Circular 230: Tax Professional Responsibilities PDF

Circula r 230 THE TAX BIBLE General Scope of Circular 230 ❖It defines “practice” and who may practice before the IRS; ❖describes a tax professional’s duties and obligations while practicing before the IRS; ❖authorizes specific sanctions for violations of the duties and obligations; and ❖...

Circula r 230 THE TAX BIBLE General Scope of Circular 230 ❖It defines “practice” and who may practice before the IRS; ❖describes a tax professional’s duties and obligations while practicing before the IRS; ❖authorizes specific sanctions for violations of the duties and obligations; and ❖ describes the procedures that apply to administrative proceedings for discipline. The Five Subparts of the Circular 1. Rules relating to the authority to 230 are: practice before the Internal Revenue Service. 2. The duties and restrictions relating to practice before the IRS. 3. Sanctions for violating the regulations. 4. Rules applicable to disciplinary proceedings. 5. General provisions.  OFFICE OF ❖ The OPR supports the IRS’s strategy PROFESSIONAL to enhance enforcement of the tax RESPONSIBILITY law by ensuring that tax professionals adhere to tax practice standards and follow the laws. ❖ The OPR is the governing body responsible for interpreting and applying the regulations governing practice before the IRS. Section 10.2(4) “Practice before Internal Revenue Service” “Practice before Internal Revenue Service” - is defined as all matters connected with a presentation to the Internal Revenue Service.  “Practice before Internal Revenue Such presentations include, but Service” are not limited to: ❖Preparing documents; ❖Filing documents; ❖Corresponding and communicating with the IRS; ❖Rendering written advice with respect to any entity, transaction, plan, or arrangement, or another plan or arrangement having a potential for tax avoidance or evasion; and ❖Representing a client at conferences, hearings, and meetings. Eligible Practitioners Provided they are not currently disbarred or suspended, the following practitioners may practice before the IRS: ❖ Attorneys ❖ Certified public accountants ❖ Enrolled agents ❖ Enrolled actuaries ❖ Enrolled retirement plan agents ❖ Registered tax return preparers  Review Question #1 1.The regulations found in Circular 230 can be found in? A) 162 of the Internal Revenue Code B) Title 31 Code of Federal Regulations, Subtitle A, Part 10 C) IRS Publication 225 D) IRS Publication 334  Answer #1 1.The regulations found in Circular 230 can be found in? A) 162 of the Internal Revenue Code B) Title 31 Code of Federal Regulations, Subtitle A, Part 10 C) IRS Publication 225 D) IRS Publication 334  Review Question #2 2. Which of the following is false regarding the Office of Professional Responsibility (OPR)? A) It is part of the Internal Revenue Service B) The OPR has the power to administer and enforce the regulations contained in Circular 230 C) The OPR has the power to discipline tax practitioners for Circular 230 violations D) None of these statements are false  Answer #1 2. Which of the following is false regarding the Office of Professional Responsibility (OPR)? A) It is part of the Internal Revenue Service B) The OPR has the power to administer and enforce the regulations contained in Circular 230 C) The OPR has the power to discipline tax practitioners for Circular 230 violations D) None of these statements are false  Section 10.22 “Diligence as to Accuracy” Diligence as to accuracy Section 10.22, “Diligence as to Accuracy,” is one of the 19 sections contained within Circular 230 Subpart B —“Duties and Restrictions Relating to Practice Before the Internal Revenue Service.” Diligence as to accuracy ❖ Although it is not required, it is highly recommended to stay current with the laws. ❖ By completing AFSP, your name will be placed in PTIN registry.  Diligence as to accuracy Circular 230 states the following regarding to diligence as to accuracy in Section 10.22: A. In general, a practitioner must exercise due diligence (1) In preparing or assisting the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to IRS matters;  Diligence as to accuracy (2) In determining the correctness of oral or written representations made by the practitioner to: ⮚ the Department of the Treasury; and ⮚ clients with reference to any matter administered by the Internal Revenue Service. Diligence as to accuracy Circular 230 states the following regarding to diligence as to accuracy in Section 10.22: B. Reliance on others. “Except as provided in §§ 10.34 and 10.37, a practitioner will be presumed to have exercised due diligence for purposes of this section if ❖ the practitioner relies on the work product of another person and ❖ the practitioner used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person.” Diligence as to accuracy Tax practitioners are expected to do his or her best to make sure that they provide correct information to both the IRS and clients.  Diligence as to accuracy For example, a practitioner who relied on information provided to her by an enrolled agent whom she knew to be in good standing would be seen to have used reasonable care. However, if she relied on information received by hearsay from her cousin’s friend—a person with no known tax credential or experience. She would not follow diligence as to accuracy. Practitioner Sanctio Title Censured by consent for n admitted violation of § 10.22(a)(1) (Revs. 2005 and 2008) (requiring practitioner to exercise due CP diligence in preparing, and filing of, tax returns for the tax A years 2006, 2007, 2008, and 2009) Disqualified by consent for violations under 31 C.F.R. § 10.22(a)(1–3) (2007) (failed to exercise due diligence in preparation of documents, failed to exercise due diligence in determining the correctness of written representation made Apprais to the Department of Treasury, and failed to exercise due er diligence in determining the correctness of written representations made to clients with reference to matters administered by the IRS). Suspended by consent under 31 C.F.R. §§ 10.51(a)(6) and Enrolled 10.22(a)(2). Agent  Review Question #1 1.Terrance is a Circular 230 tax practitioner who is representing his client Mike during an audit of his last two tax returns. The IRS revenue agent has noted that Mike's Schedule C for his roofing business claims what seems to be an excessive amount of deductions for expenses each year. This could be caused by a few circumstances, but which one of the following could represent a serious violation of Terrance's due diligence requirements in preparing the returns?  Review Question Choices A. The expenses all appeared valid because George provided detailed receipts and logbooks to support his claim. B. In both years, Henry prepared the returns by hand and accidentally transcribed some of the numbers incorrectly on to Schedule C. C. Henry used the dollar amounts that George provided verbally for each expense, even though there was no supporting evidence for any of them. D. Henry prepared the returns using supporting material provided by George that was actually false, but Henry had no reason to suspect or know it was false.  Answer A. The expenses all appeared valid because George provided detailed receipts and logbooks to support his claim. B. In both years, Henry prepared the returns by hand and accidentally transcribed some of the numbers incorrectly on to Schedule C. C. Henry used the dollar amounts that George provided verbally for each expense, even though there was no supporting evidence for any of them. D. Henry prepared the returns using supporting material provided by George that was actually false, but Henry had no reason to suspect or know it was false.  Review Question #2 2. Lois is an EA who is preparing a tax return that includes Schedule C for a small craft-making business. The client has gathered about a dozen receipts for the cost of repairs that were made on his equipment during the year and that he feels should be tax-deductible. He has added the amounts together by hand and arrived at a total to tell Lois. What due diligence requirements, if any, does Lois have in this case before entering an amount for Repairs on Schedule C?  Review Question Choices A. She should ensure that all of the receipts are both valid and deductible, and then total them by calculator. B. None. She can take the client's word for the total amount. C. She should ask the client if he is confident that he added correctly. D. She should use a calculator to add the receipts together in case the client made a mistake.  Answer A. She should ensure that all of the receipts are both valid and deductible, and then total them by calculator. B. None. She can take the client's word for the total amount. C. She should ask the client if he is confident that he added correctly. D. She should use a calculator to add the receipts together in case the client made a mistake.  Section 10.51 “Incompetence & Disreputable Conduct”. Section 10.51 Incompetence & Disreputable Conduct The tax professional is responsible for ensuring the timely filing and payment of personal income tax returns and the tax returns for any entity over which the tax professional has, or shares, control. The willful evasion of the assessment or payment of tax also violates Circular 230 regulations (Treasury Circular 230, §10.51(a)(6)).  Section 10.51 Incompetence & Disreputable Conduct (A) Incompetence and disreputable conduct. Incompetence and disreputable conduct for which a practitioner may be sanctioned under § 10.50 includes, but is not limited to: 1. Conviction of any criminal offense under federal tax laws. 2. Conviction of any criminal offense involving dishonesty or breach of trust. 3. Conviction of any felony under federal or state law for which the conduct involved renders the practitioner unfit to practice before the IRS. Section 10.51 Incompetence & Disreputable Conduct 4. Giving false or misleading information or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee. 5. Solicitation of employment as prohibited under section §10.30, the use of false or misleading representations with intent to deceive a client or prospective client to gain employment or insinuate that the practitioner can obtain special consideration with the IRS, or any officer or employee. Section 10.51 Incompetence & Disreputable Conduct 6. Willfully failing to make a federal tax return in violation of the federal tax laws or willfully evading or attempting to evade any assessment or payment of any federal tax. 7. Willfully assisting, counseling, and encouraging a client or prospective client to violate any federal tax law, or knowingly counseling or suggesting to a client an illegal plan to evade paying federal tax. Section 10.51 Incompetence & Disreputable Conduct 8. Misappropriation of, or failure to remit properly or promptly, funds received from a client for the payment of taxes or other obligations due to the United States. 9. Directly or indirectly attempting to influence or offer or agree to attempt to influence the official action of any officer or employee of the IRS using threats, false accusations, duress, or coercion, or any special inducement or promise of advantage or by bestowing of any gift, favor, or item of value. Section 10.51 Incompetence & Disreputable Conduct 10. Disbarment or suspension from practice as an attorney, certified public accountant, public accountant, or actuary by any duly constituted authority of any state, territory, or possession of the United States, including a commonwealth or the District of Columbia, any federal court of record, or any federal agency, body, or board. 11. Knowingly aiding and abetting another person to practice before the IRS during a suspension, disbarment, or ineligibility of such other individuals. Section 10.51 Incompetence & Disreputable Conduct 12. Contemptuous conduct in connection with practice before the IRS, including the use of abusive language, making false accusations or statements, knowing them to be false, or circulating or publishing malicious or libelous matter. 13. Giving a false opinion, knowingly recklessly or through gross incompetence including an opinion that is intentionally or recklessly misleading or engaging in a pattern of providing incompetent opinions on questions arising from federal tax laws Section 10.51 Incompetence & Disreputable Conduct 14. Willfully failing to sign a tax return prepared by the practitioner when the practitioner’s signature is required by federal tax laws unless the failure is due to reasonable cause and not due to neglect. 15. Willfully disclosing or otherwise using a tax return or tax return information in a manner not authorized by the IRC, contrary to the order of a court of competent jurisdiction or contrary to the order of an administrative law judge in a proceeding instituted under §10.60. Section 10.51 Incompetence & Disreputable Conduct 16. Willfully failing to file on magnetic or other electronic media a tax return prepared by the practitioner when the practitioner is required to do so by federal tax laws unless the failure is due to reasonable cause and not due to neglect. 17. Willfully preparing all or substantially all, or signing, a tax return or claim for refund when the practitioner does not possess a current or otherwise valid PTIN or other prescribed identifying number. 18. Willfully representing a taxpayer before an officer or employee of the IRS unless the practitioner is authorized to do so. Section 10.34 “Standards with the respect to Tax Returns. Documents, Affidavit and Other  Section 10.34 Standards with the respect. to Tax Returns. Documents, Affidavit and As stated in §10.34(b) regarding the submission of Other Paper any documents that may be requested by the IRS or OPR, the tax professional cannot advise a client to submit any document to the IRS that falls under one or both of the following two categories: ❑ Frivolous. ❑ Contains or omits information in a manner demonstrating an intentional disregard of a rule or regulation.  Due Diligence & The Earned Income Tax Credit. Due Diligence & The Earned Income Tax Credit From Circular 230, due diligence requirements extend to all parts of the preparation of a tax return by a paid tax preparer. However, there are some areas where tax practitioners need to be particularly vigilant due to the complexity of the regulations and the opportunity for fraudulent claims by a taxpayer. This is particularly so in the case of the earned income tax credit (EITC), where the IRS has recently passed new regulations that increase the due diligence requirements of tax practitioners.  Due Diligence & The Earned Income Tax Credit ❖ IRS estimates that between 21% to 26% of EITC claims are paid in error. ❖ The IRS can assess a penalty against a paid preparer who does not submit the form with returns or claims for refund when required. ❖ The penalty for a return or claim filed in 2021 is $540 per tax benefit claimed, and up to $2,160 per return. ❖ The form must be submitted to the IRS electronically or attached to each return mailed to the IRS.  Due Diligence & The Earned Income. Tax Credit The IRS reports that about 60% of EITC errors fall into three key categories: 1.Claiming EIC for a child who does not meet the qualifying child requirements. 2. Filing as single or head of household when married. 3. Incorrectly reporting income or expenses.  Requirement to Lodge form 8867 with. Tax Return The due diligence regulations require a paid preparer to complete Form 8867. Paid Preparer's Due Diligence Checklist The purpose of the form is to ensure that the practitioner has considered all applicable eligibility criteria for certain tax credits for each return prepared, such as: (1)The earned income tax credit (EITC), (2)Child tax credit (CTC), (3)Additional child tax credit (ACTC). Due Diligence Requirements There are four due diligence requirements for tax practitioners who prepare EITC claims. Practitioners must: 1. Meet the knowledge requirement by interviewing the taxpayer, asking adequate questions, contemporaneously documenting the questions and the taxpayer’s responses on the return or in your notes.. Due Diligence Requirements 2. Complete Form 8867 truthfully and accurately and complete actions described on Form 8867 for any applicable credit(s) claimed and HOH filing status if claimed. 3. Submit Form 8867 in the manner required. 4. Keep all five of the following records for 3 years from the latest of the dates specified later. Consequences of Filing an Incorrect EITC Claim Consequence of Filing an Incorrect EITC Claim PREPARER. A $560 penalty (per refundable credit) for the tax year 2023 for each failure to comply with EIC due diligence requirements for returns filed. The penalty is $1,000 or 50% of the income derived by the tax preparer with the respect to the return or claim for a refund Consequence of Filing an Incorrect EITC Claim They can also face:. Loss of their tax preparer designation. Suspension or expulsion from the IRS e-file program. Other disciplinary action by the IRS Office of Professional Responsibility (OPR). Injunctions barring the preparer from preparing tax returns Consequence of Filing an Incorrect EITC Claim. FIRM IRS can also assess due diligence penalties against an employer if an employee fails to comply with the due diligence requirements. (See Treasury Regulation section 1.6695-2 Consequence of Filing an Incorrect EITC Claim FIRM. The firm failed to establish reasonable and appropriate procedures to ensure compliance with the due diligence requirements; or The firm establishes appropriate compliance procedures but disregards those procedures through willfulness, recklessness, or gross indifference, including ignoring facts that would lead a person of reasonable prudence and competence to investigate or figure out the employee was not complying.  Review Question #1 When Tony was reviewing the filing cabinet needs for his tax practice, he noted that he is required to keep records relating to claims made on behalf of his clients for the earned income tax credit. For how long must he keep these records for each client? A. Until such time as the tax return is processed and the taxpayer's refund has been paid B. For three years from the later the due date of the return or the date the client signed the return C. For one year from the date the client signed the return D. For seven years from the later the due date of the return or the date the  Answer #1 When Tony was reviewing the filing cabinet needs for his tax practice, he noted that he is required to keep records relating to claims made on behalf of his clients for the earned income tax credit. For how long must he keep these records for each client? A. Until such time as the tax return is processed and the taxpayer's refund has been paid B. For three years from the later the due date of the return or the date the client signed the return C. For one year from the date the client signed the return D. For seven years from the later the due date of the return or the date the  Review Question #2 While Sam was preparing a tax return for a new client, the client mentioned in passing that his two children were currently with his ex-wife. Later in the interview, the client requested Pat to claim the earned income tax credit for both children. Given that the residency test must be met prior to an EITC claim, what actions should Pat take in response to this request? A. She should simply accept the client's word and prepare the EITC claim. B. She should refuse to complete the tax return because the client is attempting to make a fraudulent claim. C. She should ask the client a series of questions to find out who has custody of the children and with whom they live. She should document both her questions and the client's answers. D. She should grant the client's request because he is claiming the children as  Answer #2 While Sam was preparing a tax return for a new client, the client mentioned in passing that his two children were currently with his ex-wife. Later in the interview, the client requested Pat to claim the earned income tax credit for both children. Given that the residency test must be met prior to an EITC claim, what actions should Pat take in response to this request? A. She should simply accept the client's word and prepare the EITC claim. B. She should refuse to complete the tax return because the client is attempting to make a fraudulent claim. C. She should ask the client a series of questions to find out who has custody of the children and with whom they live. She should document both her questions and the client's answers. D. She should grant the client's request because he is claiming the children as PENALTIES  For each failure to comply with IRC 6695(c) regarding furnishing an identifying number (PTIN) on a return is $55 for each return. The maximum penalty imposed will not exceed $28,000. PREPARER’S FAILURE TO FURNISH IDENTIFYING NUMBER PREPARER’S The penalty is $55 for each failure to FAILURE TO comply with furnishing a copy of a client’s tax return to the taxpayer. IRC FURNISH A 6695(a) COPY OF TAX The penalty imposed will not exceed RETURNS $28,000. TO CLIENT PREPARER’S FRAUD AND FALSE STATEMENTS Guilty of a felony, a fine of not more than $100,000 ($500,000 for corporations) Must pay for prosecution cost No more than 3 years in prison  For each failure to comply with IRC 6695(e) regarding failure of a tax preparer to include correct information on a return is $55 for each return. The maximum penalty imposed will not exceed $28,000. PREPARER’S FAILURE TO FILE CORRECT INFORMATION PREPARER’S The penalty is $55 for each failure to comply with retaining a copy of a FAILURE TO client’s tax return. 6695(b) RETAIN A COPY OF TAX The penalty imposed will not exceed $28,000. RETURNS  PREPARER’S FRAUDULENT RETURNS, STATEMENTS, OR OTHER DOCUMENTS ◼ If Guilty, a fine not exceeding $10,000 ($50,000 for corporations) ◼ 1 year max in prison Preparer’s disclosure or use of Client’s Tax Return If guilty, a fine not exceeding $1,000 and no more than 1 year in prison