Circular 230 final Regs.

EXECUTIVE SUMMARY

* The final regulations ease restrictions on advertising and solicitation, making them more consistent with court decisions.

* Revised Section 10.50(a) adds censure (public reprimand) to the list of potential sanctions for Circular 230 violations.

* Disciplinary proceedings may lead to censure, disbarment or suspension.

In July 2002, the IRS published final Circular 230 (15) regulations, (16) governing practice before the IRS by enrolled agents and actuaries, attorneys and CPAs (collectively referred to as "practitioners"). This two-part article reviews selected final regulations that most affect practitioners. Part I, in last month's issue, covered regulations on IRS requests for client information, practitioner knowledge of client errors and omissions, diligence as to accuracy, assistance from disbarred and suspended persons, fee arrangements and return of client records. Part II, below, examines amendments to Circular 230 regulations on conflicts of interest, solicitation, sanctions and disciplinary procedures.

Amendments

Section 10.29--Conflicting Interests

As finalized, Section 10.29(a) prohibits practitioners from representing a client before the IRS if this involves an actual (not merely potential) conflict of interest. Under Section 10.29(b), such representation can occur, however, if (1) it is not prohibited by law, (2) the practitioner reasonably believes that he or she can diligently and competently represent each affected client and (3) such clients give informed written consent. The practitioner must retain copies of the client's informed consent for a minimum of 36 months from the date the representation is concluded, and furnish the written consents to the IRS on request.

Under Section 10.29(a)(2), a conflict of interest exists if representing one client will be directly adverse (17) to another or if there is a significant risk that one or more of the practitioner's clients will be materially limited by the practitioner's responsibilities to another former or current client, a third person or by the practitioner's own personal interest.

Under Section 10.2(d), the definition of "practice before the Service" is quite broad, raising the possibility that a conflict of interest can occur in many areas of tax practice, including sales of property, estate planning, marital disputes, representations of clients before the IRS and situations involving passthrough entities and their owners.

CPA tax practitioners should consult an attorney about their potential obligations under Section 10.29. They should also be careful about using information drawn from the AICPA's Code of Professional Conduct Rule 102-2 on conflicts of interest, because Section 10.29 is patterned after ABA Model Rule 1.7 and is more comprehensive than AICPA Rule 102-2.

Practitioners may need to increase training so their staffs will be able to identify the existence of conflicts of interest before beginning an engagement. Additionally, they should implement systems (such as computer software programs) that will enable them to determine whether conflicts exist in more complex situations that may arise in a firm with multiple offices.

Practitioners may also need to examine state law to see whether it conflicts with Section 10.29; if so, they should seek legal advice on how to resolve differences in legal standards among the various jurisdictions (including international) in which they or their clients may operate.

IRS personnel have indicated it is not necessary to maintain a central file for all conflict-of-interest waivers and that the records may be retained with the engagement file. In general, CPAs should be alert for future AICPA guidance regarding conflicts of interest in tax practice.

Section 10.30--Solicitation

Section 10.30 eases the restrictions on advertising and solicitation of employment, making the final regulations more consistent with recent court decisions. (18) Section 10.30(a) prohibits public communications and private solicitations by practitioners that contain a false, fraudulent or coercive statement or claim, or a misleading or deceptive statement or claim, eliminating the broader restrictions against "unfair" or "unduly influencing" statements or claims that were also barred by prior Section 10.30.

Section 10.30(a)(2) would also prohibit practitioners from directly or indirectly making uninvited written or oral solicitations of employment if these solicitations would violate applicable conduct rules or Federal or state law. For example, if an attorney is prohibited under state bar rules from making a certain type of uninvited solicitation, the uninvited solicitation for an IRS-related matter will be a Section 10.30 violation. The regulations still require eligible practitioners to clearly identify both lawful solicitations as such and the source of the information used in choosing the recipient.

No significant changes were made to Section 10.30(b), which authorizes practitioners to publish and disseminate fee information. (19) Practitioners must disclose in fee statements whether clients are responsible for costs. Additionally, Section 10.30(b)(2) states that they cannot charge more than the fee statement rates for at least 30 calendar days after the last date on which the fee schedule was published.

In communicating fee information, Section 10.30(c) allows practitioners to use electronic mail, facsimile and hand-delivered flyers, in addition to the previously accepted methods of professional lists, telephone directories, print media, mailings, radio and television, as long as the medium chosen does not render the communication deceptive or untruthful. Practitioners must retain a copy of direct mail and electronic communications, along with a list or other documentation identifying the persons solicited, for at least three years from the date of the last transmission or use.

Although the final regulations simplify the Section 10.30(d) language on improper associations, they are now more restrictive. In IRS-related matters, they prohibit practitioners from assisting (or accepting assistance from) persons or entities that the practitioner knows are using deceptive solicitation practices to obtain clients or otherwise engaging in practices that violate the section.

Sanctions and Disciplinary Proceedings

Subpart C of Circular 230 specifies the sanctions for violating any Circular 230 provision. Subpart D explains the rules that apply in the event of a disciplinary hearing against a practitioner or a proceeding for disqualification of an appraiser.

Section 10.50--Sanctions

Section 10.50 identifies the sanctions facing practitioners and appraisers. Under revised Section 10.50(a), practitioners are subject to an expanded array of sanctions. That section allows the Treasury Secretary, the Director of Practice (DOP) or other delegate, after notice and an opportunity for a proceeding, to censure (defined as a "public reprimand"), suspend or disbar any practitioner from practice before the IRS.20 Suspension and disbarment may lead to the loss of a CPA tax practitioner's license at the state level and can result in liability claims by clients aware of the underlying transactions that lead to the referral. (21) New Section 10.50(b) also authorizes the disqualification of appraisers.

By adding public reprimand as a new sanction, Section 10.50(a) gives the DOP an alternative to taking no action beyond a private reprimand if a suspension or disbarment would be too severe. Even though censure is not listed with disbarment or suspension in 31 USC Section 330(b), under TD 9011 Treasury can impose a public reprimand under 31 USC Section 330(a), which grants it the authority to regulate representation before Treasury.

Practitioners can be sanctioned for incompetence or disreputable conduct, as well as for "willfully and knowingly" misleading or threatening a client or prospective client with intent to defraud. In a subtle change, the DOP can sanction a practitioner who simply "fails to comply" with any Circular 230 regulation, rather than the more culpable "refuses to comply" threshold required under prior Section 10.50.

Under Section 10.52, practitioners can also be censured, suspended or disbarred for (1) willfully violating any Circular 230 regulation or (2) recklessly or through gross incompetence violating Section 10.33 (tax shelter opinions) or 10.34 (advice on tax return positions).

Section 10.51--Incompetence and Disreputable Conduct

Section 10.50(a) permits the DOP to censure, suspend or disbar practitioners who are shown to be incompetent or disreputable; Section 10.51 identifies specific forms of incompetent and disreputable conduct. As finalized, Section 10.51 makes two significant changes to prior law. First, new Section 10.51(c) adds any Federal or state felony conviction involving conduct that renders the practitioner unfit to practice before the IRS to the list of examples of incompetent and disreputable conduct. Second, renumbered Section 10.51(j) deletes the presumption that maintaining a partnership with any person disbarred from practicing before the IRS is tantamount to disreputable conduct.

Section 10.53--Receipt of Information Concerning Practitioner

Section 10.53(a) requires an IRS officer or employee who has "reason to believe" that a practitioner has violated any Circular 230 provision to promptly report the suspected violation to the DOP in writing, explaining the facts and reasons in support of that belief. The Internal Revenue Manual (IRM) also requires referral of practitioners to the DOP if they are subject to penalties under certain Code sections (such as Sec. 6694 preparer penalties). (22)

Under Section 10.53(b), any other person (including a practitioner)having information as to a suspected violation may submit an oral or written report to either the DOP or any IRS officer or employee.

Section 10.53(c) mandates destruction of reports of suspected violations as soon as permissible, unless the applicable record-control schedule approved by the National Archives and Records Administration and designated in the IRM permits retention of the record.

Section 10.76--Decision of Administrative Law Judge 

Disciplinary proceedings that can lead to the censure, disbarment or suspension of practitioners are conducted by an Administrative Law Judge (ALJ). Section 10.76 requires the ALJ, after a disciplinary hearing, to enter a decision that includes findings of fact and conclusions, the ALJ's reasoning and either a dismissal of the complaint or the sanction ordered. The standard of proof required depends on the severity of the sanction sought. If the DOP seeks to censure or suspend a practitioner for less than six months, facts must be proven "by a preponderance of the evidence." In contrast, if the DOP seeks to disbar or suspend a practitioner for six months or longer (or to disqualify an appraiser), proven facts must meet the "clear and convincing evidence" standard.

According to TD 9011, Treasury and the IRS believe that the lower "preponderance of evidence" standard is adequate to protect practitioners facing censure or short suspensions, while the "clear and convincing standard" better protects practitioners and appraisers facing the more significant sanctions of longer suspensions, disbarment or disqualification.

Section 10.79--Effect of Disbarment, Suspension or Censure

Section 10.79 authorizes the DOP to determine whether and the conditions under which a sanctioned practitioner may continue to practice before the IRS. Disbarred practitioners and disqualified appraisers cannot practice before the IRS for at least five years. (23) Suspended practitioners are not permitted to practice during the period of their suspensions, after which the DOP may condition representation before the IRS on terms it sets to "promote high standards of conduct." While censured practitioners may continue to practice before the IRS, the DOP may impose conditions on future representations that are "reasonable in light of the gravity of the practitioner's violations." (24)

Conclusion

The consequences of violating Circular 230 can be quite serious and can affect practitioners' licensure and livelihood. To ensure continued compliance with Circular 230, practitioners and their staffs should become familiar with the final regulations (and review the Statements on Standards for Tax Services). Practitioners who may be subject to sanctions under the Circular should immediately contact a tax attorney who specializes in IRS procedure, preparer penalties and practitioner sanctions under Circular 230. An understanding of rights and responsibilities and the procedural protections built into the Circular provides practitioners with the maximum opportunity to secure their rights when faced with potential sanctions.

Editor's note: Dr. Gardner chaired the AICPA Tax Division's Circular 230 Task Force.

The authors wish to acknowledge the assistance of Dan Mendelson, Benson Goldstein and Jim Emilian in reviewing this article.

For more information about this article, contact Dr. Eide at [e-mail].

(15) Treasury Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents and Appraisers Before the Internal Revenue Service (hereinafter, "Circular 230").

(16) TD 9011 (7/27/02).

(17) According to TD 9011, the Section 10.29 regulations proposed in January 2001were modified to "conform more closely with the approach of the recently revised Model Rule 1.7 of the American Bar Association (ABA) Rules of Professional Conduct," which uses a "directly adverse" standard for determining when conflicts of interest are "significant enough" to require a waiver.

(18) See Fred H. Edenfield, 507 US 761 (1993) (permissible scope of CPA in-person solicitation) and Institute of Certified Practitioners, 874 F Supp 1370 (ND GA 1994).

(19) The AICPA believes that attempts to regulate the publication and dissemination of fee schedules could lead to market distortions, because the Circular 230 regulations apply to only a portion of the marketplace.

(20) Practitioners may also be subject to a private reprimand under Section 10.60.

(21) See Wolfman, Holden and Hams, Standards of Tax Practice, at pp. 33-35 (Tax Analysts, 5th ed., 1999); Raby and Raby, "Tax Practitioner Standards and Professional Self-Discipline," 97 Tax Notes 93 (10/7/02).

(22) IRM 20.1.6.2.1 lists the penalties that result in mandatory referral.

(23) Section 10.81 permits a disbarred practitioner and a disqualified appraiser to petition for reinstatement after five years. The DOP may grant the petition if satisfied "that the petitioner, thereafter, is not likely to conduct himself contrary to the regulations in this part."

(24) Because Section 10.79 describes neither the duration nor the general circumstances under which the DOP may impose any of these sanctions, it is possible that the conditions imposed on a censured practitioner for an indeterminate period could actually exceed the suspension's duration. In its initial comments to the IRS on April 23, 2001, the AICPA expressed concern that guidelines were needed to ensure that Circular 230 is administered in "a manner that is fair and transparent to all practitioners."

John C. Gardner, Ph.D., CPA Professor of Accounting University of Wisconsin-La Crosse La Crosse, WI

Barbara J. Eide, Ph.D., CPA Assistant Professor of Accounting University of Wisconsin-La Crosse La Crosse, WI

Susan L. Willey, J.D. Associate Professor of Legal Studies Georgia State University Atlanta, GA