RECOMMENDATIONS FOR IRS TAX RETURN PREPARERS
All tax planning is not to be condemned. “It is no surprise that a knowledgeable tax attorney would use numerous legal entities to accomplish different objectives. This does not make them illegitimate. Unfortunately such ‘maneuvering’ is apparently encouraged by our present tax laws and codes.” 
CIRCULAR 230 – Cir. 230 provides the regulations governing the practice of federally authorized tax practitioners before the IRS, authorizing specific sanctions for violations of the duties and obligations; and, describing the procedures that apply to administrative proceedings for discipline.
“Practice before the IRS” generally includes all matters connected with a presentation to the IRS, or any of its officers or employees, relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the IRS. Such presentations often include preparing tax and information returns; filing documents; corresponding and communicating with the IRS; rendering oral and 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 in front of an IRS representative at conferences, hearings and meetings. A copy of Cir. 230 is available at www.irs.gov 
OFFICE OF PROFESSIONAL RESPONSIBILITY – The Mission of the IRS Office of Professional Responsibility (OPR), formerly known as the Director of Practice, is to “Interpret and apply the standards of practice for tax professionals in a fair and equitable manner.” OPR supports the IRS’s strategy to enhance enforcement of the tax law by ensuring that tax professionals adhere to tax practice standards and follow the law by, in part, enforcing the regulations governing the practice of federally authorized tax practitioners, generally defined to include attorneys, certified public accountants (CPAs), enrolled agents, enrolled actuaries and appraisers before the IRS as set forth in Treasury Department Circular No. 230 (Cir. 230; Rev. 06/2014). 
OPR has the authority to impose suspension, disbarment and/or significant monetary fines on federally authorized tax practitioners, firms and other entities. In addition, as part of any OPR investigation they may contact current and former clients. OPR has exclusive responsibility for practitioner conduct and discipline, including instituting disciplinary proceedings and pursuing sanctions, functioning independently of the Title 26 enforcement components of the IRS.
The IRS Internal Revenue Manual (IRM) indicates that misconduct under Cir. 230 which could warrant an OPR investigation include the following:
- Failure to exercise due diligence – § 10.22(a).
- Conviction of any criminal offense under the revenue laws of the United States – § 10.51(a)(1).
- Conviction of any criminal offense involving dishonesty or breach of trust – § 10.51(a)(2).
- Conviction of any felony under Federal or State law for which the conduct involved renders the practitioner unfit to practice before the IRS – § 10.51(a)(3).
- Giving false or misleading information or participating in any way in the giving of false or misleading information in connection with any matter pending or likely to be pending before the IRS, knowing the information to be false or misleading -§ 10.51(a)(4).
- Willfully failing to make a Federal tax return in violation of the Federal tax laws, or willfully evading, attempting to evade, or participating in anyway in evading or attempting to evade any assessment or payment of any Federal tax – § 10.51(a)(6).
- Disbarment or suspension from practice as an attorney, certified public accountant, public accountant, or actuary – § 10.51(a)(10).
- Giving a false opinion, knowingly, recklessly, or through gross incompetence, including an opinion which is intentionally or recklessly misleading, or engaging in a pattern of providing incompetent opinions on questions arising under the Federal tax laws – § 10.51(a)(13).
- 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 malicious or libelous matter – § 10.51(a)(12).
- Assertion of penalties under Internal Revenue Code (IRC) §§ 6694, 6695, 6700 and 6701.
REFERRALS TO OPR – Section 10.53 of Cir. 230 requires IRS employees to make a written report to OPR when there is reason to believe that a tax practitioner has somehow violated Cir. 230. When disciplinary action is deemed appropriate, the report will include sufficient detail, documentation, and exhibits, to substantiate the character and extent of the violation. IRS examiners are cautioned to exercise discretion in making referrals of asserted IRC 6694(a) (Understatement of liability due to an unreasonable position) penalties to OPR for attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers. However, referrals to OPR can arise when the following penalties are asserted against a practitioner:
- Referrals of asserted IRC 6694(a) penalties to OPR should be based on a pattern of failing to meet the required penalty standards under IRC 6694(a).
- Asserted preparer penalties under IRC 6694(b) (e.g., a willful attempt to understate the liability for tax) for attorneys, CPAs, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and appraisers are mandatory referrals to OPR.
- For IRC 6695(a) through (g)(generally the (a) failure to furnish copy of return; (b) Failure to sign return; (d) failure to keep a copy of tax return or list of taxpayer), examiners should exercise discretion in making referrals to OPR.
- Anytime a penalty for promoting abusive tax shelters under IRC 6700 is assessed.
- Anytime injunctive action under IRC 7407 (injunction of a tax return preparer) or IRC 7408 (Injunction of specified conduct relating to tax shelters and reportable transaction) is pursued.
Referrals are mandatory for violations of IRC §§ 6694(b), 6700, 6701(a), 7407 and 7408. Referrals are discretionary for violations of IRC §§ 6694(a), 6695 and 6702 (frivolous tax returns or submissions). However, the referral should be anticipated if any of the above penalties appear to become a pattern across taxpayers, tax issues or tax years since this could indicate reckless conduct or lack of competence.
Other circumstances that might anticipate a referral to OPR include inaccurate or unreasonable entries/omissions on tax returns, financial statements and other documents; a lack of due diligence exercised by the practitioner; a willful attempt by the practitioner to evade the payment/assessment of any Federal tax; cashing, diverting or splitting a taxpayer’s refund by any means, electronic or otherwise; “Patterns” of misconduct involving multiple years, multiple clients or inappropriate/unprofessional conduct demonstrated to multiple IRS employees; potential conflict of interest situations, such as representation of both spouses who have a joint liability or when representation is affected by competing interests of the practitioner; and any willful violation of Cir. 230.
OPR may, after notice and an opportunity for a conference, negotiate an appropriate level of discipline with a practitioner; or, initiate an administrative proceeding to Censure (a public reprimand), Suspend (one to fifty-nine months), or Disbar (five years) the practitioner. OPR may also, after notice and an opportunity for a conference, disqualify an appraiser from further submissions in connection with tax matters.
OPR may also, after notice and an opportunity for a conference, propose a monetary penalty on any practitioner who engages in conduct subject to sanction. The monetary penalty may be proposed against the individual or a firm, or both, and can be in addition to any Censure, Suspension or Disbarment. The penalty may be up to the gross income derived or to be derived from the conduct giving rise to the penalty. The OPR web site also has a searchable database containing the names of all the individuals currently under suspension or disbarment.
NOTIFICATION OF STATE LICENSING AUTHORITIES – Many States have statutes and regulations requiring the notification of the State licensing authority in the event a practitioner receives notification of a practitioner penalty or an inquiry investigation from an agency such as the OPR. A failure to timely notify the licensing authority within the required time period (typically 30 days from receipt of knowledge of the notification or inquiry) could result in a separate, additional violation.
An example of a State statute requiring notification of the State licensing authority is the requirement in California Business & Professions Code § 5063 for California Certified Public Accountants to notify the State Board of Accountancy of a practitioner penalty. In part, California Business & Professions Code § 5063 provides:
“California Business & Professions Code § 5063.
(a) A licensee shall report to the board in writing of the occurrence of any of the following events occurring on or after January 1, 1997, within 30 days of the date the licensee has knowledge of these events: . . . (3) The cancellation, revocation, or suspension of the right to practice as a certified public accountant or a public accountant before any governmental body or agency.
(c) A licensee shall report to the board in writing, within 30 days of the entry of the judgment, any judgment entered on or after January 1, 2003, against the licensee in any civil action alleging any of the following:….(5) Any actionable conduct by the licensee in the practice of public accountancy, the performance of bookkeeping operations, or other professional practice.
(d) The report required by subdivisions (a), (b), and (c) shall be signed by the licensee and set forth the facts which constitute the reportable event. If the reportable event involves the action of an administrative agency or court, then the report shall set forth the title of the matter, court or agency name, docket number, and dates of occurrence of the reportable event.
(f) Nothing in this section shall impose a duty upon any licensee to report to the board the occurrence of any of the events set forth in subdivision (a), (b), or (c) either by or against any other licensee.”
RECOMMENDATIONS FOR RETURN PREPARERS
Practitioners should routinely review their own procedures for gathering and documenting the information they process on behalf of taxpayers. Preparers should be documenting or know how they have arrived at reporting positions for transactions that might not meet the appropriate practice standard. Further, the preparer or their firm must have review procedures and these procedures must be followed.
Preparer penalty issues will most often arise during or at the conclusion of an IRS examination of the taxpayers return when some or all of an undisclosed or improperly disclosed position has been disallowed. Is it reasonable to believe that an agent, having disallowed a questionable position, will be convinced there was the requisite “substantial authority” for the undisclosed position? Is it reasonable to believe that an agent, having disallowed a questionable position, will be convinced there was a “reasonable basis” for the disclosed position? Also, most return positions are comprised of several sub-positions. If each sub-position has a 40% chance of success on the merits, the primary position might not have a similar overall 40% chance of success on the merits (40% of 40% of 40% is not 40% overall).
Although the preparer penalty regime is mostly intended for the “bad actors,” it can be applied to any preparer. The combination of a somewhat inattentive preparer and a somewhat aggressive government agent could result in preparer penalties being assessed in many otherwise unintentional situations.
- Your Client is Not Your Friend. If you need a friend, get a dog!
- Think “Substantial Authority.” Penalties generally require a “substantial authority” standard, or “reasonable basis” plus disclosure. Take the time to analyze relevant facts and authorities before making the determination to disclose, or not.
- Think Disclosure. Appropriate disclosures within the return can generally avoid penalties, for the taxpayer and the preparer. All disclosures should be in writing. Review Rev. Proc. 2014–15 regarding disclosure within a taxpayers return and the appropriate form of disclosure. Signing Preparer – Disclosure on Forms 8275 or 8275-R, as appropriate, filed with the return. The “signing preparer” is generally the person who prepares the most entries on the return. Non-Signing Preparer – “Disclosure” is appropriately advising the client or the preparer. There can be more than one preparer for each return.
- Tax Advice is Sufficient for IRC §6694 Penalties to Apply. It is not necessary to see the return to be the preparer. A person who renders advice which is directly relevant to the determination of the existence, characterization, or amount of an entry on a return or claim for refund, will be regarded as having prepared that entry. Whether a schedule, entry, or other portion of a return or claim for refund is a substantial portion is determined by comparing the length and complexity of, and the tax liability or refund involved in, that portion to the length and complexity of, and tax liability or refund involved in, the return or claim for refund as a whole. There can be more than one preparer for each return.
- OPR Referrals. Be aware that IRS employees are required to make a referral to the OPR if there is a “pattern” of certain conduct and a preparer penalty is sustained. Although in some situations not required to make the referral to OPR in the event of a single violation, some within the IRS may feel compelled to make the OPR referral for a single violation.
- Limit the Nature and Scope of Services to be Provided in the Engagement Letter. Have separate engagement letters for separate engagements. Do not exceed the scope of an engagement letter without another engagement.
- Requirements to Notify State Licensing Authorities. Many States have requirements for a licensee to notify the State licensing authority in the event of a preparer penalty. Failure to provide timely notification could be a separate violation.
- Establish a System of Checklists for Preparation and Advice – and Follow the System. Best practices in the office strongly suggests a system for promoting accuracy and consistency in the preparation of returns or claims and should generally should include – in the case of a signing preparer – checklists, methods for obtaining necessary information from the taxpayer, a review of the prior year’s return and possibly all related returns, and internal review procedures.
- Emails Have a Life of Their Own. “Delete” merely takes the email off your screen. Experienced investigators will locate deleted emails. Only render such advice that you reasonably believe is accurate and appropriately supported by relevant facts and authorities.
- There Are No Hypothetical Questions. Do not respond unless you are confident you have received and understand all relevant facts. Responses should be limited to the facts presented.
- Fight, Fight, Fight . . . if Facing a Preparer Penalty. The primary issue is often the reasonableness of the preparer’s belief and good faith in the reported position. Although the economic penalty under IRC §6694(a) may not be significant when compared to the effort involved to dispute it, the related investigations by OPR and the State licensing authorities may destroy the preparers practice (and reputation). Anticipate that potential malpractice claims will routinely include allegations of a failure to comply with federal tax standard of care and Cir 230. Anticipate the government may contact the current and former clients and that they may require the preparer to also disclose the violations to their clients with a full explanation. Your reputation for integrity and credibility is at issue – protect it!
- Maintain the Appearance of Cooperation and Reasonableness When Representing Clients in a Tax Dispute. Many OPR referrals arise as a result of the examination of a taxpayer’s return and conduct of the representative during the examination. Respond timely, cooperate as reasonably required, inquire when faced with uncertainty, push back when necessary and watch your back at all times.
- New Clients. Each firm should set practical guidelines re the acceptance of new clients. Consider speaking with the clients prior representatives to ascertain potential issues. The prospective client who talks poorly of the last representative(s) may only be including you in the list for next year. Sometimes it’s not the horse but the jockey who loses the race.
- Supporting Data. Although the preparer is not required to independently examine or verify all supporting information, make sure to inquire as to whether such data has been satisfactorily maintained. Encourage the client to maintain proper information supporting the positions set forth within the return. Best practices suggests retaining documentation resulting from any tax related research (including authorities both for and against the tax position), the reasoning behind the conclusion, and relevant authorities supporting the conclusion.
- Preparer Judgment. The judgment of the preparer and other tax advisors, not the client, should be the determining factor regarding positions set forth on the return. If the client refuses to comply with the recommendations, the significance of each recommendation in relation to the return may be the deciding factor re whether to withdraw from representation.
- Document Your Advice to Clients and Others in Writing. Enough said – protect yourself and your firm.
- No Good Deed Goes Unpunished. “Off the cuff” advice and quick email responses may, in certain circumstances, be sufficient for penalties or Circular 230 sanctions to apply. Tax positions should be appropriately analyzed and discussed with the client, including: (a) review and document all relevant facts; (b) explain that the position is an opinion based on information presented by the client; c) include a discussion re any possible penalties that may be assessed; and (d) avoid technical terms that may be misunderstood by the client.
- Anticipate Potential Assertion of Preparer Penalties. The increased attention on preparers and their conduct may result in an increase in incidences of assertion of preparer penalties and sanctions. Referrals might occur as a result of confusion about the appropriate standard, inadvertent oversight, less than adequate disclosures or relatively minor infractions.
- Be Prepared, Not Paranoid. If a situation arises, handle it in a clear and appropriate manner. It will not go away if you ignore it or are simply “too busy” to respond to inquiries from the IRS or OPR. OPR understands the realities of a busy tax practice and good faith efforts to comply with an extremely complex IRC.
- Be Proud of Your Profession. It is an honor and a privilege to represent taxpayers before the IRS. Tax practitioners often devote untold personal hours being educated on new tax provisions, software updates, policies and procedures. Tax practice is a profession and professionals help other professionals. If struggling with a tax issue, ask an experienced colleague for advice. If asked by a colleague for advice, take the time to listen and provide whatever meaningful assistance you can and remember, someday you may be the person placing that call for assistance . . .
Be prepared, exercise your best judgment, document your recommendations . . . and know that 98% of the problems in practice emanate from 2% of the clients. Clients who refuse to comply with your valued recommendations should be encouraged to seek other representation.
Be proud of your profession and remember that today is the tomorrow that you worried about yesterday . . . at the end of the day, if you are proud to go home and tell others about your day, you are practicing in the right profession!!
SUBSCRIBE TO NEWS AND UPDATES FROM IRS OPR – Subscribers will be notified by e-mail regarding OPR disciplinary actions, Press releases, New items, Rules governing those who practice before the IRS and related updates, and Educational info about OPR, its mission and priorities. See http://www.irs.gov/Tax-Professionals/Subscribe-to-News-and-Updates-from-the-Office-of-Professional-Responsibility-OPR
 Ballard v. Commissioner, Nos. 01-17249 (11th Circuit, April 7, 2008).
 Circular 230 is the common name given to the body of regulations promulgated from the enabling statute found at Title 31, United States Code § 330. This statute and the body of regulations are the source of OPR’s authority.
 Referrals to the Office of Professional Responsibility, IRM 18.104.22.168 (01-14-2011)
 31 C.F.R. Section 10.53(a)).
 Referrals to the Office of Professional Responsibility, IRM 22.214.171.124 (01-14-2011)
 See http://nhq.no.irs.gov/OPR/Practice/SCDefault.asp.
Rev. Proc. 2014-5 (Internal Revenue Bulletin 2014-5; January 27, 2014)