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Proposed amendments to circular 230.

This part examines Circular 230 proposed Section 10.36 (procedures to ensure compliance) and proposed Subparts C, D, and E, on sanctions, disciplinary proceedings and general provisions. (Practice & Procedures)


* According to the AICPA, the proposed Circular 230 revisions both "significantly expand the potential for violations" and "significantly cut back in basic procedural safeguards."

* Although proposed Section 10.20(b) requires practitioners to produce DOP-requested information, Subpart D does not require the Service to disclose information on which a Circular 230 violation is premised.

* The AICPA foresees an increase in disciplinary proceedings resulting from the proposed expansion of Circular 230, as well as the recently announced IRS restructuring.

In the last issue, Part I of this two-part article discussed proposed amendments to Circular 230 (20) Subpart B, Duties and Restrictions Relating to Practice Before the Internal Revenue Service. Part II, below, examines Circular 230 proposed Section 10.36 (procedures to ensure compliance) and proposed Subparts C, D and E, on sanctions, disciplinary proceedings and general provisions.

Proposed Section 10.36--Procedures to Ensure Compliance

This provision requires practitioners responsible for advising firm clients on tax matters to take "reasonable steps," consistent with their authority, to "make certain" that the firm has "adequate procedures" to ensure compliance with proposed Sections 10.33, 10.34 (21) and 10.35. The Director of Practice (DOP) could not take disciplinary action against a firm practitioner for violating proposed Section 10.36 unless the practitioner acts with recklessness, willfulness or gross incompetence in not taking the reasonable steps required, and he and one or more firm employees, members or associates are "engaged in a pattern or practice of failing to comply" with proposed Sections 10.33, 10.34 and/or 10.35. However, the IRs could discipline a practitioner under proposed Section 10.36(b) if reasonable steps are taken, but the practitioner has "actual knowledge" that a firm member, associate or employee is engaged in a practice or pattern of noncompliance with Sections 10.33-10.35 "and the practitioner, through willfulness, recklessness, or gross incompetence, fails to take prompt action, consistent with his or her authority and responsibility for the firm's practice advising clients regarding matters under Federal tax laws, to correct such pattern or practice."

Practitioner Concerns

The American Bar Association (ABA) Tax Section (22) is concerned that requiring practitioners, consistent with their authority and responsibility for the firm's practice, to "make certain" that firm procedures are adequate to ensure compliance with proposed Sections 10.33, 10.34 and 10.35, implies "a higher level of responsibility than is intended" Accordingly, it recommends that this language be modified to require practitioners to "confirm" (instead of "make certain") that the firm is "complying" with the specified sections, rather than "ensuring compliance." The ABA also recommends that the Service provide guidance as to "adequate procedures" to comply with proposed Sections 10.33-10.35, such as Regs. Sec. 1.6694-2(d)(1)-(5) and Rev. Proc. 80-40. (23) After noting that neither the preamble nor the proposed regulations provide practitioners with guidance, the American College of Tax Counsel (ACTC) (24) also recommends that the Service draft and submit for comment either revenue procedures or other guidance on how proposed Section 10.36 should be implemented. In addition, the ACTC urges the IRS to postpone the effective date of proposed Section 10.36 for at least one year after the final Circular 230 regulations are adopted. The ACTC believes that firms will require this additional time to develop and implement policies and procedures to ensure compliance with proposed Section 10.36's requirements.

Also objecting to proposed Section 10.36, the AICPA Tax Division (25) calls for both the elimination of any reference to Section 10.34 on tax return positions and for the restriction of proposed Section 10.36 to tax shelter opinions. Beyond tax shelter opinions regulated in proposed Sections 10.33 and 10.35, "the AICPA does not accept the notion that a practitioner should be held vicariously responsible for another practitioner's noncompliance with standards prescribed by Circular 230."

The AICPA believes that "indirect accountability" would result in sanctioning a from associated with "offending practitioners," disproportionately harming the firm. Accordingly, the AICPA recommends that proposed Section 10.36 be modified "to (1) clarify that it Will not be invoked against a practitioner without sanctions first being imposed against all practitioners who are alleged to have created a `pattern or practice' of directly violating the specified provisions of Circular 230, and (2) confine its application to a single practitioner within a firm." This single practitioner per firm "should be the individual who is operationally responsible for prescribing procedures to comply with the specified provisions, and who has direct authority to discipline acts of non-compliance of which he or she has actual knowledge."

The AICPA further suggests that the proposed regulation clarify that no practitioner may be sanctioned for noncompliance by another, unless that person "has a level of authority sufficient to directly invoke meaningful disciplinary actions against such persons."

Similar to the ABA and ACTC requests for additional implementation guidance, the AICPA believes that such guidance should provide examples for each type of failure to comply with proposed Section 10.36. Finally, while the ACTC does not endorse the AICPA's "single practitioner per firm" sanction for a violation of proposed Section 10.36, it does believe that "it would be inequitable to impose discipline under proposed Section 10.36(b) upon a practitioner who has not violated Section 10.33, 10.34 or 10.35 unless discipline has been imposed upon those practitioners in the firm who have violated those provisions."

Subparts C, D and E

The Circular 230 proposed revision divides the content of current Subpart C on disciplinary sanctions and procedures into two parts, eliminates current Subpart D on the disqualification of appraisers (by incorporating appraiser rules into those regulating other practitioners) and retains Subpart E's "General Provisions" with little change. Proposed Subpart C is titled "Sanctions for Violations of the Regulations;" proposed Subpart D retains the title from current Subpart C, "Rules Applicable to Disciplinary Proceedings."

Proposed Subpart C--Sanctions for Violation of the Regulations

Proposed Section 10.50: This provision identifies the sanctions facing practitioners and appraisers for violating Circular 230. Proposed Section 10.50(a), in a significant expansion of current Section 10.50, permits the Treasury Secretary to publicly reprimand or censure practitioners (in addition to suspending or disbarring them) after notice and opportunity for hearing. As under the current regulations, 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 more subtle change, practitioners would be subject to sanction under proposed Section 10.50(a) for failure to comply with any Circular 230 regulation (rather than their refusal to comply, as under the current regulation). Proposed Section 10.50(b) consolidates the Treasury Secretary's authority to disqualify appraisers assessed a Sec. 6701(a) penalty.

Proposed Section 10.51: Despite the inclusion of incompetence as a basis for sanction in both current and proposed Section 10.50(a), current Section 10.51 refers only to disreputable conduct. Proposed Section 10.51 explicitly includes incompetence as a separate basis for censure, suspension or disbarment of a practitioner from IRS practice. Proposed Section 10.51(1) defines "gross incompetence" to include "conduct that reflects gross indifference, preparation which is grossly inadequate under the circumstances, and a consistent failure to perform obligations to the client."

Specific forms of disreputable conduct are identified in proposed Sections 10.51(a)-(j). While most of the changes to proposed Section 10.51 involve section renumberings or minor grammatical changes, proposed Section 10.51(c) is new. The current regulations define disreputable conduct for which a practitioner may be suspended or disbarred to include any criminal conviction either under Federal revenue laws or involving "dishonesty or breach of trust." Responding to concerns that the current regulation is too narrow, proposed Section 10.51(c) expands the definition to include any Federal or state felony conviction involving conduct that "renders the practitioner unfit to practice" before the IRS.

Proposed Section 10.51(f) modifies current Section 10.51(d), which deals with the willful failure to file a Federal tax return, as well as evading or attempting to evade any Federal tax or payment. Proposed Section 10.51(f) deletes a practitioner's concealment of his own or another's assets to evade Federal taxes from this aspect of disreputable conduct. (26) Revising current Section 10.51(h), proposed Section 10.51(j) deletes the presumption that maintaining a partnership with any person who has been disbarred from practice before the Service constitutes disreputable conduct. Instead, proposed Section 10.51(j) bars "knowingly aiding and abetting another person to practice" before the IRS while that practitioner is suspended, disbarred or otherwise ineligible to practice before the Service.

Proposed Section 10.52(a): While proposed Section 10.52(a) (like the current regulation) provides for sanctions for any willful violation of Circular 230, the list of available sanctions would now include censure in addition to suspension or disbarment from IRS practice. These sanctions would also apply to a violation of proposed Sections 10.33 and 10.35 on tax shelter opinions and Section 10.34 on tax return positions and return preparation, if the violation is not willful, but results from recklessness or gross incompetence (as defined in proposed Section 10.51 (1)).

Proposed Section 10.53: This provision addresses receipt of information on possible practitioner violations. Current Section 10.53 requires IRS employees who have received information (or have "reason to believe") that a practitioner has violated Circular 230 to submit promptly a written report to the DOP. Proposed Section 10.53 deletes the reference to receipt of information regarding a possible violation, implicitly limiting the section to IRS employees or officers who have "reason to believe" that a practitioner has violated Circular 230. Receipt of credible information, of course, would satisfy this standard. Other persons with "information" that a practitioner has violated Circular 230 may submit a report (either oral or written) of the "alleged violation" to the DOP or any IRS employee. IRS employees who receive such a report must submit their own written report to the DOP.

Practitioner Concerns

After describing the sanction and disciplinary proceeding provisions in proposed Sections 10.50-10.82 as "extremely difficult to follow and to understand[,]" the New York State Bar Association (NYSBA) (27) urges the IRS to clarify the conduct that may subject practitioners to censure, suspension or disbarment. In addition, the NYSBA advocates that the IRS publish descriptions of sanctions issued, as well as the conduct that resulted in their imposition, so that practitioners will have "tangible evidence" and "periodic reminder[s]" that Circular 230 violations will trigger sanctions.

The AICPA supports censure only as an intermediate measure less severe than either suspension or disbarment, to be used by the DOP when these latter sanctions would be too severe. It also objects to the absence of any criteria in proposed Section 10.50 for determining the circumstances under which censure, suspension or disbarment would be appropriate. The AICPA believes that disciplinary sanctions must be "commensurate with the gravity and/or repetition of violations" and consistently applied. Clear guidelines and criteria provide fairness and transparency, ensuring consistent application by the DOP in identifying the circumstances and behaviors that will subject practitioners to censure, suspension or disbarment.

In addition, because proposed Section 10.50(a) defines censure as a public reprimand, proposed Section 10.90(a) requires the DOP to make the names of censured practitioners publicly available, along with those who are suspended or disbarred from IRS practice. The AICPA objects to the publication of names or the disclosure of records of practitioners who have been censured, except in response to a specific inquiry regarding discipline of a particular practitioner. According to the AICPA, moreover, the effect of censure under proposed Section 10.79(c) could actually be more severe than suspension, which prohibits IRS practice during the suspension period. In contrast, the IRS may permit a censured practitioner to continue IRS practice, but subject to DOP-imposed conditions for an indeterminate period. Unless proposed Sections 10.90(a) and 10.79(c) are modified to make the sanctions for censure less severe than those for suspension from practice, the AICPA cannot support this new sanction. Further, it reminds the Service that, even under a revised Circular 230, Section 10.60(a) permits the DOP to issue "private reprimands," a sanction the AICPA supports as long as they are not in effect for an undetermined period.

Similarly, the ACTC believes that adding public reprimands to the sanctions available to the DOP should not change the current IRS practice of issuing private reprimands when the DOP has determined (following an investigation) that the practitioner's conduct, while inappropriate, does not merit "more formal sanctions" Accordingly, it urges that final Section 10.60 clarify that private reprimands are still permitted. Similarly, the NYSBA recommends that the Service not only clarify "reprimand" but also address the absence of "procedural rules ... governing a determination to `reprimand[,]'" in contrast to the detailed procedures that precede the imposition of censure, suspension or disbarment.

Like the AICPA, the ABA "endorses the concept" of censure as "an appropriate remedy in certain circumstances." Unlike the AICPA, however, both the ABA and the ACTC question whether Congress has granted either the Treasury Secretary or the DOP the authority to create a sanction other than suspension and disbarment (which are specifically identified in 31 USC Section 330). Accordingly, both groups urge the IRS to clarify its statutory authority to create censure as a sanction in proposed Section 10.50. The ABA comments go even further: "if and when such statutory authority exists," the ABA will "strongly support" censure as a new sanction.

The ABA is also concerned that subjecting practitioners to sanctions under proposed Section 10.50(a) for failure to comply with Circular 230 (rather than refusal to comply) "could be interpreted" as changing the standard for sanctions articulated in proposed Section 10.52. Although both current and proposed Section 10.52 specify that violations occur through a practitioner's gross incompetence, willfulness or recklessness, permitting the DOP to impose sanctions for failure to comply appears to lower the standard to mere negligence. Because the ABA believes that a negligence standard is both "inadvisable" and "contrary to the express standards" in proposed Section 10.52, it recommends eliminating this change in terminology.

To reduce possible confusion over the application of the recklessness, gross incompetence and willful standards in proposed Sections 10.50 and 10.52, the ACTC urges that proposed Section 10.50 be modified to state explicitly that violations of proposed Circular 230 Sections 10.33, 10.34 and 10.35 "are sanctionable ONLY as set forth in [proposed] Section 10.52."

The ACTC also recommends that proposed Section 10.51, which purports to define "disreputable conduct" be revised. Rather than defining the term, this section provides examples of disreputable conduct. The ACTC urges the Service to state explicitly that the examples are"non-exclusive."

Although the ABA supports the requirement in proposed Section 10.53(a) that any IRS officer or employee who has "reason to believe" that a practitioner has violated Circular 230 notify the DOP in writing, it finds the requirement in proposed Section 10.53(b), on receipt of information by other persons, to be both unclear and redundant. It suggests that the IRS rewrite proposed Section 10.53(b) to clarify that receipt of "credible information" by an IRS employee or officer that a practitioner has violated Circular 230 is sufficient to meet the standard.

While both current and proposed Sections 10.53 deal with IRS receipt of information regarding possible Circular 230 violations, neither provision specifies the action the DOP should take when information does not result in disciplinary action against a practitioner. The ABA believes that Section 10.53 should require the DOP to notify practitioners and provide them with the "opportunity to respond contemporaneously," if they are reported for possible Circular 230 violations, unless the DOP concludes that no further action is warranted. When no further action is taken, the ABA recommends that proposed Section 10.53 require the IRS to "immediately destroy the report and all documentation or records relating thereto" a position the ACTC endorses.

In contrast, the AICPA recommends that this section be expanded to include a file-retention policy. It believes that the DOP should be required to periodically destroy claims that lack merit or that are not acted on within three years by either the IRS or the Justice Department, particularly when the practitioner has not even been notified of the allegation. Without periodic purging of no-action files, the AICPA is concerned that practitioners might find themselves defending against meritless claims years later if the IRS attempts to use the prior allegation to establish a pattern of disreputable conduct justifying discipline in an unrelated matter.

Proposed Subpart D--Rules Applicable to Disciplinary Proceedings

Proposed Subpart D, which retains the title of former Subpart C, specifies the rules that apply to disciplinary proceedings initiated under Circular 230. As proposed, current Sections 10.54-10.76 have been renumbered as 10.60-10.82. All but two section tides remain unchanged: Sections 10.79 and 10.80 add censure to suspension and disbarment, while proposed Section 10.80 has been renamed to include appraiser disqualification. The content of several revised sections was also modified to reflect these changes. In addition, references to and powers of the "Examiner" in current Sections 10.61 and 10.64 have been replaced by "Administrative Law Judge" (ALJ) in proposed Sections 10.67 and 10.70, respectively.

Disciplinary proceedings against a practitioner are instituted by filing a complaint, which, under proposed Section 10.62, must name the respondent, plainly and concisely describe the allegations that form the basis for the proceeding and be signed by the DOP. Only when a practitioner's suspension is predicated on a criminal conviction or license revocation for cause under proposed Section 10.82 may the DOP institute a proceeding under proposed Section 10.60(c) without first providing written notice of the allegations and an opportunity to respond (i.e.,"an explanation or description of mitigating circumstances"). In contrast, current Section 10.54 requires that the respondent also be afforded an opportunity to "demonstrate or achieve compliance with all lawful requirements" of Circular 230 before a proceeding can be instituted, unless the case is premised on willfulness or "time, the nature of the proceeding, or the public interest" do not permit extending these procedural safeguards before proceeding. Proposed Section 10.60 has deleted this opportunity to cure a violation before formal proceedings can be initiated.

After specifying the methods for effective service of the complaint on the respondent (including service by first-class mail), proposed Section 10.63(a) accepts, as proof of service, a sworn statement of service by the person who accomplished it. This statement must indicate not only the manner of service (as is required by current Section 10.57(a)), but also the recipient, and the date, time and place of service.

Regardless of whether formal disciplinary proceedings have been initiated seeking the censure, suspension or disbarment of a practitioner or the disqualification of an appraiser, proposed Section 10.61 (like its predecessor, current Section 10.55) permits the DOP to confer with practitioners and appraisers regarding potential Circular 230 violations. These conferences may result in stipulations, agreements consenting to the imposition of a sanction under proposed Section 10.60 or voluntary resignation from IRS practice.

Proposed Section 10.64 contains some new provisions regulating a respondent's answer. Under the current regulations, the respondent must either admit or deny each allegation in the complaint; proposed Section 10.64 (b) would allow the respondent to state that he lacks "sufficient information" to admit or deny any specific allegation. Any allegation not denied is deemed admitted under proposed Section 10.64(c), which also permits an ALJ to enter a decision by default if the respondent fails to file a timely answer. Proposed Section 10.64(d) adds a perjury clause to the respondent's answer. The respondent must sign a declaration acknowledging that statements in the answer are "true and correct"; false statements made knowingly and willfully in the answer may be punished under 18 USC Section 1001.

With the exception of proposed Section 10.78, the rules in proposed Sections 10.67-10.82 that actually govern a disciplinary hearing remain essentially the same as under current law. These rules cover proof, evidence, depositions and motions, representatives of the parties, proposed findings and conclusions, transcripts, decisions of the ALJ and appeals to the Treasury Secretary, as well as petitions for reinstatement and expedited suspension on a criminal conviction or license revocation.

In deciding an appeal of an ALJ's decision, current Section 10.72 requires the Treasury Secretary to "review the record or such portions thereof as may be cited by the parties to permit limiting of the issues." Proposed Section 10.78, which would replace this section, only requires the Treasury Secretary (or a designee) to make the "agency decision," which is then to be transmitted by the DOP to the respondent. Conspicuously omitted is any requirement that the Treasury Secretary review the record of the ALJ proceeding.

The effect of disciplinary sanctions, explained in proposed Section 10.79, has been expanded to include the new Circular 230 sanction, censure. Proposed Section 10.79(c) permits the DOP to impose conditions "designed to promote high standards of conduct" on censured respondents before they are allowed to continue IRS practice. To illustrate such a condition, this section suggests that the DOP might require practitioners to provide the IRS with copies of client consents as a condition to future practice when a practitioner is being censured for not informing clients of potential conflicts of interest and obtaining their written consent.

Similarly, proposed Section 10.80 (regarding notice of disciplinary sanctions) has been modified to reflect the additions of censure and disqualification. Current Section 10.74 requires the DOP to notify both appropriate IRS employees and "interested" Federal agencies and departments when a practitioner has been disbarred or suspended. Proposed Section 10.80 makes such notice by the DOP discretionary, rather than mandatory. Proposed Section 10.80 also permits the DOP to determine the "manner" of giving notice of a practitioner's censure, suspension or disbarment to proper state authorities.

Practitioner Concerns

Both the AICPA and ABA raise a number of concerns as to the Circular 230 disciplinary proceeding rules. Current Section 10.57(a) and proposed Section 10.63(a) permit service of a complaint to initiate a disciplinary proceeding by certified mail; if this is returned undelivered, effective service can be accomplished by mailing the complaint first-class mail to the respondent's last-known address. When a certified letter is returned undelivered, the AICPA believes the regulation should require the DOP to "undertake some additional effort to locate a practitioner" (such as contacting the appropriate state licensing board or sending an investigator to locate a better address). Because failure to answer a complaint timely can result in a default decision under proposed Section 10.64(c), the consequence of an undelivered letter can be severe. At a minimum, the AICPA believes that the period in which a practitioner must respond to a disciplinary complaint should not begin to run until the notice has been mailed to the practitioner's last-known address by the appropriate licensing authority.

The AICPA is concerned that the proposed Circular 230 revisions both "significantly expand the potential for violations" and "significantly cut back in basic procedural safeguards." Much of this concern relates to the IRS

restructuring announced shortly after it issued the Circular 230 proposed amendments. The appellate procedure is outlined in Treasury General Counsel Order No. 9; (28) the IRS Chief Counsel for the office that initially instituted the proceeding will hear appeals of Circular 230 disciplinary sanctions, instead of the Treasury General Counsel. While proposed Section 10.77 provides that an ALJ's decision in a Circular 230 disciplinary hearing is appealed to the Treasury Secretary or designee, the AICPA believes that designating the IRS Chief Counsel to review ALJ decisions does not provide the type of independent review afforded an IRS examination appeal. Further, the AICPA recommends that the IRS explain the reasoning underlying any IRS restructuring and provide practitioners the opportunity to comment on proposed changes before they become final.

The AICPA is also concerned by the elimination in proposed Section 10.78 of the current requirement that the Treasury Secretary review the record of the ALJ proceeding, particularly because the official IRS explanation of the revised regulations fails even to mention this change. Because it is unclear whether the IRS no longer anticipates reviewing the record, the AICPA urges the IRS either to reinsert that requirement into Section 10.78 or to explain officially why it was omitted (and indicate the change's effect).

The AICPA foresees an increase in disciplinary proceedings resulting from the proposed expansion of Circular 230, as well as the recently announced IRS restructuring. Because Circular 230 disciplinary proceedings often involve complex tax transactions, the AICPA is concerned about the use of ALJs who may lack tax expertise. The AICPA also notes that judicial rules of evidence "are not controlling" in disciplinary hearings brought under either the current or the proposed regulations. Given these "procedural impediments" the AICPA believes that practitioners appealing the Treasury Secretary's decision (after an adverse ALJ decision) should be afforded a "fresh start" in the district court. Thus, it urges that appeals to the district court be conducted de novo.

As worded, proposed Section 10.80 allows (but does not direct) the DOP to notify appropriate state-licensing authorities when a practitioner has been censured, suspended or disbarred. The AICPA believes such notice should be mandatory and clearly stated in the final regulations.

The ABA also raises a number of concerns as to Subpart D. After noting that Circular 230 fails to articulate the standard of proof for an ALJ disciplinary proceeding, it argues that the DOP should be held to a "clear and convincing" evidentiary standard in disciplinary proceedings, rather than merely "preponderance of the evidence."

The ACTC raises similar procedural issues. Given the "seriousness" of practitioner sanctions, the ACTC urges the DOP to exercise "extreme care" to ensure that the sanctions are imposed only when appropriate and after a careful examination of the alleged misconduct. In addition, a practitioner should be "granted a presumption of innocence," the IRS should be required to prove misconduct under a "clear and convincing evidence" standard and ALJs who hear sanction cases should "receive specialized training in the application of Circular 230."

Although proposed Section 10.20(b) requires practitioners to produce DOP-requested information, Subpart D does not require the Service to reciprocate and disclose information on which a Circular 230 violation is premised. The ABA argues that the Service should be required to produce such evidence, within a specified time period, with or without a specific practitioner request. It also believes that Circular 230 should prescribe a period within which the DOP would be required to institute disciplinary proceedings against a practitioner, unless extended with the practitioner's consent.

As indicated previously, the ABA endorses the addition to proposed Section 10.60(a) of public censure as an intermediate sanction between private reprimand and suspension. However, it believes that censure should be imposed only after administrative due process or with the practitioner's consent. Similarly, it recommends "modest changes" to proposed Section 10.61 to clarify that only enrolled agents and actuaries may "resign" from the IRS to avert Circular 230 disciplinary proceedings; at the DOP's discretion, other practitioners may consent to censure, suspension or disbarment.

The ABA also objects to the new language in proposed Section 10.72 permitting an ALJ to admit both irrelevant and hearsay evidence. Because the admission of such evidence can be prejudicial to practitioners and deny them due process, it believes that the current language, requiring the ALJ to exclude irrelevant evidence, should be retained.

Proposed Section 10.77, like current Section 10.71, requires that the appeal of an ALJ decision filed with the DOP must include "exceptions" to the decision. The ABA distinguishes between notice of appeal (a procedural step) and the reasons supporting the appeal (a substantive step), and argues that practitioners should not be required to specify the reasons when they file a "notice of appeal."

Proposed Subpart E--General Provisions

Proposed Subpart E makes few changes to the existing regulations. Proposed Section 10.90, like current Section 10.98, requires the DOP to make the rosters of enrolled and sanctioned practitioners, as well as disqualified appraisers, available for public inspection. Like the savings clause in current Section 10.100, proposed Section 10.91 specifies that practitioner conduct before the final Circular 230 revisions become effective will be subject to the regulations in effect when the conduct occurred. Subject to this limit, proposed Section 10.93 provides that the final Circular 230 regulations become effective on their publication in the Federal Register.

Practitioner Concerns

As discussed previously, the AICPA objects to the provision in proposed Section 10.90(a) that permits the publication of censured practitioners' names. Similarly, records of censured practitioners should not be disclosed, except in response to specific inquiries "as to whether a particular practitioner has ever been disciplined." As noted previously, the ACTC believes that proposed Section 10.36 should not become effective when the final regulations are published in the Federal Register. Instead, it recommends that practitioners and firms be given time to develop compliance policies and procedures on the new tax shelter and due diligence requirements in proposed Sections 10.33-10.35. In addition, it urges that the effective date of proposed Section 10.29 (on conflicts of interest) also be deferred, to give practitioners the opportunity both to understand the "substantial change" contemplated by the regulations and to implement compliance policies.

The ACTC comments conclude with a recommendation that the IRS take a more "focused pro-active approach to the enforcement of Circular 230." Specifically, the ACTC recommends that the DOP prioritize practitioner violations that have the greatest adverse effect on the tax system and that Service personnel be better trained to identify and refer the "most serious violations" to the DOP. In addition, the ACTC believes that by publicizing its priorities, tax practitioners should be encouraged "to curtail non-compliant behavior voluntarily[.]" Finally, the ACTC recommends that the Service not only regularly publish statistics on the types of alleged violations and their disposition, but also hypothetical situations that depict sanctionable behavior, accompanied by a summary of the "significant considerations" that could result in the various Circular 230 sanctions.


The extensive changes proposed to Circular 230 are complicated, comprehensive and, in some areas, overreaching. Developing policies and procedures to comply with the new standards will impose additional costs on tax planning and compliance services.

The costs of noncompliance are even greater. Current and proposed Section 10.53 require IRS employees to report, in writing, suspected Circular 230 violations to the DOP; the Internal Revenue Manual (29) identifies a number of violations that require mandatory referrals. Increased staffing of the DOP's Office, coupled with the addition of censure as a public sanction and the lowering of some standards for imposing sanctions, signal that the IRS envisions increased vigilance in Circular 230 enforcement. Similarly, publication of the names of censured practitioners indicates a more proactive enforcement strategy. Dissatisfied clients may also bring malpractice claims based on the underlying transactions that gave rise to a Circular 230 referral, while state accountancy boards may apply additional sanctions to suspended, disbarred or censured practitioners.

It is impossible to determine whether the Circular 230 revisions will be adopted as proposed. The IRS may further revise proposed Circular 230 in response to these concerns before issuing the final regulations. (30) For example, although proposed Section 10.93 specifies that the final regulations will become effective on publication in the Federal Register, the IRS may defer the effective date until the 2002 filing year, particularly if the regulations are published in late 2001. If additional revisions are proposed, practitioners, firms and professional organizations should have the opportunity to comment further on the viability and clarity of the changes.

Comments already submitted to the IRS by the ABA, NYSBA, ACTC and AICPA, as well as formal testimony at the May 2, 2001 public hearing, provide an initial indication of how these Circular 230 stakeholders see the problems and potential in the proposed revisions.

The AICPA, NYSBA and ABA, for example, expressed serious reservations with the definition of tax shelter in proposed Sections 10.33 and 10.35. According to IRS officials, proposed Section 10.33 was included in the Circular 230 revisions because the Service had some evidence of tax opinions that did not meet the more-likely-than-not standards in proposed Section 10.35. It is doubtful, however, that many practitioners would issue such an opinion, because few clients would want to pay for it if it did not provide penalty-abatement protection; there would also be questions of practitioner liability for such an opinion.

More importantly, these groups recommended that the IRS return to the "principal purpose" test for defining tax shelters used in Sec. 6662(d)(2)(C)(iii) prior to its 1997 amendment. In contrast to the proposed "significant purpose" tax shelter definition, a narrower definition in the Circular 230 regulations that excludes ordinary business transactions would provide "an ascertainable" minimal standard for sanctions. Alternatively, if the principal-purpose test is not adopted in the final regulations, the AICPA has urged the IRS to exclude explicitly three categories of transactions from the definition of "tax shelter" so that they would not be deemed entered into for tax-avoidance purposes: transactions (1) germane to the taxpayer's business; (2) that would produce "a reasonable economic return" consistent with the taxpayer's risk and investment; and (3) consistent with both the intent and purpose of the tax law that the practitioner believes applicable to the transaction.

Richard Lipton, representing the ABA at the hearings, voiced similar concerns; he stated that the IRS-proposed definition of tax shelter is "too broad and would include written advice given during most routine tax planning." (31) He reiterated the ABA's previously discussed concern that if the significant-purpose test is retained, the Service will need to create a lengthy list of exceptions.

The IRS appears reluctant to replace the current significant-purpose standard for defining a tax shelter with the pre-1997 principal-purpose definition. In comments to the ABA Tax Section's Standards of Tax Practice Committee on May 12, 2001, Rita Cavanaugh, Office of the Tax Legislative Counsel for the Treasury, stated that "use of this alternative language could ultimately blow a hole in the standards." (32) Other IRS officials continue to engage the AICPA in dialogue on alternative language and exclusions if the principal-purpose test is retained.

The use of the words "possible" and "potential" in the proposed regulations may also be problematic for practitioners. For example, proposed Section 10.35(a)(2)(iv)(3) requires tax shelter opinions to state that the practitioner has considered the "possible application" of "all potentially relevant judicial doctrines ... as well as potentially relevant statutory and regulatory anti-abuse rules." Similar all-encompassing language can also be found in other proposed sections (e.g., potential Circular 230 violations in proposed Section 10.20(b) and "the possible consequences of not taking corrective action" in proposed Section 10.21). The IRS should continue its dialogue with the AICPA, ABA and ACTC about how these terms are used before issuing final regulations. When appropriate, moreover, it may be advisable for the IRS to further revise the proposed amendments to facilitate practitioner understanding of and compliance with Circular 230.

The AICPA's comments and testimony raise a number of other issues involving the proposed revisions. Even the addition of censure as a sanction is troublesome. While censure is apparently intended as a sanction that will be less severe than suspension and disbarment, but more serious than a private reprimand, the IRS needs to establish clear standards for imposing censure to ensure that it does not result in a more severe sanction than suspension. In addition, elimination of the phrase "of doubtful legality" in proposed Section 10.20 would apparently limit a practitioner's ability to challenge a defective summons. The AICPA also questions whether the publication of fee schedules (as required by proposed Section 10.30) should come within the purview of Circular 230 sanctions. Other concerns center on contingent fees when "it is reasonably anticipated that the position will be substantively reviewed by the IRS prior to the filing of such return." The AICPA also offered alternative or additional language to other sections it views as particularly problematic (e.g., proposed Section 10.25 on practice by former government employees and proposed Section 10.28 on the definition of "client records").

Practitioners must carefully review Circular 230 to ascertain the proposed changes' effects on their practices. The AICPA comments should prove helpful as CPAs adapt existing firm procedures to any new requirements appearing in the final regulations. The proposed revisions have generated thoughtful, substantive comments from the various professional organizations that may lead to further modifications before final regulations are published. If additional revisions are proposed, they should be published in the Federal Register as proposed regulations, with ample time for comment by professional organizations and other practitioners. The opportunity to comment on further revisions will help ensure that when Circular 230 is finalized, it will be a workable document for both the Service and practitioners.

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

Authors' note: The authors wish to acknowledge the assistance of Dan Mendelson and Benson Goldstein in reviewing this article.

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

(21) Proposed Section 10.34, which imposes the realistic possibility standard for tax return positions, makes two minor revisions to current Section 10.34.

First, proposed Section 10.34(c) mandates that practitioners make "reasonable inquiries" if information furnished by clients appears to be inconsistent with other facts or "factual assumptions," similar to proposed Section 10.35(a)(1)(ii). Second, the disciplinary standards in current Section 10.34(b) shift to proposed Section 10.52, which specify censure, suspension or disbarment for Circular 230 violations.

(22) The ABA comments are available at tax/pubpolicy/2001/c230irs0104/.

(23) Rev. Proc. 80-40, 1980-2 CB 774.

(24) The ACTC comments are available at www., Doc. No. 2001-15321.

(25) The AICPA comments are available at www.

(26) Consistent with its Nonfiler Initiative, the IRS has announced that practitioners who fail to file tax returns may also be subject to disciplinary sanctions under Circular 230. See Cogdell, 620 T.M., Practice Before the IRS; Attorney's Fees in Tax Proceedings (2001), on disreputable conduct, at n. 167.

(27) The NYSBA comments are available at menu/index.htm.

(28) See CC-2001-009 (1/19/01).

(29) See IRM, Handbook 120.1, Penalty Handbook, Section 6.2, Director of Practice (last amended 7/8/99); see also Wolfman, Holden and Harris, Standards of Tax Practice (Little, Brown and Co., 5th ed., 1999), [paragraphs] and 302.6.2.

(30) See Hembera, Jr., "Witnesses Say Circular 230 Kegs Are Too Burdensome," 91 Tax Notes 880 (5/7/01) (hereinafter, "Hembera 1"); see also Hembera, Jr., "Tax Practice Panel Reviews Circular 230 Developments," 91 Tax Notes 1223 (5/21/01) (hereinafter, "Hembera 2").

(31) See Hembera 1, note 30 supra, at p. 880.

(32) See id.; see also Hembera 2, note 30 supra, at p. 1223.
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Title Annotation:tax consultant standards; part 2
Author:Cress, William P.
Publication:The Tax Adviser
Geographic Code:1USA
Date:Dec 1, 2001
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