Ethics, Circular 230, and Tax Practice and Procedure
Circular 230 duties
Circular 230 governs practitioners: attorneys, CPAs, enrolled agents, enrolled actuaries, and appraisers. Key rules include:
- §10.21: on learning of a client’s error or omission, advise the client promptly but do not disclose without consent.
- §10.22: exercise due diligence in preparing returns and advising.
- §10.34: do not sign a return or advise a position that is frivolous or lacks a reasonable basis; undisclosed positions need substantial authority, disclosed positions need reasonable basis, and tax shelters need more likely than not.
- §10.37: conflicts of interest require informed consent and reasonable belief of competent representation.
- §10.27: return client records on request; §10.23 restricts contingent fees.
- §10.51: sanctions for incompetence, disreputable conduct, or willful violation.
Practice and procedure
The IRS assesses tax under §6201 and issues a notice of deficiency under §6212. The taxpayer has 30 days to request Appeals and 90 days (150 if outside the U.S.) to petition the Tax Court under §6213. The assessment statute of limitations is generally three years under §6501, six years for a 25% omission, and unlimited for fraud. Collection due process rights arise under §6320 and §6330. Innocent spouse relief is under §6015.
Preparer penalties include §6694 for understatements from unreasonable positions, §6695 for failure to sign or furnish a copy, and §6701 for aiding or abetting. Accuracy-related penalties under §6662 apply to negligence, substantial understatement, and valuation misstatements.
Worked example
A preparer discovers that a client omitted $20,000 of consulting income. Under §10.21, the preparer must advise the client to correct the return but may not disclose the omission to the IRS without consent. If the client refuses, the preparer should not sign the return and should consider withdrawal. Signing with knowledge of the omission could violate §10.34 and expose the preparer to §6694 penalties.
Traps
- Disclosing client information to correct an error.
- Signing a return with a frivolous position.
- Missing the 90-day Tax Court deadline.
- Assuming the three-year statute always applies.
- Confusing Circular 230 sanctions with preparer penalties.