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Treasury issues proposed regulations concerning eligibility to practice before IRS.

On Oct. 8, 1992, the Treasury withdrew earlier amendments to Treasury Circular 230 that had been proposed in 1986 on the standards of conduct governing tax professionals, and proposed new amendments that would generally bring those standards more closely in line with the realistic possibility of success standard in Sec. 6694 and the regulations thereunder adopted on Dec. 30, 1991. The withdrawn 1986 amendments generally would have prohibited a practitioner from advising or preparing a return with respect to a position which the practitioner determined would subject the taxpayer to a substantial understatement penalty.

Sec. 6694(a)provides for a preparer penalty of $250 if a preparer advises a taxpayer to take an undisclosed return position that does not have a realistic possibility of success if litigated, and such position causes an understatement. However, because Circular 230's role in regulating practitioner conduct differs from the role played by penalties prescribed by the Code, the proposed amendments provide that a practitioner may be disciplined under Circular 9,30 only if a failure to comply with the realistic possibility standard is willful, reckless or the result of gross incompetence. A practitioner will not be considered to have acted willfully, recklessly or through gross incompetence with respect to a return position if there was reasonable cause for the position and the preparer acted in good faith.

This new proposed standard of practice should be viewed favorably. In particular, the new standard would liberalize the ability of practitioners to advise clients on undisclosed return positions that have a realistic possibility of success but may lack substantial authority. This is because the substantial authority standard is generally viewed as more stringent than the realistic possibility standard. Similar to the rules under Sec. 6694(a) and AICPA Statements of Responsibility in Tax Practice Nos. 1 and 8, a practitioner will not violate Circular 230 with respect to a position that lacks a realistic possibility of success but is adequately disclosed and is not frivolous.

Other significant provisions in the proposed amendments include (1) the ability of practitioners to rely, without verification, on information furnished by the client, although the implications of information that appears incorrect, inconsistent or incomplete may not be ignored, (2) a general prohibition of contingent fees for preparing a tax return, including a claim for refund, but excluding refund claims filed in anticipation of litigation; (3) changing the rules to provide for expeditious discipline of a practitioner who has been convicted of committing certain crimes or whose license to practice law or accounting has been suspended or revoked for cause; and (4) broader application of the standards of conduct so they would now apply to nonpractitioners, such as trustees representing a trust.

The provision in the proposed amendments on contingent fees has been the subject of some controversy among practitioners. Although the proposed regulations are intended to prohibit a contingent fee when a practitioner cannot reasonably anticipate that a determination will be made on the merits with respect to the positions taken on the return as filed, the language in the proposed amendments appears unnecessarily restrictive. Limiting contingent fees to refund claims filed in anticipation of litigation excludes many situations not involving the "audit lottery" (the situation targeted by the change), such as amended returns that will receive substantive consideration by the IRS. From Ronald Friedman, Esq., and Jeffrey Schechter, Esq., Washington, D.C.
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Author:Schechter, Jeffrey
Publication:The Tax Adviser
Date:Jan 1, 1993
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