TREASURY CIRCULAR 230 FREQUENTLY ASKED QUESTIONS
- Q: While reviewing a new client’s prior year returns, I realized her last preparer had claimed numerous expenses that were not deductible. I informed the client of the errors and advised her to correct the noncompliance. Do I need to make sure she files an amended return, or is it enough to notify the client of her obligation?
A: You must advise the client of the consequences of the noncompliance and must inform her of any penalties that are reasonably may apply. You will also want to verify the accuracy of any amounts carrying forward to the current year if you prepare her return. Treasury Circular 230 §10.21, §10.22
- Q: I discovered a large error on a client’s return that I prepared last year. If I inform him of it, he may fire me. It was an honest mistake and the IRS will probably never notice. Can I just ignore it and not tell him about it?
A: No. You must promptly advise a client when you find an error or omission in any return or document previously submitted to the IRS, even if it was your mistake. You must also advise the client of the consequences of the client’s noncompliance, including potential penalties and the opportunity to avoid such penalties. Treasury Circular 230 §10.21
- Q: I have heard I can rely on information furnished by my client without verifying it, so if my client completes an organizer, can I take it at face value?
A: No. Due diligence requires that you determine the correctness of representations made on tax returns or other documents relating to Internal Revenue Service matters. To the best of your ability, you must gather sufficient information, consider all facts, know the applicable laws, and accurately apply the laws to these facts. You cannot ignore facts that you know, or should have known, were inaccurate, and must make reasonable inquiries if the information appears to be incorrect, incomplete, or inconsistent with other facts. Treasury Circular 230 §10.22, §10.34(d)
- Q: Am I in violation of the due diligence requirements if my client lies to me?
A: Only if you knew, or should have known from other evidence, that your client has lied to you. You cannot ignore implications of information furnished by the client or facts that are known by you, and must make reasonable inquiries to determine the accuracy of the information. Treasury Circular 230 §10.22, §10.34(d)
- Q: Can I rely on work that was done by someone else in my office?
A: Yes, as long as you have used reasonable care in selecting the person performing the work and that person is competent. For example, you may rely on a competent colleague, but would likely take more care if relying on a first year staff person who may not be competent. Treasury Circular 230 §10.22, §10.37(b)
- Q: Following a disagreement between us, my client called and demanded his records back and is refusing to pay me for my time. What are my obligations?
A: Generally, upon demand, you must return all documents necessary for the client to fulfill his tax obligations. In the case of a dispute over fees for services rendered, state law controls whether you may be entitled to withhold some records, but otherwise, all documents obtained from the client or a third party must be returned. Treasury Circular 230 §10.28
- Q: I inherited a number of clients from a preparer who used questionable judgment on a few issues in multiple clients’ returns, but otherwise he seems competent. Can I rely on his work papers, calculations, and schedules if they appear to be reasonable and are unrelated to the questionable items?
A: Maybe. The standard for reliance requires evaluation of all facts and circumstances to make a determination of the reasonableness and correctness of information supplied. You cannot rely on another who you know or should know is incompetent, lacks the necessary qualifications to perform the work, or has a conflict of interest in violation of Treasury Circular 230. You also cannot rely on another’s work if you know or should know it is based on faulty data or assumptions. Treasury Circular 230 §10.37
- Q: I think my business partner is advising his clients to take credits for which they do not qualify. We have never had policies involving supervision or training since we are both licensed and neither of us “manages” the other. Can I be sanctioned for his negligent or reckless actions?
A: Yes. The IRS may designate one or more individuals to be responsible for the firm’s compliance with Treasury Circular 230. If you know or should have known of others within your firm who are engaged in a pattern or practice in violation of Circular 230, you could be held accountable for failure to correct the noncompliance, even if it involves individuals who you do not supervise. Treasury Circular 230 §10.36
- Q: A new client owes the IRS for multiple years of tax, penalties, and interest. When I called the IRS to inquire about the status of her account, they told me a levy had been issued to my client’s bank the previous day. Can I advise the client to move the money to a different bank?
A: No. You may tell the client a levy has been issued and can reveal the details furnished by the IRS, but you cannot advise the client to move her money to avoid the levy. Treasury Circular 230 prohibits counseling or suggesting a client evade taxes or payment of taxes. Treasury Circular 230 §10.51(a)(7)
- Q: Can I advise a client to submit a request for a Collections Due Process (CDP) hearing to stop collection activity if the client is not compliant and does not intend to become compliant?
A: No. This is an example of making a submission to delay or impede tax administration. As a tax practitioner you know, or should know, that the IRS will not consider resolution of a collection action when a taxpayer is not in compliance. Treasury Circular 230 §10.34(a), 10.34(b)(2)
- Q: A returning client started a new business in an industry with numerous specialized tax regulations and incentives. As I began working on his tax return, I found I did not understand most of the elections and credits. Can I prepare and sign this tax return?
A: No. You cannot prepare or sign a tax return if you lack sufficient competence. Competence requires the appropriate level of knowledge, skill, thoroughness and preparation. You can become competent through consulting with experts in the relevant area or studying the relevant law applicable to this client’s new venture. Treasury Circular 230 §10.35
- Q: Can I represent both spouses in the audit of a Married Filing Joint return if they are now divorced?
A: Treasury Circular 230 prohibits representation of parties in conflict, but provides an exception under certain circumstances. You can represent parties when a conflict exists if you believe you will be able to provide competent and diligent representation to each affected client and the representation is not otherwise prohibited by law. This engagement involves the representation of persons whose interests may be adverse to one another. Under these circumstances, both spouses must be fully informed of the potential issues and both must consent, in writing, to waive the conflict. Treasury Circular 230 §10.29
- Q: I joined a tax resolution marketing service that refers representation clients to me for a fee. Is this type of solicitation allowed?
A: Yes, but you must be cautious about the referral service’s solicitation practices and advertising claims. You may not assist or accept assistance from any person or entity who obtains clients using false, fraudulent, or coercive claims or otherwise uses misleading or deceptive advertising. Treasury Circular 230 §10.30(d)
- Q: Can a tax preparer use Form 8888, Allocation of Refund, to pay their tax preparation fee?
A: No. The federal government prohibits a tax practitioner from directly or indirectly negotiating a taxpayer check into an account owned or controlled by the practitioner or an associated entity. This includes depositing a taxpayer’s check or electronically directing all or a part of a refund to a tax preparer. Treasury Circular 230 §10.31
- Q: How are certain tax preparation businesses able to receive their fees from a client’s refund?
A: Certain vendors have third-party affiliated or contracted relationships with service providers (financial institutions) who are separately regulated by the federal government. In these arrangements, the refund is deposited into a temporary bank account in the taxpayer’s name and the taxpayer directs the bank to pay the tax return preparer fee.
- Q: If I advised a client to take a position on a tax return for which penalties may be incurred, what are my duties?
A: You must advise the client of the penalties which are reasonably likely to apply regarding a position on a tax return if you advised the client regarding the position or if you prepared the tax return. You must also advise the client of how to avoid these penalties. Treasury Circular 230 §10.34(c)
- Q: If a client tells me she used her automobile 100% for business and tells me the business mileage, may I rely on her statement without further information?
A: No. This is a case in which you must make reasonable inquiries including, for example, does the client have another automobile for personal use? Did the client commute to work? Did the client keep records of the business mileage? Treasury Circular 230 §10.34(d), §10.22
- Q: I am the tax partner in charge of our tax department although I do not supervise all of our tax preparers. Can I be subject to discipline if one of my preparers violates Circular 230?
A: Yes. The person who has principal authority for overseeing the firm’s tax practice must take reasonable steps to ensure that adequate procedures are in place and are followed to comply with Treasury Circular 230. You can be subject to discipline if the violation is a result of willfulness, recklessness, or gross incompetence and is part of a practice or pattern of failure to comply. Treasury Circular 230 §10.36
- Q: I work in the tax division of a large firm with a management team that does not include tax professionals. What if there is no individual who has responsibility for the firm’s procedures to ensure compliance with Treasury Circular 230?
A: If no person is designated as having principal authority over a tax practice, the Internal Revenue Service may identify one or more individuals in the practice as having principal authority for the firm’s compliance with this section. Treasury Circular 230 §10.36
- Q: How do I demonstrate compliance with the oversight requirements of §10.36?
A: Some of the steps may include:
- Treasury Circular 230 training for all members of the department
- Requirements that other’s work is reviewed
- Periodic monitoring of compliance
- Written quality control procedures
Treasury Circular 230 §10.36
- Q: Can I rely on another practitioner’s work product without question?
A: Generally, yes, but only if the advice is reasonable and in good faith. You cannot rely on advice if you know or reasonably should know:
- That the advice is not reliable. For instance, if you have not provided all of the relevant facts to the other practitioner who is rendering the advice.
- That the person rendering the advice is not competent or qualified. For instance, if the person rendering the advice has limited knowledge of the tax law.
- If the person rendering the advice has a conflict of interest that violates Treasury Circular 230.
Treasury Circular 230 §10.37(b), §10.22
- Q: If my State Board of Accountancy suspends my CPA license, may I still represent clients before the IRS?
A: No. Treasury Circular 230 allows a certified public accountant who is not under suspension or disbarment from the IRS to practice only after filing a written declaration that the CPA is currently qualified to practice as a CPA and is authorized to represent the party. Treasury Circular 230, §10.3(b)