 Income Tax 2023-2024 Circular 230 Regulations Governing Practice Before the IRS Internal Revenue Service Get ready and some coffee because we're laying down the facts about Income Tax Preparation 2023-2024 First, a word from our sponsor Yeah, actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us But but that's okay. Whatever because our merchandise is better than their stupid stuff anyways like our trust me I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant Because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com Circular number 230 Regulations Governing Practice Before the Internal Revenue Service can be found at the IRS website irs.gov irs.gov and is a great resources for those working in the field of taxation It being useful to try to distinguish what are the responsibilities of the taxpayer, what are the responsibilities of the tax professional And what are the differences between the preparation of the tax return and representing say a client before the internal revenue service So in general for example, we as taxpayers are primarily responsible for the positions being taken on the tax return even if we hire someone else to do the tax preparation In other words, if I'm a taxpayer, I hire someone else to help prepare the tax return Then I can't say well look I am not responsible for the positions taken on the tax return because I hired a professional to do that Due to the fact that we're basically hiring the other person as an agent and therefore we're still basically primarily responsible for the positions taken The IRS will come back to the taxpayer primarily to question or audit positions on the tax return However of course the taxpayer does have responsibilities as a tax professional to act in a professional manner when filling out the tax return And we also want to distinguish between the preparation of the tax return and representing someone before the internal revenue service So often times we think of those things as kind of different In other words representing someone before the internal revenue service is similar often times to what you might think of as a lawyer doing in other kind of court situations So for example if there's a criminal case or something like that and you hire a lawyer to act on your behalf They might be able to then go to the court for example and basically make decisions on your behalf acting as your agent in that instance In the event of the internal revenue service coming to a client having a question about a position being taken Possibly you can basically hire someone else maybe not necessarily a lawyer in this case but someone who has tax authority and the ability then to represent someone in a similar way as a lawyer But in a more restricted fashion to the internal revenue service in a similar kind of fashion So that's the you know just a general overview will go over some of these items here again You can look this up in more detail at the iris website for the circular number 230 Okay it contains rules governing the recognition of attorneys so these are people that generally have certification or some kind of ability to be able to possibly represent clients before the internal revenue service Now obviously lawyers that's what the law degree is generally granting or one of the major powers of possibly being an attorney However attorneys are very broad in their ability to represent people and therefore they may not always be professionals in the area of taxation Right so then you've got certified public accountants enrolled agents enrolled retirement plan agents registered tax return preparers and other persons presenting taxpayers before the internal revenue service So we have then sub part a of this part sets forth rules relating to the authority to practice before the internal revenue service the IRS Sub part B of this part prescribes the duties and restrictions relating to such practice Sub part C of this part prescribes the sanctions for violating the regulations Obviously the consequences of violation are important to take a look at Sub part D of this part contains the rules applicable to disciplinary proceedings And sub part E of this part contains general provisions relating to the availability of official records Practice before the internal revenue service the IRS comprehends all matters connected with a presentation to the internal revenue service or any of its officers or employees relating to a taxpayers rights privileges or liabilities under laws or regulations administered by the internal revenue service So in essence acting as basically an agent impossibly in a similar fashion as a lawyer might do for a client in other types of situations many people might be more familiar with Sets presentations include but are not limited to preparing documents filing documents corresponding and communicating with the internal revenue service Our rendering written advice with respect to any entity transaction plan or arrangement or other plan or arrangement having a potential for tax avoidance or evasion and representing a client at conferences hearings and meetings So if you ever dealt with a lawyer if you've been in a legal situation that's where they earn a lot of their money It seems to me is basically being able to represent you in certain situations where if you had to show up to all those situations that you're being pulled into You would be very restrained and the ability to just basically make money if you're tied into a certain legal type of situation So having and being able to possibly pay someone else to act and be there and help to represent you in those situations could be useful in possibly making decisions on your behalf Having the ability to and the knowledge of that particular field So who may practice so we have attorneys remembering that if we're thinking about our practice or if we're thinking about basically hiring someone for taxation Then attorneys clearly have the broadest capacity generally to represent people before the government in a wide range of areas including taxation But oftentimes possibly don't have the specialized knowledge in the field of taxation Now some do but that takes a lot more specialized lawyers right they became a lawyer and then they're going to specialize in a particular field of taxation So often times if you're looking at an attorney you're looking at attorneys that are highly specialized in one area basically of expertise is how it often plays out And then you've got certified public public accountants so when you're talking about people that have an accounting background then they might go into taxation So remember attorneys have a general broader kind of legal background who then could go into taxation But they but it's probably more likely that a CPA who has a very more specific background in in accounting and possibly could decide if they want to get into audit or taxation Because those are often related in similar CPA firms more likely possibly to go into taxation the certified public accountants usually have more specialized knowledge in business kind of things And bookkeeping type of things and accounting problems so they might be better or if you are a CPA or you're looking or you're thinking about a client that needs tax help Then the CPA firms are often good with with the accounting side of things so schedule C's S corporations limited liability companies that have a factor to them that includes you know accounting Enrolled agents so enrolled agents often have the capacity to be able to represent people but in a more restricted fashion as do CPAs for the IRS possibly rather than more broadly in legal situations Might not have as much background in like the accounting in terms of the debits and credits and therefore might specialize more in the individual income tax returns or although of course any of these areas they could expand And touch on different areas as well as the general overview enrolled enrolled actuaries which is a special kind of area for actuaries and enrolled retirement plan agents so now we're kind of outside the scope of what we're really focused in on here But that could touch into you know taxation our registered tax return preparers so now we're talking about the people that are preparing the tax returns others any individual qualifying under section 10.5 e 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 now note from a practical standpoint that if you're a CPA firm or you're thinking of of doing tax preparation or if you're looking at someone who's thinking about Hiring someone to help them out with their taxes oftentimes on the lower income side of things they're going to spend a lot more of their time you know preparing The tax returns and there might be a lot of turnover in small and lower income tax preparations like an possibly an H&R block for example might have more turnover To crank out you know taxes might not have as much focus on representing people before the IRS in the event that the IRS comes back with a question right they could I'm not you know but that might be more of the And then higher income people are when you're when you're going into a larger CPA firms then part of the value that they might be providing people is that they are more likely to they're going to be around here when you get audited because remember the audit could happen Like three years after the tax return was prepared and so it would be nice if you can go to the CPA firm that prepared the tax return and say I would like you to help me defend this position before the IRS and they have the knowledge because they At least did the tax return three years ago possibly and can help to represent in that kind of scenario so from a practical standpoint the lower income tax returns might you know CPA firms might have a lot more turnover and might not really be around And focus as much time on practicing before the IRS in a similar fashion as like a lawyer where it would whereas again in the larger firms that might be a large part of the business because there might be a lot of questions about great areas in the code and positions That were taken in specific situations and larger more complex tax returns. Okay, so fees in general a practitioner may not charge an unconscionable fee in connection with any matter before the internal revenue service. So obviously we get into questions about what it means to be an incognito inconscionable fee but unconscionable fee but generally you know a reasonable person what what a reasonable think would be an unconscionable fee 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. Now this could seem strange at first because if you look at some areas of the legal profession You might say hey look they do that all the time in legal they say hey look at you know I'll represent you for free and you'll I'm only going to I'm only going to take money if we win we're going to win millions of dollars and then I and then I take half of it for my fee but if I lose like it But that's not the case with the IRS typically because you could see with other cases lower income individuals would not be able to hire a lawyer if they couldn't hire people in that scenario on a contingent fee basically saying look do you think I have a case lawyer I can't pay you right now because I don't have any money And my possibly my medical bills are out of control but if you win the case then then you'll get the money and everybody because I'll have the money to pay you so that kind of makes sense but when you're representing before the IRS then you don't want to give an incentive that that you're going to take a position that's not proper For as a tax professional right because we want to basically say I'm taking a position that is going to be a legitimate position that's within that's within the law so so and so you don't want to incentivize people to try to inflate refunds to try to get a Commission on the refund particularly on the tax preparation side of things because it leads to scamming meaning if you file a fraudulent tax return it might not get audited for three years later and the person that filed the tax return could be gone by that time So so so again the the idea is that you don't want to so you don't want to allow them to get paid on a contingent fee to try to incentivize them to take really extreme kind of positions In any case 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 challenged by the internal revenue service or is sustained either by the internal revenue service or in litigation So you can see like CPA firms if you didn't allow that CPA firms can also play the statistics right meaning that what would happen is you're going to say hey look the tax law is set up in a similar way as other laws like speeding on the freeway So if you speed on the freeway you're probably not going to get a ticket but the law is such that if you do get a ticket the cost is so high that it's going to prevent you from speeding One ticket is going to say I'm not going to speed at all because the one ticket is pretty high that's how the system kind of works so if you're a rational thinker you can I'm not going to speed because I'm going to get caught one time out of twenty but that one time is going to be hurt really bad And so the tax is the same way you're not going to get audited possibly every time you take a position that is incorrect or an extreme position but when you do the penalties could be high Now if you allow a CPA firm to say collect money based on the contingencies of the positions they take they can just say well yeah I'm just going to get hit you know I have thousands of clients You know some of them ten percent of them are going to get hit for these radical positions that I'm taking but because I have hundreds of clients it's going to be worth it right I'll be able to pay them back the penalties and whatnot and I'll just keep on doing right and that would hurt the profession so the CPA profession the tax profession has an incentive like lawyers to build trust like doctors and so on to build trust Because the more of a scam happens on the professional side of things the less value there is to being in the profession of tax professionals because what those people are doing when they're scamming is they're making money off of the good name of the other people that aren't scamming So a contingent fee includes a fee that is based on a percentage of the refund reported on a return that is based on a percentage of the taxes saved or that otherwise depend on the specific result attained So a contingent fee also includes any fee arrangement in which a practitioner will reimburse the client for all of a portion of the client's fee in the event that a position taken on a tax return or other filing is challenged by the internal revenue service or not sustained Whether pursuant to an indemnity agreement or a guarantee recession rights or any other arrangement so you can see what the IRS is trying to prevent here right because again that the tax firm could say I'm going to take these radical positions which I'm not likely to be able to defend in the event of an audit But I'm going to only get audited like 10% of the clients that I have and I'll just pay those people back I'll just pay them for the position that I lost and the other 90% are going to be fine and I'm going to get contingent I'm going to get a contingent fee based on these high refunds that I got which are going to be higher than what anybody else can get So you can see how they're trying to avoid people playing the numbers like that in basically a dishonest way So return of clients records so in general a practitioner must at the request of a client properly return any and all records of the client that are necessary for the client to comply with his or her tax obligations Now this seems pretty obvious but often times when people get into these disputes about I did the work you didn't pay me then they can get kind of heated at some times and people might say well I'm just not going to give you your records back But the records are theirs right so the W-2s are theirs the 1099s are theirs you can't just keep their stuff right so that they can't do their taxes with somebody else You're going to have to cut the losses and say okay you know we're not going to get paid or whatever and then let them go just let the client go and go your separate ways which is difficult at times But the practitioner may retain copies of the records returned to a client so the original is theirs you might have the copies because of course you might have done services based on their behalf And if there are questions about it you should have the ability to say this is why I did what I did based on the information provided to me here are the copies So the existence of a dispute over fees generally does not relieve the practitioner of his or her responsibility under this section So you can't say I'm going to get mad at you I'm going to hold your documents hostage so that you cannot be in compliance with the IRS that's not professional So nevertheless if applicable state law allows a or permits the retention of a client's records by a practitioner in the case of a dispute over fees for services rendered the practitioner need only return those records that must be attached to the taxpayers return So there could be some conditions on state law this overlap between state law and federal law can be complex sometimes 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 Conflict in interest 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 So in other words obviously if you're representing somebody as an agent before the internal revenue service then you shouldn't be representing someone where their interests are commingled in some way with yours Right because then it's going to look it's going to look like you're not Independent not a lot of people have problems with this kind of thing because they say why don't care what it looks like I'm going to be honest right and it doesn't matter but it does matter because when people Questions somebody about their professionalism whether or not their decision is legitimate or not they're going to question whether or not they have vested interests in the situation and you can't just say well yeah I have a vested interest in the situation but I still was honest You could say that but it's still going to look bad right the better thing to do would be to not be the one you know acting in that situation because the appearance could look bad from a professional standpoint So the representation of one client will be directly adverse to another client so obviously if you're representing two clients on the different sides of a particular dispute you're basically arguing with yourself Now again a lot of people a lot of people have problems with wrapping their mind around this they're like well I can I can be fair on both sides of the dispute and again you probably You might be able to but again the appearance of it could look you could see how you get into sticky situations in terms of the look of it the claims they could have So there is a significant risk that the representation of one or more clients will be materially limited by the practitioner's responsibilities to another client a former client or a third person or by a personal interest of the practitioner So once again there is a significant risk that the representation of one or more clients will be materially limited by the practitioner's representation to another client So again you have two clients that might have different interests the interests of one could cause a problem in the other a former client or third person or by the personal interest of the practitioner Again if you're personally involved in the decision the decision has a personal impact on you it's going to be difficult for people to say well that person's impartial even though you could try to be impartial Okay advertising and solicitation restrictions so our practitioner may not with respect to any internal revenue service matter in any way use or participate in the use of any form of public communication or private solicitation containing a false fraudulent or coercive statement or claim or a misleading or deceptive statement or claim so note that as professionals clearly there's going to be a incentive and hopefully that incentive is self regulated within the profession Just like a law firm just like in the case of medicine when the profession starts to deceive the public then it has a very negative impact on the entire profession again they're making money off of basically the good name of the people that are not doing that And so it becomes really important honesty becomes important because usually in a in a business transaction the dissent that both people have significant knowledge about the transaction Meaning if you're going to buy an apple from a store you can see the apple you can see it's not rotten and in your and you're able to see the price you have everything you need to make the decision When you're talking about medicine law taxation there's an uneven amount of knowledge on one side versus the other because most people don't know a whole lot about the law or taxation or what the proper fees might be in this kind of stuff So that leads to the possibility of someone being able to deceive especially if they've been propped up from the idea of being professional being a profession that's why it's really painful to see doctors or something like that that are lying to people And that kind of thing because they've been propped up as professionals and they should be held to the standard of that because they have the uneven number of amount of information when dealing with people so they have the ability to take advantage Okay enrolled agents enrolled retirement plan agents are registered tax return preparers in describing their professional designation may not utilize the term certified or imply an employer employee relationship with the internal revenue service So examples of acceptable descriptions for enrolled agents are enrolled to represent taxpayers before the internal revenue service enrolled to practice before the internal revenue service and admitted to practice before the internal revenue service Now obviously from a marketing standpoint you know you go like that's not this a lot of wordy wordy stuff there so you can see where that runs into people when they're trying to market themselves they end up sometimes getting in trouble because again the formal language that we're trying to put in places to not be deceptive in nature So 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 quote enrolled to practice before the internal revenue service as a retirement plan agent and quote rolls right off the tongue that's going to pull people in no problem so an acceptable an example of an acceptable description for registered tax returns preparer is quote designated as a registered tax return preparer by the internal revenue service and quote Advertising and solicitation restrictions a practitioner may not make directly or indirectly an 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 or are precluded from making a solicitation that is prohibited by the contact rules applicable to all attorneys in their states of license so clearly this touches in on the kind of interplay between federal law and you know the state laws 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 one a practitioner may not willfully recklessly or through gross incompetence sign a tax return or claim the refund that the practitioner knows or reasonably should know contains a position that a lacks a reasonable basis B is an unreasonable position as described in section 669 for a two of the internal revenue code including related regulations and other published guidance so in other words note that as the tax preparer the question is you know how much responsibility do I have in making sure that everything is exactly correct because we're reliant as the taxpayer on the documentation provided by the client so it's it can't be the case that we we have the responsibility to make sure that that everything that the client tells us is not a lie so then the but obviously if what we're being given is just on an unreasonable position it doesn't it's clearly wrong then as a professional then we should be that's you know where does the line be drawn on that is kind of the question so let's go through it one more time a practitioner may not willfully recklessly or through gross incompetence a sign a tax return or claim a refund that the practitioner knows or reasonably should know contains a position that a lacks reasonable basis so you put a position on there that there's no reasonable basis you're pretty darn sure that if you get audited by you would lose it would be the general idea B is unreasonable position as described in section 669 for a two of the internal revenue code so unreasonable position including the related regulations see 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 669 for B two of the code so obviously if we're willfully attempting to understate the liability then you know we're we're we're succumbing to either pressure from the client to try to understate the liability to pull in more clients are possibly people are trying to basically get paid on the refund which goes back to that commission type of situation so and then advice advise a client to take a position on a tax return or claim the 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 669 for a two of the code including the regulations and other published guidance or see is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard for rules or regulations by the practitioner as described in section 669 for B two of the code including the related regulations and other publication guidance.