What Is the Primary Source of Ethics for Tax Practitioners?

Individuals and businesses entrusting their financial matters to tax professionals expect them to perform their duties with professional and ethical integrity. This expectation is based on concrete, enforceable standards. The rules governing the conduct of tax professionals are formally codified, establishing a clear framework for their responsibilities to clients and the tax system. These regulations ensure representation is both competent and ethical.

Identifying the Primary Source of Authority

The principal document governing the conduct of tax professionals who practice before the Internal Revenue Service (IRS) is Treasury Department Circular 230. This set of regulations, officially titled “Regulations Governing Practice before the Internal Revenue Service,” is issued by the U.S. Department of the Treasury. Its authority extends to professionals like attorneys, Certified Public Accountants (CPAs), and Enrolled Agents (EAs). Anyone who prepares tax documents, corresponds with the IRS for a client, or represents a taxpayer is subject to these rules.

The purpose of Circular 230 is to safeguard the integrity of the U.S. tax system by setting forth clear standards of conduct. These standards help maintain public confidence in tax administration. The regulations protect taxpayers from incompetent or unscrupulous practitioners while ensuring the IRS can rely on the information presented by these professionals. This establishes a baseline for professional behavior in the administration of tax laws.

Key Duties and Obligations for Practitioners

Diligence as to Accuracy

A requirement for tax practitioners under Circular 230 is the exercise of due diligence. This obligation applies to all aspects of their work, including preparing tax returns, submitting documents, and making representations for a client. Practitioners must take reasonable care to ensure the accuracy of the information they provide. They cannot ignore the implications of questionable information and must make reasonable inquiries if a client’s information appears incorrect or incomplete.

Client Information and Records

Practitioners have a duty regarding the handling of client-provided records. Upon a client’s request, a practitioner must promptly return all records necessary for the client to comply with their federal tax obligations, even if there is a fee dispute. The practitioner is permitted to retain copies of the client’s records but cannot hold the original documents to compel payment. This rule ensures a client’s ability to meet tax deadlines is not hindered by a disagreement with their representative.

Conflicts of Interest

Managing conflicts of interest is another responsibility. A conflict of interest exists if representing one client will be directly adverse to another. A conflict also exists if there is a significant risk that representation will be materially limited by the practitioner’s responsibilities to another client, a former client, or a personal interest. To proceed, the practitioner must believe they can provide competent and diligent representation to each affected client and must obtain informed consent, confirmed in writing, from each client.

Fees and Solicitation

Circular 230 places restrictions on how practitioners can charge for their services. The regulations prohibit charging “unconscionable fees,” which are fees grossly disproportionate to the services performed. There is also a ban on contingent fees for services like preparing an original tax return. Limited exceptions exist, such as in connection with an IRS examination or challenge to a return. Additionally, any advertising or solicitation must not contain false, fraudulent, or coercive statements and must not be misleading.

Standards for Written Tax Advice

The standards for providing written tax advice ensure a client receives a well-reasoned and complete analysis. A practitioner must base all written advice on reasonable factual and legal assumptions. This means the practitioner must use reasonable efforts to identify the relevant facts and must not rely on representations from the client if that reliance would be unreasonable. For example, relying on a client’s assertion that an expense was for business without further inquiry, when it seems personal, would be unreasonable.

This framework is known as the “reasonable practitioner” standard. The regulations require that the advice relate applicable law to the relevant facts. A practitioner cannot base their written advice on the likelihood of a return being audited, the chance an issue will be raised on audit, or the possibility of settling an issue. The advice must stand on its own merits without regard to these audit-related considerations.

The practitioner must consider all relevant federal tax issues and reach a conclusion, supported by facts and law, as to the likelihood the taxpayer will prevail on the merits for each issue. If the practitioner is unable to reach a conclusion on one or more issues, the advice must state this and describe the reasons why. This approach ensures the client is fully informed of the strengths and weaknesses of their tax position.

Consequences of Non-Compliance

When a tax practitioner fails to adhere to Circular 230 standards, they become subject to a formal disciplinary process. The IRS Office of Professional Responsibility (OPR) is the body that investigates allegations of misconduct. The OPR can initiate inquiries based on information from various sources, including other IRS divisions or client complaints, to enforce the regulations.

If the OPR determines a violation has occurred, it can impose sanctions depending on the severity of the infraction. For less severe misconduct, a practitioner might receive a censure, which is a public reprimand. More serious violations can lead to a suspension, prohibiting the practitioner from practicing before the IRS for a set period. The most severe sanction is disbarment, a permanent revocation of practice rights.

In addition to these sanctions, the OPR can impose monetary penalties on the practitioner or their firm. These financial penalties can be substantial and are often levied in cases involving willful misconduct, recklessness, or gross incompetence. These consequences create a strong incentive for practitioners to adhere to their ethical obligations.