Ethics and Procedures: Circular 230, Practice, and Penalties
Who may practice and what standards apply
Circular 230 governs practice before the IRS. Key concepts: the duty of competence (knowledge plus skill, or reasonable reliance on another), due diligence in preparing returns, and the prohibition on giving false or misleading information. A practitioner may not endorse or negotiate a client's refund check, may not charge an unconscionable fee, and must return client records upon request (with limited exceptions for work product still in progress).
Written advice and reliance
Written tax advice intended for a client to rely on must be based on reasonable factual and legal assumptions, consider all relevant facts, and not rely on unreasonable representations. The "more likely than not" standard applies to certain marketed opinions; the substantial-authority standard governs return positions where disclosure is not made. Traps: a practitioner cannot rely blindly on client-provided information that appears incorrect, and cannot use a confidentiality disclaimer to avoid Circular 230 responsibility.
Return positions and disclosure
A position may be taken without disclosure only if there is substantial authority, or the position is disclosed and has a reasonable basis. Frivolous positions expose both taxpayer and preparer to penalties. The preparer penalty framework distinguishes willful or reckless conduct from mere negligence, and reasonable cause with good faith can be a defense.
Sanctions and procedure
The IRS may impose sanctions including censure, suspension, or disbarment, and monetary penalties. The Office of Professional Responsibility handles disciplinary matters. Taxpayers have appeal rights, and practitioners must respond timely to IRS requests and keep clients informed.
Worked rule of thumb
Before signing a return, ask three questions: Do I have the facts? Is the position supportable (substantial authority, or disclosed with reasonable basis)? Have I documented the client's representations? If any answer is no, do not sign.