Regulations Governing Practice Before the Internal Revenue Service (IRS)

Representing taxpayers before the U.S. Internal Revenue Service (IRS) is not a task anyone can undertake. The IRS strictly governs who can practice before it through a set of regulations known as Circular 230. These regulations are in place to protect taxpayers' rights and ensure the integrity of the tax system.

Who Can Practice Before the IRS:

According to Circular 230, the following individuals are authorized to practice before the IRS:

Attorneys: Must be duly licensed as an attorney in good standing in any state.
Certified Public Accountants (CPAs): Must hold a valid and active CPA license.
Enrolled Agents: These are individuals who have either passed the IRS's Special Enrollment Examination or have gained enrollment through prior service with the IRS. They have broad authority to represent taxpayers on all matters under IRS jurisdiction.
Enrolled Actuaries: Their practice is limited to specific pension and retirement plan matters.
Enrolled Retirement Plan Agents: Their practice is limited to specific retirement plan matters.

Duties and Ethical Standards for Practitioners:

Tax practitioners have a responsibility to adhere to IRS regulations and maintain high ethical standards. Key duties and ethical standards include:

Due Diligence: Practitioners must exercise due diligence in preparing, assisting in preparing, approving, and filing tax returns, documents, and other papers relating to IRS matters.
Confidentiality: Client tax information must be kept confidential, except as authorized by law.
Conflict of Interest: Practitioners must avoid situations where their interests conflict with those of their clients.
Fees: Fees charged must be reasonable and not unconscionable. Contingent fees are prohibited in certain circumstances.
Obligations to the IRS: Practitioners must comply with requests from the IRS and must not engage in any unlawful conduct.
Advertising and Solicitation: Advertising must not be false, misleading, or deceptive.

Applying the Regulations:

Consider the scenario of Minjun Kim, who recently returned from studying in the U.S. and has significant income from U.S. stock investments. He hires Sunyoung Park, a licensed CPA, to handle his complex tax filings. As a CPA, Sunyoung Park is obligated to diligently review all of Minjun's financial information and accurately apply relevant tax laws when preparing his tax return. Furthermore, she must maintain the confidentiality of Minjun's personal financial details. If Sunyoung Park intentionally violates tax law, causing detriment to Minjun, she could face disciplinary actions under Circular 230.

Tax Return Preparer

A tax return preparer is any person who prepares for compensation, or who employs one or more persons to prepare for compensation,¹ any tax return required under the Internal Revenue Code or any claim for refund of tax imposed by the Internal Revenue Code.² This is a broader category than those authorized to practice before the IRS and includes individuals who may not hold specific credentials. However, all tax return preparers are responsible for preparing accurate returns in accordance with tax laws.

Situations Resulting in Tax Return Preparer Penalties:

Tax return preparers may face penalties for various infractions, including:

Understatement of Taxpayer's Liability Due to an Unreasonable Position: Penalties may apply if there is an understatement of tax due to a position for which there was not substantial authority or a reasonable basis (depending on disclosure).
Willful or Reckless Conduct: Penalties can be imposed for intentionally disregarding tax rules or recklessly disregarding information provided by the taxpayer.
Failure to Sign Return: Preparers are generally required to sign tax returns they prepare.
Failure to Furnish Copy to Taxpayer: Preparers must provide a copy of the return to the taxpayer.
Failure to Retain Copy or List: Preparers must keep a copy of the returns they prepared or a list of taxpayers for whom returns were prepared for a specified period.
Endorsement or Negotiation of Taxpayer's Refund Check: Preparers are prohibited from endorsing or negotiating a taxpayer's refund check.
Improper Disclosure or Use of Information: Penalties can apply for the unauthorized disclosure or use of taxpayer information.

Applying Potential Tax Return Preparer Penalties:

Consider the case of Soohyun Lee, who, lacking tax knowledge, used an online tax preparation service. The preparer, without a proper understanding of tax regulations, incorrectly overstated deductions, leading to an underpayment of Soohyun's income tax. In this situation, the tax return preparer could face penalties for the negligent or intentional disregard of rules or regulations resulting in the understatement of tax liability. Additionally, if the tax preparation service shared Soohyun's personal information without her consent, they could face further penalties for the improper use of taxpayer information.

Conclusion

In the AICPA exam, the Ethics section goes beyond mere memorization, emphasizing the ability to apply principles to real-world scenarios. Understanding the regulations governing practice before the IRS and tax return preparer penalties is a crucial step in becoming an ethical and competent professional. By familiarizing yourself with these rules through various examples, you will be well-prepared to uphold taxpayer rights and the integrity of the tax system.

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