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Ripped circuLar: circular 230 regulation of cpas upended by court cases.

to say that the scope and breadth of Circular 230 has been thrown into a state of flux by the courts would be an understatement.

Some Background

Circular 230 is a set of Treasury regulations under Title 31 that "regulates" the conduct of persons who "practice" that is, "represeru" taxpayers--belbre the IRS. Circular 230 has loIlg. governed certain aspects of the conduct CPAs, attorneys and enrolled agents with regard to their interactions with the IRS. Only tangentially did it reach unlicensed persons, in that it allowed a return preparer to "represent" a taxpayer with regard to, and only with regard to, the return he or she specifically prepared.

Otherwise, the unlicensed preparer statutory provisions in We Internal Revenue Code include preparer penalties tsee, IRC secs. 6694, 6695 and 6695A) under certain circumstances, and a "death sentence" where the IRS could seek injunctive relief to prohibit a person from preparing returns see IRC S. 7407).

Regarding Circular 230 CPA practitioners, it. was commonly believed that their return preparation activities were subject to oversight and discipline under the regulations because they described their reach as including "documents filed with IRS," and that would seemingly include income tax returns.

Including Unlicensed Preparers

In 2010. the U.S. Treasury issued pi., pos. to -regulate- previousl unlicensed tax preparers by adding return preparation to what constitutes "practice beli we We IRS" under Circular 230. and imposing on previously unlicettsed preparers a testing and continuing educational requirement with respect: to their tax knowledge when the person prepared an individual km' I 040 series; returns. Ali exception was provided for employees clrnevs and enrolled agents.

It should be noted that a provision in Circular 230. Sec. 10.36, which origimally appeared in June 2005 to require "supervisory" responsibility by management over members, assiwiates and employees of. firms It tr written advice, was expanded to impose on management supervisory responsibility Nvith regard to die preparation or tax niurns. amencled returns and claims for refund

Note: The American jObs Creation Act of 200-I. Pub. L. 108-357) added Sec. 330tdi of the LS. Code, which authorizes the Treasury to "regulate" written tax advice of a type described in language similar to the IRC See. 6662(d)(2)(C)(ii) definition of the characteristics of a "tax shelter".

Prior to the proposals, unlicensed tax preparers were prohibited from representing a taxpayer with respect to a return prepared allV other party, and unlicensed prepawrs were not permitted to represent a taxpayer before the IRS Appeals Officers, regardless of the fact they prepared a return that gave rise to a tax issue with the IRS (those limitations remain in Circular 230 unchanged by any revisions promulgated in the past several years. In fact, one Treasury proposal was to remove the right of an unlicensed preparcr to represent a taxpayer in any examination).

Final regulzaions allow limited representation bv1fl unlicensed preparer that isn't restricted to representing at the examination level a client kvhose return she prepared. The proposed rules were finalized in September 2012.

Courts Chime In

Almost as soon as these regulations were finalized, the rebellion of the previously unlicensed tax prcparer began. This culminated in the widely discussed Loving case, which began as a Washington, D.C. District Court case and was subsequently sustained by the washington, D.C. Circuit in the Loving case [See Loving v. IRS, 742 F.3D 1013

(D.C. Cur. 2014), aff g 917 F.Supp.2d 67 (D.D.C. 2013)]

Briefly. the Lorw, couits concluded that the Treasury/IRS did riot have the authority to, regulate heretofore unlicensed preparers under Circular 230 because return preparation did not constitute "practice" under Circular 230, as "practice" only meant "representing' a taxpayer in a matter before the IRS and that rciutti preparation was just that: prTaration for the client's submission of a return that did not involve uetutti preparation. tst-Loring. t lit nigh. Ill' 1St CPAs, those few atioriteys who engage in return preparation and enrolled agents probably shrugged and went on w it h their practices comibrtalle in the know-h. ige that since they were Circular 230 practitioners in any event and long had been), they remained subject to Circular 230 provisions as written--including those that attached to preparation activities.

And these tax practitioners specifically CPA and enrolled agent income tax return preparers were governed lw a standard of' their own professional bodies that were similar to Circular 230 conduct requirements.

An example of this type of conduct. requirement is the AICPA Code of Professional Conduct and Statements on Standards for Tax Services. which are adopted by reference or implied in virtually every CPA licensing jurisdietiftn.

And then along came Ridgely [Gerald Lee R idgely Jr. vs. Jacob J. Lew el al; 1:12-cv-00565 (D.D.C. 2015), July IG. 2014].

Getting What You Wish For

Ridgely involved a CPA challenging the Circular 230 prohibition on contingent lees (except under limited circumstances after receiving notice of an IRS challenge to the original return . Ridgely also won. and the court permanently enjoined the IRS from enforcing Circular 230. Sec. 10.27 as invalid.

It was die same district court that decided on Living that decided Ridgely; thus, any appeal would be to the same circuit that upheld Living the Washington. D.C; Circuit). Consequently; die IRS decided not to pursue an appeal.

In Ridgely. the lower court held that CPAs engaged in the preparation of what it labeled "Ordinary Refund Claims" were preparing returns, and that activity did not constitute "practice" before die IRS because it was not "representation" (as described earlier). The Ridgely court also made clear its opinion that CPAs undertaking in original return preparation are not engaged in "representation" of taxpayers, and thus they aren't engaged in "practice" subject to Circular 230 when preparing returns, amended returns or claims for refund.

In the court's view. Circular 230 arguably, and without any noted or defined exception, only regulates CPAs (ancl attorneys and enrolled agents) when they are involved in examination or appeals representation.

The IRS. having decided to regulate all tax preparers and, having moved forward and promulgated operative regulations, may now have to live with the unintended consequences of: "Be careful what you wish for."

While IRS Office of Professional Responsibility OPR Director Karen Hawkins, the enforcement arm for Circular 230, has put on her best spin in asserting that OPR will take a very narrow reading of the Ridgely case and what the court meant by "Ordinary Refund Claims." it appears the court was clear that "preparation" is not "representation," and consequentiv not "practice" subject to the jurisdiction conveyed to OPR by Circular 230

Ridgely Impact on Circular 230

Ridgely arguably calls into question the issue of whether any aspect of return preparation undertaken or engaged in by a CPA. an enrolled agent or an attorney is subject to Circular 230, and, if so. where the court would consider it subject to Circular 230.

Many of the conduct provisions in Subpart B of Circular 230 would seemingly not apply when a CPA is engaged in return preparation, and only the various statutory constraints would apply to preparation activity.

For example, return preparation advice governed by Sec. 10.34 would appear meaningless for enforcement; in fact, the Ridgely court cited the statutory regime surrounding return preparation as a factor in concluding return preparation was not practice under Circular 230. And. if this is die case, then the due diligence and supervisory provisions related to tax preparation by CPAs, enrolled agents and attorneys would appear moot. This would likely extend to the "omissions" provision of tin- Circular in Sec. 10.21.

As well, the rules concerning written advice in Sec. 10.37 may be inapplicable to the extent the advice is non-tax-shelter, written advice concerning tax returns "reporting" provisions. The court might hold in that fashion when reading Ridgely and considering the manner in which it Ibllowed Living.

Standards Must Still Be Followed

While Ridgely may impede the ability of the IRS through its OPR to regulate CPAs engaged solely in return preparation activities, CPAs must still comply with professional standards adopted by their respective state of licensers). For virtually every United States licensing jurisdiction including California those standards are the AICPA Code of Professional Ethics and tlic AICPA Statements on Standards lor l ax Services SSTSs .

Those standards are similar to the substantive conduct rules in Circular 230. And there is nothing to prevent the OPR from filing complaints with a CPA's licensing jurisdiction. Considering the source of the referral. it's also likely to receive careful attention by a board of accountancy.

Ridgely and Professional Standards

Interpretation 302-1 of the Rule 302 of the AICPA Code of Professional Conduct contains an explanation of the ethical standards that apply to contingent fee arrangements, including contingent fees with respect to preparing amended returns.

A review of that Interpretation indicates that Ridgely may have disregarded, and thus violated, the AICPA professional standards, which are adopted by the authority with jurisdiction over his license. An example in the Interpretation would appear to prohibit a contingent fee in what would be an "ordinary refund" situation, and it was noted by the Ridgely court that his preparation involved an "ordinary refund claim."

The opinion in Ridgely is clear that a primary reason for his challenge of Circular 230 was that the prohibition deprived him of income. So, in addition to a violation of a contingent fee prohibition, Ridgely disregarded professional standards for personal gain, whicn could be a reason lor a licensing jurisdiction to conduct an investigation.

Regardless of the state of flux with the application of Circular 230 to CPAs engaged in tax preparation and not representation, CPAs are advised to review the AICPAs professional conduct standards and SSTSs.

Free Member Webcast: Dec. 22

Understanding Recent Revisions to the Rules of Ethics for IRS Practice

Join us as Karen L. Hawkins, director of the IRS Office of Professional Responsibility, will discuss Circular 230 revisions that became effective June 12, 2014. Learn, among other things, what your due diligence responsibilities are when giving written tax advice; what your responsibilities are for ensuring your employees comply with Circular 230; what you may and may not do with a client's refund check; and what to do about that penalty disclaimer in your email messages.

* Dec. 22: 11 a.m.-12:30 p.m.

Tax Practice Conduct Standards: Jan. 15

Circular 230 and AICPA Statements on Standards for Tax Services Webcast

Meet your four-hour ethics requirement while addressing significant changes in the statutory and regulatory standards governing you as a tax practitioner. This CalCPA Education Foundation course, taught by the author of this article, explores the myriad rules that govern the professional conduct of CPAs in tax practice, including the CPAs responsibilities with respect to advising clients on tax positions and related penalty avoidance.

* Jan. 15: 8:30 a.m.-4 p.m.

Kip Dellinger, CPA is a senior tax partner at Cooper Moss Resnick Klein & Co. LLP. You can reach him at
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Title Annotation:regulatory update
Author:Dellinger, Kip
Publication:California CPA
Date:Dec 1, 2014
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