 Income tax 2022-2023, Circular 230 Regulations Governing Practice Before the IRS. Let's do some wealth preservation with some tax preparation. Circular 230 Regulations Governing Practice Before the Internal Revenue Service is a good resource to have. You can find it on the IRS website at irs.gov, irs.gov. We're talking about practice before the IRS. It being similar to like a legal situation where you might have a lawyer acting on behalf of a client to say a court. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category, further broken out by course. Each course then organized in a logical, reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Possibly empowered to make certain decisions even if the client isn't there due to a documentation of something like a power of attorney. You might have a similar situation in tax related issues. If you're at a tax court or dealing with the IRS, a client or taxpayer might want to hire someone to represent them, make decisions on their behalf, giving them certain powers to act as an agent possibly with the use of a form like a power of attorney. Now this is a huge resource for many CPA firms and tax preparers because clearly clients would like them to give them help with just preparing the tax return. But it would also be nice if the IRS came back with questions and they questioned a position that was taken that you might be able to have someone that can act on your behalf and make decisions on your behalf, possibly saving some time and possibly having more abilities to make those types of decisions. So that's the idea here. So obviously there's rules and regulations in terms of who can act in that position because now we have a situation where usually you have this differential in knowledge and that's where the whole profession comes into play because you need to make sure that the professionals involved aren't taking advantage of the difference in knowledge. And so now you've got these rules that are basically applied here. So this contains, the circular 230 contains rules governing the recognition of attorneys. So attorneys can practice and act in this capacity as well. Attorneys are usually much more broad in scope and when they're working in tax, then if they choose to work in taxation, they're usually working in a specialized kind of area oftentimes. Now certified public accountants are usually credentialed more on the accounting. So they come more from an accounting kind of field and then are specializing in of course the tax area. Enrolled agents are usually specified more in tax itself oftentimes than being focused on individual income taxes, possibly or specialized areas. Of course, there's a lot of overlapping on a lot of the stuff. Enrolled retirement plan agents, our main focus isn't really on the retirement plan agents here, but similar kind of situations there. Registered tax return preparers and other persons representing taxpayers before the internal revenue service. Subpart A of this part sets forth rules relating to the authority to practice before the internal revenue service. Do you have the capacity to practice before the IRS on behalf of say a client or taxpayer? Subpart B of this part prescribes the duties and restrictions relating to such practice. So what do you have to do in order to do that, your due diligence and that kind of stuff? Subpart C of this part prescribes the sanctions for violating the regulations. So if you don't do what you're supposed to do, your due diligence and what not, what are the consequences? Subpart D of this part contains rules applicable to disciplinary proceedings and Subpart E of this part contains general provisions relating to the availability of official records. So we'll just go through a couple items here. You can look it up in the IRS website to peruse it in more detail. So practice before the internal revenue service. Comprehends all matters connected with a presentation to the internal revenue service or any of its officers or employees related to a taxpayer's rights, privileges or liabilities, underlaws or regulations administered by the internal revenue service. So such presentations include but are not limited to preparing documents, filing documents, corresponding and communicating with the internal revenue service, rendering written advice with respect to entity, transaction plan or arrangement or other plan or arrangement having a potential for tax avoidance or evasion and presenting a client at conferences, hearings and meetings. So clearly this can be quite advantageous to a client if you're able to correspond basically with the IRS and especially if you're required to go to meetings and whatnot, if you can do that on their behalf then that obviously is a good perk for a client oftentimes. So who may practice? You have attorneys, certified public accountants, enrolled agents, enrolled actuaries and enrolled retirement plan agents. So obviously when you have a tax practice kind of situation or if you're practicing in tax then you want to think about where's your specialization going to be and are you going to be in a situation where you're going to be taking on representation and whatnot and can that be a beneficial thing basically to the practice? Usually again clients would like to have that capacity in the people that we're working with or that could be a valuable resource and give them at least a feeling of ease in case the IRS comes back with questions. So registered tax return preparers. So others, any individual qualified under section 10.5e or section 10.7 is eligible to practice before the IRS to the extent provided in those sections. Government officers and employees and state officers and employees. So these are the people that could practice. There's a wide range of difference between these individuals and some of their specializations. So you're going to want to get into more detail depending on where you fall on the spectrum. So fees in general, a practitioner may not charge an unconscionable fee in connection with any matter before the Internal Revenue Service. Notice what we have here is basically an attempt to have some kind of like self-regulation within the industry because if you have a situation where just one or two people are dishonest within it obviously what they are doing is they're actually profiting off of the goodwill of the industry in and of itself. So it's like having a doctor. If you had a doctor and there's all these good doctors out there but you just have a few doctors out there that are really selling snake oil and ripping off people then they're really making money off of the goodwill of the good doctors. And so that's kind of the problem. So the industry of the doctors have an incentive to not allow the snake oil salesmen to basically do that because then it hurts everybody. So the same kind of thing goes for any kind of profession where there's a big difference between you're selling something that's knowledge-based. That means there's going to be a difference between understanding between yourself and the client and that's where there's always potential for scamming to take place and some kind of rules that hopefully can be somewhat self-input within the profession instead of outside rules from like a legal consequence kind of thing because there's an incentive for the industry itself to self-regulate because of the nature of the situation. So except as provided in paragraph B2, 3 and 4 of this section a practitioner may not charge a contingent fee for services rendered in connection with any matter before the internal revenue service. So contingent fees are kind of an issue oftentimes because if you're saying that my fee is going to be contingent on an outcome then that kind of changes the whole incentive structure. With regards to taxation oftentimes the idea, of course, is that you're there to try to provide the tax returns or create the tax returns as accurately within the law as possible. If you start to create incentive structures where you're going to charge them based on how much money you get out of it which is going to be dependent on a tax refund or something like that then the tax preparer has more incentive to basically be dishonest about their positions that they're taking. They may be more likely to make more extreme positions because it would benefit them possibly more than the client because the client could run into troubles with those positions along the road. You've got this agency issue where the agent's goals would be a little bit different than the client's goals which leads them to have kind of different strategies and whatnot. So contingent fee is any fee that is based in whole or in part on whether or not a position taken on a tax return or other filing avoids challenge by the internal revenue service or is sustained either by the internal revenue service or in litigation. Contingent fee includes a fee that is based on the percentage of the refund reported on return that is based on percentage of the taxes saved or that otherwise depends on the specific result attained. Now note this differs a little bit than what you might expect from other kind of legal situations where you have attorneys that might say that they're going to do the work on contingent fees and you can see why that might be beneficial in certain attorney cases although it still leads to this agency issues where you have lawyers being highly aggressive in situations that are possibly detrimental to the client because they just want to win the case because their fee is contingent on the winning at any cost. But you can see a situation where if someone can't afford a lawyer and you say it's contingent well then you can kind of afford the lawyer because if you win they're taking on a risk if they win they get paid kind of thing. But with taxes it's a little bit different because you can't really say I'm going to do your taxes but only contingent upon whether or not you get a refund because that invites scammers who are going to take very aggressive positions and the whole point is that you're hiring someone that's going to hopefully help you to be in compliance with the law not take aggressive positions because if you take an aggressive position preparing the taxes it's quite possible that you do get a refund in the short run but you could be audited in the next three years and if it was a very extreme position it could be the next five years so after the person got paid from the contingent fee doesn't mean the client is not on the hook the client is on the hook. And so in any case a contingent fee also includes many fee arrangements in which the practitioner will reimburse the client for all or a portion of the client's fee in the event that the position taken on a tax return or other filing is challenged by the internal revenue service or is not sustained whether pursuant to an indemnity agreement a guarantee a recession rights or any other arrangement with a similar effect. So if you set up a situation you're like okay look it's an extreme position we're taking here but if the IRS audits you then we'll reimburse you for it. Notice again the problem here is because then there's an incentive to take these extreme positions and you can imagine a situation like the IRS is set up so that they audit certain returns they audit a percentage of the returns it's kind of similar to a situation where if you're on the road you don't speed because you could speed you won't get caught most of the time but when you do get caught the fee is going to be high enough that it disincentivizes you to speed all of the time same kind of concept with the tax law. Now if you had a practitioner that's just going to play the odds if you're talking about someone that has hundreds of clients then and he just says okay whatever we'll just take really extreme positions and then I'll just pay back I'll just pay off the ones that get hurt. Well because he has hundreds of clients there's only going to be if they just audit randomly there's only going to be a few that actually get caught and so you can see this is a scammy system right so now he's doing scammy stuff here and you can't that's the problem. So return of client records in general a practitioner must at the request of a client properly return any and all records that the client that are necessary for the client to comply with his or her federal tax obligations. So it's kind of you would think this is obvious but you get in these situations especially when there's fees that aren't paid or something like that where the tax preparer doesn't give back and actually says refuses to give back the documents and whatnot and obviously they're not the tax preparer's documents they're only there so that you can prepare the tax returns and so you got to give them back to the client and it seems pretty clear. So the practitioner may retain copies of the records returned to a client so you might make copies in the event that you have to justify you know positions and whatnot but you would give the originals back you would think that's the general process. The existence of a dispute over fees generally does not relieve the practitioner of his or her responsibility under this section. So if you're going to say well if you don't pay my fee I'm not going to give you your documents back. That's just seems childish but you know that happens. Nonetheless if applicable state law allows or permits the retention of a client's records by a practitioner in the case of a dispute over fees for service rendered the practitioner need only return those records that must be attached to the taxpayers return. So the practitioner however must provide the client with reasonable access to review and copy any additional records of the client retained by the practitioner under state law that are necessary for the client to comply with his or her federal tax obligations. So then we have conflicting interests except as provided by paragraph B of this section a practitioner shall not represent a client before the internal revenue service if the representation involves a conflict of interest a conflict of interest exists if now note clearly this should be intuitively kind of makes sense if you're you know if you're going to represent someone saying you are my agent you're acting on my behalf I'm paying you to make decisions for me your job is to make decisions that are best for me in my interest. Now you already have an agency issue no matter what because even though you're kind of on the same side there's always going to be this kind of agency problem where certain decisions are going to benefit the agent differently than the tax preparer we don't want to complicate the situation by having a complete conflict of interest between someone who's supposed to be acting as an agent but have has interest that might be counter to that action. So the representation of one client will be directly adverse to another client. So if you've got two clients obviously it'd be like it'd be like you're trying to you're trying to represent both sides of like a divorce case that doesn't make any sense right you see you can't really I mean if they're at odds you you you know then then you're gonna you have to represent one of the other if it's a mutually exclusive kind of thing you would think so and even if you're saying well that's not true like I have had a lot of people argue they say well that's not true because I can be fair I can be just even though there's two people that have these different interests that may well be but even still you can see why they wouldn't want to do it because you don't look to be fair it doesn't look to be just right you know no matter what you say someone's gonna argue that you're that you're not being fair even if you totally are being fair and so the fact that that appearance is wrong would mean that someone else would be better suited for that position just due to appearance alone you would think so there is a significant risk that the representation of one or more clients will be materially limited by the practitioner's responsibility to another client a former client or third person or by a personal interest of the practitioner or advising and solicitation restrictions a practitioner may not with respect to any internal revenue service matter in any way use a participant or participate in the use of any form of publication public communication or private solicitation advertising containing a false fraudulent or coercive statement or claim so clearly advertising is becoming more and more important the whole goal of the profession is is to maintain credibility so it's kind of similar you can you can compare to other professions like the medical profession which is one of the oldest types of professions and if you're if the medical profession you have someone advertising snake oil that's going to say that's going to cure every known disease to man obviously that advertisement again is if it drives clients is profiting off of the goodwill of not that person but off the profession in general and is therefore dampening the profession in general so that's that's the profession itself has a has has an incentive to stop that that kind of the kind of poaching type of thing that people will do with a false advertising and lies and closer states so so an or misleading or deceptive statements or claims so basically lying kind of an advertising so then the question of course is well what does that mean you know what is that enroll agents enrolled retirement plan agents are registered tax return preparers and describing their professional designation may not utilize the term certified or implied an employee or employee relationship with the internal revenue service examples of acceptable descriptions for enrolled agents are quote enrolled to represent taxpayers before the internal revenue service and quote so obviously that's kind of a long statement but they're trying to be clear that that you're not like employed at the internal revenue set read they're trying to distinguish what the actual rule is quote enrolled to practice before the internal revenue service and quote admitted to practice before the internal revenue service in quote similarly examples of acceptable descriptions for enrolled retirement plan agents are quote enrolled to represent taxpayers before the internal revenue service as a retirement plan agent and enrolled to practice before the internal revenue service as a retirement plan agent an example of the acceptable description for registered tax return preparers is quote designated as a registered tax return preparer by the internal revenue service in quote advertising and solicitation restrictions continuing here so a practitioner may not make directly or indirectly and uninvited written or oral solicitation of employment in matters related to the internal revenue service if the solicitation violates federal or state law or other applicable rule e.g. attorneys are precluded from making a solicitation that is prohibited by contact rules applicable to all attorneys in their states of license so any lawful solicitation made by or on behalf of a practitioner eligible to practice before the internal revenue service must nevertheless clearly identify the solicitation as such and if applicable identify the source of the information used in choosing the recipient standards with respect to tax returns and documents affidavits and other papers so a tax returns a practitioner may not willfully recklessly and through gross incompetence sign a tax return or claim for refund that the practitioner knows or reasonably should know contains positions that a lacks a reasonable basis B is an unreasonable position as described in section 6694A2 of the internal revenue code including the related regulations and other published guidance so if it's clear that you're taking a position on the tax return which a lacks a reasonable basis B is an unreasonable position then of course you shouldn't be taking that position on the tax return now we talked about before that there could be areas that are gray areas we talked about the hierarchy of resources in terms of the internal revenue code and then and then other you know regulations issued by the iris and court cases and the fact there there will be kind of gray area so you might not be completely sure you this doesn't mean that you can say this position I'm not 100% sure that would hold up within an audit that's not the rules we're looking for because there could be positions of course that were not 100% sure of because they're not completely covered by the code but this would be like the terminology the guidance that you're basically looking for here so you can't take a position that once again let's read the whole thing a practitioner may not willfully recklessly or through gross incompetence sign a tax return or claim for refund that the practitioner knows or reasonably should know contains positions that a lacks a reasonable basis B is an unreasonable position as described in section 6 6 9 4 a 2 of the internal revenue code including the related regulations and other publications guidance so C is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of the rules or regulations by the practitioner as described in section 6 6 9 4 of the code included the related regulations so again notice the terminology often present in the law the willful attempt that term willful and these kind of things that are geared towards intent are difficult to kind of define you know or prove like in practice but obviously they're important in the law but notice if it's not exactly a willful you also have the term reckless right so you oftentimes you can say well did they do that did you did you take a position that was clearly wrong okay did you do it recklessly like you just didn't you know you didn't take the time to consider and if you did a reasonable person would have would have made a different decision possibly or willful you did it on purpose that would typically be worse generally right if it's willful you knew the right path you knew the right thing to do and you will fully did otherwise and so I advise a client to take a position on a tax return or claim for refund or prepare a portion of a tax return or claim for refund containing a position that a lacks a reasonable basis B is an unreasonable position as described in section 6 6 9 4 a 2 of the code including the related regulations other publication guidance or C is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of rules or regulations by the practitioner as described in section 6 6 9 4 B 2 of the code