AICPA responds to IRS circular 230 amendments.

The American Institute of CPAs commended the Internal Revenue Service and the Treasury Department on proposed amendments issued last October to regulations governing the practice of individuals before the IRS under circular 230, while recommending a number of modifications.

In comments submitted to IRS Commissioner Shirley D. Peterson by Harvey L. Coustan, chairman of the AICPA tax executive committee, the Institute noted the amendments were "much improved" over a 1986 proposal and responded to many of the concerns expressed by practitioners.

However, the Institute strongly disagreed with the position on contingent fees and urged expanding the list of authorities on which practitioners may rely to meet the realistic possibility standard.

Contingent fees. The circumstances permitting contingent fees to be charged should be expanded, the Institute said.

The proposed regulations allow contingent fees "for preparing a claim for refund if the practitioner reasonably anticipates, at the time the claim is filed, that the claim will be denied by the Service and subsequently litigated by the client."

The Institute argued the proposed regulations are unnecessarily restrictive and exclude appropriate fee arrangements. It recommended that "the critical test for determining the acceptability of a contingent fee in tax matters is whether the practitioner reasonably expects at the time of the fee arrangement that the IRS will substantively consider the matter."

This test was adopted in Interpretation no. 302-1, Contingent Fees in Tax Matters, of the AICPA Code of Professional Conduct. "Such a test assures that recommended positions will not 'exploit the audit selection process,'" the Institute noted.

Realistic possibility standard. The Institute also recommended widening the list of authorities on which practitioners may rely to meet the realistic possibility standard (under which a penalty may be imposed if the position argued lacks a realistic possibility of being sustained administratively or judicially on its merits).

The AICPA indicated in its Interpretation no. 1-1 to Statement on Responsibilities in Tax Practice no. 1, Tax Return Positions, that "CPAs may rely on well-reasoned treatises, articles in recognized professional tax publications and other reference tools and sources of tax analyses commonly used by tax advisers and return preparers." By including these additional authorities as sources on which practitioners may rely, the Institute recommended, circular 230 would conform to the AICPA professional rules of practice.

"Moreover, most practitioners commonly rely on these sources," the Institute's comments state. "Sanctions under circular 230 should not apply to behaviors considered customary and acceptable conduct by practitioners."