Area I: Acronyms & Notes

I. Circular 230

What Is Circular 230?

Rules governing the authority to practice before the IRS regarding the following:

1. Authority to practice before the IRS
2. Duties and restrictions relating to practice before the IRS
3. Sanctions for violations of the regulations
4. Rules applicable to disciplinary proceedings

Circular 230: Key Prohibitions

1. Endorsing or negotiating refund checks issued to the client
2. Withholding client records at the request of the client
3. Charging unconscionable fees (fees so unfair or one-sided they shock the conscience)

Authority to Practice Before the IRS

1. Attorneys
2. CPAs
   • Must notify the IRS of the identity of any person who, according to their belief, could have records for the client
   • Must not currently be under suspension or disbarment from practice before the IRS
3. Enrolled agents
4. Enrolled actuaries
5. Enrolled retirement plan agents
6. Registered tax return preparers
7. Other persons allowed to represent a taxpayer before the IRS in limited circumstances

Written Tax Advice Under Circular 230

A practitioner who provides written advice (including email) on a federal tax matter must:

1. Base advice on reasonable factual and legal assumptions
2. Reasonably consider all relevant facts and circumstances the practitioner knows or should know
3. Use reasonable efforts to identify and ascertain the relevant facts
4. Not rely on representations, statements, or agreements if reliance would be unreasonable
5. Relate applicable law and authorities to the facts
6. Not take into account the possibility that a return will not be audited

Written Advice: Requirements

1. Base on reasonable factual and legal assumptions (including assumptions as to future events)
2. Reasonably consider all relevant facts and circumstances the practitioner knows or reasonably should know
3. Use reasonable efforts to identify and ascertain the facts relevant to written advice on each federal tax matter
4. Not rely on representations, statements, findings, or agreements if reliance would be unreasonable
5. Relate applicable law and authorities to facts
6. Must not take into account the possibility that a tax return will not be audited

Required Conduct By a Preparer of an Income Tax Return

1. Legally minimize the taxpayer's tax liability and abide by the tax code
2. Make a reasonable effort to obtain necessary information; make inquiries if information appears incorrect or incomplete
3. Recommend a tax return position only if there is a good faith belief it has a realistic possibility of being sustained if challenged
4. Notify the taxpayer if aware of a tax return error
5. Inform the taxpayer on how to correct a failure to file
6. Consider withdrawing from the engagement if the taxpayer does not correct the error or file the return
7. Not inform the IRS without the taxpayer's permission

Fees

• A practitioner may not charge an unconscionable fee in connection with any matter before the IRS
• Any published written fees must be honored for 30 days

Diligence as to Accuracy

1. Preparing, approving, and filing tax returns and other documents related to IRS matters
2. Determining the correctness of oral or written representations made to clients or the Treasury Department
3. Practitioner is presumed to have exercised due diligence when relying on the work product of another person if reasonable care was used

Return of Client Records

1. General Rule: At request of a client; practitioner may keep copies of records returned
2. If state allows: Practitioner may retain records in a fee dispute but must provide the client access to review and copy retained records

Conflict of Interest

May not represent a client before the IRS if it involves a conflict of interest, unless the practitioner believes they can competently represent each client, and each affected client waives the conflict in writing within 30 days.

Other Key Rules

• Prompt Disposition: No practitioner may unreasonably delay any matter before the IRS
• Reasonable Basis: Relying on a reputable accountant or attorney generally gives the taxpayer a reasonable basis
• Assistance from Disbarred/Suspended Persons: No practitioner can knowingly accept help from or assist any person who is disbarred or suspended from practice before the IRS

II. Professional Responsibilities & Tax Return Preparer Penalties

Who Is a Tax Return Preparer?

Any person who:

1. Prepares a tax return for compensation, or
2. Employs others to prepare for compensation

Exclusions: NOT a Tax Return Preparer

• Merely furnishes typing, reproducing, or other mechanical assistance
• Prepares a return for their employer
• Prepares a return for another person as a fiduciary (trustee, executor, etc.)
• Volunteers not compensated
• Those providing only mechanical assistance (data entry)

Representation Rights

• Unlimited: Enrolled agents, CPAs, and attorneys
• Limited: Annual Filing Season Program participants who are PTIN holders but do not have a credential

PTIN (Preparer Tax Identification Number)

• IRS requires all paid tax return preparers to register with the IRS and obtain a PTIN
• An individual who prepares income tax returns for compensation must include their PTIN on returns

Wrongful Disclosure and/or Use of Tax Return Information

Penalty: $250 for each disclosure (max $10,000), and guilty of a misdemeanor, fine not more than $1,000 and/or imprisonment up to 1 year

Disclosure Exceptions

• Disclosures allowed by any provision of the IRC
• Disclosures pursuant to a court order
• Allowable uses
• Disclosures and uses permitted by the U.S. Treasury for quality and peer reviews
• Client consent: Confidential client information may be disclosed to any party if the client consents

Understatement Due to an Unreasonable Position

The penalty can be assessed because of understatement of a taxpayer's liability due to an unreasonable position. A position is unreasonable unless:

1. Reasonable basis for a disclosed position exists, or
2. Substantial authority for the position, regardless of disclosure, exists, or
3. Reasonable to believe that a tax shelter or reportable transaction position would meet the more-likely-than-not standard

Understatement Due to Willful or Reckless Conduct

1. Compensated preparer is liable if understatement is due to negligent or intentional disregard of rules and regulations
2. Willful: Willful attempt to understate tax liability
3. Reckless: Reckless or intentional disregard of tax rules despite the signed declaration on the return

III. Federal Tax Procedures & Taxpayer Penalties

Failure to File Penalty (Tax Delinquency)

• 5% per month (or any part of a month) the return is late, up to a maximum of 25%
• Return more than 60 days late: Minimum penalty is the lesser of $525 or 100% of the tax due (for 2025 returns filed in 2026)
• If no tax is due, there is no penalty
• Failure to file + failure to pay = 4.5% (0.05 − 0.005)
• Penalty for a 2025 partnership or S corporation return filed in 2026: $255/month (max 12 months) × number of partners

Failure to Pay Penalty (Tax Delinquency)

• ½% per month, up to a maximum of 25% of unpaid tax

Penalty for Failure to Make Sufficient Estimated Income Tax Payments

Individual Taxpayers: does NOT apply if:

1. Tax owed is $1,000 or less
2. Payments equal at least 90% of current year tax
3. Payments equal 100% of last year's tax
4. Payments equal 110% of last year's tax (if prior-year AGI exceeded $150k for most filers, or $75k if married filing separately)
5. Payments equal estimated current year tax based on the annualization of income method

Corporations: does NOT apply if: Owes less than $500 AND makes timely payments equal to the lesser of 100% of current year or 100% of prior year tax

Accuracy-Related Penalties

Tax Courts Overview

Appeals Process

1. Revenue Agent Audit: Revenue agent reviews return and proposes adjustments
2. 30-Day Letter: If no agreement, taxpayer receives a copy of the Revenue Agent's Report and a 30-day letter, 30 days to request an administrative appeals conference
3. Office of Appeals: Goal is to resolve controversies without litigation. If agreement reached, taxpayer signs Form 870-D (Waiver of Restrictions on Assessment); interest stops accruing when form is accepted
4. 90-Day Letter (Notice of Deficiency): If no agreement, taxpayer has 90 days to pay the deficiency or file a petition with the U.S. Tax Court

Tax Authority Hierarchy

Primary Authorities (in order):

1. U.S. Constitution (supreme law)
2. Internal Revenue Code (enacted by Congress)
3. Income Tax Treaties
4. U.S. Treasury Regulations (official interpretations of the IRC; force of law)
   • Final regulations > Temporary regulations > Proposed regulations
5. Judicial Decisions (Tax Court Cases)
6. IRS Revenue Rulings and Revenue Procedures

Secondary Authorities:

• Private letter rulings (not binding on others)
• Technical Advice Memoranda (TAMs)
• IRS Agent Reports on Prior Years
• IRS Notices, Announcements, and other administrative pronouncements

Tax Position Standards

Reporting Requirements for Foreign Bank Accounts (FBAR)

A U.S. person must file FBAR if they have a financial interest in, or signature/authority over, a financial account located outside the U.S. and the aggregate exceeds $10,000.

IV. Legal Duties and Responsibilities

Legal Liabilities

• Civil actions for tax malpractice are based on either contract principles or tort principles
• Torts include: Negligence, Constructive fraud (gross negligence), Actual fraud

Elements of Actual Fraud

1. Misrepresentation of material fact
2. Intent to deceive
3. Actual and justifiable reliance by plaintiff
4. Intent to induce the plaintiff's reliance and damages

Elements of Constructive Fraud (Gross Negligence)

1. Misrepresentation of a material fact
2. Defendant acts with gross negligence or recklessly
3. Intent to induce plaintiff's reliance
4. Actual and justifiable reliance by plaintiff
5. Damages

Elements of Common Law Negligence

1. Owed a duty of care
2. Breach of duty
3. Causation (CPA's breach must be the direct cause of the plaintiff's injury)
4. Damages

Penalties for Breach of Contract by an Accountant

Ultramares Rule: Accountant Liability for Negligence

Limits an accountant's liability for negligence. Accountant is liable for negligence only to:

1. Parties in privity: those with a direct contractual relationship with the accountant
2. Intended third-party beneficiaries

Privileges Available to CPAs

• Attorney-Client Privilege
• Tax Practitioner–Taxpayer Privilege
• Work Product Privilege: Protects tangible material produced in preparation for litigation

Regulatory Bodies