalty for each failure [§6695(g)].

The penalty can be avoided by meeting the following due diligence requirements:

Completion of eligibility checklist. Complete Form 8867, Paid Preparer’s Earned Income Credit Checklist, or other permissible form based on the information obtained from the taxpayer as a record of the taxpayer’s eligibility.

Computation of credit. Complete the worksheet provided in the instructions to Forms 1040, 1040A, or 1040EZ, or an equivalent worksheet provided by tax software etc.

Knowledge. The tax return preparer must not know, or have reason to know, that any information used to determine eligibility or amount is incorrect. The preparer cannot ignore the implication that the information furnished by the taxpayer appears to be incorrect, inconsistent, or incomplete. A preparer must make reasonable inquiries in such cases and be well-informed (knowledgeable in the law) to be able to make these inquiries. A preparer must create contemporaneous documentation of the inquiries and the taxpayer’s responses.

Retention of records. Retain the aforementioned items for three years after June 30 following the date the return or claim for refund was presented to the taxpayer for signature [Reg. §1.6695-2(b)].

KNOWLEDGE When Reg. §1.6695-2 was amended on December 15, 2008, for tax returns prepared after December 31, 2008, there was an expansion of the “must not know or have reason to know” criteria. This subsection of the regulation is titled “Knowledge.”

Specifically, Reg. §1.6695-2(b)(3)(i) reads exactly as follows:

In general. The tax return preparer must not know, or have reason to know, that any information used by the tax return preparer in determining the taxpayer’s eligibility for, or the amount of, the EIC is incorrect. The tax return preparer cannot ignore the implications of information furnished to, or known by, the tax return preparer, and must make reasonable inquiries if the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete. A tax return preparer must make reasonable inquiries if a reasonable and well-informed tax return preparer knowledgeable in the law would conclude that the information furnished to the tax return preparer appears to be incorrect, inconsistent, or incomplete. The tax return preparer must also contemporaneously document in the files the reasonable inquiries made and the responses to these inquiries.


EXAMPLES OF KNOWLEDGE AND REASONABLE INQUIRES

The following are four examples from the regulation to illustrate the knowledge that the IRS believes a preparer should have and to understand when reasonable inquiries are warranted.

Example: A 22 year-old taxpayer wants to claim two sons, ages 10 and 11, as qualifying children for purposes of the EIC. Preparer A must make additional reasonable inquiries regarding the relationship between the taxpayer and the children as the age of the taxpayer appears inconsistent with the ages of the children claimed as sons [Reg. §1.6695-2(b)(3)(ii), Example (1)].

Example: An 18 year-old taxpayer mentions that she and her daughter live with her parents. She earned $3,000 from a part-time job and wants to claim EIC. The return preparer should make reasonable inquiries to determine if this taxpayer is a qualifying child of her parents and therefore ineligible to claim EIC [Reg. §1.6695-2(b)(3)(ii), Example (2)].

Example: Taxpayer asks Preparer C to prepare his tax return and wants to claim his niece and nephew as qualifying children for the EIC. Preparer C should make reasonable inquiries to determine whether the children meet EIC qualifying child requirements and ensure possible duplicate claim situations involving the parents or other relatives are properly considered [Reg. §1.6695-2(b)(3)(ii), Example (3)].

Example: The taxpayer states that she is head of her household and has two children ages 13 and 14. She states that she earned $12,000 as a self-employed hairdresser, but had no expenses. Since it is unusual to incur no expenses in the production of income, it appears the taxpayer is providing incomplete information. The return preparer should make reasonable inquiries to determine whether a business exists and what, if any, expenses were incurred [Reg. §1.6695-2(b)(ii), Example (4)].

Note: The IRS has created a website to help preparers with regard to their due diligence requirements. It is called Tax Preparer Toolkit and is at http://www.eitc.irs.gov/rptoolkit/main


PREPARER’S UNDERSTATEMENT OF

TAXPAYER’S LIABILITY Tax return preparers can be subject to penalties for understating the taxpayer’s liability under §6694.

UNDERSTATEMENT DUE TO UNREASONABLE

POSITION Under §6694(a), a penalty is imposed on a tax return preparer for an understatement of liability due to an “unreasonable position” that the tax return preparer knew or reasonably should have known. In general, an undisclosed position is unreasonable if there is no “substantial authority” for the position.

If a position (other than a position with respect to a tax shelter or a reportable transaction) was disclosed but there was no reasonable basis for the position, the position is unreasonable.

With respect to tax shelters and reportable transactions, it must be reasonable to believe that the position would more likely than not be sustained on its merits, or the position is unreasonable.

Note: The 2008 Tax Extenders Act replaced the “more likely than not” standard for undisclosed positions with the “substantial authority” standard. The standard for disclosed positions did not change. However, the more likely than not standard was added for tax shelters and reportable transactions.

Some of the key provisions of the §6694(a) penalty include:

An individual is a tax return preparer subject to §6694 if the individual is primarily responsible for the position(s) on the return or claim for refund giving rise to an understatement.

Multiple individuals per firm are tax return preparers with respect to one tax return. However, only one individual per firm is primarily responsible for each position on the return giving rise to an understatement [Reg. §1.6694-1(b)(1)].

The signing tax return preparer is generally considered the person primarily responsible for all of the positions on the return or claim for refund giving rise to an understatement [Reg. §1.6694-1(b)(2)].

The tax return preparer and the firm that employs the tax return preparer may both be subject to the penalty [Reg. §1.6694-1(b)(5)].

The tax return preparer generally can rely in good faith without verification upon information furnished by the taxpayer, another advisor, or another tax return preparer. However, the tax return preparer must make reasonable inquiries if the


information as furnished appears to be incorrect or incomplete [Reg. §1.6694-1(e)].

The penalty does not apply if the understatement was due to reasonable cause and the preparer acted in good faith [§6694(a)(3)].

Example: Maurice (tax return preparer) conducted an interview with his client, who stated that she made a charitable contribution of real estate in the amount of $50,000, when in fact, she never made this charitable contribution. Maurice did not inquire about the existence of a qualified appraisal, or complete Form 8283, Noncash Charitable Contributions. Maurice deducted the charitable contribution, which resulted in an understatement of tax, and he signed the tax return. Maurice is subject to the §6694 penalty.

The penalty for understatement due to an unreasonable position is the greater of $1,000 or 50% of the income derived by the tax return preparer for preparing the return or claim for refund [§6694(a)(1)].

In general, “income derived” means all compensation the tax return preparer receives or expects to receive with respect to preparing the return or claim for refund or providing tax advice (including research and consultation) with respect to the position taken on the tax return that gave rise to the understatement [Reg. §1.6694-1(f)(1)].

If a tax return preparer and the firm that employs that individual are both subject to the penalty, the total amount assessed against the individual and the firm shall not exceed 50% of the income derived by the firm from the engagement. The portion of the penalty assessed against the individual shall not exceed 50% of the individual’s compensation reasonably allocated to the engagement of preparing the return or providing tax advice with respect to the position taken on the return that gave rise to the understatement [Reg. §1.6694-1(f)(3)].

Example: Brad is an attorney who works for a law firm as an employee with a salary of $75,000 per year. Brad performed tax preparation work for Renee. Renee’s tax return contained a position that resulted in an understatement subject to the §6694 penalty. Brad spent 100 hours on the position out of a total 2,000 billed during the year. The total fees earned by the law firm with respect to the position reflected on Renee’s tax return were $50,000. If Brad is subject to the penalty, the penalty amount computed under the 50% of income standard is .5 x (100/2,000) x $75,000 = $1,875. If the law firm is subject to the penalty, the penalty under the 50% of income standard is .5 x $50,000 = $25,000, less any penalty imposed against Brad.


SUBSTANTIAL AUTHORITY

An undisclosed position is unreasonable unless there is substantial authority for the position.

Substantial authority is defined in Reg. §1.6662-4(d), which states that the substantial authority standard is an objective standard involving analysis of the law and application of the law to relevant facts. It is less stringent than the more likely than not standard (more than 50% likelihood the position will be upheld), but more stringent than the reasonable basis standard. There is substantial authority for the tax treatment of an item only if the weight of the authorities supporting the treatment is substantial in relation to the weight of authorities supporting contrary treatment.

The weight accorded an authority depends on its relevance and persuasiveness, and the type of document providing the authority. For example, a revenue ruling is accorded greater weight than a private letter ruling (PLR) addressing the same issue. An older PLR generally must be accorded less weight than a recent one. In addition, any PLR, technical advice memorandum, general counsel memorandum or action on decision that is more than 10 years old generally is accorded very little weight. However, the persuasiveness and relevance of the document, viewed in light of subsequent developments, should be taken into account along with the age of the document [Reg. §1.6662-4(d)(3)(ii)].

The following, as set forth in Reg. §1.6662-4(d)(3)(iii), are considered valid authorities for the purpose of determining if there is substantial authority for tax treatment of an item:

Internal Revenue Code and other statutory provisions.

Proposed, temporary, and final regulations.

Revenue rulings and revenue procedures.

Tax treaties, regulations thereunder, and Treasury Department’s official explanations of such treaties.

Court cases.

Congressional intent as reflected in committee reports.

Private letter rulings (PLRs) and technical advice memoranda (TAMs) issued after October 31, 1976.

Actions on decisions (AODs) and general counsel memoranda (GCMs) issued after March 12, 1981.

IRS information or press releases, notices, announcements, and other administrative pronouncements published in the Internal Revenue Bulletin.

Conclusions reached in treatises, legal periodicals, legal opinions or opinions rendered by tax professionals are not authority. However, the authorities underlying such expressions of opinion can give rise to substantial authority for the tax treatment of an item. In addition, an authority does not continue to be an authority to the extent it is overruled or modified by a body with the power to overrule or modify earlier authority.


ADEQUATE DISCLOSURE AND REASONABLE BASIS

The penalty under §6694(a) is not imposed if the position (other than a position with respect to a tax shelter or a reportable transaction) is adequately disclosed under §6662(d)(2)(B)(ii)(I) on the return or claim for refund, and there is a “reasonable basis” for the position.

Reasonable basis has the same meaning as in Reg. §1.6662-3(b)(3). It is significantly higher than not frivolous or not patently improper. However, it is not satisfied by a position that is merely arguable. If the position is reasonably based on one or more of the authorities set forth in Reg. §1.6662-4(d)(3)(iii) (taking into account the relevance and persuasiveness of the authorities and subsequent developments), it generally satisfies the reasonable basis standard even though it may not satisfy the substantial authority standard.

In general, disclosure of a position for which there is reasonable basis but no substantial authority is adequate if the signing tax return preparer discloses the position by properly completing and filing Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement [Reg. §1.6694-2(d)(3)].

If a nonsigning tax return preparer provides advice to another tax return preparer with respect to a position for which there is reasonable basis but no substantial authority, disclosure of that position is adequate if the tax return preparer advises the other tax return preparer that disclosure under §6694(a) may be required. The tax return preparer must also contemporaneously document the advice in his or her files [Reg. §1.6694-2(d)(3)(ii)(B)].

Rev. Proc. 2011-13 identifies circumstances under which disclosure of a position on a taxpayer’s income tax return is adequate for purposes of avoiding the penalty under §6694(a) with respect to income tax returns. This revenue procedure only applies to any income tax return filed on 2010 tax forms for a taxable year beginning in 2010, and to any income tax return filed on 2010 tax forms in 2011 for short taxable years beginning in 2011.

The taxpayer must furnish all required information in accordance with the applicable forms and instructions. Furthermore, the money amounts entered on these forms must be verifiable. A number is verifiable if, on audit, the taxpayer can prove the origin of the amount (even if that number is not ultimately accepted by the IRS) and the taxpayer can show good faith in entering that number on the applicable form.

Disclosure is not adequate under this revenue procedure when the understatement arises from a transaction between related parties. If an entry presents a legal issue or controversy because of a related-party transaction, the transaction and relationship must be disclosed on Form 8275 or Form 8275-R.

When the amount of an item is shown on a line that does not have a preprinted description identifying that item (such as under an “Other Expense” category) the taxpayer must clearly identify the item by including the description on that line.

If a line referenced in this revenue procedure is affected by tax law changes effective after December 31, 2010, and requires additional reporting, the taxpayer may have to file Form 8275 or Form 8275-R until the IRS prescribes criteria for complying with the requirement.

For example, additional disclosure of facts relevant to, or positions taken with respect to, issues involving any of the items set forth below is unnecessary, provided that the


forms and attachments are completed in a clear, accurate manner and in accordance with their instructions.

Form 1040, Schedule A, Itemized Deductions:

Medical and dental expenses: Complete Lines 1 through 4, supplying all required information.

Taxes: Complete Lines 5 through 9, supplying all required information. Line 8 must list each type of tax and amount paid.

Interest expenses: Complete Lines 10 through 15, supplying all required information. This section does not apply to amounts disallowed under §163(d) unless Form 4952, Investment Interest Expense Deduction, is completed, or amounts disallowed under §265, expenses and interest relating to tax-exempt income.

Note: This is not an all-inclusive list. Rev. Proc. 2011-13 contains more items.

UNDERSTATEMENT DUE TO WILLFUL OR RECKLESS

CONDUCT Section 6694(b) penalties are imposed on a tax return preparer for an understatement of a tax liability that is due to a willful attempt to understate the tax liability, or that is due to a reckless or intentional disregard of rules or regulations.

A tax return preparer is considered to have willfully attempted to understate the tax liability if the preparer disregards information furnished by the taxpayer or other persons in an attempt to wrongfully reduce the taxpayer’s tax liability. For example, if the tax return preparer ignores taxable income furnished by the taxpayer, or reports six dependents on the return when the taxpayer only said he has two dependents, the preparer is subject to the penalty [Reg. §1.6694-3(b)].

A tax return preparer is considered to have recklessly or intentionally disregarded a rule or regulation if the preparer takes a position on the return or claim for refund that is contrary to a rule or regulation and the preparers knows of, or is reckless in not knowing of, the rule or regulation in question. A preparer is reckless in not knowing of a rule or regulation if the preparer makes little or no effort to determine whether a rule or regulation exists, under circumstances that demonstrate a substantial deviation from the standard of conduct that a reasonable preparer would observe in the situation [Reg. §1.6694-3(c)(1)].

If the position contrary to the rule or regulation has a reasonable basis and is adequately disclosed, the tax return preparer is not considered to have recklessly or intentionally disregarded the rule or regulation. The position must represent a good faith challenge to the validity of the regulation and the regulation must be identified in the disclosure [Reg. §1.6694-3(c)(2)].

If the position is contrary to a revenue ruling or notice, the tax return preparer is not considered to have reckless or intentionally disregarded the ruling or notice if the position meets the substantial authority standard described in Reg.


§1.6662-4(d) and is not with respect to a reportable transaction [Reg.§1.6694-3(c)(3)].

Example: Alyssa provided her tax return preparer with detailed check registers reflecting personal and business expenses. One of the expenses was for domestic help and this expense was identified as personal on the check register. Her tax return preparer knowingly deducted the expenses for Alyssa’s domestic help as wages paid in Alyssa’s business. Alyssa’s tax return preparer is subject to the penalty under §6694(b).

The penalty for an understatement due to willful or reckless conduct is the greater of $5,000 or 50% of the income derived by the tax return preparer for preparing the return or claim for refund.

If the imposition of both the unreasonable position penalty [§6694(a)] and the willful or reckless conduct penalty [§6694(b)] apply to the same return, the §6694(b) penalty for willful or reckless conduct is reduced by any amount assessed and collected against the preparer under §6694(a).

DISCLOSURE OR USE PENALTIES IRC 6713 — WRONGFUL DISCLOSURE OR USE Without taxpayer consent, a tax return preparer who discloses any information furnished by the taxpayer or uses such information for any purpose other than to prepare or assist in preparing the taxpayer’s return is subject to a civil penalty of $250 for each disclosure or use. However, the total penalty assessed against such preparer may not exceed $10,000 for any calendar year [§6713(a)].

There are some exceptions under §7216(b) where taxpayer consent is not required to disclose or use information [§6713(b)].

Disclosure of tax return information without taxpayer consent can be made under the following conditions:

Pursuant to any other provision of the Code or regulations.

For quality or peer reviews.

Under an order of a court. Taxpayer consent is not required to use information under the following conditions:

In the preparation of State and local tax returns and declarations of estimated tax of the person to whom the information relates.

Any other use permitted under the regulations (discussed under §7216).


Note: There are a couple more exceptions in Rev. Rul. 2010-4 and Rev. Rul. 2010-5, discussed under §7216.

IRC 7216 — KNOWING OR RECKLESS DISCLOSURE

OR USE A tax return preparer who knowingly or recklessly discloses or uses tax return information for a purpose other than preparing a tax return is guilty of a misdemeanor. Upon conviction thereof, such preparer shall be fined not more than $1,000, or imprisoned not more than one year, or both together with the costs of prosecution [§7216(a)].

IRC 7216 is similar to §6713. The only difference is that the disclosure or use of information under §7216 must be knowing or reckless. In addition, the penalty is more severe because it is a criminal penalty.

New regulations under §7216 became effective on January 1, 2009. In general, Reg. §301.7216 had not changed substantially for over 30 years. It did not address the modern return preparation marketplace, particularly electronic filing and the cross-marketing of financial and commercial products and services during the return preparation process. The new regulations give taxpayers greater control over their personal tax return information. In general, tax return preparers cannot use or disclose tax return information for other purposes, such as soliciting any service or product other than tax return preparation services.

There are several exceptions though. The regulations describe how preparers, with the informed written consent of taxpayers, may use or disclose tax return information for other purposes. The regulations also describe specific and limited exceptions that allow a preparer to use or disclose tax return information without the consent of taxpayers.

The regulations apply to all tax return preparers, including:

Any person engaged in the business of preparing or assisting in preparing tax returns.

Any persons who hold themselves out as preparers, whether or not they charge a fee for their services, including volunteer preparers in programs like Volunteer Income Tax Assistance (VITA) and Tax counseling for the Elderly (TCE).

Any person engaged in the business of providing auxiliary services in connection with the preparation of tax returns, including:

Any person who develops software that is used to prepare or file a tax return.

Any authorized IRS e-file Provider, including Electronic Return Originators (EROs), Intermediate Service Providers, Software Developers, Transmitters, and Reporting Agents (Rev. Proc. 2007-40).

Any person who is compensated for preparing or assisting in preparing a tax return for another person.

Any individual who works for any person described above and performs services that assist in the preparation of, or assist in providing auxiliary services in connection with the preparation of, a tax return [Reg. §301.7216-1(b)(2)].


An individual is not a tax return preparer simply because he or she:

Leases office space to a tax return preparer.

Furnishes credit to a taxpayer whose tax return is prepared by a tax return preparer.

Furnishes information to a tax return preparer at the taxpayer’s request [Reg. §301.7216-1(b)(2)(v)].

Tax return information is any information tax return preparers obtain from taxpayers or third parties in any form or manner that is used for or in connection with the preparation of the taxpayer’s tax return. It includes the taxpayer’s name, address, and identifying number [Reg. §301.7216-1(b)(3)]. It also includes the following:

All computations, worksheets, and printouts preparers create.

Correspondence from the IRS during the preparation, filing, and correction of returns.

Statistical compilations of tax return information.

Tax return preparation software registration information.

DISCLOSURE OF TAX RETURN INFORMATION

The term disclosure means the act of making tax return information known to any person in any manner whatsoever [Reg. §307.7216-1(b)(5)]. The regulations authorize two types of disclosures:

Certain disclosures permitted without taxpayer consent.

Disclosures permitted only with taxpayer consent.

Disclosures NOT Requiring Taxpayer Consent

Disclosure is permitted without taxpayer consent under Reg. §301.7216-2 in the following circumstances:

Pursuant to any other provision of the Code or regulations.

To an officer or employee of the IRS.

For tax preparation services (i.e., disclosure to tax return preparers located within the same firm in the U.S.).

To other tax return preparers located in the U.S., as long as the services the second preparer provides are not substantive determinations or advice that affect the taxpayer’s tax liability. This includes disclosures to an Authorized IRS e-file Provider for the purpose of electronically filing the return with the IRS.

To certain related parties. Disclosure to a second taxpayer is permitted in preparing the second taxpayer’s return provided the second taxpayer is a related party, the first taxpayer’s tax interest in the information is not adverse to the second taxpayer’s tax interest in the information, and the first taxpayer has not expressly prohibited the disclosure or use. A related party for this purpose is defined as husband and wife, child and parent, grandchild and grandparent, partner and partnership, trust or estate and beneficiary, trust or estate and


fiduciary, corporation and shareholder, or members of a controlled group of corporations as defined in §1563.

Under any federal, state, or local court order.

Under a subpoena issued by a federal or state grand jury.

Under a subpoena issued by the United States Congress.

Pursuant to a written request from a professional association ethics committee or board investigating the ethical conduct of the tax return preparer.

To an attorney to secure legal advice.

To a duly appointed fiduciary of the taxpayer or taxpayer’s estate.

In preparation or audit of state or local tax returns or assisting the taxpayer with foreign country tax obligations.

To pay for tax preparation services (i.e., if taxpayer pays by credit card, tax return preparer may disclose certain tax return information to credit card company to process the payment).

Retention of records.

To report the commission of a crime.

Due to a tax return preparer’s incapacity or death.

Example: Edward, an employee at Firm’s MN office, receives tax return information from Tony for Firm’s use in preparing Tony’s income tax return. Edward makes substantive determinations and forwards the tax return information to Paula, an employee at Processor located in WI. Paula places the tax return information on the income tax return and furnishes the finished product to Edward. Edward is not required to receive Tony’s consent before disclosing Tony’s tax return information to Paula because Processor’s services are not substantive determinations and the tax return information remained in the U.S. during the entire course of the tax return preparation process.

Note: On December 30, 2009, the IRS issued proposed and temporary regulations (effective January 4, 2010) and related revenue rulings addressing the use or disclosure of tax information by tax return preparers. The regulations and related revenue rulings under §7216 enable tax return preparers to more effectively provide a range of services that taxpayers would ordinarily expect from tax return preparers.

Disclosure is permitted without taxpayer consent under Reg. §301.7216-2T as follows:

List for solicitation of tax return business. The tax return preparer may compile and maintain a list containing solely the names, addresses, e-mail addresses, phone numbers, taxpayer entity classification, and income tax return form number of taxpayers whose tax returns the tax return preparer has prepared. The compiler may only transfer this list if the transfer takes place in conjunction with the sale or other disposition of the compiler’s tax return business [Reg. §301.7216-2T(n)].


For quality, peer, or conflict reviews. A quality or peer review may only be conducted by an attorney, certified public accountant, enrolled agent, enrolled plan administrator, or enrolled actuary who are eligible to practice before the Internal Revenue Service.

Rev. Rul. 2010-5

Under Rev. Rul. 2010-5, tax return preparers are not subject to the disclosure penalties under §§6713 or 7216 when they disclose to a professional liability insurance carrier tax return information:

Required by the insurance carrier to obtain or maintain professional liability insurance coverage, including obtaining price quotes for such insurance coverage.

Required by the insurance carrier to promptly and accurately report a claim or potential claim against the tax return preparer for professional negligence, misconduct, or fraud, or to aid in the investigation of that claim or potential claim.

Required by the insurance carrier in order to secure legal representation relating to a professional liability claim.

Required by the insurance carrier to an unrelated attorney for the purpose of evaluating a claim or potential claim against the tax return preparer.

Disclosures Requiring Taxpayer Consent

If disclosure is not permitted under §7216(b) or Reg. §301.7216-2, disclosure is permitted under Reg. §301.7216-3 as long as the tax return preparer obtains the taxpayer’s written consent before the disclosure. In addition, the consent must be knowing and voluntary. In general, the provision of tax preparation services may not be conditioned on the taxpayer furnishing consent because it makes the consent involuntary.

Disclosure is permitted with taxpayer consent in the following circumstances:

Disclosure of tax return information as the taxpayer directs for purposes other than preparing the taxpayer’s return.

Disclosing tax return information to another tax return preparer who is located outside of the United States. However, consent cannot be obtained to disclose a taxpayer’s social security number unless the disclosure is through the use of an adequate data protection safeguard as defined in Rev. Proc. 2008-35, section 4.07 [Reg. §301.7216-3(b)(4)].

Disclosing tax return information to another tax return preparer in a different firm located in the U.S. if the services the second preparer provides are substantive determinations or advice affecting the taxpayer’s tax liability [Reg. §301.7216-2(d)].


Example: Carrie, who is located within the U.S., is retained by Company XYZ to provide tax return preparation services for employees of XYZ. Maurice, an employee of XYZ, works for XYZ in Germany. To provide tax return preparation services for Maurice, Carrie requires the assistance of and needs to disclose Maurice’s tax return information to a tax return preparer who works for Carrie’s affiliate located in Germany. Carrie may condition the provision of tax return preparation services upon Maurice consenting to the disclosure of Maurice’s tax return information to the tax return preparer located in Germany.

Example: Allen, an employee at Firm ABC, receives tax return information from Tricia for ABC’s use in preparing Tricia’s tax return. Allen forwards the tax return information to Brandi, an employee at another firm, to obtain advice on the issue of whether Tricia can claim a deduction for a certain business expense. Allen is required to receive Tricia’s consent before disclosing her tax return information to Brandi because Brandi’s services involve a substantive determination affecting the tax liability that Tricia will report.

USE OF TAX RETURN INFORMATION

Uses of tax return information are occurrences where tax return preparers refer to, or rely on, tax return information as the basis to take or permit actions. The regulations authorize two types of uses:

Certain permissible uses without taxpayer consent.

Uses requiring taxpayer consent to use tax return information.

Types of Use NOT Requiring Taxpayer Consent

Use of tax return information is permitted without taxpayer consent as follows:

To update taxpayer’s tax return preparation software provided by the tax return preparer [Reg. §301.7216-2(c)(1)].

To compile and maintain a list for solicitation of tax return business. The tax return preparer may compile and maintain a list containing solely the names, addresses, e-mail addresses, phone numbers, taxpayer entity classification, and income tax return form number of taxpayers whose tax returns the tax return preparer has prepared. This list may be used by the compiler solely to contact taxpayers on the list for the purpose of providing tax information and general business or economic information or analysis for educational purposes, or soliciting additional tax return preparation services [Reg. §301.7216-2T(n)].

To produce statistical information in connection with tax return preparation business. The statistical compilation must be anonymous as to taxpayer identity and contain data from at least ten tax returns. However, statistical compilations that identify dollar amounts of refunds, credits, or deductions associated with tax


returns, or percentages relating thereto, may not be disclosed in marketing or advertising, whether or not the data are statistical, averaged, aggregated, or anonymous [Reg. §301.7216-2T(o)].

To accomplish a quality, peer, or conflict review [Reg. §301.7216-2T(p)].

Example: Nancy is a tax return preparer. She maintains a list of taxpayer clients containing the information allowed under Reg. §301.7216-2T(n). She provides monthly federal income tax information updates in the form of a newsletter to all of her taxpayer clients by e-mail or U.S. mail. When she hires a new employee, she announces each hire in the newsletter for the month that follows the hiring. Each announcement includes a photograph of the new employee, the employee’s name, the employee’s telephone number, and a brief listing of the employee’s employment responsibilities. She may use the tax return information described in Reg. §301.7216-2T(n) in this manner without taxpayer consent because she is providing tax information updates. She may include the new employee announcements in the form described above because this is considered tax information for educational or informational purposes, provided the announcements do not contain solicitations for nontax return preparation services. She can also deliver this information to her clients by e-mail or U.S. mail without taxpayer consent because those delivery methods use information authorized by Reg. §301.7216-2T(n).

Example: Steve is a tax return preparer. In 2010, Steve used tax return information to produce statistical compilation of data for both internal management purposes and to support Steve’s tax return preparation business. The statistical compilation included a cell containing the information that Steve prepared 32 S corporation tax returns in 2010. In 2011, Steve decides to embark upon a new marketing campaign emphasizing his experience preparing small business tax returns. In the campaign, Steve discloses the cell containing the number of S corporation tax returns prepared in 2010. Steve’s disclosure does not include any information that can be associated with or that can identify any specific taxpayers. Steve can disclose the anonymous statistical compilation without taxpayer consent.

Example: Jose is a tax return preparer. In 2011, in support of Jose’s tax return preparation business, Jose wants to advertise that the average tax refund obtained for his clients in 2010 was $2,800. Jose cannot disclose this information because it contains a statistical compilation reflecting average refund amounts.

Rev. Rul. 2010-4

Under Rev. Rul. 2010-4, tax return preparers are not subject to the disclosure penalties under §§6713 or 7216 when they:


Use tax return information to contact taxpayers to inform them of a change in tax law that could affect the income tax liability on the taxpayers’ returns that were previously prepared or processed by the tax return preparer.

Use tax return information to determine which taxpayers’ future income tax return filing obligations may be affected by a prospective change in tax rule or regulation and to contact such taxpayers to notify them of the changed rule or regulation, explain how the change may affect them, and advise them with regard to actions they may take in response to the change.

Disclose tax return information [limited to the information compiled to solicit tax return business under Reg. §301.7216-2(n)] to a third-party service provider, that creates, publishes, or distributes by mail or e-mail, newsletters, bulletins, or similar communications to taxpayers whose tax returns the tax return preparers have prepared or processed containing tax information and general business and economic information or analysis for educational purposes or for purposes of soliciting additional tax return preparation services for the tax return preparer.

OBTAINING CONSENT

Revenue Procedure 2008-35 provides specific form and content guidance to tax return preparers for obtaining consent to disclose and consent to use taxpayer data in both the paper and electronic environments. Generally, tax preparers must obtain the signed consent of the taxpayer on paper, or electronically, before they can disclose taxpayer return information to anyone or use it for any purpose other than in the context of preparing and filing the return. Separate consents are required for disclosure(s) and use(s). Consent forms may contain multiple uses and multiple disclosures. However, consent for use and consent for disclosure cannot be included on the same form.

Consents must:

Cleary identify the intended purpose of the disclosure or use.

Identify the recipient(s) and describe the particular authorized information to be disclosed or used.

Include the name of the tax return preparer and the name of the taxpayer.

Include the applicable mandatory language set forth in §4.04(a)-(c) of Rev. Proc. 2008-35 that informs the taxpayer that he is not required to sign the consent and if he signs the consent, he can set a time period for the duration of that consent.

Include the mandatory language set forth in §4.04(d) of Rev. Proc. 2008-35 that refers the taxpayer to the Treasury Inspector General for Tax Administration (TIGTA) if he believes that his tax return information has been disclosed or used improperly.

Where applicable, include the appropriate mandatory statement set forth in §4.04(e) of Rev. Proc. 2008-35 that informs the taxpayer that his tax return information may be disclosed to a tax return preparer located outside the U.S.

Be in 12-point type on 8½ by 11” paper. Electronic consents must be in the same type as the website’s standard text.

Contain the taxpayer’s affirmative consent (as opposed to an “opt-out” clause).

Be signed and dated by the taxpayer.


Any consent to disclose tax return information must contain the following statements in the following sequence:

Federal law requires this consent form be provided to you. Unless authorized by law, we cannot disclose, without your consent, your tax return information to third parties for purposes other than the preparation and filing of your tax return. If you consent to the disclosure of your tax return information, Federal law may not protect your tax return information from further use or distribution.

You are not required to complete this form. If we obtain your signature on this form by conditioning our services on your consent, your consent will not be valid. If you agree to the disclosure of your tax return information, your consent is valid for the amount of time that you specify. If you do not specify the duration of your consent, your consent is valid for one year.

All consents (whether for use or disclosure) must contain the following statement:

If you believe your tax return information has been disclosed or used improperly in a manner unauthorized by law or without your permission, you may contact the Treasury Inspector General for Tax Administration (TIGTA) by telephone at 1-800-366-4484, or by email at [email protected].

Sample Consent Forms

There are sample consent forms on NATP’s website, www.natptax.com. Search for Section 7216 Toolkit. These forms can be filled in with the appropriate use or disclosure and then printed so the client can sign it. The forms cannot otherwise be altered or saved to the computer.

If the specific use or disclosure is not provided within these samples, a customized consent form can be created using the guidelines provided above and in Rev. Proc. 2008-35.

SAFEGUARDING TAXPAYER INFORMATION Anyone who handles taxpayer information should understand the risk of data privacy and security breaches, and take preventive measures. Information security rules require businesses and individuals to use safeguards to protect taxpayer information from events that can result in unauthorized use, identity theft, fraud, or destruction of information.

The following short list of information safeguards contains security measures used by governments and private companies to comply with security rules.

Maintain a list of all the locations taxpayer information is handled.


Assess the risk of unauthorized access, use, disclosure, modification, or destruction of the taxpayer information that is handled.

Assess the impact of unauthorized access, use, disclosure, modification, or destruction of the taxpayer information that is handled.

Write and follow an information security plan that show how the risks are addressed.

Specify in contracts with service providers the safeguards they must follow. Monitor how contractors handle taxpayer information.

Test, monitor, and revise the information security plan on a periodic basis.

Put in place additional safeguards as needed.

Provide privacy notices and practices to customers, if required by the Federal Trade Commission Privacy Rule.

Follow Federal, state, and local laws and regulations.

Note: For more information, see Pub. 4600, Safeguarding Taxpayer Information.

DISCLOSURE AUTHORIZATIONS FORM 8821 Form 8821, Tax Information Authorization, authorizes any individual, corporation, firm, organization, or partnership the taxpayer designates to inspect and/or receive the taxpayer’s confidential information in any IRS office for the type of tax and the years or periods listed on Form 8821. Form 8821 does not authorize the taxpayer’s appointee to advocate the taxpayer’s position with respect to the federal tax laws; to execute waivers, consents, or closing agreements; or to otherwise represent the taxpayer before the IRS.

POWER OF ATTORNEY (POA), FORM 2848 If the taxpayer wants to authorize an individual to represent him or her before the IRS, the taxpayer must use Form 2848, Power of Attorney and Declaration of Representative. The individual must be a person eligible to practice before the IRS.

In general, Circular 230 allows attorneys, certified public accountants (CPAs), enrolled agents (EAs), registered tax return preparers (RTRPs), enrolled actuaries, and enrolled retirement plan agents to practice before the IRS. However, practice as a RTRP is limited to preparing and signing tax returns and claims for refund, and other documents for submission to the IRS.

A RTRP can represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the IRS (including the Taxpayer Advocate Service) during an examination of a return the registered tax return


preparer signed. Unless otherwise prescribed by regulations or notice, the right to represent does not permit the RTRP to represent a taxpayer before appeals officers, revenue officers, Counsel or similar officers or employees of the IRS or the Treasury Department [§10.3(f)(3)].

Note: Just preparing a tax return, furnishing information at the request of the IRS, or appearing as a witness for the taxpayer is not practice before the IRS. These acts can be performed by anyone.

Any representative, other than a RTRP, named under a POA can usually perform the following acts:

Represent the taxpayer before any office of the IRS.

Record the interview.

Sign an offer or waiver of restriction on assessment or collection of a tax deficiency, or a waiver of notice of disallowance of claim for credit or refund.

Sign a consent to extend the statutory time period for assessment or collection of a tax.

Sign a closing agreement.

Receive, but not endorse or cash, a refund check drawn on the U.S. Treasury. This must be specifically authorized in the POA.

E-FILE PROCEDURES After the tax return preparer has reviewed and completed the individual income tax return, the taxpayer must sign the return using an electronic signature. There are two methods of signing with an electronic signature:

Self-select PIN.

Practitioner PIN. Taxpayers must sign and date the Declaration of Taxpayer to authorize the origination of the electronic submission of the return to the IRS prior to the transmission of the return to the IRS. The Declaration of Taxpayer includes the taxpayer’s declaration under penalties of perjury that the return is true, correct, and complete, as well as the taxpayers’ Consent to Disclosure. The Consent to Disclosure authorizes the IRS to disclose information to the taxpayers’ Providers. Taxpayers authorize Intermediate Service Providers, Transmitters, and EROs to receive from the IRS an acknowledgement of receipt or reason for rejection of the electronic return, an indication of any refund offset, the reason for any delay in processing the return or refund and the date of the refund.

Taxpayers must sign a new declaration if the electronic return data on individual income tax returns is changed after taxpayers signed the Declaration of Taxpayer and the amounts differ by more than either:

$50 to “Total income” or “AGI.”

$14 to “Total tax,” “Federal income tax withheld,” “Refund,” or “Amount you owe.”


SELF-SELECT PIN To use the self-select PIN method, taxpayers must provide their prior year adjusted gross income (AGI) or prior year PIN so the IRS can authenticate the taxpayers. After reviewing the completed return, the taxpayers can either:

Enter their own PINs directly into the electronic record using key strokes. This method is completely paperless.

Authorize the electronic return originator (ERO) to enter PINs on their behalf, in which case the taxpayers must review and sign a completed signature authorization form.

The following taxpayers are ineligible to use the self-select PIN method:

Primary taxpayers under age 16 who have never filed.

Secondary taxpayers under age 16 who did not file the prior tax year.

Note: EROs should advise taxpayers to keep a copy of their completed tax return to assist with authentication in the subsequent year.

PRACTITIONER PIN Practitioner PIN does not require the taxpayers to provide their prior year AGI or prior year PIN. Taxpayers must always appropriately sign a completed signature authorization form after reviewing the completed return. Taxpayers, who use the Practitioner PIN method and enter their own PINs in the electronic record using key strokes after reviewing the completed return, must still appropriately sign the signature authorization form.

IRS E-FILE SIGNATURE AUTHORIZATION Regardless of the method of electronic signature used, taxpayers can enter their own PINs; EROs can select and enter the taxpayers’ PINs; or the software can generate the taxpayers’ PINs in the electronic return. After reviewing the return, the taxpayers must agree by signing an IRS e-file signature authorization containing the PIN.

When taxpayers are unable to enter their PIN directly in the electronic return, taxpayers authorize the ERO to enter their PINs in the electronic return record by signing the appropriate completed IRS e-file signature authorization form.

Form 8879, IRS e-file Signature Authorization, authorizes an ERO to enter the taxpayers’ PINs on individual income tax returns.

Form 8878, IRS e-file Authorization for Application of Extension of Time to File, authorizes an ERO to enter the taxpayers’ PINs on Form 4868 and 2350.


The ERO can enter the taxpayers’ PINs in the electronic return record before the taxpayers sign Form 8879 or Form 8878, but the taxpayers must sign and date the appropriate form before the ERO originates the electronic submission of the return. The taxpayer must sign and date Form 8879 or Form 8878 after reviewing the return and ensuring the tax return information on the form matches the information on the return.

Only taxpayers who provide a completed tax return to an ERO for electronic filing can complete the IRS e-file Signature Authorization without reviewing the return originated by the ERO. The ERO must enter the line items from the paper return on the applicable Form 8879 or Form 8878 prior to the taxpayers signing and dating the form. The ERO can use these pre-signed authorizations as authority to input the taxpayer’s PIN only if the information on the electronic version of the tax return agrees with the entries from the paper return.

Taxpayers and the ERO representative must always complete and sign Form 8879 or Form 8878 for the Practitioner PIN method of electronic signatures.

SUBMITTING THE RETURN Once signed, an ERO must originate the electronic submission of a return as soon as possible. EROs must not electronically file individual income tax returns prior to receiving Forms W-2, W-2G. pr 1099-R. If the taxpayer is unable to secure and provide such a form, the ERO can electronically file the return after the taxpayer completes Form 4852, Substitute for Form W-2, Wage and Tax Statement or 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.

An ERO must ensure that stockpiling of returns does not occur at its offices. Stockpiling is:

Collecting returns from taxpayers or from another Authorized IRS e-file Provider prior to official acceptance in IRS e-file.

After official acceptance to participate in IRS e-file, stockpiling refers to waiting more than three calendar days to submit the return to the IRS once the ERO has all necessary information for origination.

Note: The IRS does not consider returns held prior to the date that it accepts transmission of electronic returns stockpiled. EROs must advise taxpayers that it cannot transmit returns to the IRS until the date the IRS accepts transmission of electronic returns.

The ERO must, at the request of the taxpayer, provide the Declaration Control Number (DCN) and the date the IRS accepted the electronic individual income tax return data. The ERO may use Form 9325, Acknowledgment and General Information for Taxpayers Who File Returns Electronically, for this purpose. The ERO must also, if


requested, supply the electronic postmark if the Transmitter provided one for the return.

REJECTED TAX RETURNS

Rejected electronic individual income tax return data can be corrected and retransmitted without new signatures or authorizations if changes do not differ from the amount on the original electronic return by more than either:

$50 to “Total income” or “AGI.”

$14 to “Total tax,” “Federal income tax withheld,” “Refund,” or “Amount you owe.” The ERO must give taxpayers copies of the new electronic return data.

If the IRS rejects the electronic portion of the taxpayer’s return for processing and the ERO cannot rectify the reason for the rejection, the ERO must take reasonable steps to inform the taxpayer of the rejection within 24 hours. When the ERO advises the taxpayer that it has not filed the tax return, the ERO must provide the taxpayer with the reject code(s) accompanied by an explanation. If the taxpayer chooses not to have the electronic portion of the return corrected and transmitted to the IRS, or if the IRS cannot accept the return for processing, the taxpayer must file a paper return. To timely file the return, the taxpayer must file the paper return by the later of the due date of the return or ten calendar days after the date the IRS gives notification that it rejected the electronic portion of the return or that the return cannot be accepted for processing. Taxpayers should include an explanation in the paper return as to why they are filing the return after the due date.

RECORD KEEPING Taxpayers must keep records to prove their income and expenses. If they own a home or investments, their basic records should contain documents related to those items including all tax-related documents. Tax return preparers should advise taxpayers to keep a copy of the following documents for at least three years:

Form 1040 with all forms, schedules, and attachments.

All other tax-related documents, including Form(s) W-2 and Form(s) 1099.

If applicable:

Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents (or similar statement).

Original power of attorney.

For e-file returns, the taxpayer must also keep a copy of the signed Form 8879. This form is not needed if the self-select PIN method is used.

EROs must retain the following material until the end of the calendar year at the business address from which it originated the return or at a location that allows the ERO to readily access the material as it must be available at the time of IRS request:

Copy of Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return, and supporting documents that are not included in the electronic records submitted to the IRS.


Copies of Forms W-2G, W-2G and 1099-R.

Copy of signed IRS e-file consent to disclosure forms.

Complete copy of the electronic portion of the return that can be readily and accurately converted into an electronic transmission that the IRS can process.

The acknowledgement file for IRS accepted returns. Forms 8879 and 8878 must be available to the IRS in the same manner described above for three years from the due date of the return or the IRS received date, whichever is later.

EROs can electronically image and store all paper records they are required to retain for IRS e-file. The electronic storage system must satisfy the requirements of Rev. Proc. 97-22. It must ensure an accurate and complete transfer of the hard copy to the electronic storage media. The ERO must be able to reproduce all records with a high degree of legibility and readability (including the taxpayers’ signatures) when displayed on a video terminal and when reproduced in hard copy.


Review Questions 1. ___ Any person, who gives sufficient information and advice so that completion

of the return is largely a mechanical or a clerical matter, is a tax return preparer even if he or she is not compensated. A. True. B. False.

2. ___ A tax return preparer is:

A. Any person who prepares for compensation any tax return or claim for refund. B. A person who furnishes to another preparer sufficient information so that completion is just clerical. C. A person who prepares a return or claim for refund outside the U.S. D. All of the above.

3. ___ Under the de minimis rule, a schedule, entry or other portion of the return

is not considered to be a substantial portion if the amounts are: A. Less than $10,000. B. Less than $15,000. C. Less than $20,000. D. Less than $25,000.

4. ___ A tax return preparer must sign the tax return:

A. When they get the singed copy of Form 8879. B. Before it is presented to the taxpayer for signature. C. Only after they receive payment for services. D. After it has been accepted for e-file.

5. ___ Tax return preparers must retain a complete copy of a return or claim for

refund A. True. B. False.

6. ___ All of the following are considered valid authorities for the purpose of

substantial authority except: A. Internal Revenue Code. B. Revenue Procedure. C. Opinion rendered by tax professionals. D. IRS press release.


7. ___ For tax returns filed in 2011, the tax return preparer’s social security number is no longer valid to use as an identification number on the tax return. A. True. B. False.

8. ___ Which of the following is not a valid authority for the substantial authority

test? A. Congressional intent as reflected in committee reports. B. IRS information on press releases. C. Legal opinions. D. Proposed regulations.

9. ___ If a tax return preparer intentionally reported more business expenses on

Schedule C than the taxpayer furnished so the taxpayer would not have to pay any self-employment tax, which preparer penalty applies? A. §6694(a). B. §6694(b). C. §6695(f). D. §7216.

10. ___ Which of the following positions should be disclosed on the tax return?

A. If there is substantial authority for the position. B. If the position is unreasonable. C. Because the taxpayer wants to do that right thing and is willing to report income in the current year that was properly reportable in a closed year, claiming it in the wrong year is advisable as long as it is disclosed. D. If there is reasonable basis for the position.

11. ___ When determining whether a taxpayer is eligible for EIC, if the information

furnished by the taxpayer appears to be incorrect, inconsistent, or incomplete, the preparer must do which of the following? A. A preparer must make reasonable inquires in such cases and be well- informed (knowledgeable in the law) to be able to make these inquires. A preparer must create contemporaneous documentation of the inquires and the taxpayer’s responses. B. Create contemporaneous documentation of what the taxpayer said that appears to be incorrect, inconsistent, or incomplete. There is no need to make inquires because that is an invasion of the taxpayer’s privacy. C. After the appointment is over, and when there is free time, circle the taxpayer’s house and surrounding neighborhood, gathering as much information as possible to verify what the taxpayer indicated in the appointment. However, do not disclose to anyone the taxpayer’s name. D. Contact all relatives listed in the phone book (public record) and make inquires as to the correctness of the taxpayer’s assertions. Create contemporaneous documentation of the phone conversations.


12. ___ The penalty for failure of EIC due diligence is: A. A onetime fine of $100. B. A $100 fine for each failure. C. A $500 fine for each failure. D. A $1,000 fine for each failure.

13. ___ If the taxpayer is adamant about claiming an unreasonable position, which

of the following will eliminate the preparer penalty for understatement due to unreasonable position? A. If there is substantial authority for the position. B. Disclosed the position and have the taxpayer sign a statement saying he or she is willing to take this risk even though the preparer does not believe it is right. C. There is no relief from the preparer penalty for an understatement due to an unreasonable position. D. If there is reasonable basis for the position.


Review Answers 1. B. False is correct. Section 7701(a)(36)(A) defines a “tax return preparer” as

any person who prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of, any tax return or claim for refund.

2. A. Incorrect. This is a definition of a tax return preparer. However, answers B &

C are also correct. B. Incorrect. This is a definition of a tax return preparer. However, answers A & C are also correct. C. Incorrect. This is a definition of a tax return preparer. However, answers A & B are also correct. D. Correct. All three answers are a definition of a tax return preparer.

3. A. Correct. With respect to a nonsigning tax return preparer, the schedule,

entry or other portion of the return or claim for refund is not considered to be a substantial portion if it involves amounts of gross income, deductions or credits that are less than $10,000 or less than $400,000 and also less than 20% of the gross income. B. Incorrect. With respect to a nonsigning tax return preparer, the schedule, entry or other portion of the return or claim for refund is not considered to be a substantial portion if it involves amounts of gross income, deductions or credits that are less than $10,000 or less than $400,000 and also less than 20% of the gross income. C. Incorrect. With respect to a nonsigning tax return preparer, the schedule, entry or other portion of the return or claim for refund is not considered to be a substantial portion if it involves amounts of gross income, deductions or credits that are less than $10,000 or less than $400,000 and also less than 20% of the gross income. D. Incorrect. With respect to a nonsigning tax return preparer, the schedule, entry or other portion of the return or claim for refund is not considered to be a substantial portion if it involves amounts of gross income, deductions or credits that are less than $10,000 or less than $400,000 and also less than 20% of the gross income.

4. A. Incorrect. The tax return preparer must sign the return after it is completed

and before it is presented to the taxpayer for signature. B. Correct. The tax return preparer must sign the return after it is completed and before it is presented to the taxpayer for signature. C. Incorrect. The tax return preparer must sign the return after it is completed and before it is presented to the taxpayer for signature. D. Incorrect. The tax return preparer must sign the return after it is completed and before it is presented to the taxpayer for signature.

5. B. False is correct. A tax return preparer can retain a completed copy of the

return or claim for refund or they can retain a record, by list, card file or otherwise of the name, taxpayer identification number, taxable year of the taxpayer and type of return or claim of refund filed.


6. A. Incorrect. The Internal Revenue Code is a valid authority for the purpose of substantial authority. B. Incorrect. A revenue procedure is a valid authority for the purpose of substantial authority. C. Correct. An opinion rendered by tax professionals is not a valid authority for the purpose of substantial authority. D. Incorrect. An IRS press release is a valid authority for the purpose of substantial authority.

7. A. True is correct. For returns filed after December 31, 2010, all tax return

preparers must use a PTIN as their identifying number.

8. A. Incorrect. Congressional intent as reflected in the committee report is valid

authority. B. Incorrect. IRS information on press releases is valid authority. C. Correct. Legal opinions are not a valid authority. D. Incorrect. Proposed regulations are valid authority.

9. A. Incorrect. The §6694(a) penalty applies if the client furnished extra business

expenses and the preparer knew or reasonably should have known that the amount was unreasonable. B. Correct. The §6694(b) penalty applies when a preparer intentionally attempts to understate the client’s tax liability by claiming more expenses than the client furnished. C. Incorrect. The §6695(f) penalty applies if the preparer attempts to negotiate or endorse a check for a taxpayer. D. Incorrect. The §7216 penalty applies when a tax return preparer knowingly or recklessly discloses or uses tax return information for a purpose other than preparing a tax return.

10. A. Incorrect. A position with substantial authority does not require disclosure.

B. Incorrect. An unreasonable basis for a position remains unreasonable; disclosure does not avoid §6694(a) penalty. C. Incorrect. This is a good example of an unreasonable basis. Income, deductions, or credits should be reported in the correct year. A thorough review of the statute of assessment should be made. If a taxpayer omitted greater than 25% of gross income, there is a 6-year statute. If the taxpayer committed fraud, the statute never closes on assessment. D. Correct. A position that has a reasonable basis, but not substantial authority, should be disclosed on the tax return.


11. A. Correct. The preparer cannot ignore the implication that the information furnished by the taxpayer is incorrect, inconsistent, or incomplete. A preparer must make reasonable inquires in such cases and be well-informed (knowledgeable in the law) to be able to make these inquires. A preparer must create contemporaneous documentation of the inquires and the taxpayer’s responses. B. Incorrect. A preparer must make reasonable inquires in such cases and be well-informed (knowledgeable in the law) to be able to make these inquires. This is not an invasion of the taxpayer’s privacy. C. Incorrect. This is not required by the preparer. If a preparer discloses the name of the taxpayer without permission, he or she is potentially violating §§6713 and 7216. D. Incorrect. This is not required by the preparer and could make him or her subject to §§6713 and 7216 penalties. Contemporaneous documentation is needed for the inquires made to the taxpayer and the taxpayer’s responses.

12. A. Incorrect. The penalty is $100 for each failure. B. Correct. The penalty is $100 for each failure. C. Incorrect. The penalty is $100 for each failure. D. Incorrect. The penalty is $100 for each failure.

13. A. Incorrect. An unreasonable position will not have substantial authority.

B. Incorrect. Although commonly believed to be a solution, this is not going to prevent the preparer penalty for understatement due to unreasonable position. C. Correct. There is no relief from the preparer penalty for an understatement due to an unreasonable position in a case like this. D. Incorrect. An unreasonable position will not have a reasonable basis.


ETHICS AND CIRCULAR 230

OBJECTIVES: Upon completion of this section, the tax professional will:

Obtain a general understanding of ethics as it relates to practice before the IRS under Circular 230 (including the new designation of registered tax return preparer).

OVERVIEW OF CIRCULAR 230 The Internal Revenue Code is under Title 26 of the United States Code. Circular 230, however, is under Title 31, Money and Finance: Treasury, Subtitle A—Office of the Secretary of the Treasury, Part 10— Practice Before the Internal Revenue Service.

Individuals eligible to practice before the Internal Revenue Service (IRS) are subject to the provisions of Circular 230, in addition to the provisions set forth in the Internal Revenue Code and the regulations thereunder.

Circular 230 is divided into five Subparts:

Subpart A — Rules Governing Authority to Practice.

Subpart B — Duties and Restrictions Relating to Practice Before the Internal Revenue Service.

Subpart C — Sanctions for Violation of the Regulations.

Subpart D — Rules Applicable to Disciplinary Proceedings.

Subpart E — General Provisions.

Note: Subparts D and E will not be covered on the RTRP exam per the IRS Test Specifications issued on August 31, 2011.

On May 31, 2011, the IRS released the final regulations amending Circular 230. The final regulations are effective on August 2, 2011.

Note: NATP has a copy of the final Circular 230 regulations on its website at http://www.natptax.com Tax Knowledge Center, Tax News, Circular 230 — Final Regulations.


PRACTICE BEFORE THE IRS Circular 230 contains the rules governing recognition of attorneys, certified public accountants, enrolled agents, enrolled retirement plan agents, enrolled actuaries, registered tax return preparers, and other persons representing taxpayers before the IRS.

Practice before the IRS comprehends (includes) all matters connected with a presentation to the IRS or any of its employees relating to a taxpayer’s rights, privileges, or liabilities under the laws or regulations administered by the IRS. This presentation includes, but is not limited to, the following:

Representing a taxpayer at a conference, hearing, or meeting with the IRS.

Preparing and filing documents with the IRS for a taxpayer.

Corresponding and communicating with the IRS.

Rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion.

INDIVIDUALS WHO MAY PRACTICE Enrollment to practice is only granted to natural persons (individuals).

Section 10.3 of Circular 230 allows attorneys, certified public accountants, enrolled agents, registered tax return preparers, enrolled actuaries, enrolled retirement plan agents, and individuals qualifying under §§10.5(d) and 10.7(d) of Circular 230 to practice before the IRS.

Section 10.7 of Circular 230 also allows individuals to represent themselves and allows limited practice by others as specified.

Federal or state government officers and employees are listed in Circular 230 under “Who may practice,” §§10.3(g) and 10.3(h), but generally may not practice.

In Circular 230, the term practitioner means an attorney, certified public accountant, enrolled agent, registered tax return preparer, enrolled actuary, and enrolled retirement plan agent. Furthermore, the term tax return preparer means any individual defined in §7701(a)(36) and Reg. §301.7701-15.

ATTORNEYS An attorney who is not currently under suspension or disbarment from practice before the IRS can practice by filing with the IRS a written declaration that the attorney is currently qualified as an attorney and authorized to represent the party or parties.


CERTIFIED PUBLIC ACCOUNTANTS (CPA) A CPA who is not currently under suspension or disbarment from practice before the IRS can practice by filing with the IRS a written declaration that the CPA is currently qualified as a CPA and authorized to represent the party or parties.

ENROLLED AGENTS (EA) Any individual enrolled as an agent under Circular 230 who is not currently under suspension or disbarment from practice before the IRS can practice.

OPR can grant enrollment to an applicant who demonstrates competence in tax matters by passing a written examination and who has not engaged in any conduct that would justify the suspension or disbarment of any practitioner under these provisions on the date the application is submitted.

Note: Even though attorneys and CPAs are not required to take the examination, if such individuals want to use the EA designation, prior enrollment or an examination is required.

OPR can grant enrollment as an EA without an examination to a former IRS employee under certain conditions listed in §10.4(d).

REGISTERED TAX RETURN PREPARERS Registered tax return preparer is a new designation governed by Circular 230. Practice as a registered tax return preparer is limited to preparing and signing tax returns, claims for refund, and other documents for submission to the IRS. The IRS will prescribe by forms, instructions, or other appropriate guidance the tax returns and claims for refund that a registered tax return preparer can prepare and sign [§10.3(f)(2)].

A registered tax return preparer can represent taxpayers before revenue agents, customer service representatives, or similar officers and employees of the IRS (including the Taxpayer Advocate Service) during an examination of a return the registered tax return preparer signed. Unless otherwise prescribed by regulations or notice, the right to represent does not permit the registered tax return preparer to represent a taxpayer before appeals officers, revenue officers, Counsel or similar officers or employees of the IRS or the Treasury Department [§10.3(f)(3)].

The registered tax return preparer’s authorization to practice under Circular 230 does not include the authority to provide tax advice to a client or another person except as necessary to prepare a tax return, a claim for refund, or other document intended to be submitted to the IRS [§10.3(f)(3)].


An individual who becomes a registered tax return preparer must comply with the applicable rules in Circular 230 in the same manner as attorneys, certified public accountants, enrolled agents, enrolled retirement plan agents and enrolled actuaries [§10.3(f)(4)].

ENROLLED ACTUARIES Practice by an enrolled actuary is limited to representation with respect to issues involving specific statutory provisions, the majority of which deal with employee plans.

ENROLLED RETIREMENT PLAN AGENTS OPR can grant enrollment to an applicant who demonstrates special competence in qualified retirement plan matters by written examination and who has not engaged in any conduct that would justify the suspension or disbarment of any practitioner under Circular 230.

Practice by an enrolled retirement plan agent is limited to representation of the following:

Forms in the 5300 and 5500 series filed by retirement plans and plan sponsors, but not with respect to actuarial forms or schedule.

Employee Plans Determination Letter program.

Employee Plans Master and Prototype and Volume Submitter program.

Employee Plans Compliance Resolution System. OPR can grant enrollment as an enrolled retirement plan agent without an examination to a former IRS employee under certain conditions listed in §10.4(d).

TAXPAYERS Individuals can appear on their own behalf before the IRS provided they present satisfactory identification. A fiduciary is considered to be the taxpayer and not a representative of the taxpayer. The term fiduciary means a trustee, receiver, guardian, personal representative, administrator, or executor.

LIMITED PRACTICE An individual who is not a practitioner is allowed to represent a taxpayer before the IRS in the following instances:

An individual can represent members of his or her immediate family. Immediate family means a spouse, child, parent, brother, or sister of the individual.


A bona fide officer of a corporation (including a parent, subsidiary, or other affiliated corporation), association, or organized group can represent the corporation, association, or organized group. An officer of a governmental unit, agency, or authority, in the course of his or her official duties, can represent the organization before the IRS.

A general partner can represent the partnership.

A regular full-time employee can represent his or her employer. An employer can be, but is not limited to, an individual, partnership, corporation (including a parent, subsidiary, or other affiliated corporation), association, trust, receivership, guardianship, estate, organized group, governmental unit, agency, or authority.

An individual can represent any individual or entity, who is outside the United States, before personnel of the IRS when such representation takes place outside the United States [§10.7(c)(1)].

An individual who is under suspension or disbarment from practice before the IRS cannot engage in limited practice before the IRS.

Note: The final regulations remove the limited practice authorization in former §10.7(c)(1)(viii), which allowed an unenrolled tax return preparer to represent a taxpayer during an examination if that individual prepared the return for the taxable period under examination.

OTHERS An individual other than those previously listed can be given authority to practice before the IRS under §10.5(d) of Circular 230 for temporary recognition and those that are allowed to make special appearances under §10.7(d) of Circular 230.

Note: Directly supervised preparers are not included in the aforementioned “limited practice” or “other.” Directly supervised preparers who do not hold a recognized Circular 230 professional designation such as an attorney, CPA, EA, etc. cannot represent taxpayers before the IRS in any capacity other than what is otherwise provided, such as he or she is an immediate family member of someone being examined.

INFORMATION TO BE FURNISHED §10.20 When required to do so, the practitioner must promptly submit records or information requested by either the IRS or OPR. Interference with a lawful request from the IRS or OPR is prohibited unless the record or information is privileged.


INFORMATION TO BE FURNISHED TO THE IRS

A practitioner must, on a proper and lawful request by a duly authorized officer or employee of the IRS, promptly submit records or information in any matter before the IRS unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.

Where the requested records or information are not in possession of, or subject to the control of, the practitioner or the practitioner’s client, the practitioner must promptly notify the requesting IRS officer or employee and 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. 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.

INFORMATION TO BE FURNISHED TO OPR

When a proper and lawful request is made by OPR, a practitioner must provide OPR with any information the practitioner has concerning the inquiry by OPR into an alleged violation of the regulations by any person, and to testify regarding this information in any proceeding instituted under this part, unless the practitioner believes in good faith and on reasonable grounds that the information is privileged.

INTERFERENCE IS PROHIBITED

A practitioner may not interfere or attempt to interfere with any proper and lawful effort by the IRS or OPR to obtain any record or information unless the practitioner believes in good faith and on reasonable grounds that the record or information is privileged.

The confidentiality protection for certain communications between a taxpayer and an attorney (privileged communications) applies to similar communications between a taxpayer and any federally-authorized tax practitioner.

The protection of this provision applies only to tax advice given, which is advice in regard to a matter that is within the scope of the practitioner’s authority to practice.

The confidentiality protection applies to communications that would be considered privileged if they were between the taxpayer and an attorney and that relate to the following:

Noncriminal tax matters before the IRS.

Noncriminal tax proceedings brought in federal court by or against the United States.

This confidentiality privilege cannot be used in any administrative proceeding with an agency other than the IRS.


This protection of tax advice communications does not apply to written communications between a federally-authorized tax practitioner and a director, shareholder, officer, employee, agent, or representative of a corporation. It also does not apply if the communication involves the promotion of the direct or indirect participation of a corporation in any tax shelter.

CLIENT OMISSION §10.21 If a practitioner knows that the client has not complied with the law, or has made an error in or omission from any return or other document submitted to the government, the practitioner is required to advise the client promptly of the error or omission, and the consequences of such noncompliance, error, or omission. Failure to so advise the client can lead to sanctions against the tax practitioner.

Note: Practitioners are not required to amend an erroneous return, but must inform the client about the error, instruct them as to what should be done to correct it, and the consequences of such error. It is suggested to put this in writing. Make a notation for the file if the client refuses to have the practitioner correct the error.

Example: A client has a prior year Schedule C with a home office deduction, even though the Schedule C has a loss. After double checking the gross income limit for the business, it is clear that the deductions for the home office, other than the allowable deductions for mortgage interest and property taxes, exceed the gross income limit. It is the preparer’s job to explain to the client that the loss is not allowed and that the home office expenses should have been carried over to the following year. Thus, the preparer should explain that the proper way to correct the error is to amend the prior year’s return (which the preparer may offer to amend). The client must decide if he or she wants to amend the return. If he or she says no, the preparer is required to explain what the consequences of not doing so could be (such as an audit) and explain what will happen if the return is audited, meaning that the client will be liable for the resulting tax, interest that is currently accumulating daily, plus potential penalties. For preparer protection and to have a record for an errors and omissions insurance carrier, the preparer should write a note about the conversation, date it, explain that an offer was made to complete an amendment and that the client refused. List the potential consequences of the client’s actions and put the record into the file. It is up to the preparer if he or she wants to have the client sign the statement about the amendment.


DILIGENCE AS TO ACCURACY §10.22 A practitioner must exercise due diligence in the following:

Preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to IRS matters.

Determining the correctness of oral and written representations he or she makes to the Department of Treasury.

Determining the correctness of oral and written representations he or she makes to clients with reference to any matter administered by the IRS.

Except as provided in §10.34, §10.35, and §10.37, the practitioner is presumed to have exercised due diligence for purposes of this section if he or she relies on the work product of another person and the practitioner used reasonable care in engaging, supervising, training, and evaluating the other person, taking into proper account the nature of the relationship between the practitioner and the person.

PROMPT DISPOSITION OF PENDING

MATTERS §10.23 A practitioner may not unreasonably delay the prompt disposition of any matter before the IRS.

ASSISTANCE FROM OR TO DISBARRED OR

SUSPENDED PERSONS AND FORMER IRS

EMPLOYEES §10.24 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 IRS if the assistance relates to matters constituting practice before the IRS.

Accept assistance from any former government employee where the provisions of §10.25 or any federal law would be violated.


FEES §10.27 A practitioner may not charge an unconscionable fee for representing a client in any matter before the IRS.

Note: Unconscionable is not defined in Circular 230. After this statement in Circular 230, there is a lot of detail about contingent fees. Recollection of the word unconscionable will be helpful for the exam. With regard to how it applies in practice, reviewing state law would be helpful to determine what is or is not unconscionable.

Matters before the IRS with regard to unconscionable and contingent fees include:

Tax planning and advice.

Preparing or filing or assisting in preparing or filing returns or claims for refund or credit.

All matters connected with a presentation to the IRS relating to a taxpayer’s rights, privileges, or liabilities under the laws and regulations administered by the IRS.

Generally, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the IRS. However, a practitioner may charge a contingent fee for:

Services provided in connection with the IRS’s examination or challenge of:

An original return.

An amended return or claim for refund or credit filed before the taxpayer received a written notice of examination of, or a written challenge to, the original tax return; or filed no later than 120 days after the receipt of such written notice or written challenge. The 120 days is computed from the earlier of a written notice of examination (if any) or a written challenge to the original return [Prop. Reg. §10.27(b)(2) and Notice 2008-43].

Services provided to file a claim for refund or credit solely in connection with the determination of statutory interest and penalties assessed by the IRS.

Services rendered in connection with a claim under §7623 (whistleblower claim) of the Internal Revenue Code [Prop. Reg. §10.27(b)(4)].

Services provided in connection with any judicial proceeding arising under the Internal Revenue Code.

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 IRS or is sustained by the IRS or in litigation.

A fee that:

Is based on a percentage of the refund reported on a return.

Is based on a percentage of the taxes saved.


Otherwise depends on the specific tax result attained.

A contingent fee also includes any fee arrangement in which the practitioner will reimburse the client for all or part of the client’s fee in the event that a position taken on a tax return or other filing is challenged by the IRS or is not sustained.

RETURN OF CLIENT’S RECORDS §10.28 A practitioner must, at the request of the 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.

The existence of a dispute over fees generally does not relieve the practitioner of his or her responsibility to return records. If state law allows or permits the retention of a client’s records, the practitioner need only return those records that must be attached to the taxpayer’s return.

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 pre-existed the retention of the practitioner by the client.

CONFLICTING INTERESTS §10.29 Generally, a practitioner shall not represent a client in his or her practice before the IRS if representation involves a conflict of interest.

A conflict of interest exists if either of the following applies:

The representation of one client is directly adverse to another client.

There is a significant risk that the representation of one or more clients is 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.

Although a conflict of interest may exist, the practitioner may represent both parties if all the following apply:

The practitioner reasonably believes that the practitioner is able to provide competent and diligent representation to each affected client.

The representation is not prohibited by law.

Each affected client waives the conflict of interest and gives informed consent, confirmed in writing by each affected client, at the time the existence of conflict of interest is known by the practitioner. The confirmation may be made within a reasonable period of time after the informed consent, but no later than 30 days.


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 IRS upon request.

SOLICITATION §10.30

ADVERTISING AND SOLICITATION A practitioner cannot use any form of advertising or solicitation with respect to an Internal Revenue Service matter that is false, coercive, misleading, or deceptive.

EAs, enrolled retirement plan agents, and registered tax return preparers, in describing their professional designation, cannot utilize the term “certified” or imply an employer/employee relationship with the IRS.

Examples of acceptable descriptions for EAs are:

Enrolled to represent taxpayers before the Internal Revenue Service.

Enrolled to practice before the Internal Revenue Service.

Admitted to practice before the Internal Revenue Service. Examples of acceptable descriptions for enrolled retirement plan agents are:

Enrolled to represent taxpayers before the Internal Revenue Service as a retirement plan agent.

Enrolled to practice before the Internal Revenue Service as a retirement plan agent.

The only example provided for registered tax return preparers is “designated as a registered tax return preparer with the Internal Revenue Service.”

Note: When Notice 2011-45 was published on May 31, 2011, it indicated that the conditions for becoming a registered tax return preparer are not yet able to be satisfied by any individual (i.e., not until the exam is available), no individual can represent that he or she is a registered tax return preparer. It is only after the exam is available and individuals begin to pass the examination that an individual can be registered tax return preparer.

Notice 2011-45 indicates that §10.30 will be amended to require a registered tax return preparer using any paid advertising involving print, television or radio, in which the individual represents himself or herself to be a registered tax return preparer to display or broadcast the following statement: “The IRS does not endorse any


particular individual tax return preparer. For more information on tax return preparers go to IRS.gov.”

FEE INFORMATION A practitioner may publish the availability of a written schedule of fees and disseminate 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 are responsible for such costs.

A practitioner may charge no more than 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, and electronic mail, fax, hand-delivered fliers, radio, TV, 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 must cease soliciting a prospective client who asks not to be solicited.

If radio or TV broadcasting is used, the broadcast must be recorded and the practitioner must retain a recording of the actual transmission. In the case of direct mail and e-mail 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 for at least 36 months from the date of the last transmission or use.

IMPROPER ASSOCIATIONS A practitioner may not, in matters related to the IRS, assist or accept assistance from any person or entity who, to the knowledge to the practitioner, obtains clients or otherwise engages in forbidden practices.


NEGOTIATING A CHECK §10.31 A practitioner who prepares tax returns cannot endorse or otherwise negotiate any check issued to a client by the government in respect of a federal tax liability.

Note: Attempting to use Form 8888, Allocation of Refund, to obtain the tax preparation fee by entering the preparer’s account is against Circular 230 (§10.31) and could be subject to a penalty under §6695(f). Form 8888 instructions indicate entering an account in someone else’s name, such as a preparer, causes the direct deposit request to be rejected and the taxpayer is sent a paper check instead. If collecting the tax preparation fee is a concern, consider setting up an ACH debit. The IRS indicated they are looking into how they might be able to help the tax profession in this area for the 2012 tax season.

STANDARDS WITH RESPECT TO TAX

RETURNS AND DOCUMENTS, AFFIDAVITS, AND OTHER PAPERS §10.34

TAX RETURNS Section 10.34(a) states that a practitioner cannot willfully, recklessly, or through gross incompetence sign a return or claim for refund, advise the client to take a position on a tax return or claim of refund, or prepare a portion of the tax return or claim for refund containing a position that the practitioner knows or reasonably should know contains a position that:

Lacks a reasonable basis.

Is an unreasonable position as described in §6694(a)(2), including the related regulations and other published guidance.

Is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of rules or regulations by the practitioner as described in §6694(b)(2), including the related regulations and other published guidance.

A pattern of conduct is a factor that will be taken into account in determining whether the practitioner acted willfully, recklessly, or through gross incompetence.


Note: If the IRS imposes a penalty against a practitioner under §6694 and also refers the practitioners for possible discipline under Circular 230, OPR will make an independent determination as to whether the practitioner engaged in willful, reckless, or grossly incompetent conduct subject to discipline under §10.34(a) before any disciplinary proceeding are instituted or any sanctions are imposed. Therefore, a practitioner liable for a penalty under §6694 is not automatically subject to discipline under §10.34(a).

DOCUMENTS, AFFIDAVITS AND OTHER PAPERS A practitioner cannot advise a client to take a position on a document, affidavit or other paper submitted to the IRS unless the position is not frivolous. Furthermore, a practitioner cannot advise a client to submit a document, affidavit or other paper to the IRS that:

Purposely delays or impedes the administration of the Federal tax laws.

Is frivolous.

Contains or omits information in a manner that demonstrates an intentional disregard of a rule or regulation unless the practitioner also advises the client to submit a document that evidences a good faith challenge to a rule or regulation [§10.34(b)].

ADVISING CLIENTS ON POTENTIAL PENALTIES A practitioner must inform a client of any penalties that are reasonably likely to apply to the client with respect to:

A position taken on a tax return if:

The practitioner advised the client with respect to the position.

The practitioner prepared or signed the tax return.

Any document, affidavit or other paper submitted to the Internal Revenue Service. The practitioner also must inform the client of any opportunity to avoid any such penalties by disclosure, if relevant, and of the requirements for adequate disclosure. This paragraph applies even if the practitioner is not subject to a penalty under the Internal Revenue Code with respect to the position or with respect to the document, affidavit, or other paper submitted [§10.34(c)].

RELYING ON INFORMATION FURNISHED BY CLIENTS A practitioner, when advising a client to take a position on a tax return, document, affidavit, or other paper submitted to the IRS, or preparing or signing a tax return as a preparer, generally can rely in good faith, without verification, upon information furnished by the client.


The practitioner cannot, 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 [§10.34(d)].

PROCEDURES TO ENSURE COMPLIANCE

§10.36 Prior to the changes made to the Circular 230 regulations, §10.36 only provided procedures to ensure responsible persons within firms were properly overseeing covered opinions under §10.35. The IRS expands the successful self-regulating aspects of §10.36 to now include the following information with regard to tax returns and other documents.

Any practitioner who has or shares principal authority and responsibility for overseeing a firm’s practice of preparing tax returns, claims for refunds, or other documents for submission to the IRS, must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees for purposes of complying with Circular 230.

Any such practitioner is subject to discipline for failing to comply with the requirements of this paragraph if:

The practitioner through willfulness, recklessness, or gross incompetence does not take reasonable steps to ensure that the firm has adequate procedures to comply with Circular 230, and one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, of failing to comply with Circular 230.

The practitioner knows or should know that one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, that does not comply with Circular 230 and the practitioner, through willfulness, recklessness, or gross incompetence, fails to take prompt action to correct the noncompliance [§10.36(b)].

INCOMPETENCE AND DISREPUTABLE

CONDUCT §10.51 Incompetence and disreputable conduct for which a practitioner may be sanctioned under §10.50 includes, but is not limited to, the following:

Conviction of any criminal offense under the federal tax laws or of any criminal offense involving dishonesty or breach of trust.

Conviction of any felony under federal or state law for which the conduct involved renders the practitioner unfit to practice before the IRS.


Giving false or misleading information, or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof, or to any tribunal authorized to pass upon federal tax matters, in connection with any matter pending or likely to be pending before them, knowing such information to be false or misleading.

Soliciting employment, as prohibited under §10.30, using false or misleading representations with the intent to deceive a client or prospective client in order to procure employment, or intimating an IRS employee or officer that the practitioner is able to improperly obtain special consideration or action from the IRS or officer or employee thereof.

Willfully failing to make a federal tax return in violation of federal tax laws, or willfully evading, attempting to evade, or participating in any way in evading or attempting to evade any assessment or payment of any Federal tax.

Willfully assisting, counseling, encouraging a client, or a prospective client, in violating, or suggesting to a client or prospective client to violate, any Federal tax law, or knowingly counseling or suggesting to a client or prospective client an illegal plan to evade Federal taxes or payment thereof.

Misappropriation of, or failure to properly and promptly remit funds received from a client for the purpose of payment of taxes or other obligations due the United States.

Directly or indirectly influencing or attempting to influence an action of an IRS employee through threats, false accusations, duress or coercion, offer of special inducement, gifts, etc.

Disbarment or suspension by any state; any territory or possession of the United States; or any federal court or federal body, agency, or board.

Knowingly aiding or abetting a suspended, disbarred, or ineligible person to practice before the IRS.

Contemptuous conduct in connection with practice before the IRS, including the use of abusive language, making false accusations and statements knowing them to be false, or circulating or publishing malicious or libelous matter.

Willfully failing to sign a tax return prepared by the practitioner when that practitioner’s signature is required by federal tax laws unless the failure is due to reasonable cause and not due to willful neglect.

Willfully disclosing or otherwise using a tax return or tax return information in a manner not authorized by the Internal Revenue Code (i.e., federal tax laws), contrary to the order of a court of competent jurisdiction, or contrary to an administrative law judge in proceedings instituted under §10.60.

Giving a false opinion, knowingly, recklessly, or through gross incompetence, including an opinion which is intentionally or recklessly misleading, or engaging in a pattern of providing incompetent opinions on questions arising under the federal tax laws.

False opinions include those which reflect or result from a knowing misstatement of fact or law, from an assertion of a position known to be unwarranted under existing law, from counseling or assisting in conduct known to be illegal or fraudulent, from concealing matters required by law to be revealed, or from consciously disregarding information indicating that material facts expressed in the tax opinion or offering material are false or misleading.

Reckless conduct is a highly unreasonable omission or misrepresentation involving an extreme departure from the standards of ordinary care that a practitioner should observe under the circumstances.


A pattern of conduct is a factor that is taken into account in determining whether a practitioner acted knowingly, recklessly, or through gross incompetence.

Gross incompetence includes conduct that reflects gross indifference, preparation that is grossly inadequate under the circumstances, and a consistent failure to perform obligations to the client.

Willfully failing to file on magnetic or other electronic media a tax return prepared by the practitioner when the practitioner is required to do so by the federal tax laws unless the failure is due to reasonable cause and not due to willful neglect.

Willfully preparing all or substantially all of, or signing, a tax return or claim for refund, when the practitioner does not possess a current or otherwise valid preparer tax identification number (PTIN).

Willfully representing a taxpayer before an officer or employee of the IRS unless the practitioner is authorized to do so pursuant to Circular 230.

Note: The last three items did not apply before August 2, 2011.

SANCTIONS §§10.50 AND 10.52 A practitioner may be censured (i.e., publically reprimanded), suspended, or disbarred from practice before the IRS after notice and an opportunity for a proceeding if the practitioner is shown to be incompetent or disreputable (within the meaning of §10.51), fails to comply with any regulation in this part (under the prohibited conduct standards of §10.52), or willfully and knowingly misleads or threatens a client or prospective client with the intent to defraud [§10.50(a)].

Under Reg. §10.50(c), the Secretary of the Treasury, or delegate, after notice and an opportunity for a proceeding, may impose a monetary penalty on any practitioner who engages in conduct subject to sanction under §10.50(a). If the practitioner was acting on behalf of an employer or any firm or other entity in connection with the conduct giving rise to the penalty, a monetary penalty may be imposed on the employer, firm, or entity if it knew, or reasonably should have known, of such conduct.

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 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 on a practitioner.

Under Reg. §10.52(a), a practitioner may be sanctioned under §10.50 if the practitioner:

Willfully violates any of the regulations (other than §10.33) contained in this part.

Recklessly or through gross incompetence (within the meaning of §10.51(a)(13) violates:


Section 10.34, Standards with respect to tax returns and documents, affidavits and other papers.

Section 10.35, Requirements for covered opinions.

Section 10.36, Procedures to ensure compliance.

Section 10.37, Requirements for other written advice.


Review Questions 1. ___ Beau hired Randy, an EA, to prepare his federal income tax return for 2010.

While gathering information to prepare the return, Randy discovered that Beau failed to file returns for the 2008 and 2009 tax years. Circular 230 requires Randy to do which of the following? A. Promptly advise Beau that he did not comply with the Internal Revenue laws by failing to file federal income tax returns for the 2008 and 2009 tax years and inform him of the consequences. B. Refuse to prepare Beau’s 2010 federal income tax return unless he files his 2008 and 2009 federal income tax returns. C. Inform the IRS that Beau did not file federal income tax returns for the 2008 and 2009 tax years. D. Both B and C.

2. ___ A registered tax return preparer can practice before:

A. Appeals officers. B. Counsel. C. Revenue agents. D. Revenue officers.

3. ___ Frank, an EA, prepares Vito’s income tax return. Vito gives Frank power of

attorney, including the authorization to receive his federal income tax refund check. Accordingly, the IRS sends Vito’s $200 refund check to Frank. Vito owes Frank $500. Frank should: A. Use Vito’s check as collateral for a $200 loan to tide him over until Vito pays him. B. Refuse to give Vito the check until Vito pays him the $500. C. Get Vito’s written authorization to endorse the check, cash the check, and reduce the amount Vito owes him to $300. D. Turn the check directly over to Vito.

4. ___ A tax return preparer may charge a contingent fee:

A. To prepare an amended return that is filed before the taxpayer receives a written challenge to the original return. B. For services rendered in connection with a whistleblower claim under §7623. C. Any judicial proceeding arising under the Internal Revenue Code. D. All of the above.


5. ___ Under Circular 230, once an individual passes the registered tax return preparer exam, he or she can use which of the following acceptable descriptions: A. Designated as a registered tax return preparer with the IRS. B. Enrolled to represent taxpayers before the IRS. C. Enrolled to practice before the IRS. D. Admitted to practice before the IRS.


Review Answers 1. A. Correct. If a practitioner knows that the client has not complied with the law,

or has made an error in or omission from any return or other document submitted to the government, the practitioner is required to advise the client promptly of the error or omission, and the consequences of such noncompliance, error, or omission. B. Incorrect. Randy is permitted to prepare the return even if Beau decides not to file his other delinquent returns. He must be sure to tell him of the consequences of not filing them though. C. Incorrect. Randy has no obligation to notify the IRS of Beau’s delinquent returns regardless of whether he prepares the 2010 or not. D. Incorrect. Randy has no obligation to do either B or C.

2. A. Incorrect. A registered tax return preparer cannot practice before appeals

officers. B. Incorrect. A registered tax return preparer cannot practice before Counsel. C. Correct. A registered tax return preparer can practice before revenue agents with respect to the return that he or she prepared. D. Incorrect. An registered tax return preparer cannot practice before revenue officers.

3. A. Incorrect. Circular 230 prohibits a preparer from using a check as collateral

until the client pays his or her bill. B. Incorrect. Circular 230 prohibits a preparer from withholding a refund check from the payee until he or she pays the bill. C. Incorrect. Circular 230 prohibits preparers from endorsing clients’ refund checks. D. Correct. The preparer should turn the check over to Vito unconditionally and without endorsement.

4. A. Incorrect. A contingent fee may be charged to prepare an amended return

that is filed before the taxpayer receives a written challenge to the original return. B. Incorrect. A contingent fee may be charged for services rendered in connection with a whistleblower claim under §7623. C. Incorrect. A contingent fee may be charged for any judicial proceeding arising under the Internal Revenue Code. D. Correct. All of the above are correct.

5. A. Correct. Designated as a registered tax return preparer is an acceptable

description. B. Incorrect. This is an acceptable description for an enrolled agent, but not a registered tax return preparer. C. Incorrect. This is an acceptable description for an enrolled agent, but not a registered tax return preparer. D. Incorrect. This is an acceptable description for an enrolled agent, but not a registered tax return preparer.


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INDEX A Advertising or solicitation .................... 45 C Censured .......................................... 51 Circular 230 ...................................... 35

Limited practice ............................. 39 Claim for refund .................................. 2 Client's omission ................................ 41 Confidentiality protection .................... 40 Contingent fee ................................... 43 D Disclosure ......................................... 12 Disreputable conduct .......................... 49 Due diligence .................................... 42 E EIC due diligence ................................ 7 Enrollment to practice ......................... 36 F Fees ................................................. 43 Furnish copy of return ......................... 6 Furnish indentifying number (PTIN) ....... 5 I Incompetence ................................... 49

O Obtaining consent .............................. 21 P Penalty, disclosure ............................. 14 Preparer penalty

§6694(a) ........................................ 9 §6694(b) ....................................... 13 Due diligence .................................. 7

Preparer required to sign ..................... 4 R Reasonable basis ............................... 12 Registered tax return preparer ............. 37 Retain a copy of returns prepared ......... 6 Rev. Rul. 2010-4 ............................... 20 Rev. Rul. 2010-5 ............................... 18 S Substantial authority .......................... 11 T Tax return defined .............................. 2 Tax return preparer definition ............... 1 Taxpayer’s written consent .................. 18

2011 Registered Tax Preparer Ethics Supplement Supplemental... · specifications provide guidance...

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Transcript of 2011 Registered Tax Preparer Ethics Supplement Supplemental... · specifications provide guidance...