The IRS is aiming to change the rules for tax professionals. The U.S. Treasury Department and the IRS have released proposed regulations to update the rules for certain tax professionals, including attorneys, certified public accountants (CPAs), and enrolled agents (EAs) who can practice before the IRS. These rules have long been found in Treasury Department Circular 230.
Circular 230
Circular 230—technically titled Regulations Governing Practice before the Internal Revenue Service—is often called Circ 230. The rules in Circ 230 aren’t just guidelines—they are codified as Title 31 Code of Federal Regulations, Subtitle A, Part 10 (the cite can be found on the front of the publication).
While the statute has existed since 1884, Treasury didn’t package the regulations as a Circular until 1921. Since then, Circular 230 has been amended several times, with significant changes in 2005 and 2014.
While almost anyone can prepare a tax return (the preparation of returns by non-credentialed preparers is not regulated), there are rules that govern who, exactly, can represent clients before the IRS. Typically, the only professionals who can do that are attorneys, CPAs, or EAs (a few other exceptions apply). Representing clients before the IRS can include a broad range of activities but generally means communicating with the IRS on behalf of a client. That doesn’t apply to every instance of tax work—you have to be specifically licensed, for example, to appear in Tax Court on behalf of a client.
Circular 230 can best be considered a list of dos and don’ts. As a tax professional, do exercise due diligence, submit returns and records on time, and provide clients with a copy of the return. Don’t take a frivolous tax return position, cash Treasury checks made out to clients, or represent clients with conflicting interests.
(There are more rules—it’s 44 pages long—but you get the idea.)
Tax preparers and advisers who violate Circular 230 may be subject to penalties, including fines and disciplinary proceedings. The IRS Office of Professional Responsibility—or OPR—is responsible for discipline, including disciplinary proceedings and sanctions. OPR generally handles matters related to practitioner conduct and has responsibility for discipline.
Proposed Changes
The proposed regulations are extensive and include changes in the law since Circular 230 was last amended nearly a decade ago. Here’s a (somewhat) brief look at some of the proposed changes.
Tax Return Preparer Regulations
One of the changes involves regulating preparers. Prior to 2011, individual tax return preparers were generally not subject to Circular 230 unless they were attorneys, CPAs, EAs, or other types of practitioners. On June 3, 2011, the Treasury Department and the IRS published final regulations in the Federal Register to establish qualifications for tax return preparers. These regulations required them to become registered tax return preparers subject to the requirements under Circular 230.
Those 2011 amendments were challenged in Loving v. IRS. In Loving, three tax preparers challenged the IRS’ authority to regulate tax return preparation. They were ultimately successful—in 2013, a U.S. District Court barred the IRS from regulating tax preparers. The IRS, of course, appealed. The U.S. Court of Appeals agreed with the District Court’s findings, ruling that “[t]he IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of [the statute].” (You can read more about the history here.)
As a result of Loving, the 2011 amendments related to registered tax return preparers are no longer enforceable. Therefore, the proposed regulations would eliminate rules regarding registered tax return preparers and remove references to registered tax return preparers.
Contingent Fees
Final regulations published in the Federal Register on September 26, 2007, amended the exceptions to the general prohibition on contingent fees. The 2007 rules prohibited professionals from charging contingent fees for original returns but permitted practitioners to charge a contingent fee for certain services rendered in connection with the IRS’s audit or challenge to an original tax return, amended returns, or claims for refund or credit. Treasury and the IRS subsequently clarified the 2007 amendments in 2008 and proposed modifications in 2009. The 2009 proposed regulations were never finalized.
(Contingent fees typically represent a percentage of an amount received—in the context of lawsuits, you tend to see them as a percentage of the total award. When it comes to tax returns, they may be a percentage of the expected refund or a percentage of tax “savings”—however that is defined.)
In 2014, a U.S. District Court held that preparing and filing ordinary refund claims, like preparing original tax returns, did not involve representing taxpayers or practice before the IRS. As a result, according to the district court, the IRS lacked the authority to treat the preparation of ordinary refund claims as practice before the IRS, and therefore, the IRS cannot prohibit charging contingent fees for ordinary refund claims.
The IRS has continued to bump up against contingent fees. The section of Circular 230 that prohibits practitioners from entering into contingent fee arrangements for services rendered in connection with a “matter before the IRS” would be removed under the proposed regulations. However, the term “disreputable conduct” would include charging contingent fees in connection with preparing an original or amended tax return or claim for refund or credit and charging fees that, under the facts and circumstances, are unconscionable.
Some organizations—like the American Institute for Certified Public Accountants (AICPA)—have clarified their contingent fee positions. As noted in the proposed regulations, the AICPA Code of Professional Conduct prohibits CPAs from charging contingent fees for preparing original returns, amended returns, and ordinary refund claims because of the risk that these arrangements would allow a CPA to improperly benefit from the transaction. Many state accountancy board rules also ban contingent fee arrangements for preparing an original or amended return or claim for refund or credit.
Here’s why the IRS doesn’t like these fees. A contingent fee based on getting a big refund may encourage evasion or abuse of Federal tax laws by incentivizing practitioners to take unduly aggressive tax positions. That gives the practitioner “a direct, financial interest in the tax benefits of a client.” And that, says the IRS, is “incompatible with ethical practice” before the Treasury Department or the IRS under Circular 230.
Contingent fees have recently gotten a second look because of employee retention credits. Those assisting companies with ERC applications often took a contingent fee—typically, a percentage of the refund due the taxpayer. The IRS encouraged taxpayers to be wary of promoters who charged a contingent fee because of concerns that the economic driver could push promoters to suggest ineligible people file a claim for the credit and that they might not inform taxpayers that they must reduce the wage deductions they claimed on their federal income tax return by the amount of the credit. Especially in cases where the contingent fee is collected upfront, the IRS has warned that in the case of an ERC denial (or audit), the taxpayer may be stuck with a reduced credit or penalty—and out the contingent fee.
Enrolled Retirement Plan Agent and Enrolled Agent Procedures
The IRS stopped offering the Enrolled Retirement Plan Agent Special Enrollment Examination (ERPA-SEE) on February 12, 2016, and no longer accepts applications for new enrollment as ERPAs. The proposed regulations clarify that individuals who passed the ERPA-SEE before that date and are currently enrolled as ERPAs can maintain their status if they continue to pay the annual user fee and complete the continuing education requirements. The proposed regulations would also remove the description of the process to become an ERPA by special examination.
Currently, a former IRS employee, based on past service and technical experience in the IRS, may be granted enrollment as an EA or ERPA without testing if certain criteria are met. However, there is no statutory requirement that the IRS provide this exemption, and administering requests for this waiver has consumed substantial IRS resources. Accordingly, the proposed regulations would eliminate the opportunity for former IRS employees to apply for a waiver of enrollment requirements as of 30 days after these regulations are published in the Federal Register as final regulations. Applications from former IRS employees submitted on or before that date would be processed according to current procedures.
Limited Practice and Annual Filing Season Program (AFSP) Participants
The Annual Filing Season Program (AFSP) aims to recognize the efforts of non-credentialed return preparers who go the extra mile. Those who participate can meet the requirements by obtaining 18 hours of continuing education, including a six-hour federal tax law refresher course with a test. The return preparer must also renew their preparer tax identification number (PTIN) for the upcoming year and consent to adhere to the appropriate Circular 230 rules.
The proposed regulations would provide that individuals with a current AFSP Record of Completion may engage in limited practice by representing taxpayers before the IRS regarding tax returns or claims for refund or credit that the individuals prepared and signed during the calendar year for which a Record of Completion was issued.
Continuing Education Provider Fees
Most tax professionals must engage in some form of continuing education. Under the current rules, continuing education providers that provide education to practitioners must be approved by the IRS, obtain a continuing education number, and pay any applicable user fee. Continuing education providers must also renew their status annually by renewing their provider number and paying a user fee.
The continuing education program is administered by a third-party vendor through a five-year contract with the IRS. Because the IRS does not incur direct costs to administer the continuing education program, it does not currently charge a separate user fee to recover costs. However, if circumstances change, the IRS may charge a user fee. A new rule in the proposed regulations explains that a potential user fee may be charged in addition to the current vendor fee for approving continuing education providers and their programs.
Knowledge of Error or Omission
Currently, practitioners must advise clients of any noncompliance with tax laws or any error or omission on a tax return or other document submitted to the IRS—and the consequences. The proposed regulations would clarify that the noncompliance, error, or omission may have been made by the client or the practitioner (or a previous practitioner).
The proposed regulations would also expand the current guidance by requiring practitioners to explain how the client can correct the noncompliance, error, or omission. (Knowingly failing to inform a client of the noncompliance, error, or omission is disreputable conduct.)
The proposed regulations would also instruct practitioners to consider whether they can continue to meet their obligation to exercise diligence if the client refuses to take corrective action. A practitioner’s obligation under the proposed rule applies only to tax returns prepared, approved, or submitted in connection with representing a client before the IRS.
Negotiation of Payments to Clients
Currently, a practitioner may not endorse or otherwise negotiate any check issued to a client by the government with respect to federal tax liability, including directing or accepting payment into an account owned or controlled by the practitioner. In other words, practitioners shouldn’t cash (or accept) refund checks that belong to taxpayers. When it was last amended in 2014, this regulation was revised to clarify that this included electronic transactions.
The proposed regulations would broaden this rule to apply to all electronic payments made to clients regarding federal tax liabilities, including prepaid debit cards, phone or mobile payments, or other electronic payments, even if the Treasury Department does not currently use that payment method.
Best Practices for Tax Practitioners
The current regulations provide best practices for practitioners related to client representation. The proposed rules would replace references to “tax advisors” with “tax practitioners.”
The proposed rules also provide that it is a best practice for practitioners to create a data security policy to safeguard client information and establish a plan and procedures for responding to data breaches. Practitioners who also prepare returns have a legal obligation to comply with the Federal Trade Commission’s Safeguards Rule under the Gramm-Leach Bliley Act.
The proposed regulations would also provide that it is a best practice for practitioners to identify, evaluate, and address a mental impairment due or related to age, substance abuse, a physical or mental health condition, or some other circumstance that could adversely impact a practitioner’s ability to effectively represent a client before the IRS. The purpose of the rule is to encourage practitioners to seek and obtain assistance or treatment.
The proposed rules would provide that it is a best practice for practitioners to establish a business continuity and succession plan that includes procedures related to the normal cessation of a practitioner’s practice and the occurrence of an outside event, like a natural disaster or cyberattack.
Duty To Maintain Technological Competence
If you’ve ever been on a Zoom call with tax practitioners, you know that some in the profession struggle with using the mute button. However, as technology increasingly plays a more significant role in tax practices, practitioners must adapt.
A practitioner must be competent when engaged in practice before the IRS. Specifically, practitioners must have the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter in which the practitioner is engaged. Increasingly, competence also includes familiarity with technological tools used to represent a client. (A similar standard for technological competency is included in the American Bar Association (ABA) Model Rules of Professional Conduct.)
Under the proposed rules, competency would be defined to include understanding the benefits and risks associated with technology used by the practitioner to provide services to clients or to store or transmit confidential information, including tax return information.
Regulation of Written Tax Advice
Current rules provide basic principles to which all practitioners must adhere when giving written tax advice. Circular 230 was amended in 2014 to eliminate the covered opinion rules and replace them with broad standards for written tax advice.
The proposed regulations would change some wording, including amending the definition of a Federal tax matter for this purpose to clarify that it encompasses any transaction, plan, arrangement, or other matter (whether prospective or completed) that is of the type that the IRS determines has the potential for tax avoidance or evasion.
Incompetence or Disreputable Conduct
The proposed rules explain that a practitioner can be sanctioned for conduct related to the practitioner’s overall fitness to practice and is not limited to actions taken while representing clients before the IRS. That would include conduct concerning practice before the IRS or any investigation by the Treasury Inspector General for Tax Administration (TIGTA). Under a new proposed rule, the willful failure to follow any federal tax law is disreputable conduct because knowingly violating a federal tax law reflects a lack of due regard for the tax laws.
Finally, a new proposed rule would make clear that a willful attempt to understate tax liabilities under section 6694(b), aiding or abetting in the understatement of tax liabilities under section 6701, careless, reckless, or intentional disregard for the rules or regulations, or promotion of abusive tax shelters under section 6700 will be considered a violation subject to sanctions.
Appraiser Standards
The proposed regulations would introduce a new subsection related to appraisers and standards for disqualification.
Currently, proceedings to disqualify appraisers can begin after a penalty has been assessed against an appraiser under the Code and the IRS determines that the appraiser acted willfully, recklessly, or through gross incompetence with respect to the conduct at issue. This penalty prerequisite limits the IRS’s ability to respond to misconduct under Circular 230 when a specific penalty does not cover the misconduct, an applicable penalty is not imposed, or a proposed penalty assessment has not yet been made. The proposed regulations would eliminate the penalty prerequisite.
Under the proposed regulations, appraisals submitted in an administrative proceeding before the IRS must conform to the substance and principles of the Uniform Standards of Professional Appraisal Practice (USPAP) promulgated by the Appraisal Standards Board of the Appraisal Foundation or the International Valuation Standards (IVS) enacted by the International Valuation Standards Council. Appraisers who willfully fail to meet these standards may be subject to disqualification. (A failure to conform to the substance and principles of either USPAP or IVS standards that is not the result of willful, reckless, or grossly incompetent conduct is not sanctionable.)
OPR would determine whether an appraisal conforms to the substance and principles of these general appraisal guidelines during the Circular 230 investigatory and disciplinary process before instituting any formal disciplinary proceeding. When making that determination, a court opinion finding that an appraiser failed to comply with the substance and principles of USPAP (or otherwise violated the standards for appraisers) may be considered.
The proposed regulations would also provide that appraisers who know or reasonably should know that an appraisal will be used in an administrative proceeding by taxpayers to support a substantial valuation misstatement, a substantial estate or gift tax valuation understatement, or a gross valuation misstatement would be subject to disqualification if they act willfully, recklessly, or through gross incompetence. This standard would allow the IRS to address common appraiser misconduct related to tax return positions.
A new proposed regulation would also provide that an appraiser who has been assessed certain penalties, and acted willfully, recklessly, or through gross incompetence may be disqualified for engaging in disreputable conduct. If the penalty is later abated, an appraiser can petition for reinstatement under another proposed rule. The proposed regulations also provide that an appraiser may show adherence to USPAP standards when issuing the relevant appraisal, which will be taken into account as a defense with respect to potential disqualification.
Because appraisers are subject to the same notice and opportunity for a hearing as practitioners under Circular 230, disqualification procedures would remain the same as those for practitioners.
Effect of Disbarment, Suspension, or Censure
In 2017, the U.S. District Court for the District of Nevada held in Sexton v. Hawkins that the Treasury Department and the IRS did not have jurisdiction to investigate whether suspended practitioners violated their suspension terms because suspended individuals were not considered practitioners under Circular 230.
The Treasury Department and the IRS disagree with this holding. The IRS believes it has continuing jurisdiction to investigate suspended practitioners. Practitioners who do not comply with requests for information from OPR or who violate the terms of their suspension may face further sanctions, such as monetary penalties or disbarment.
The proposed regulations would clarify that suspended practitioners remain practitioners under Circular 230 for the purposes of investigating and acting on any violation of a suspension or any violation of the law or regulations governing practice before the IRS while suspended. The IRS wants to ensure that individuals who are not authorized to practice before the IRS, either because they have been disbarred or do not have the required credentials, do not claim authority to practice. The proposed regulations would clarify that the IRS has jurisdiction to make inquiries to determine whether an individual has wrongly held themselves out as a practitioner.
Expedited Suspension
The current regulations do not address practitioners or appraisers who have been suspended or disqualified through the expedited procedures. While current law authorizes the immediate suspension of a practitioner who has engaged in certain conduct, it does not include expedited procedures for appraisers or address the voluntary forfeiture of a license or certification by practitioners or appraisers.
The proposed changes explain that practitioners can establish good cause (for reinstatement) by showing that the conditions giving rise to their expedited suspension or disqualification no longer apply. For example, restoring a suspended license, reversing a conviction, or removing a sanction may be sufficient to show good cause. The proposed regulations would also extend expedited disciplinary proceedings to appraisers who have had a license or certification revoked or suspended by a state licensing or certification board or who have voluntarily forfeited their license or certification. Finally, the proposed regulations would clarify that when a practitioner or appraiser responds to a show cause order but does not request a conference, the IRS will issue a written notice of expedited suspension immediately following consideration of a practitioner or appraiser’s response.
Feedback
You can find the complete list (and language) of the proposed regulations in the Federal Register. It’s a lot. You might have some reactions to some of the proposed changes—good or bad. Either way, the IRS wants to hear from you.
Electronic or written comments must be received by February 24, 2025. You can submit electronic submissions via the Federal eRulemaking Portal (indicate IRS and REG-116610-20). Comments cannot be edited or withdrawn once submitted to the portal. The Treasury Department and the IRS will publish for public availability any comment submitted electronically or on paper to the public docket. Send paper submissions to: CC:PA:01:PR (REG-116610-20), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044.
A public hearing is being held on March 6, 2025, at 10 a.m. Eastern Time (ET). Requests to speak and outlines of topics to be discussed at the public hearing must be submitted as prescribed in the “Comments and Public Hearing” section. The IRS must receive speakers’ outlines of the topics to be discussed at the public hearing by February 24, 2025. If no outlines are received by February 24, 2025, the public hearing will be canceled. Requests to attend the public hearing must be received by 5 p.m. ET on March 4, 2025.
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