IRS Rejects Proposed ABA Standards for Preparers Under Circular 230

By Diane Freda

Several modifications that the American Bar Association Section of Taxation sought from the Internal Revenue Service in relation to the reporting of uncertain tax positions were not adopted in final rules under Circular 230, practitioners told BNA June 1.

The ABA tax section had recommended that the proposed amendment to Section 10.34 of Circular 230 say that disciplinary sanctions would not be imposed for undisclosed “non-tax shelter” return positions that meet the “realistic possibility of success on the merits” standard, and for disclosed positions that meet the “reasonable basis” standard.

Instead, in final rules issued June 1, IRS maintained the standards outlined in the proposed rules, and adopted the civil penalty standards in tax code Section 6694(a) requiring a substantial authority standard and reasonable basis with adequate disclosure.

IRS and Treasury concluded that the professional standards in Section 10.34 should be consistent with the civil penalty standards in Section 6694 for return preparers.

“The Treasury Department and IRS continue to believe that a practitioner also acts unethically in violating the civil penalty standards under Section 6694(a) (including when there is a reasonable basis for a position on a return or claim for refund but the practitioner does not adequately disclose the position within the meaning of Section 6694 …through willfull, reckless, or grossly incompetent conduct,” IRS said.

Unification of Standards

Some members of the tax section said this wording is confusing.

“A significant concern, particularly with the cross-reference in section 10.34 to the definition of an ‘unreasonable position' in Code section 6694, is the complexity of what should be an easy to understand practice rule. While I don't think this will lead to a large increase in sanctions cases under Circular 230, it will cause considerable hand wringing for practitioners as they struggle to parse the rules to understand what standard applies,” Michael Desmond, partner with Bingham McCutchen said June 1.

Desmond said that exercise can be exceedingly complicated particularly when, for example, the largely undefined concept of a ‘tax shelter' is involved.

“If the standard is supposed to be reasonable basis then they don't need the reference to an unreasonable position in Section 6694,” Chris Rizek, a partner with Caplin & Drysdale, told BNA June 1. “That language merited some clarification.”

Rizek also pointed to references to the federally authorized tax practitioner privilege contained in the final rules under code Section 7525. IRS and Treasury concluded that the privilege generally does not apply to communications between a taxpayer and a registered preparer because the advice a registered tax preparer gives is “ordinarily intended to be reflected on a tax return and is not intended to be confidential or privileged.”

“That's their position, but we'll see if it works out that way and if it will withstand judicial scrutiny,” Rizek said.

No Registered Preparers Yet

For the American Institute of Certified Public Accountants, a new disclaimer required to accompany any print, television, or radio advertising by registered tax return preparers is significant.

In Notice 2011-45, IRS said that it has set up all the procedures for individuals to become registered tax preparers under a new IRS oversight regime that includes registering for a PTIN, passing a competency test in some cases, and undergoing suitability checks. However, the designation of registered tax preparer will not exist until the IRS implements the competency test, expected some time in the fall of 2011.

Even when preparers do become registered tax preparers, they will be required to display on any advertising that “ The IRS does not endorse any particular individual tax return preparer,” and will direct the taxpayer back to the IRS website.

For the National Association of Enrolled Agents, the big issue had been limited practice, which allows tax preparers without the credentials afforded to certified public accountants, attorneys, and enrolled agents to represent clients before the IRS in a limited way. The final rule does not give them all the rights that licensed practitioners and enrolled agents have always had under Circular 230, but it does allow them to represent clients in a limited way solely for the returns they prepare.

The complete text of this article can be found in the BNA Daily Tax Report, June 2, 2011.