Ethics, Professional Responsibilities and Federal Tax Procedures
Core concepts
Circular 230 governs practice before the IRS. Know the difference between the general standards (competence, due diligence, proper reliance on others) and the specific prohibitions (no contingent fees except for certain audit/collections and rulings requests, no giving false opinions, no negotiating refund checks). A "tax return position" framework matters: a position needs substantial authority to avoid the accuracy-related penalty, and a disclosed position needs a reasonable basis. Tax preparer penalties under IRC 6694 turn on whether the preparer knew or should have known of an understatement.
Procedure essentials
Statute of limitations: three years normally, six years for a substantial omission of gross income (more than 25%), and unlimited for fraud or failure to file. Refund claims generally must be filed within three years of filing or two years of payment, whichever is later. Assessment, collection due process, and the appeals process all appear in questions.
Traps
Questions love to test who may practice before the IRS, whether a preparer can rely on client information without verification, and the difference between the preparer's obligations and the client's. Watch for the distinction between "more likely than not" (a confidence level) and "substantial authority" (a standard based on weight of authority).
Worked rule of thumb
If a client omits gross income exceeding 25% of reported gross income, the return is open for six years. Example: reported gross income $100,000, omitted $30,000 (30%) → six-year statute applies; omitted $20,000 (20%) → three-year statute.
Key points
- Circular 230: competence, due diligence, contingent fee limits.
- Position standards: reasonable basis → substantial authority → more likely than not.
- Statute: 3 years / 6 years (>25% omission) / unlimited (fraud, no return).
- Refund claim: 3 years from filing or 2 years from payment.
- Preparer penalties depend on knowledge or should-have-known.