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Practice management implications of Circular 230 proposed regulations.

On Oct. 8, 1992, the IRS released proposed amendments to the Circular 230 regulations governing standards of practice before the IRS. While these amendments generally conform IRS practice standards to those of the AICPA, certain differences remain that could have tax practice management implications.

Due diligence standard

Circular 230 has adopted the same "realistic possibility" standard that appears in Regs. Sec. 1.6694-2(b) dealing with preparer penalties. Under this standard, unless a position is adequately disclosed on the return, a practitioner may not advise with respect to tax return positions, or sign a return as a preparer, unless he determines that there is a "realistic possibility of the position being sustained on its merits," without consideration of the likelihood of an audit.

This standard is virtually identical to the AICPA standard of practice (Statement on Responsibilities in Tax Practice No. 1) except that, in determining whether a realistic possibility exists, Circular 230 and Regs. Sec. 1.6694-2(b) do not allow the practitioner to rely on treatises, articles in recognized tax periodicals, or other similar reference tools and sources of tax analysis commonly used by tax advisers and return preparers.

Therefore, a practitioner could be exposed to preparer penalties under Sec. 6694 and disciplinary action under Circular 230 despite the fact that he has adhered to the professional guidelines promulgated by the AICPA. At first glance, it may appear that this difference in standards and the potential ramifications are more academic than practical since a preparer penalty under Sec. 6694 is only $250, and a violation of the Circular 230 standard must be "willful, reckless, or the result of gross incompetence" before disbarment from IRS practice will be considered.

However, what is often overlooked is the reliance that will likely be placed on these standards by judges and juries - based on expert testimony - in civil litigation against a practitioner for alleged malpractice. For example, if a situation arises in which a position recommended by a CPA is not upheld, and the CPA's files show that his recommendation relied solely on the opinion of a well-respected commentator or colleague, plaintiff's counsel will undoubtedly find an expert to opine that, because such reliance did not rise to the standard set by the Service, the practitioner engaged in malpractice, despite the fact that the AICPA standard was met. Even if the CPA is ultimately exonerated, the costs to defend such an action - both tangible and intangible - could be substantial.

So, from a practice management standpoint, it would seem to behoove practitioners to thoroughly document the support for controversial recommended positions and, if possible, emphasize in that documentation the authorities acceptable under IRS guidelines (see the chart on page 192), as opposed to the opinions of others.

Contingent fees

Rule 302 of the AICPA Code of Professional Conduct permits the charging of contingent fees in tax matters only if the CPA "can demonstrate a reasonable expectation, at the time of the fee arrangement, of substantive consideration" of the matter by the IRS or other governmental agency. This criterion is deemed not to have been met in the preparation of original tax returns, or, for example, in the preparation of a claim for refund filed merely to correct a ministerial error on the original return.

Circular 230 has proposed a considerably more stringent limitation on the allowability of contingent fees in connection with the preparation of a refund claim. The IRS standard requires that "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." From a practical standpoint, these criteria will often preclude the CPA from charging a contingent fee for the preparation of a refund claim - even relating to a controversial or contentious issue - since the vast majority of contested claims get settled administratively, and it would therefore be difficult to demonstrate an expectation of litigation.

In recent years, the use of contingent fees has become an increasingly popular tool in connection with the marketing of services to new and prospective clients. Typically, in such arrangements, the CPA's fee is based to some extent on the amount of refunds derived from filing the amended returns. Practitioners engaging in or considering such practices should carefully examine their policies and strategies in light of the Circular 230 proposed criteria, and monitor the evolution of the rules from proposed to final form.

Authorities Acceptable Under IRS Standards in

Determining Whether a "Realistic Possibility" Exists

[] The Internal Revenue Code and other statutory provisions.

[] Proposed, temporary and final regulations.

[] Revenue rulings and revenue procedures.

[] Tax treaties, implementing regulations, and Treasury and other official explanations of the treaties.

[] Court cases.

[] Congressional intent - as reflected in committee reports, joint explanatory statements of managers included in conference committee reports, and floor statements made prior to enactment by one of a bill's managers.

[] General explanations of tax legislation prepared by the Joint Committee on Taxation (the "Blue Book").

[] Private letter rulings (PLRs) and technical advice memoranda (TAMs) issued after Oct. 31, 1976 (subject to a caveat in Regs. Sec. 1.6662-4(d)(3)(ii) that any PLRs or TAMs more than 10 years old generally will be accorded very little weight).

[] Actions on decisions (AODs) and general counsel memoranda (GCMs) issued after Mar. 12, 1981, as well as GCMs published in pre-1955 volumes of the Cumulative Bulletin (again subject to the caveat that very little weight will be accorded AODs or GCMs more than 10 years old).

[] IRS information or press releases.
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Article Details
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Author:Bukofsky, Ward M.
Publication:The Tax Adviser
Date:Mar 1, 1993
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