What Is Treasury Department Circular No. 230?

Treasury Department Circular No. 230 establishes the ethical standards for professionals who practice before the Internal Revenue Service (IRS). These regulations, found in Title 31 of the Code of Federal Regulations, are designed to ensure that tax professionals act with integrity and competence. By setting these standards, Circular 230 protects taxpayers and fosters public confidence in the U.S. tax system.

Who is Governed by Circular 230

Circular 230 applies to “practitioners” who engage in “practice before the IRS.” This includes representing a taxpayer in meetings with the IRS, communicating with the agency on a client’s behalf, and preparing and filing documents like tax returns. The regulations identify several categories of professionals who are authorized to practice before the IRS.

Attorneys, Certified Public Accountants (CPAs), and Enrolled Agents (EAs) have unlimited practice rights, meaning they can represent any taxpayer on any tax matter. EAs earn their credentials directly from the IRS by passing a comprehensive examination or through specific work experience at the agency.

Other practitioners have limited practice rights.

• Enrolled Retirement Plan Agents may only represent clients on issues related to employee and retirement plans.
• Enrolled Actuaries have a practice limited to matters involving pension funding and specific actuarial issues.
• Appraisers may be subject to Circular 230 when providing valuations for federal tax matters, but they cannot represent taxpayers in a broader capacity.

Practitioner Duties and Restrictions

Circular 230 outlines a detailed set of duties and restrictions that govern the daily conduct of tax practitioners. These rules cover responsibilities ranging from the accuracy of submitted documents to the management of client relationships and fees.

Diligence as to Accuracy

A practitioner must exercise due diligence when preparing and filing tax returns and other documents for a client. They are responsible for ensuring the information submitted to the IRS is correct and cannot ignore the implications of information they know or should know to be questionable. This requires a proactive approach to verifying a client’s information.

For example, if a client provides a summary of business expenses that seems unusually high or lacks documentation, the practitioner has an obligation to ask for more detail. Simply accepting the numbers without further inquiry could be seen as a failure to exercise due diligence.

Client Information

Practitioners must promptly comply with lawful requests for information from the IRS regarding a client’s case. An exception exists if the practitioner has a good faith belief that the information is protected by a legal privilege, such as the attorney-client privilege or the tax practitioner-client privilege under Internal Revenue Code Section 7525. If a privilege is asserted, the practitioner must inform the IRS of their refusal to comply and identify the specific privilege.

Client Records

Upon a client’s request, a practitioner must promptly return any and all records the client provided that are necessary for them to meet their federal tax obligations. This rule prevents a practitioner from holding a client’s records over a fee dispute or other disagreement. While a practitioner may retain copies of the client’s records, they cannot refuse to return the originals.

Conflicts of Interest

A conflict of interest exists if representing one client will be directly adverse to another, or if there is a significant risk that the representation will be materially limited by the practitioner’s other responsibilities. For instance, a practitioner cannot represent two parties in a transaction if their tax interests are in opposition.

To proceed in such a situation, the practitioner must reasonably believe they can provide competent representation to each client, the representation is not prohibited by law, and each affected client provides a written waiver after being fully informed.

Fees

Circular 230 prohibits practitioners from charging an “unconscionable fee,” which is a fee so excessive that it is considered shocking. Whether a fee is unconscionable depends on factors like the case’s complexity, the skill required, and fees charged for similar services in the area.

The regulations also restrict contingent fees, which are based on a percentage of the tax savings or refund obtained. Contingent fees are generally prohibited for preparing an original tax return but are permissible in specific circumstances, such as in connection with an IRS examination or for a claim for a refund filed after a formal notice of disallowance.

Solicitation and Advertising

Practitioners are permitted to advertise, but any solicitation must be truthful and not misleading. Circular 230 prohibits the use of false, fraudulent, or deceptive statements. This includes misrepresenting a practitioner’s expertise or promising specific outcomes, such as a guaranteed refund. Any advertised fees for routine services must be honored for a reasonable period.

Negotiation of Taxpayer Checks

There is a strict prohibition against a practitioner endorsing or otherwise negotiating any check issued to a client by the U.S. Treasury. This rule prevents potential abuses, such as a practitioner taking their fee directly from a client’s refund check. A practitioner cannot have a client’s refund direct-deposited into their own bank account, with the sole exception being if the practitioner is a bank negotiating the check as part of normal banking services.

Standards for Written Tax Advice

The rules for written tax advice require practitioners to base their analysis on reasonable factual and legal assumptions. They cannot rely on information they know or should know to be incorrect or incomplete and must use reasonable efforts to identify all relevant facts. The practitioner is also prohibited from considering the possibility that a tax return will not be audited or that a specific issue will not be raised on audit.

This “reasonable practitioner” standard replaced a more complex set of rules that were in place until 2014. The previous rules required lengthy and often confusing disclosures on written advice. The current, more principles-based standard is intended to make written tax advice more useful for taxpayers while still holding practitioners to a high professional standard.

Sanctions for Violations

The IRS Office of Professional Responsibility (OPR) enforces Circular 230 and can impose sanctions for violations. The grounds for sanctions are broad and include incompetence and “disreputable conduct.” Disreputable conduct includes being convicted of a criminal offense under federal tax laws, giving false information to the Treasury Department, or willfully failing to file a federal tax return.

When the OPR finds that a practitioner has violated Circular 230, it can impose several sanctions depending on the severity of the misconduct.

• A censure is a public, formal reprimand from the IRS.
• A suspension is a temporary loss of practice rights before the IRS.
• A disbarment is an indefinite or permanent revocation of practice rights.
• Monetary penalties can be levied against the practitioner and, in some cases, their employer or firm. The penalty can be up to the gross income derived from the conduct that led to the violation.