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					                                 Chapter 4


                            Circular 230


§   4:1    Introduction
§   4:2    Authority to Issue the Circular
§   4:3    Overview of the Circular
§   4:4    Construction of the Circular
§   4:5    Meaning of “Practice Before the IRS”
§   4:6    Meaning of “Practitioner”
     § 4:6.1     Introduction
     § 4:6.2     Definition of “Practitioner”
                 [A] Certain Attorneys
                 [B] Certain Certified Public Accountants
                 [C] Meaning of “Filing . . . a Written Declaration”
                 [D] Enrolled Agent
                 [D][1] Application for Enrollment As an Enrolled Agent
                 [D][2] Renewal of Enrollment As an Enrolled Agent
                 [D][3] Continuing Professional Education
                 [D][4] Qualifying Continuing Professional Education
                 [D][4][a]    Types of Qualifying Continuing Professional
                              Education
                 [D][4][b]    Renewal by Reexamination
                 [D][4][c]    Waiver of Continuing Professional Education
                 [D][4][d]    Failure to Renew
                 [D][5] Enrolled Actuary
                 [D][6] Registered Tax Return Preparers and PTINs:
                           2011 Amendment
                 [E] Representation of Oneself; Participation in Rulemaking;
                       Special Appearances; Return Preparation
                 [E][1] Representation of Oneself
                 [E][2] Representation of an Immediate Family Member
                 [E][3] Representation of an Individual Employer
                 [E][4] Representation of a Partnership
                 [E][5] Representation of a Corporation and Similar
                           Organized Groups
                 [E][6] Representation of a Trust, Etc.



(Circ. 230 Deskbook, Rel. #12, 3/12)   4–1
                         THE CIRCULAR 230 DESKBOOK

                [E][7]    Representation of Governmental Entities
                [E][8]    Representation of Entities by Practitioners
                [E][9]    Representation of a Person Outside the United
                          States
§   4:7    Duties and Restrictions on Practice Before the IRS
     § 4:7.1     Information to Be Supplied to the IRS
                 [A] Practitioner Responsibility
     § 4:7.2     Duty to Advise Taxpayer of Non-Compliance,
                 Error or Omission
     § 4:7.3     Duty of Due Diligence in Return Preparation and Other
                 Representations
                 [A] Conditioning Statements
                 [B] Reliance on Others
     § 4:7.4     Duty to Dispose Promptly of Pending Matters
     § 4:7.5     Duty to Avoid Working with a Suspended or
                 Disbarred Practitioner
     § 4:7.6     Practice Before the IRS by Certain Former Government
                 Employees, Their Partners, Associates and Others
                 [A] Proof of Isolation
§   4:8    Restrictions on Practitioner Certification of Certain Documents
           and Information
§   4:9    Fees
     § 4:9.1     General Rule
     § 4:9.2     Contingent Fees
     § 4:9.3     Contingent Fees Under Section 10.27 As Amended by Notice
                 2008-43
     § 4:9.4     Contingent Fees Under Proposed Regulations
§   4:10 Practitioner Conflict of Interests
     § 4:10.1 Introduction
     § 4:10.2 Overview
     § 4:10.3 CPA Conflict of Interest Rules
§   4:11 Solicitation of Work by Practitioners
     § 4:11.1 Advertising and Solicitation Restrictions Imposed by the
                 Circular
     § 4:11.2 Limitations of Uninvited Solicitations by Practitioners
     § 4:11.3 Fee Information in Solicitations and Advertisements
     § 4:11.4 Limit on Changing Fees
     § 4:11.5 Permitted Fee Dissemination Information by Practitioners
     § 4:11.6 Unwanted Solicitation
     § 4:11.7 Records of Advertisements
     § 4:11.8 Ban of Accepting Assistance That Would Be Improper If Done
                 by Practitioner
     § 4:11.9 Registered Tax Return Preparers
§   4:12 Negotiation of Taxpayer Checks
§   4:13 Section 10.34
     § 4:13.1 Realistic-Possibility Standard
     § 4:13.2 Reasonably Likely Penalties
     § 4:13.3 Information Supplied by the Client



                                   4–2
                                       Circular 230

    § 4:13.4    2007 Amendment to Section 10.34
    § 4:13.5    2011 Amendment to Section 10.34
    § 4:13.6    I.R.C. Section 6694
                [A] Introduction
                [B] Act Changes
                [C] Expansion of Those Treated As Return Preparers
                [D] New Penalty for Erroneous Claims for Refund
                [E] Notice 2007-54 “Suspended” the Act Changes for 2007
                [F] Notice 2008-13
                [F][1] Reasonable Basis Exceptions
                [F][2] Inconsistency Between the Code and the Notice
                [F][3] Reasonable Basis Exception for Advisers
                [G] Some Lessons from the Examples
                [H] Treatment of Tax Shelters
                [I] Guidance on Identifying Preparers
                [J] Returns Covered and Not Covered
                [K] Written Advice to Taxpayers About the Penalty
                      Standards
                [L] Summary and Conclusions
    §   4:13.7 Proposed Regulations Under I.R.C. Section 6694
                [A] Introduction
                [B] Different Preparers Can Be Responsible for Different
                      Positions on the Return
                [C] Different Treatment for Preparers of Non–Income Tax
                      Returns
                [D] Tax Shelters
                [E] Penalty Advice: No Boilerplate
                [F] Critical Example Revisited
                [G] The Weight of Authority and the More-Likely-Than-Not
                      Standard
                [H] Conclusion: Avoiding Preparer Penalties
    §   4:13.8 2008 Legislation and Final Regulations Under
                I.R.C. Section 6694
                [A] 2008 Amendment to I.R.C. Section 6694
                [B] 2008 Act and Its Substantial-Authority Provision
                [C] Interim Guidance Under the 2008 Act
                [D] Final Regulations
                [D][1] One Position per Preparer
                [D][2] Pre-Transaction Advice
                [D][3] Disclosure
                [D][4] Reliance on Others
                [D][5] Appraisers Are Subject to I.R.C. Section 6694
                [D][6] Preparer’s Sophistication As a Relevant Factor
                [D][7] Disregard of Regulations, Revenue Rulings or
                         Notices
                [D][8] Burden of Proof
    §   4:13.9 Proposed Amendment to Sections 10.34(a) and 10.34(e)
    §   4:13.10 Service’s Procedures in Estate and Gift Tax Context with
                Respect to Section 6694


(Circ. 230 Deskbook, Rel. #12, 3/12)      4–3
                      THE CIRCULAR 230 DESKBOOK

§ 4:14 Section 10.37
   § 4:14.1 Section 10.37’s Heightened Duties
   § 4:14.2 Unreasonable Legal Assumptions
   § 4:14.3 Unreasonable Factual Assumptions
   § 4:14.4 Type of Engagement
§ 4:15 Section 10.35
   § 4:15.1 What Is a Covered Opinion?
   § 4:15.2 Listed-Transaction Category
   § 4:15.3 Principal-Purpose Category
   § 4:15.4 Safe Harbor
   § 4:15.5 Significant-Purpose Category
               [A] Reliance Opinions
               [A][1] Confidence Lower Than More-Likely-Than-Not
               [A][2] Statement That Advice Cannot Be Used for Penalty
                        Protection
               [B] Marketed Opinions
               [C] Conditions of Confidentiality
               [D] Contractual Protection
   § 4:15.6 Excluded Advice
               [A] Exclusion for Preliminary Advice
               [B] Exclusion for Pension, Bond and SEC Document Advice
               [C] Written Advice After the Return Is Filed
               [D] Written Advice Provided by Taxpayer’s In-House Counsel
               [E] Negative Written Advice
   § 4:15.7 Summary
   § 4:15.8 Section 10.35’s Requirements
               [A] Factual Matters
               [B] Relating the Law to the Facts
               [C] Evaluation of the Significant Federal Tax Issues
               [D] Overall Conclusion
               [E] Competency to Render the Opinion
               [E][1] Practitioner’s Competence and Reliance on Other
                        Practitioners
               [E][2] Limited Scope Opinions
               [F] Required Disclosure on Promoter Relationship
               [G] A Few Points About Form of Covered Opinions
§ 4:16 Section 10.33
§ 4:17 Section 10.36: Supervisory Responsibility Regarding
         Section 10.35
   § 4:17.1 Statutory and Constitutional Questions As to the Validity of
               Section 10.35
§ 4:18 Sanctions and Penalties for Failure to Comply with the Circular
   § 4:18.1 Meaning of “Incompetence and Disreputable Conduct”
               [A] Conviction of Criminal Violation of Revenue or Certain
                     Other Laws
               [B] Conviction of Crime Involving Dishonesty or Breach of
                     Trust
               [C] Conviction of a Felony Rendering the Practitioner Unfit
                     to Practice Before the IRS


                                  4–4
                                       Circular 230

                  Providing False or Misleading Information to the
                   [D]
                  Treasury or Tribunal
             [E] Soliciting Employment in Violation of the Circular
             [F] Willful Failure to File Return, Pay Tax and Related
                  Offenses
             [G] Misappropriation of Client’s Tax Funds
             [H] Bribes to and Threats Against IRS Employee
             [I] Disbarment or Suspension from Practice As an Attorney
                  or CPA
             [J] Knowingly Aiding and Abetting a Suspended or
                  Disbarred Person
             [K] Engaging in Contemptuous Conduct While Practicing
                  Before the IRS
             [L] Knowingly, Recklessly, or Through Gross Incompetence
                  Giving a False Opinion
             [M] 2011 Amendment to Section 10.51
   § 4:18.2 Violations of the Regulations for Which a Practitioner May Be
             Censured, Suspended or Disbarred from Practice Before the
             IRS
             [A] In General
             [B] American Jobs Creation Act of 2004 Provisions
             [C] Provisions with Respect to Appraisers
             [D] Meaning of “Censure”
             [E] Meaning of “Suspension”
             [F] Meaning of “Disbarment”
             [G] Meaning and Importance of “Willful”
             [H] Meaning of “Reckless”
             [I] Meaning of “Gross Incompetence”
   § 4:18.3 Violations Requiring Only a Reckless or Gross Incompetence
             Element
   § 4:18.4 Providing Information About Practitioner Violations
             [A] Information to Be Provided by IRS Personnel
             [B] Information by Others
§ 4:19 Subpart D of Circular 230 Provides Rules Applicable to Disciplinary
        Proceedings Against Practitioners and Appraisers
   § 4:19.1 Overview
   § 4:19.2 Institution of a Proceeding Against a Practitioner
   § 4:19.3 Institution of a Proceeding Against an Appraiser
   § 4:19.4 Internal Revenue Code Provisions with Respect to Appraisers
   § 4:19.5 Required Opportunity to Dispute an Alleged Violation
   § 4:19.6 Conferences Relating to Alleged Misconduct
   § 4:19.7 Resignation or Voluntary Censure, Suspension or Disbarment
   § 4:19.8 Voluntary Disqualification by an Appraiser
   § 4:19.9 Requirements of the Complaint Against the Practitioner
             [A] Clear and Concise Description That Fairly Informs the
                  Practitioner of the Charges
             [B] Specification of Sanction Sought by the IRS
             [C] Demand for Answer



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–5
                     THE CIRCULAR 230 DESKBOOK

             [D] Service of the Complaint and Filing of Papers
             [E] Answer and Potential of Default
             [F] Supplemental Charges
             [G] Reply to Answer
             [H] Proof and Related Matters
             [I] Motions
             [J] Response
             [K] Oral Motions and Argument
   § 4:19.10 Representation of the Director and the Respondent
             [A] Ex Parte Communications
   § 4:19.11 Administrative Law Judge
   § 4:19.12 Hearings
             [A] Hearings Must Be Conducted in Accordance with the
                  Federal Administrative Procedure Act
             [B] Other Hearing Requirements
             [C] Making Proceedings Public
             [D] Location of Hearing
             [E] Default Judgment for Failure to Appear at Hearing
             [F] Special Procedure Hearing Called Under Section
                  10.82(g)
   § 4:19.13 Evidence
   § 4:19.14 Depositions
   § 4:19.15 Transcript of the Proceeding
   § 4:19.16 Proposed Findings and Conclusions
   § 4:19.17 Decision of the Administrative Law Judge
             [A] Different Burden to Establish Facts for Different
                  Sanctions
             [B] Finality of Decision
   § 4:19.18 Appeal of the Decision
   § 4:19.19 Decision on Appeal by the Secretary of the Treasury
   § 4:19.20 Effect of Disbarment, Suspension or Censure and Possible
             Reinstatement to Practice
   § 4:19.21 Notice of Disbarment, Suspension, Censure or
             Disqualification
   § 4:19.22 Expedited Suspension in Some Cases
             [A] Practitioners Against Whom the Expedited Suspension
                  Procedures May Be Applied
             [B] Commencement of the Proceeding
             [C] Answer Required to Be Filed
             [D] Director’s Authority to Effect Expedited Suspension If
                  No Answer Is Made
             [E] Time and Place of Conference
             [F] Suspension Immediately After Conference
             [G] Period of Expedited Suspension
             [H] Proceeding After Expedited Suspension
§ 4:20 Record of Enrollments, Sanctioned Practitioners, Etc.




                                 4–6
                                       Circular 230                               § 4:1

§ 4:1          Introduction
   Section 330 of title 31 of the U.S. Code authorizes the Secretary of
the Treasury Department of the United States (“Treasury” or “Trea-
sury Department”) to regulate the practice of representatives before the
Treasury, apparently including bureaus of the Treasury of which the
Internal Revenue Service (IRS or “Service”) is one. This authorization
includes the capacity to suspend or disbar individuals from such
practice, after notice and an opportunity for a proceeding. Pursuant
to that authority, the Secretary of the Treasury has issued regulations
in Circular 230 (31 C.F.R. part 10) that authorize the Director of
Practice (the “Director”) of the IRS to act upon applications for
enrollment to practice before the IRS (for example, to become an
“enrolled agent”), to make inquiries as to the jurisdiction of the
Director, to institute proceedings for suspension or disbarment of
practice before the IRS, and to perform such other duties as necessary
to carry out those functions.1
   The regulation of practice before the IRS essentially is carried out by
the Director in two ways. First, to be permitted to “practice” before the
IRS, the individual must be, as a general rule, an attorney or a certified
public accountant (CPA) who has submitted a written declaration to
the IRS that he or she is authorized to act on behalf of a taxpayer, or
must be an enrolled agent or an enrolled actuary. Such individuals are
referred to in this chapter as “Practitioners” to distinguish from other
professionals (such as lawyers and CPAs who are not “Practitioners”
within the meaning of the Circular, but are commonly referred to as
“Practitioners”). Among other things, Practitioners are required to
comply with the requirements of the Circular when representing a
taxpayer with respect to a federal tax matter. The Circular also applies
to a more limited degree to certain actuaries (other than enrolled
actuaries) and valuation appraisers and to certain others.
   Second, the Circular prescribes disciplinary action against Practi-
tioners who commit certain offenses described in the Circular and the
procedures by which such disciplinary action may be imposed upon a
Practitioner. In some cases, the IRS may “disqualify” the work of
certain valuation appraisers from having any probative value before the
IRS. Disciplinary action against a Practitioner may include public
censure by the Treasury Department, suspension or disbarment from
practice before the Service, or the imposition of monetary penalties.




  1.       The Treasury Department Organizational Chart is available at www.treas.
           gov/organization/org-chart-122005.pdf. Prop. Treas. Reg. § 10.1 would
           change “Director of Practice” to the “Office of Professional Responsibility.”



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–7
§ 4:2                   THE CIRCULAR 230 DESKBOOK

§ 4:2        Authority to Issue the Circular
    The authority to control which individuals may practice before the
IRS and how they must conduct themselves is derived from 23 Stat.
258, § 3; 60 Stat. 237 et seq.; 5 U.S.C. §§ 301, 500, 551–59; 31 U.S.C.
§§ 321, 330.2 In fact, federal statutory law has long permitted the
Treasury Department to issue rules relating to practice before the IRS. 3
    Although it has been stated that “it cannot be disputed that a
federal agency can regulate the conduct of attorneys who appear before
it,”4 the agency may not exceed the authority granted by federal
statutory law nor may it violate the U.S. Constitution in exercising
the authority granted to it by statute.

§ 4:3        Overview of the Circular
   The Circular was originally issued by the Treasury Department in
1921.5 It has been revised several times, most recently on May 19,
2005, effective on that date but applicable as of June 21, 2005. 6 The
Circular is divided into five subparts:
   •    Subpart A, which sets forth certain basic rules on governing
        authority to control practice before the IRS;
   •    Subpart B, which sets forth duties and restrictions relating to
        practice before the IRS;
   •    Subpart C, which sets forth sanctions for violating the Circular;
   •    Subpart D, which sets forth the rules applicable to disciplinary
        proceedings; and
   •    Subpart E, which contains certain general provisions.
Each subpart is divided into sections, each of which begins with “10.”
followed by a higher integer, although not in all cases consecutive
numbers—for example, 10.1, 10.2, and so on. Many sections have



  2.     The American Jobs Creation Act of 2004 (Pub. L. No. 108-357) amended
         31 U.S.C. § 330 to clarify that the Treasury Department may impose
         standards for written advice relating to any matter that is identified as
         having potential for tax avoidance or evasion and to authorize the IRS to
         impose monetary penalties against a Practitioner who violates any provi-
         sion of Circular 230. Treasury Department has issued proposed regula-
         tions under those amendments made by the American Jobs Creation Act
         of 2004. These proposed regulations are reproduced in Appendix P.
  3.     Circular 230 was first promulgated in 1921. A copy of the original version
         of the Circular is reproduced in Appendix C.
  4.     N.Y. State Bar Ass’n v. FTC, 276 F. Supp. 2d 110, 136 n.22 (2003).
  5.     C.B. 4-1600A, Dep’t Cir. 230.
  6.     70 Fed. Reg. 2884.



                                      4–8
                                       Circular 230                               § 4:5

subsections labeled with small, consecutive alphabetical letters and
“lower” divisions using Arabic numerals—for example, 10.25(a)(1).
   In general, only the current provisions of the Circular are discussed
in this chapter. It should be noted that although, in general, any
disciplinary proceeding is conducted under the current provisions of
the Circular, the determination of the “substantive” rules of the
Circular in effect at the time an alleged violation of the Circular
occurred may apply.7

§ 4:4          Construction of the Circular
   As discussed later in this chapter, any disciplinary proceeding
against a Practitioner for an alleged violation of the Circular is held
before an Administrative Judge of the United States. Probably any
question of construction of the Circular in that proceeding would be
determined by that judge. If the decision of the Administrative Law
Judge is appealed to the Secretary of the Treasury, all questions of law
are considered de novo.8

§ 4:5          Meaning of “Practice Before the IRS”
   Practice before the IRS encompasses all matters connected with
presentation to the IRS or any of its personnel, relating to a taxpayer ’s
rights, privileges, or liabilities under laws or regulations administered
by the Service.9 Those presentations include the preparation and filing




  7.       See, e.g., Addendum to Treasury Department Circular No. 230 (Rev.
           7-2002), which states, in part, “Any proceeding under this part based on
           conduct engaged in prior to July 26, 2002, which is instituted after that
           date, shall apply Subparts D and E of this part, but the conduct engaged in
           prior to July 26, 2002, shall be judged by the regulations in effect at the
           time the conduct occurred.” This Addendum is reproduced in Appendix B.
  8.       Circular 230 § 10.78.
  9.       Circular 230 § 10.2(d) (first sentence). Prop. Treas. Reg. § 10.2(a)(4) would
           expand the definition of “practice before the IRS” to include rendering
           written advice with respect to any entity, transaction plan or arrange-
           ment, or other plan or arrangement having a potential for tax avoidance
           of evasion. Although the proposed regulation would clarify that practice
           before the IRS includes rendering written advice, it does not seem
           that the regulation makes a lawyer or CPA a Practitioner merely because
           he or she renders written tax advice. Practitioner is defined in § 10.3(a)
           as including only an attorney or CPA who has filed a written declaration
           of representation of a taxpayer (e.g., filing an IRS Power of Attorney
           Form 2848). The Circular applies, with exceptions not relevant here,
           only to Practitioners as defined in that section. Note, however, that in
           News Release 2010-1, the IRS indicated that it intends to expand the
           coverage of Circular 230 to include signing and non-signing preparers



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–9
§ 4:5                   THE CIRCULAR 230 DESKBOOK

of necessary documents, correspondence with and communications to
the IRS,10 and the representation of a taxpayer at conferences, hearings
and meetings.11 Although not specified in the Circular, practice before
the IRS seems to encompass responding to inquiries or proposed
additions to federal tax by the IRS, participating in the audit of a
U.S. tax return of a taxpayer and appearing on behalf of a taxpayer
before the Appeals division of the IRS.12
    For a discussion of section 10.8, which makes the Circular duties
and restrictions applicable to certain individuals who prepare
returns or refund claims or who submit documents to the IRS, see
section 4:6.2[D][6]. Note, in this regard, that section 10.2 provides
that a person who is a tax return preparer within the meaning of
section 7701(a)(36) of the Code and its implementing regulation13 is a
tax return preparer within the meaning of the Circular. The significance
of this definition is unclear. For example, if an attorney gives oral advice
about a position to be taken on a return, the attorney could be viewed as
a return preparer within the meaning of section 7701(a)(36) of the Code
by reason of giving the advice (if the position is sufficiently substantial in
terms of the taxpayer ’s overall liability).14 Thus, given section 10.2, the
attorney would be viewed as a return preparer for purposes of the
Circular. But if the attorney does not otherwise practice before the IRS
and does not prepare returns, refund claims or documents within the
meaning of section 10.8, it would appear that the attorney is not subject
to the Circular’s duties and restrictions, thus raising a question about
the practical significance of section 10.2 treating the attorney as a return
preparer for purposes of the Circular.




         who are not attorneys, CPAs or enrolled agents. Presumably, § 10.3, as
         well as § 10.7, of the Circular will be amended to reflect this change.
         Nonetheless, non-licensed Practitioners will not be permitted to provide
         services beyond those currently permitted. While News Release 2010-1
         contemplates that all preparers will be required to register and use a
         preparer-identification number when preparing a return, it imposes new
         continuing-education and testing requirements only on non-licensed
         Practitioners.
 10.     See section 10.8 (providing that submitting documents to the IRS triggers
         the Circular ’s duties and restrictions).
 11.     Circular 230 § 10.2(d) (second sentence).
 12.     The Appeals division of the IRS is also commonly referred to as the
         “Appellate Division.”
 13.     See Treas. Reg. § 301.7701-15.
 14.     See id.



                                     4–10
                                       Circular 230                             § 4:6.2

§ 4:6          Meaning of “Practitioner”
    § 4:6.1           Introduction
   The Circular provides rules for practice before the IRS. It specifies
those who may practice before the IRS and refers to them as “Practi-
tioners.” (As mentioned above, such a Practitioner is referred to in this
chapter as a “Practitioner” to distinguish such a person from a profes-
sional commonly referred to as a “practitioner,” generally meaning any
lawyer or CPA.)
   The meaning of Practitioner includes only individuals and not firms,
associations, or other organizations or groups. Becoming a Practitioner
is voluntary and requires filing with the IRS and, in some cases,
satisfying certain other requirements. Nevertheless, individuals who
are not Practitioners may represent a taxpayer before the IRS in very
limited circumstances even though such individuals are not Practi-
tioners within the meaning of the Circular and, as such, it seems can
do so without being subject to discipline under the rules governing
Practitioners. Also, in some cases, certain provisions of the Circular are
made applicable to firms in which a Practitioner practices.15

    § 4:6.2           Definition of “Practitioner”
   The Circular, as discussed below, provides an explicit definition of
Practitioner. Practitioner for purposes of the Circular means only
individuals and not entities, such as an accounting firm or a law
firm. The Circular also applies to individuals other than Practitioners
in limited circumstances.16




 15.       See, e.g., Circular 230 § 10.25(c)(1) (relating to the firm isolating certain
           former government employees).
 16.       Under proposed regulations issued on August 23, 2010, the reach of the
           Circular would be expanded to include all people who prepare a return for
           compensation. Under the regulations, a person preparing a return for
           compensation who is not an attorney, CPA or enrolled agent would be
           required to become a registered tax return preparer. As a result, such a
           person would become subject to the Circular. The preamble states: “Only
           an attorney, certified public accountant, enrolled agent, or registered tax
           return preparer may prepare for compensation all or substantially all of a
           tax return or claim for refund, or sign as a preparer tax returns and claims
           for refund.” The preamble also states: “The conduct of the registered tax
           return preparer in connection with the preparation of the return, claim for
           refund, or other document, as well as any representation of the client
           during an examination, will be subject to the standards of conduct in
           Circular 230.” If someone not falling into one of these categories none-
           theless prepares a return (or a substantial portion of a return) for com-
           pensation and violates the Circular, he/she is deemed to be a Practitioner



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–11
§ 4:6.2                   THE CIRCULAR 230 DESKBOOK

             [A] Certain Attorneys
   An attorney means anyone who is a member in good standing of
the bar of the highest court of a state, territory, or possession of the
United States, including a Commonwealth (such as Puerto Rico), or
the District of Columbia.17 Hence, it would not include an individual
who is admitted to practice in another jurisdiction, such as a province
of Canada, unless the individual is also admitted to practice in a U.S.
jurisdiction. A U.S. attorney who is not then under suspension or
disbarment from practice before the IRS may practice before it by filing
with the IRS a written declaration that he or she is currently qualified
as an attorney and is authorized to represent the party or parties for
whom he or she acts.


          and therefore subject to all of the rules of the Circular. The preamble
          states: “An individual who is not an attorney, certified public accountant,
          enrolled agent, or registered tax return preparer who nevertheless prepares
          for compensation all or a substantial portion of a document (including tax
          returns and claims for refund) for submission to the IRS is engaged in
          practice before the IRS, and subject to the rules and standards of Circular
          230.” Thus, a person preparing a return for compensation who is required
          to become a registered preparer but who fails to register does not thereby
          escape from the responsibility to comply with the Circular.
              In Notice 2011-6, the Service has provided certain transitional rules
          regarding the requirement imposed by regulations under section 6109 of
          the Code that paid preparers obtain a PTIN (i.e., an identification
          number). In addition, the Notice provides that a person who is over
          18 years of age can obtain a PTIN without having to take the competency
          exam and without having to obtain continuing education if they provide
          assistance to “an attorney, certified public accountant, enrolled agent,
          enrolled retirement plan agent, or enrolled actuary authorized to practice
          before the IRS under Circular 230 § 10.3(a) through (e).”
              Note also that, in Notice 2011-11, the Service indicates that a preparer
          who fails to obtain a PTIN in early 2011 is not sanctionable if a good faith
          application for a PTIN has been made.
              It should also be noted that not all paid return preparers within the
          meaning of Treas. Reg. § 301.7701-15 are required to obtain a PTIN. For
          example, a lawyer who gives advice for compensation to an accountant
          who actually prepares the return is not a preparer within the meaning of
          section 6109 and therefore need not obtain a PTIN. See Treas. Reg.
          § 1.6109-2(g), Example 4. The lawyer is nonetheless a preparer within
          the meaning of Treas. Reg. § 301.7701-15 and would therefore be subject
          to penalties under section 6694 if the lawyer gave advice with respect to an
          item constituting a substantial portion of the return (i.e., with respect to
          an item that constitutes a substantial portion of the tax liability required to
          be shown on the return). See Treas. Reg. § 301.7701-15(b)(3).
              The IRS has also issued some guidance in the form of FAQs concerning
          the need for administrative and other employees assisting a preparer to
          obtain a PTIN. In general, such an assistant or employee who provides
          mechanical assistance (i.e., not involving discretion) does not need to
          obtain a PTIN. See www.irs.gov/taxpros/article/0,,id=218611,00.html.
 17.      Circular 230 § 10.2(a).



                                        4–12
                                       Circular 230                            § 4:6.2

   Under a 2007 amendment to sections 10.2 and 10.3, any attorney
who gives written advice subject to section 10.35 or section 10.37 is
engaged in practice before the Service.18

               [B] Certain Certified Public Accountants
   A certified public accountant (CPA) means, for purposes of the
Circular, a person who is duly qualified to practice as a CPA in any
state, territory, or possession of the United States, including a Com-
monwealth, or the District of Columbia. A CPA who is not currently
under suspension or disbarment from practice before the IRS may
practice before it by filing a written declaration that he or she is
currently qualified as a certified public accountant and is authorized to
represent the party or parties for whom he or she acts.
   Under a 2007 amendment to sections 10.2 and 10.3, any CPA who
gives written advice subject to section 10.35 or section 10.37 is
engaged in practice before the Service.

               [C] Meaning of “Filing . . . a Written Declaration”
   As noted, an attorney or CPA may practice, if not under suspension
or disbarment from practice before the IRS, by filing a written
declaration. The Circular provides no definition of written declaration.
It certainly appears to include the IRS Power of Attorney Form
(Form 2848).19 It includes at least certain other writings or forms.
For example, Part 4 (General Information) of the United States Estate
(and Generation-Skipping Transfer) Tax Return (Revised August 2005),


 18.       See Dir., Office of Professional Responsibility v. Sykes, Complaint 2006-1
           (Jan. 2009, Administrative Law Judge Richard A. Scully) (reproduced in the
           Appendix EE) (indicating that an attorney who gives tax advice about a
           transaction, at least where that advice is intended to provide penalty
           protection or to persuade the Service with respect to an underlying issue,
           becomes subject to the Circular).
 19.       It will be noted that Form 2848 requests the Practitioner to list his or her
           Centralized Authorization File or CAF number. This is a control number
           assigned to the Practitioner when he or she is designated as a taxpayer ’s
           representative and has signed the form for the first time. Under Form
           2848, an unenrolled return preparer is permitted to represent a taxpayer by
           the execution of Form 2848 but only before customer service representa-
           tives of the IRS, revenue agents and examination officers, with respect to
           an examination about the return he or she prepared. Such an unenrolled
           return preparer cannot represent a taxpayer before other offices of the IRS,
           execute waivers (such as extending the time within which tax may be
           assessed), etc. The authority of the IRS to deal with the taxpayer ’s
           representative is contained in I.R.C. § 6103(c). Form 2848 is reproduced
           as Appendix N. Also, it seems that the designation by a taxpayer of a
           representative does not have to be on Form 2848, but may be contained in
           another writing as long as the writing contains all appropriate information
           and is executed by the taxpayer and the designated representative(s).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–13
§ 4:6.2                   THE CIRCULAR 230 DESKBOOK

also known as Form 706, provides for a named attorney, CPA or
enrolled agent to represent the estate20 before the IRS by signing the
return in that Part and certifying under penalties of perjury that he or
she is not under suspension or disbarment from practice before the IRS
and is qualified to practice in the state specified. 21 No such designation
of a representative is contained on the United States Gift (and
Generation-Skipping Transfer) Tax Return (Form 709) or in the U.S.
Individual Income Tax Return (Form 1040). It seems relatively certain
that an attorney or CPA does not become a Practitioner within the
meaning of the Circular merely by signing a return (including a
Form 706) as the preparer.
   In any case, it seems to be a critical point that, because the Circular
applies only to “Practitioners” as defined above, the term excludes a
lawyer or CPA who does not file the form indicating that he or she is
the representative of the taxpayer for practice before the IRS.22


 20.      Technically, the representation is of the executor of the Will or adminis-
          trator of the estate. In many jurisdictions, that fiduciary position is known
          as “personal representative.” Under I.R.C. § 6018, the “executor” is
          responsible for filing the United States Estate (and Generation-Skipping
          Transfer) Tax Return. Under I.R.C. § 2202, the term “executor,” when used
          “in connection with the estate tax . . . means the executor or administrator
          of the decedent, or, if there is no executor or administrator appointed,
          qualified, and acting within the United States, then any person in actual
          or constructive possession of any property of the decedent.” (Emphasis
          added.)
 21.      An enrolled agent, unlike an attorney or CPA, is a Practitioner even if he or
          she has not filed a Form 2848 or other form to represent a taxpayer before
          the IRS.
 22.      On September 26, 2007, section 10.3 of the Circular was amended to
          provide that, where an attorney or certified public accountant renders
          written advice about a federal tax issue that would be subject to sec-
          tion 10.35 or 10.37 of the Circular, he or she is engaged in practice before
          IRS. As a result, he or she becomes a Practitioner and is therefore subject to
          sanctions under the Circular if the advice fails to adhere to the standards
          contained in section 10.35 or 10.37 (as well as the other provisions of the
          Circular). This, of course, does make some sense in that, were a contrary
          approach taken, section 10.35 and 10.37 would be rendered largely mean-
          ingless: it would not be necessary to comply with these sections because
          the rendering of the advice would not constitute practice before the IRS.
          On the other hand, it is difficult to reconcile the amendment with the
          authorizing statute. Consider, for example, a case where an attorney who
          does non-tax litigation and who has never had any contact with the IRS
          gives a client a letter about the tax consequences of a proposed settlement.
          Under the amendment, the attorney would be subject to the Circular as a
          result of writing the letter. Yet the authorizing statute (31 U.S.C. § 330) is
          limited: it only authorizes regulations, in the case of such advice, where
          there is a potential for tax avoidance or evasion. In the posited case, there
          would appear to be no such potential. Nonetheless, under the amend-
          ment, as suggested, the attorney apparently becomes subject to the
          Circular.



                                        4–14
                                       Circular 230              § 4:6.2

   The Circular does not specify whether a lawyer or CPA who has
previously filed a written statement to represent a taxpayer before the
IRS (for example, a power of attorney) continues to be treated as a
Practitioner if the representation of the taxpayer has ended. Nor does
the Circular specify whether any written statement filed may be
withdrawn, such as by having the taxpayer revoke the power of
attorney, which the taxpayer certainly has the power to do. (Of course,
if many Forms 2848 have been filed naming the lawyer or CPA as an
attorney in fact, it may be impracticable to consider having each one
revoked by the respective taxpayers on whose behalf they were filed.)
The Circular does not specify whether an attorney or CPA may
voluntarily withdraw from practice before the IRS (that is, withdraw
as a Practitioner). In any case, personnel at the IRS Office of Profes-
sional Responsibility (OPR), which is responsible for enforcement of
the Circular, have advised informally that a Practitioner cannot take
any action that would eliminate him or her as a Practitioner—in other
words, OPR has advised that once an accountant or lawyer is a
Practitioner under the Circular, he or she is always under it unless
he or she is disbarred pursuant to it.
   This position would seem to be an overreaching exercise of regu-
latory authority to the point of having constitutional implications as
an unauthorized restriction of free speech. There should be no reason
why an individual who voluntarily became authorized to act as a
Practitioner cannot voluntarily withdraw from such practice by filing a
similar declaration to that effect. While such an individual would still
be subject to discipline for activities undertaken while a Practitioner,
such individual should thereafter be free from the requirements of the
Circular. Thus, upon such withdrawal, such individual should be able,
for example, to engage in whatever writings concerning federal tax
issues he or she chooses, without the possibility of monetary penalties
or public censure for failure to comply with the Circular. Conduct
intentionally designed to circumvent the application of the Circular
could presumably be regulated on that basis. But good-faith with-
drawal from practice before the IRS should be permissible.

               [D] Enrolled Agent
   The Circular provides a procedure for an individual to become
enrolled as an agent authorized to practice before the IRS. The
Circular sets forth various requirements, including an obligation for
continuing education. The individual may not currently be under
suspension or disbarment from practice before the IRS. It will be
noted that it seems that an enrolled agent may practice even if he or
she does not file a written declaration that he or she is authorized to




(Circ. 230 Deskbook, Rel. #12, 3/12)      4–15
§ 4:6.2                  THE CIRCULAR 230 DESKBOOK

represent the party or parties on whose behalf he or she acts. 23
However, the enrolled agent would have to be designated as a repre-
sentative by a specific taxpayer to represent him or her (for example,
the taxpayer would have to execute a Form 2848 by which the enrolled
agent would be named the taxpayer ’s representative for the tax matters
specified in that form). In other words, an enrolled agent is, by
definition, a Practitioner under the Circular but, in order to represent
a taxpayer, would have to be designated by the taxpayer as a repre-
sentative to represent that taxpayer before the IRS.
   In unusual circumstances, an individual may be granted the
temporary right to practice before the IRS pending a determination
as to whether practice as an enrolled agent should be granted. 24
   In addition to attorneys and CPAs (as well as enrolled actuaries 25
with respect to certain limited areas, such as matters relating to the
qualification of employee retirement plans), enrolled agents who are
not currently under suspension or disbarment before the IRS, may
practice under section 10.3(c), before the IRS, generally in the same
manner as an attorney or CPA may.26 Enrolled agents, like attorneys
and CPAs, are generally unrestricted as to which taxpayers they can
represent, what types of tax matters they can handle, and which IRS
offices they can practice before.

             [D][1] Application for Enrollment As an Enrolled Agent
   Enrollment generally requires taking and passing an examination
that demonstrates competence in tax matters.27 The exam is admin-
istered by the Office of Professional Responsibility. Any person who
has engaged in conduct that would justify censure, suspension or
disbarment under the Circular is not eligible to take the examination
and become an enrolled agent.28 Application for enrolled is made on



 23.      Among other qualifications of a continued right to practice as an enrolled
          agent are requirements for continuing education. Circular 230 § 10.6(f).
          For more on the enrolled agent continuing education requirements,
          see www.irs.gov/tax pros/agents/article/0,,id=114324,00.html.
 24.      See, e.g., Circular 230 § 10.5(d).
 25.      Enrollment and renewal of enrollment of actuaries to practice before the
          IRS is governed by regulations of the Joint Board for Enrollment of
          Actuaries at 20 C.F.R. §§ 901.1 through 901.71; Circular 230 § 10.6(o).
 26.      See generally www.irs.gov/pub/irs-pdf/f23.pdf.
 27.      This is known as the Special Enrollment Examination (SEE).
 28.      Circular 230 § 10.4(a). This section has not been revised to reflect the
          imposition of monetary penalties as a sanction for violating the Circular
          authorized by the American Jobs Creation Act of 2004. This determina-
          tion is made in part by a background check of the applicant. This back-
          ground check is also made with respect to a former IRS employee who
          seeks to become an enrolled agent by reason of IRS work rather than by



                                      4–16
                                       Circular 230                        § 4:6.2

Form 23.29 A fee is payable at the time of application and is non-
refundable (that is, no refund of the fee is made by the IRS to the
applicant even if the applicant is denied enrollment). The fee must
be made by check or money order payable to the “Internal Revenue
Service.”30
   An individual may also become enrolled agent by reason of prior
employment and technical experience in the IRS (again, if the individ-
ual has not engaged in conduct that would be grounds for discipline
under the Circular),31 without taking and passing an examination.
The former IRS employee must apply for enrollment within three
years after ending employment with the IRS and must have had at
least five years of continuous employment with the IRS, during which
the applicant regularly engaged in applying and interpreting the
Code and Treasury Regulations relating to income, estate, gift, employ-
ment or excise taxes.32 Once the application by a former IRS employee
is made, an appropriate IRS office, at the request of the Office of
Professional Responsibility, provides the Director of the Office with a
report of the nature and rating of the applicant’s work and a recom-
mendation whether that employment qualified the applicant “techni-
cally or otherwise” for the enrollment. The Circular seems to emphasize
technical qualification, indicating that considerable experience with the
Code, Treasury Regulations and other parts of the tax law (such as cases,
revenue rulings, revenue procedures and IRS Notices) is a prerequisite
for enrollment based upon prior employment with the IRS. That might
cover, for example, a field agent who has audited income tax returns. It
would not seem to include individuals whose IRS employment, regard-
less of its importance in the administration of the federal tax system,
involved largely management or administrative matters.
   In any case, enrollment based upon past IRS service may be
unlimited in scope or may be limited to only certain types of matters
or only within a particular unit or division of the IRS. For example, a
former IRS employee whose employment was limited to payroll tax
matters might be limited to representing taxpayers only with respect
to those and directly related matters.




           examination. Note that censure is sufficient to prevent someone from
           applying to become an enrolled agent, but censure after enrollment
           apparently does not prevent the agent from continuing to practice before
           the IRS.
 29.       This form and its instructions are reproduced at Appendix Y. See also
           www.irs.gov/pub/irs-pdf/f23.pdf.
 30.       Circular 230 § 10.4(b).
 31.       Id.
 32.       Circular 230 § 10.4(b)(5).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–17
§ 4:6.2                  THE CIRCULAR 230 DESKBOOK

   The Office of Professional Responsibility may grant an applicant
temporary recognition to practice pending a determination as to
whether permanent enrollment should be granted. However, such
temporary recognition is to be granted only in “unusual” circum-
stances which are not specified in the Circular. It might include, for
instance, a situation where a recently retired IRS employee who
developed unique expertise in taxation of fluorocarbons and has
been asking to represent a taxpayer in a complex pending matter
before the IRS that involves such tax.33
   The Director must inform any applicant who is denied enrollment
the reasons why the enrollment was denied. The applicant may,
within thirty days after receipt of the notice of denial, file an appeal
to the Secretary of the Treasury (or his or her delegate). The appeal
must be in writing. The Secretary (or delegate) is to render a decision
on appeal “as soon as practicable.”34 There is no provision in the
Circular for an individual who has been denied enrollment to seek a
hearing before the Secretary (or delegate).

             [D][2] Renewal of Enrollment As an Enrolled Agent
   The Director of Practice is required to maintain rosters of all
individuals who have been granted active enrollment, those who are
in inactive status for failure to meet renewal requirements, those in
retirement status, those who have been censured, suspended or dis-
barred from practice before the IRS,35 those whose offer to resign from
enrollment has been accepted by the Director, and those whose
application for enrollment has been denied.36
   An enrollment card is issued to each applicant admitted to practice
after July 26, 2002. An individual may not practice before the IRS if his
or her enrollment card is not valid. The enrollment card is valid for the
period stated on the card.37
   To maintain active enrollment, the enrolled agent must have his or
her enrollment renewed. Although it is understood that the Office of
Professional Responsibility notifies enrolled agents in a timely manner


 33.      It should be kept in mind that under Circular 230 § 10.25, certain former
          government employees are foreclosed from certain representations before
          the IRS with respect to some matters they worked on while in the employ
          of the IRS.
 34.      Circular 230 § 10.5(e).
 35.      This section has not been revised to reflect the imposition of monetary
          penalties as a sanction for violating the Circular authorized by the
          American Jobs Creation Act of 2004. It may be that the Office of
          Professional Responsibility will determine to maintain a roster also of
          those against whom a monetary penalty has been imposed.
 36.      Circular 230 § 10.6(a).
 37.      Circular 230 § 10.6(b).



                                      4–18
                                       Circular 230                         § 4:6.2

that they must renew, failure to receive such notification is not a
justification for failure to renew.38 In any case, the Circular provides
general information as to when renewal application is to be made based,
in part, on whether the individual was enrolled before November 2,
2004.39
   Individuals whose initial enrollment was before November 2, 2004,
and who have a Social Security or tax identification number that ends
with 0, 1, 2, or 3, must have applied for renewal between November 1,
2003, and January 31, 2004. Any such renewal (unless denied) became
effective on April 1, 2004.
   Individuals whose initial enrollment was before November 2, 2004,
and who have a Social Security or tax identification number that ends
with 4, 5, or 6, must have applied for renewal between November 1,
2004 and January 31, 2005. Any such renewal (unless denied) became
effective on April 1, 2005.
   Individuals whose initial enrollment was before November 2, 2004,
and who have a Social Security or tax identification number that ends
with 7, 8, or 9, must have applied for renewal between November 1,
2005 and January 31, 2006. Any such renewal (unless denied) became
effective on April 1, 2006.
   For periods thereafter, including those whose initial enrollment was
after November 1, 2004, renewal applications are required between
November 1 and January 31 every subsequent third year (although
those whose receive initial enrollment after November 1 and April 2
are not required to renew until the first full renewal period following
receipt of their initial enrollment) according to the foregoing rules
based on the last digit of the agent’s Social Security or tax identifica-
tion number.

               [D][3] Continuing Professional Education
   In order to qualify for renewal, an enrolled agent must certify that
he or she has satisfied the continuing professional education require-
ments set forth in section 10.6(e) of the Circular.
   For renewed enrollment effective after March 31, 2004 (and,
essentially, before April 2, 2007), the enrolled agent must have at
least sixteen hours of continuing professional education credit during
each calendar year in the enrollment term.
   For renewed enrollment effective after April 1, 2007, the enrolled
agent must have at least seventy-two hours of continuing professional


 38.       Circular 230 § 10.6(d). A reasonable nonrefundable fee may be charged for
           renewal application. The form for renewal may be obtained from the Office
           of Professional Responsibility, Internal Revenue Service, 1111 Constitu-
           tion Avenue, NW, Washington, D.C. 20224.
 39.       Id.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–19
§ 4:6.2                  THE CIRCULAR 230 DESKBOOK

education credit during the three-year period that coincides with his or
her renewal period specified above. (That approximate three-year
period is called the “enrollment cycle” in the Circular.) In addition,
the agent must have at least sixteen hours of continuing professional
education credit during each calendar year in the enrollment term,
which must include at least two hours of ethics or professional
conduct credit.
   In addition, those individuals (for their renewed enrollment effec-
tive after April 1, 2007) who are initially enrolled during an enrollment
cycle must complete two hours of qualifying continuing education
credit for each month of enrollment during the enrollment cycle.

             [D][4] Qualifying Continuing Professional Education
   To constitute continuing professional education, the course must be
a program designed to enhance professional knowledge in federal
taxation or federal tax-related matters,40 including accounting, tax
return preparation software and taxation or ethics, by a “qualifying
sponsor,” which is a program sponsor that
   (1)    is an accredited educational institution;
   (2)    is recognized for continuing education purposes by the licensing
          body of any state, territory or possession of the United States,
          including a Commonwealth or the District of Columbia;
   (3)    is recognized by the Office of Professional Responsibility as a
          professional organization or society whose program includes
          continuing professional education opportunities in federal
          taxation or federal tax-related matters; or
   (4)    files a sponsor agreement with the Office of Professional
          Responsibility and obtains approval from the Office of the
          program as qualifying.
   The sponsor must ensure that
   (1)    the program is developed by individuals qualified in the
          subject matter;
   (2)    the program content is current;
   (3)    the speakers are qualified in the subject matter;
   (4)    there is a means for evaluating the technical content and
          presentation;


 40.      It will be noted that credit for continuing professional education for
          publications under Circular 230 § 10.6(f)(2)(iv) includes publications for
          “financial management,” which are not included in the general definition
          of qualifying continuing education under Circular 230 § 10.6(f)(1)(i).



                                      4–20
                                       Circular 230                 § 4:6.2

    (5)   the program certifies (apparently to the Office of Professional
          Responsibility) which enrolled agents successfully completed
          the program; and
    (6)   the program maintains records for three years that verify
          which enrolled agents attended and completed the program.
    All professional education programs for enrolled agents are mea-
sured in terms of “contact hours.” The shortest program permitted is
one contact hour. Hence, no credit is granted for one-half of a contact
hour and apparently two one-half contact hours cannot be combined
to count as one contact hour. A contact hour is measured is terms of
fifty-minute segments. Hence, a fifty-minute program is one contact
hour; a ninety-minute program is one contact hour; and a 100-minute
program is two contact hours. For university or college courses, each
semester (apparently, one half of the “normal” school year) hour credit
equals fifteen contact hours, and each quarter (apparently, one-quarter
of the entire year for schools that divide their years into quarter-of-the-
year segments) hour credit equals ten contact hours.

               [D][4][a] Types of Qualifying Continuing Professional
                         Education
    The Circular permits four types of educational experience to count
toward the continuing professional education requirements. The first
is a formal program, which includes instruction (teaching) by a
qualified instructor (including a discussion leader who has the requi-
site background in the area taught or discussed) and which provides or
requires a written outline, textbook or suitable electronic educational
materials.
    The second qualifying education is correspondence or individual
(taped) study programs. To qualify under this second category of
education, registration with the sponsor is required, written (electron-
ic) educational materials must be provided and a method to measure
completion (for example, a written examination) must be provided,
including issuance of a certificate of completion by the sponsor.
    The third method is by serving as an instructor, discussion leader,
or speaker. Only one hour of continuing education credit is awarded
for each contact hour completed by an instructor, discussion leader, or
speaker. However, two hours are awarded for actual preparation for
each contact hour instructed or led. (An instructor must maintain
records to verify preparation time.) No more than one-half of the
continuing professional educational requirements for the enrollment
cycle may be granted for instruction and preparation. Also, an
instructor or leader may receive contact hour credit only once even
if he or she makes multiple presentations on the same subject matter
during the enrollment cycle.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–21
§ 4:6.2                   THE CIRCULAR 230 DESKBOOK

   Finally, continuing professional educational credit may be granted
for publications in federal taxation or federal tax-related matters,
including accounting, financial management, tax preparation soft-
ware, and taxation, if the content is current and designed to enhance
the professional knowledge of an enrolled agent. The meaning of
“publication” is not specified in the Circular. It certainly would include
publication of an article on a current federal tax topic in a recognized
tax publication such as Tax Notes or the Journal of Taxation. It may
also include an article that is presented at a professional program, such
as one sponsored by the AICPA or a state or local bar association, even
though not “formally” published elsewhere. In any case, one hour of
credit is granted for each hour spent in preparing the publication,
although no more than one quarter of the continuing professional
education requirements for the enrollment cycle may be granted for
such publications.

             [D][4][b] Renewal by Reexamination
   An enrolled agent may also establish eligibility for renewal for the
enrollment cycle by achieving a passing score on each part of the
Special Enrollment Examination administered by the Office of Profes-
sional Responsibility during the three-year period before renewal and
by completing sixteen hours of qualifying continuing professional
education during the last year of the enrollment cycle. 41 Unlike
an enrolled agent who applies for renewal solely on the basis of
continuing professional education (without examination), there is no
stated requirement of two hours of ethics or professional conduct.

             [D][4][c] Waiver of Continuing Professional Education
   The Circular also contains provision for a waiver from the con-
tinuing professional educational requirements for renewal of enroll-
ment. The Office of Professional Responsibility may grant a waiver for
health problems that prevented compliance with the educational
requirement, for extended active military duty, for extended absence
from the United States for employment or other reasons (as long as the
individual did not practice before the IRS during that absence), or for
another “compelling” reason. A request for waiver must include
appropriate documentation, such as military orders. The request for
waiver must be filed no later than the end of the renewal application
period. If the waiver is approved, the agent will be issued a renewal
card, but he or she must timely file the application for renewal. If the
waiver is denied, the agent is placed into inactive status.



 41.      Circular 230 § 10.6(f)(3).



                                       4–22
                                       Circular 230                            § 4:6.2

               [D][4][d] Failure to Renew
   The Director of Practice is required under the Circular to notify an
individual who fails to meet the requirements for renewal by first-class
mail. The notice must include the basis for non-compliance. The
agent has sixty days within which to furnish information, which must
be in writing, relating to the renewal, which the Director is to consider
to make a final determination for renewal enrollment. The Circular
does not provide an opportunity to demand a hearing.
   Individuals who fail to renew in a timely manner are placed on the
“inactive” roster and are prohibited from practicing before the IRS or
stating or implying that they are enrolled to practice. (They are also
prohibited from using the term “enrolled agent,” “E.A.,” or any other
reference to eligibility to practice before the IRS.)
   An individual placed into inactive status may be reinstated to active
enrollment by applying for renewal within three years of being placed
into inactive status and by providing proof to the Office of Professional
Responsibility of compliance with the continuing professional educa-
tional requirements needed for enrollment.
   A retired enrolled agent may apply for renewal by providing
evidence of completion of the continuing professional education
requirements.
   An individual who is ineligible to practice before the IRS by reason
of disciplinary action must be in conformance with the continuing
professional educational requirements before seeking to have eligibility
to practice before the IRS restored.

               [D][5] Enrolled Actuary
   An individual who is enrolled as an actuary by the Joint Board for
the Enrollment of Actuaries pursuant to 29 U.S.C. § 1242,42 and who
is not currently under suspension or disbarment from practice before
the IRS, may practice before it by filing a written statement with it that
he or she is currently qualified as an enrolled actuary and is authorized
to represent before the IRS the party or parties for whom he or she will
be acting. A former employee of the IRS may be admitted to practice
before the IRS as an enrolled actuary based upon past service and
technical experience with the IRS, if he or she has not engaged in any
conduct that would justify the censure, suspension or disbarment of
any Practitioner, apparently even though the former IRS employee is



 42.       Under that statute, the Joint Board shall, by regulations, establish reason-
           able standards and qualifications for persons performing actuarial services
           with respect to plans in which this Act applies and, upon application by
           any individual, shall enroll such individual if the Joint Board finds that
           such individual satisfies such standards and qualifications.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–23
§ 4:6.2                  THE CIRCULAR 230 DESKBOOK

not enrolled as an actuary by the Joint Board for the Enrollment of
Actuaries. Any enrollment so granted to such a former IRS employee
may be limited or unlimited in scope.
   In any case, practice before the IRS as an enrolled actuary is limited
to issues relating to certain employee retirement plans. Therefore, by
way of example, the actuary presumably could not represent a corpo-
rate taxpayer as to whether interest incurred by it is deductible for
federal income tax purposes.

             [D][6] Registered Tax Return Preparers and PTINs:
                    2011 Amendment
   The thrust of the 2011 amendments to the Circular concerns the
expansion of the regulation of tax-return preparers. Prior to these
amendments, anyone could prepare a tax return for compensation. 42.1
The mere preparation of a return did not make a preparer subject to
the Circular ’s duties and restrictions.42.2 Under the amendments,
only the following individuals may prepare a tax return for compensa-
tion: attorneys, CPAs, enrolled agents and registered tax return
preparers.42.3
   The registered-tax-return-preparer concept is new, requiring one
who seeks this status to pass a competency exam,42.4 to take continu-
ing education42.5 and to pass a suitability check.42.6 Thus, under the
amendments, anyone who prepares a tax return for compensation and
who is not an attorney, CPA or enrolled agent must secure registered-
tax-return-preparer status. On the other hand, any individual may,
without securing such status, provide assistance in preparing tax
returns or refund claims provided the service does not constitute the
preparation of substantially all of the return or refund claim. 42.7 The
amendments also expand the scope of the Circular, making all paid
preparers of returns and documents that are submitted to the IRS
subject to its duties and restrictions.
   The registered-tax-return-preparer amendments are largely con-
tained in a handful of sections: 10.3, 10.4, 10.5, 10.7, 10.8 and


 42.1.    See Notice 2011-6, 2011-3 I.R.B. 315; see also Publication 4832.
 42.2.    See Circular 230 § 10.2 (defining practice before the IRS but not including
          any reference to the preparation of returns).
 42.3.    Circular 230 § 10.8(a) provides that only attorneys, CPAs, enrolled agents
          or registered tax return preparers can obtain a PTIN. In addition, Treas.
          Reg. § 1.6109-2 provides that all tax return preparers must obtain a PTIN.
 42.4.    See Notice 2011-6, 2011-3 I.R.B. 315.
 42.5.    See Circular 230 § 10.6(f).
 42.6.    See Circular 230 § 10.5(d). See also Circular 230 § 10.6 (requiring
          registered tax return preparers, enrolled agents and enrolled retirement
          plan agents to satisfy a renewal process).
 42.7.    See Circular 230 § 10.8(b).



                                       4–24
                                       Circular 230                                § 4:6.2

10.9. Thus, as the preamble to the 2011 amendments explicitly states,
attorneys and CPAs, who need not secure registered-tax-return-
preparer status, need not concern themselves with these amendments.
   Mirroring Treasury Regulations section 1.6109-2, section 10.8
provides that all tax return preparers must obtain a PTIN. 42.8 A tax
return preparer is defined for this purpose as “any individual who is
compensated for preparing, or assisting in the preparation of, all or
substantially all of, a tax return or claim for refund of tax.” 42.9 In order
to obtain a PTIN, as a general rule, the preparer must be an attorney,
certified public accountant, enrolled agent or registered tax return
preparer.42.10 Under an exception, the regulation authorizes indivi-
duals under the supervision of certain preparers, such as a paralegal, to
obtain a PTIN.42.11
   The requirement that a preparer obtain a PTIN does not necessarily
apply to all tax professionals. Consider, for example, an attorney who


 42.8.     But see Notice 2011-91, 2011-47 I.R.B. 792 (indicating that section 10.4
           of the Circular would be amended to eliminate the requirement that an
           enrolled retirement plan agent obtain a PTIN).
 42.9.     See Treas. Reg. § 1.6109-2(g). This regulation makes a distinction between
           the kind of service that triggers the requirement to obtain a PTIN, on the
           one hand, and the kind of service that could expose the Practitioner to
           penalty under section 6694, on the other. For purposes of the section 6694
           penalty, which imposes penalties on a paid return preparer, Treas. Reg.
           § 301.7701-15(b)(2) provides that a person is only treated as such a
           preparer if he/she prepares a substantial portion of the return. That is, a
           non-signing adviser is treated as a return preparer for section 6694
           purposes if advice is given about a position taken on the return where
           the tax liability attributable to the position is a substantial portion of the
           taxpayer ’s overall liability. See Treas. Reg. § 301.7701-15(b)(3). In contrast,
           Treas. Reg. § 1.6109-2, which requires that a preparer obtain a PTIN,
           provides that a person is deemed a preparer for this purpose only if he/she
           prepares all or substantially all of the return. See Treas. Reg. § 1.6109-2(g),
           Example 4 (providing an example that illustrates this distinction). Thus, as
           the cited example indicates, a person may be considered a paid return
           preparer for purposes of the section 6694 penalty but may nonetheless not
           be required to obtain a PTIN.
 42.10.    See Treas. Reg. § 1.6109-2(d). Note that the IRS has the authority to make
           exceptions to the general rule stated in text. See Treas. Reg. § 1.6109-2(h).
           Pursuant to this provision, the IRS has indicated that certain returns can
           be filed by a person who does not obtain a PTIN. See Notice 2011-6,
           2011-3 I.R.B. 315.
 42.11.    Pursuant to the authority granted the IRS in Treas. Reg. § 1.6109-2(h),
           certain individuals who are supervised by a Practitioner—but not a
           registered tax return preparer—may obtain a PTIN and prepare returns
           for compensation. See Notice 2011-6, 2011-3 I.R.B. 315. Unlike a
           registered tax return preparer, such a supervised individual need not pass
           a competency exam or take continuing education in order to obtain a
           PTIN. Although such supervised individuals become subject to the Cir-
           cular ’s duties and restrictions by reason of the Notice and section 10.8(a),
           the Notice explicitly prohibits them from signing the returns they prepare.



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§ 4:6.2                   THE CIRCULAR 230 DESKBOOK

prepares a single return for a single client. The attorney would be
required to obtain a PTIN. If, on the other hand, the attorney did not
prepare a return (or substantially all of a return) for any client but
merely gave clients on a for-compensation basis advice about the
treatment of various tax-related issues, the attorney would not need
to obtain a PTIN. To be sure, the attorney could be treated as a return
preparer for purposes of the section 6694 penalty.42.12 But acting as a
return preparer within the meaning of section 6694 does not inex-
orably lead to a requirement that a PTIN be obtained. In short, the
PTIN-related concept of return preparation is different from the
counterpart concept in section 6694.42.13
   In order to secure registered-tax-return-preparer status, an individ-
ual must (1) complete a competency examination or otherwise satisfy
standards prescribed by the IRS; (2) possess a valid PTIN; and (3) not
have engaged in conduct that would warrant suspension or disbarment
under the Circular.42.14 Until the competency exam is operational,
preparers hoping to secure registered-tax-return-preparer status can
obtain a PTIN on a provisional basis and will be permitted to prepare
returns in the interim (as well as appear before the IRS in connection
with returns they have prepared provided they were permitted to

          Thus, for example, a person who works for an attorney and who assists in
          preparing returns or actually prepares returns that are signed by the
          attorney may obtain a PTIN if over the age of 18. See Notice 2011-6,
          2011-3 I.R.B. 315. If the employee failed to obtain a PTIN, he/she would
          be in violation of Treas. Reg. § 1.6109-2(d) as well as the Circular.
          See section 10.8(a) (requiring any individual who prepares a return, or
          substantially all of a return, to secure a PTIN and imposing the Circular ’s
          duties on such an individual).
 42.12.   See Treas. Reg. § 301-7701-15 (defining the term “tax return preparer” for
          purposes of section 6694).
 42.13.   Treas. Reg. § 1.6109-2 makes a distinction between the kind of service that
          triggers the requirement to obtain a PTIN, on the one hand, and the kind
          of service that could expose the Practitioner to penalty under section 6694,
          on the other. For purposes of the section 6694 penalty, which imposes
          penalties on a paid return preparer, Treas. Reg. § 301.7701-15(b)(2)
          provides that a person is only treated as such a preparer if he/she prepares
          a substantial portion of the return. That is, a non-signing adviser is treated
          as a return preparer for section 6694 purposes if advice is given about a
          position taken on the return where the tax liability attributable to the
          position is a substantial portion of the taxpayer ’s overall liability.
          See Treas. Reg. § 301.7701-15(b)(3). In contrast, Treas. Reg. § 1.6109-2,
          which requires that a preparer obtain a PTIN, provides that a person is
          deemed a preparer for this purpose only if he/she prepares all or substan-
          tially all of the return. See Treas. Reg. § 1.6109-2(g), Example 4 (providing
          an example that illustrates this distinction). Thus, as the cited example
          indicates, a person may be considered a paid return preparer for purposes
          of the section 6694 penalty but may nonetheless not be required to obtain
          a PTIN.
 42.14.   See Circular 230 § 10.4(c).



                                        4–26
                                       Circular 230                           § 4:6.2

do so).42.15 Registered tax return preparers, as well as enrolled agents and
enrolled retirement plan agents, will be required to take continuing
education in order to satisfy the Circular ’s renewal requirements.42.16
   Unlike attorneys, CPAs and enrolled agents, a registered tax return
preparer does not enjoy the ability to practice before the IRS on an
unlimited basis.42.17 Such a preparer may only prepare returns and
appear before the IRS with respect to a return he/she has prepared. 42.18
   Registered tax return preparers are subject to the duties and
restrictions that the Circular imposes on an attorney, CPA or enrolled
agent.42.19 In addition, under section 10.8(a), any individual who
prepares for compensation (or assists in preparing) a tax return or
refund claim (or substantially all of the return or claim) becomes
subject to these duties and restrictions. Section 10.8(c) extends this
provision to documents other than tax returns or refund claims. It
provides that an individual who prepares, or assists in preparing, for
compensation all or a substantial portion of a document pertaining to
any person’s tax liability for submission to the IRS becomes subject to
the Circular.42.20 Thus, a person who is hoping to become a registered
tax return preparer when the competency exam becomes available and
who has obtained a PTIN on an interim basis becomes subject to the
Circular ’s duties and restrictions under subsection (a) by reason of
preparing a return or under subsection (c) by reason of preparing a
document for submission to the IRS.42.21 Also, under subsection (a),
any individual who is not an attorney, CPA, enrolled agent or
registered tax return preparer and who nonetheless prepares returns
for compensation is subject to the Circular ’s duties and restrictions.
Thus, even though such an individual is not authorized to prepare


 42.15.    See Notice 2011-6, 2011-3 I.R.B. 315.
 42.16.    See Circular 230 § 10.6; see also section 10.9. In Notice 2011-61, 2011-31
           I.R.B. 91, the IRS requested public comments regarding the continuing-
           education process. In Rev. Proc. 2012-12, 2012-2 I.R.B. 275, the Service
           announced the requirements to become a continuing-education provider.
           See also IR 2011-89 (discussing the nature and scope of the competency
           exam to be taken by registered tax return preparers).
 42.17.    See Circular 230 § 10.3.
 42.18.    See Circular 230 § 10.3(f). A registered tax return preparer may not appear
           “before appeals officers, revenue officers, Counsel or similar officers or
           employees of the Internal Revenue Service or the Treasury Department.”
           See section 10.3(f)(3); section 10.7(c)(1)(viii).
 42.19.    See Circular 230 § 10.2(f)(4).
 42.20.    Note that Circular 230 § 10.8(c) creates an exception by cross-referencing
           Treas. Reg. § 301.7701-15(f). So, for example, a person who supplies typing
           or similar assistance in preparing a document for the Service does not
           become subject to the Circular ’s duties.
 42.21.    See also Notice 2011-6, 2011-3 I.R.B. 315 (imposing the Circular ’s duties
           and restrictions on individuals who practice before the IRS on an interim
           basis).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–27
§ 4:6.2                    THE CIRCULAR 230 DESKBOOK

returns for compensation, he/she nonetheless becomes subject to the
Circular by reason of actually rendering such service.
    While section 10.8(a) and 10.8(c) are essentially parallel provisions,
there is an important difference that should be underscored. While an
individual becomes subject to the Circular under subsection (a) by
preparing all, or substantially all, of a return or refund claim for
compensation, an individual could become subject to the Circular
under subsection (c) merely by writing a letter to the IRS on a for-
compensation basis. Another difference between these two subsections
is also worth noting. Consider an individual who assists in preparing a
schedule attached to a return that reflects a deduction that generates a
tax savings that is substantial in relation to the taxpayer ’s overall
liability. Such assistance would appear not to constitute the prepara-
tion of the entire return or substantially all of the return. As a result,
the individual would not become subject to the Circular ’s obligations
merely because he/she provided such assistance. In contrast, if the
individual assisted in preparing a similar schedule that is attached to a
letter to the IRS, rather than to a return, subsection (c) would appear to
make the individual subject to the Circular. While the difference in
language in the two subsections does seem to call for this distinction,
it is not clear whether it was intended.
    Finally, the IRS has determined that individuals who prepare for
compensation tax returns other than a Form 1040, for example, a
corporate income tax return, and who are not an attorney, CPA or
enrolled agent may do so without having to pass a competency exam or
take continuing education—though the IRS may change this approach
in the future.42.22 Such individuals may obtain a PTIN and may sign the
returns they prepare.42.23 They may also represent the taxpayer before
the IRS with respect to a return they signed.42.24 They may not, however,
represent themselves to the public or to the IRS as a registered tax return
preparer or a Circular 230 Practitioner.42.25 Nonetheless, by reason of
preparing a tax return—albeit a return other than a Form 1040—they
become subject to the Circular ’s duties and restrictions.42.26

            [E]      Representation of Oneself; Participation in
                     Rulemaking; Special Appearances; Return
                     Preparation
   In addition to attorneys, CPAs, enrolled agents and enrolled actu-
aries, the Circular permits others in certain circumstances to practice


 42.22.   See   Notice 2011-6, 2011-3 I.R.B. 315.
 42.23.   See   id.
 42.24.   See   id.
 42.25.   See   id.
 42.26.   See   id.; see also Circular 230 § 10.8(a).



                                         4–28
                                       Circular 230                             § 4:6.2

before the IRS.42.27 This practice includes, for example, representing
immediate family members. Even this limited practice, however,
is not allowed for anyone who is under suspension or disbarment
from practice before the IRS. Hence, it seems that an individual who
is under suspension or disbarment from practice before the IRS
may not represent an immediate family member although he or she
may represent himself or herself.43 In addition, other than when
representing oneself, an individual who is not a Practitioner may be
denied eligibility to engage in the representation of others specified
below although only after notice and an opportunity for a conference.
Also, such representatives may be subject to additional rules of
conduct.

               [E][1] Representation of Oneself
   Individuals may represent themselves before the IRS upon
presenting satisfactory identification, and may participate in rule-
making by the IRS as provided in the Administrative Procedure Act
(5 U.S.C. § 553).44

               [E][2] Representation of an Immediate Family Member
   Upon presenting satisfactory identification and providing proof of
authority to do so, an individual may represent a member of his or her
immediate family.45 Although no definition of immediate family is
provided by the Circular, one is contained in the Internal Revenue
Code, which lists one’s spouse and any child, parent, grandparent,
brother, half-brother, sister, or half-sister, and the spouses of such
persons.46 Although not certain, it seems that the Code definition
would be applied for purposes of the Circular.

               [E][3] Representation of an Individual Employer
   A regular full-time employee of an individual employer may repre-
sent the employer.47 No definition is provided in the Circular of
“regular,” “full time” or “individual employer.” The term “individual
employer” presumably encompasses individuals who have employees
and who operate as an employer through a proprietorship. Although it
is not certain, “employee” might be found to have the same definition



 42.27.    See Wright v. Everson, 543 F.3d 649 (11th Cir. 2008) (explaining section 10.7
           and holding it valid).
 43.       Circular 230 § 10.7(a), (c)(1), (c)(2).
 44.       Circular 230 § 10.7(a).
 45.       Circular 230 § 10.7(c)(1)(i).
 46.       I.R.C. § 9004(e).
 47.       Circular 230 § 10.7(c)(1)(ii).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–29
§ 4:6.2                   THE CIRCULAR 230 DESKBOOK

as provided in the Code and, therefore, would exclude an independent
contractor.48

             [E][4] Representation of a Partnership
    A general partner49 (but apparently not a limited partner) or a regular
full-time employee of a partnership may represent the partnership.50
The Circular does not provide that the “tax matters partner” within
the meaning of section 6231 of the Code is a representative or the
representative of the partnership before the IRS,51 even though, as a
general rule, the Tax Matters Partner must be a general partner. In any
case, the Circular seems relatively certain that any general partner, even
if not the Tax Matters Partner, may represent the partnership before the
IRS.
    The Circular does not have an express rule as to whom may
represent a limited liability company (LLC) even if taxed as a partner-
ship.52 LLCs are managed by the members (owners) in a “member
managed” LLC or by a manager who may or may not be a member in a
“manager managed” LLC.53

             [E][5] Representation of a Corporation and Similar
                    Organized Groups
    A bona fide officer or regular full-time employee of a corporation
(including such an officer or employee of a parent, subsidiary, other
affiliated corporation), association, or organized group may represent
the corporation, association or organized group.54 The Circular does




 48.      The Code contains many definitions of employee. See, e.g., I.R.C.
          §§ 1402(d), 3121.
 49.      UNIFORM LIMITED PARTNERSHIP ACT § 102 contains definitions of general
          partner.
 50.      Circular 230 § 10.7(c)(1)(iii).
 51.      The Tax Matters Partner is that general partner so designated. If none is so
          designated, it is the general partner having the largest profits interest at the
          close of the taxable year involved or, if more than one has the largest profits
          interest, the partner whose name appears first alphabetically. If there is no
          general partner, the Secretary of the Treasury may designate any partner as
          the Tax Matters Partner. The Code imposes certain duties and grants
          certain powers to the partnership’s Tax Matters Partner. See, e.g., I.R.C.
          §§ 6223(g) and 6226(a).
 52.      A limited liability company or similar entity (e.g., limited liability partner-
          ship) may elect to be taxed as a partnership (if there is more than one
          owner) or as a corporation. Treas. Reg. § 301.7701-2(a). It is understood
          that almost all limited liability companies with more than one owner are
          taxed as partnerships.
 53.      See, e.g., DEL. CODE ANN. tit. 6, § 18-402.
 54.      Circular 230 § 10.7(c)(1)(iv).



                                         4–30
                                       Circular 230                              § 4:6.2

not provide definitions of certain of the terms involved in this
representation.55
   The Circular does not specify who may represent a limited liability
company (LLC) or similar entity. An LLC may elect to be taxed as a
corporation.56 In such a case, it might seem that the same rule for
representation for a corporation should apply—that is, any representa-
tion may be conducted by a bona fide officer or regular full-time
employee. An LLC may not have an officer or employee although
any manager or managing member57 (whether or not a member or
owner of the LLC) might be treated as such an officer or employee for
such purposes. If the LLC is not taxed as a corporation, but rather as a
partnership, it seems logical, but it is by no means certain, that the
rules under the Circular for representing a partnership should apply.
Of course, if it is a single member (that is, one owner) LLC which is
not taxed as a corporation, the existence of the LLC is ignored for
federal tax purposes58 and the income, deductions and credits of the
LLC are attributed directly to that owner, in which case, the rules for
representing that taxpayer under the Circular probably will apply. For
example, if the single member of the LLC (that is not taxed as a
corporation) is an individual, the rules for representing an individual
might apply. If the single member of such an LLC is a corporation,
then the rules for representing a corporation may apply.59



 55.       For example, the meaning of “bona fide” for certain tax purposes is some-
           what unsettled. Cf. Estate of Schutt v. Comm’r, T.C. Memo 2005-126,
           and Estate of Bongard v. Comm’r, 124 T.C. 95, 113 (2005) (Halpern, J.,
           concurring and dissenting).
 56.       Treas. Reg. § 301.7701-2(b). Unless it is a corporation or elects to be taxed
           as a corporation pursuant to Reg. § 301.7701-2(b), a single member entity
           is disregarded for federal tax purposes. See Littriello v. United States, 2005
           U.S. Dist. LEXIS 9813 (W.D. Ky. 2005) (single member of LLC liable
           for FICA taxes and upholding the regulations under I.R.C. § 7701);
           Kandi v. United States, 2006 U.S. Dist. LEXIS (W.D. Wash. 2006)
           (similar); but see REG-114371-05 for proposed regulation that would
           provide that an owner of a disregarded single member entity is not
           personally liable for employment taxes.
 57.       Cf., e.g., DEL. CODE ANN. tit. 6, § 18-402 (“Unless otherwise provided in a
           limited liability company agreement, each member and manager has the
           authority to bind the limited liability company.”).
 58.       Treas. Reg. § 301.7701-3(b)(1)(ii).
 59.       As logical as those two contentions may seem, the IRS has refused, in
           some cases, to issue private letters rulings clarifying whether the partner-
           ship or corporation rule of a particular Code section applies, where the
           section provides somewhat different rules for partnerships and for corpora-
           tions, when asked to specify which rule applies where the entity is an LLC.
           That has occurred, for example, with respect to a request for ruling under
           I.R.C. § 2701 (relating to special gift tax valuation rules for certain
           transfers with respect to entities).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–31
§ 4:6.2                    THE CIRCULAR 230 DESKBOOK

             [E][6] Representation of a Trust, Etc.
   A regular full-time employee of a trust, receivership, guardianship
or estate may represent the trust, receivership, guardianship or
estate.60 As a theoretical legal matter, many of these “entities” may
not exist. Rather than represent a type of legally recognized entity, the
term connotes a legal relationship, such as being a trustee.61 In other
words, although it is common to speak of a trust, there seems to be
some debate as to whether such entity exists under at least certain
principles of law.62 Hence, the employee would seem to include one of
the trustees. In fact, the Circular provides that a fiduciary (for
example, a trustee) is considered to be the taxpayer and not a
representative of the taxpayer.63 Because (subject to the limitations
expressed above) a taxpayer is permitted to represent himself or herself
before the IRS, it seems a fiduciary may represent himself or herself in
his or her fiduciary capacity—for example, a trustee may represent the
“trust.” Although no guidance is provided where the fiduciary is not an
individual (in the case of, for example, a corporate fiduciary), it seems
that a regular employee of the fiduciary (for example, a trust officer)
may represent the trust, estate, etc. In other words, the rules relating
to representing a corporation apply even though the corporation is
acting in a fiduciary capacity. In fact, in practice, the officers of
corporate fiduciaries very often do represent the fiduciary. And no
special form (such as the IRS Power of Attorney Form 2848) is filed
with the IRS in the case of such a representation.
   An interesting question is who may represent a trust that is a
grantor trust in its entirety for federal income tax purposes. Such a
trust is one in which all of the income, deductions and credits against
tax are attributed to the “owner” of the trust, which usually is the
grantor who created it.64




 60.      Circular 230 § 10.7(c)(1)(v).
 61.      ASCHER, SCOTT, FRATCHER, SCOTT ON TRUSTS § 170.
 62.      See generally SCOTT ON TRUSTS § 2.4 (“It will be noticed . . . that we have
          said that a trust is a relationship. . . . Legal writers and courts have
          sometimes defined a trust as a certain kind of duty or obligation. Such a
          definition is too narrow. . . . It would seem proper . . . to define the trust
          either as a relationship . . . or perhaps as a juridical device of legal
          institution. . . .”). Note that Subchapter J of Chapter 1 of the Code has
          many references to “trust” indicating that, for federal income tax purposes, it
          is regarded as a separate legal entity. See, e.g., I.R.C. § 651(a). Nevertheless, it
          will be noted that the applicable federal income tax return is called a
          “Fiduciary” return (see Form 1041), not a “Trust” or “Estate” return.
 63.      Circular 230 § 10.7(f).
 64.      See I.R.C. §§ 671–79.



                                          4–32
                                       Circular 230                          § 4:6.2

   It is the official position of the IRS that a grantor trust does not
exist for federal income tax purposes.65 The trustee of such a trust may
well be someone other than the grantor. Such a trust may be required
to file an information United States Fiduciary Income Tax Return
(Form 1041) with the IRS. At least in such a case, it seems that the
rules on representing a trust (or trustee) discussed above could or
should apply rather than the rules for representing an individual
(that is, the grantor or other owner of the trust). The answer seems
less certain if the trust and its income tax reporting procedures are
structured so no income tax return for the trust need be and is not filed
with the IRS.66 Because the trust, according to the IRS, is completely
disregarded for federal income tax purposes, it may be that only those
who could represent the grantor may represent the grantor trust before
the IRS since all income, deductions and credits against tax of the
trust are attributed directly to the grantor. But, in some cases, other
federal tax issues may arise with respect to the grantor trust, which is
apparently not disregarded for such other tax purposes. For instance,
in some cases, the trustee (or trust) may be liable for generation-
skipping transfer tax (as opposed, for example, to the grantor being
liable for such tax).67 The trust almost certainly is not disregarded for
generation-skipping transfer tax purposes, so the rules for representing
the trust (or the trustee) would seem to apply rather than those
relating to representing the grantor (which may be an individual or a
corporation). Also, a trust may be a grantor trust only in part.68 In
such a case, a United States Fiduciary Income Tax Return must be filed
by the trustee, but it is uncertain whether the trustee, the grantor or
both would needed to be represented before the IRS.

               [E][7] Representation of Governmental Entities
   An officer or regular employee of a governmental unit, agency, or
authority may represent the unit, agency, or authority in the course of
his or her official duties.69 The fact that this representation is limited
to “his or her official duties” suggests that only an officer or employee




 65.       Rev. Rul. 85-13, 1985-1 C.B. 184. Accord Madorin v. Comm’r, 84 T.C. 667
           (1985). Note that Rothstein v. United States, 735 F.2d 704 (2d Cir. 1984),
           is contra. In Rev. Rul. 85-13, the IRS announced it would not follow
           Rothstein.
 66.       See generally Jonathan G. Blattmachr & Bridget J. Crawford, Grantor
           Trusts and Income Tax Reporting Requirements: A Primer, PROB. PRAC.
           REP. Vol. 13, No. 5 (May 2001).
 67.       See I.R.C. § 2662.
 68.       Treas. Reg. § 1.671-2(a).
 69.       Circular 230 § 10.7(c)(1)(vi).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–33
§ 4:7                   THE CIRCULAR 230 DESKBOOK

of the governmental entity who is authorized to represent it before
the IRS may do so. In other words, an officer or employee who is not
authorized to represent the government entity before the IRS may not
do so. It is uncertain how such proof of authority to represent the
government entity before the IRS is established. It may be that local
rules that authorize certain officers or employees to take action on
behalf of the government entity would be sufficient to grant the
authority to someone to represent the entity. It may be, in certain
cases, that the IRS would demand proof, including a resolution of the
board of a corporation that is the taxpayer.

           [E][8] Representation of Entities by Practitioners
   It seems that an attorney, CPA or enrolled agent may also be
authorized to represent any one of the above referenced entities or
persons (for example, a corporation, partnership, trust, governmental
entity). The IRS Form 2848 (Power of Attorney) seems to envision that
the appropriate officer of the entity would designate the attorney, CPA
or enrolled agent to be its representative before the IRS. Presumably,
normal rules for determining who within the organization is autho-
rized to designate the representative of the entity would apply for such
purpose.

           [E][9] Representation of a Person Outside the United
                  States
   Any individual may represent another individual or an entity
who or that is outside the United States before personnel of the IRS
when such representation takes place outside the United States. 70 No
requirement of professional standing (for example, being a CPA) or
other relationship (for example, being a family member or employee of
the taxpayer) is stated in the Circular as being required. Hence, a
taxpayer outside the United States apparently may designate any
individual as his, her or its representative before the IRS by so
designating that individual in a Form 2848, if the representation
will occur outside of the United States.

§ 4:7      Duties and Restrictions on Practice Before the IRS
   The Circular places duties and restrictions on the conduct of
Practitioners seeking to maintain their authority to practice before
the IRS. These duties and restrictions may include activities that fall
outside of their practice before the IRS.71



 70.    Circular 230 § 10.7(c)(1)(vii).
 71.    Circular 230 §§ 10.20–10.38.



                                     4–34
                                       Circular 230                              § 4:7.1

    § 4:7.1           Information to Be Supplied to the IRS
   Circular 230 prescribes specific rules on supplying information to
the IRS. Practitioners may be disciplined under the Circular for failing
to do so in accordance with the requirements of the Circular.72

               [A] Practitioner Responsibility
   Section 10.20(a)(1) requires a Practitioner, on a proper and lawful
request by a duly authorized officer or employee of the IRS, promptly
to submit records or information in any matter before the IRS unless
the Practitioner believes, in good faith and on reasonable grounds, that
the record or information is privileged.
   Although not expressly stated in the Circular, it seems apparent
that the records or information referred to in section 10.20(a)(1) are
those records or information requested by the duly authorized officer
or employee of the IRS. Also, although not expressly stated, the
requirement that the officer or employee must be duly authorized
means the request by that person must be in his or her capacity as
such officer or employee and must related to some IRS matter.
Presumably, an employee may not on his or her own initiative
instigate a request unless it is within the scope of his or her duties.
   The terms “proper” and “lawful” are not defined. The former term
might imply a rather broad limitation.73 For example, if the request is
irrelevant to the matter before the IRS, it might be regarded as not
proper. Nevertheless, the result is not clear. An improper request also
might include a demand for information addressed to a taxpayer ’s
attorney whom the IRS employee knows would be violating a client
confidence by disclosing it. The word “lawful” is not explained.
Although there are several general definitions of the term,74 its mean-
ing in the Circular is uncertain. Presumably, a request that would
violate the law on some other ground, such as an invasion of privacy,
harassment or other tortious conduct would be unlawful.
   The term “promptly” is not defined but probably means within a
reasonable time under the circumstances. Opinions, of course, might
vary widely about what is regarded as promptly under the specific



 72.       Circular 230 § 10.20.
 73.       AMERICAN HERITAGE DICTIONARY defines “proper” as: “(1) characterized
           by appropriateness or suitability; (2) called for by rules or conventions;
           correct; (3) strictly following rules or conventions, especially in social
           behavior; (a) belonging to one; own: restored to his proper shape by the
           magician, (b) characteristically belonging to the being or thing in question.”
 74.       BLACK’S LAW DICTIONARY (7th ed.) defines “lawful” as: “Not contrary to
           law; permitted by law.” “Legal” has been defined as: “(1) Of or relating to
           law; falling within the province of law; (2) established, required, or
           permitted by law.”



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–35
§ 4:7.1                THE CIRCULAR 230 DESKBOOK

circumstances involved. Although arising in another context, the
National Office of the IRS, in one instance, permanently closed the
file for a request for a private letter ruling even though a heart
operation prevented the taxpayer from being able to provide the
information in what the personnel working on that matter determined
to be a timely fashion. The matter was not litigated and the National
Office refused to return the filing fee the taxpayer had paid for the
ruling.
    Section 10.20(a)(2) requires a Practitioner promptly to notify the
requesting IRS officer or employee he or she does not have possession
of or control over the requested information or record. In other words,
even if the Practitioner does not have the information requested by the
IRS, he or she must promptly so advise the IRS and cannot simply
ignore the request.
    Also, the Practitioner must provide any information about the
identity of the person or persons whom the Practitioner believes
may have possession or control of the requested record or information
if the Practitioner to whom the request was made does not have it. The
Circular may require that the Practitioner provide the identity of such
person or persons even if not specifically requested in those cases
where the Practitioner does not have the requested record or informa-
tion. For example, the IRS requests information from a Practitioner.
It does not request the identity of anyone else who might have it. The
Practitioner does not have it but knows who does have it. It seems the
Practitioner must promptly advise the IRS of the fact that he or she
does not have the information. The Practitioner must also provide to
the IRS the identity of the person who does have the information.
No doubt disagreements as to what constitutes a “belief” and “may”
could arise. It might not apply, for example, to situations where the
Practitioner has a hunch that a particular person might have the
requested information or record. It certainly would cover a situation
where the Practitioner is aware that the record or information is held
by another person at his or her firm.
    Furthermore, the Practitioner must make reasonable inquiry of his
or her client regarding the identity of any person who may have
possession or control of the requested record or information but
need not make inquiry of any other person or independently verify
any information provided by the Practitioner ’s client about the iden-
tity of any such person.
    Section 10.20(a)(2), unlike sections 10.20(a)(1) and 10.20(b), does
not contain an exception for privilege. For example, the Practitioner,
who is a lawyer, is aware his or her client has the information or record
but the client has previously instructed the attorney not to divulge that
the client has it. No exception is written into section 10.20(a)(2). Yet it is
difficult to imagine that an attorney would be subject to discipline for



                                   4–36
                                       Circular 230                                  § 4:7.1

complying with the client’s direction as long as that direction would
be enforceable (for example, it is not fostering a crime or fraud).75
For example, one Practitioner represents another who is being investi-
gated by the IRS for potential violations.
   It is important to note that the requirement of providing the
requested records or information pursuant to section 10.20(a) or
section 10.20(b) does not seem to be limited to or even need to involve
a situation where the request is pursuant to a subpoena or summons.
Sections 10.20(a) and 10.20(b) seem to encompass a mere verbal
request. However, it may be that any request made that would not
be enforced by a court is not “lawful” within the meaning of section
10.20. In other words, if for any reason a court determines that the
request will not be enforced, it may be that the request is by definition
not “lawful.” For example, it appears that the IRS may not enforce a
summons/subpoena in court for information or records from a
taxpayer that the IRS already has in its possession.76 It is far from
certain, however, whether a refusal by a court to enforce a summons or
subpoena for information means the request is not “proper and lawful”
within the meaning of the Circular. If an IRS request may be proper
and lawful, even if a court would not enforce a summons 77 for the
information or subpoena78 for testimony, the Practitioner, who does
not promptly comply with the request, might be subject to disciplinary


 75.       Under MODEL RULES OF PROF ’L CONDUCT R. 1.2(d), a lawyer may not
           counsel a client to engage, or assist a client, in conduct that the lawyer
           knows is criminal or fraudulent.
 76.       See United States v. Powell, 379 U.S. 48, 49 (1964). However, in the “real
           world,” a court likely would order it to be produced if the IRS has difficulty
           locating it.
 77.       A “subpoena” is a writ commanding a person to appear before a court or
           other tribunal, subject to a penalty for failing to comply. To “subpoena” is
           to call before a court or other tribunal by subpoena; to order the production
           of (documents or other things) by subpoena duces tecum. For purposes of
           sharing information with other agencies, IRS retains its power to issue
           subpoenas so long as it is actively conducting bona fide investigation of
           taxpayer ’s civil liability and confines its sharing of information to limits of
           I.R.C. § 6103. United States v. Scholbe, 664 F.2d 1163 (10th Cir. 1981).
           FED. R. CIV. P. 45 sets forth the rules for the form of the subpoena, its
           service, how the person to whom it is addressed must respond and a
           provision for contempt if this is not done.
 78.       A “summons” is a writ or process commencing the plaintiff ’s action and
           requiring the defendant to appear and answer. See I.R.C. § 7602. Sum-
           monses are within scope of 26 U.S.C. § 7602, where they are issued in
           good-faith investigation of civil liability. United States v. Boulware, 350
           F. Supp. 2d 837 (D. Haw. 2004). A summons under I.R.C. § 7602 may be
           issued where investigation is to some extent conducted for determination
           of civil liability since there is the possibility of error in a taxpayer ’s returns
           for closed years. Lash v. Nighosian, 273 F.2d 185 (1st Cir. 1959), cert.
           denied, 362 U.S. 904 (1960).



(Circ. 230 Deskbook, Rel. #12, 3/12)       4–37
§ 4:7.1                   THE CIRCULAR 230 DESKBOOK

action under the Circular. Nevertheless, it seems that if a subpoena or
summons would not be enforced the request for it should not be
regarded as proper and lawful.
   In any disciplinary proceeding brought against a Practitioner by the
Director of Practice, the Administrative Law Judge will rule on ques-
tions of the construction of the Circular. It is important to keep in
mind that a court, as a general matter, must follow the construction
of a regulation proposed by the agency charged with the enforcement of
the statute under which the regulation was promulgated. 79
   As stated, a Practitioner need not personally comply with the
request if the Practitioner believes in good faith and on reasonable
ground that such record or information is privileged. 80
   No definition of “good faith” is provided under the section or
otherwise in the Circular. But “good faith” is used in several Treasury
regulations. For example, in determining if a transfer for estate tax
purposes has been made in a bona fide sale for an adequate and full
consideration (which may prevent a pre-death transfer from being
included in the transferor ’s gross estate for federal estate tax purposes),
“the transfer must have been made in good faith.” 81 “Reasonable
ground” is not defined or explained in the Circular.82 It seems somewhat


 79.      See Auer v. Robbins, 519 U.S. 452 (1997).
 80.      The prior version of this rule not only provided that the request need not
          be complied with where the Practitioner believed that the record of
          information was privileged but also where the Practitioner believed in
          good faith and on reasonable grounds that the request for, or effort to
          obtain, the record or information was of “doubtful legality.” See Adden-
          dum to Treasury Department Circular No. 230 (Rev. 7-2002) § 10.20(a), in
          Appendix B of this treatise.
 81.      Treas. Reg. § 20.2043-1. Note also that I.R.C. § 6664 provides that a
          taxpayer may avoid the underpayment of tax penalties imposed by I.R.C.
          § 6662 by showing the position taken that resulted in the underpayment
          was taken in good faith and with reasonable cause. See Melnik v. Comm’r,
          T.C. Memo 2006-25, for an example of the application of I.R.C. § 6664 to
          avoid an underpayment of tax penalty under I.R.C. § 6662.
 82.      BLACK’S LAW DICTIONARY (7th ed.) refers to “probable cause” for the
          meaning of “reasonable grounds,” and it defines “probable cause” as a
          reasonable ground to suspect that a person has committed or is commit-
          ting a crime or that a place contains specific items connected with a crime.
          Under the Fourth Amendment to the U.S. Constitution, probable cause—
          which amounts to more than a bare suspicion but less than evidence that
          would justify a conviction—must be shown before an arrest warrant or
          search warrant may be issued. Treas. Reg. § 1.6664-4 sets forth rules for
          determining if a taxpayer has acted in taking a position with reasonable
          cause and good faith. It seems that similar rules may apply for purposes of
          the Circular even though the regulation deals, in part, with establishing a
          taxpayer’s reasonable cause and good faith by relying on the opinion of a
          professional tax adviser, and the Circular deals with the Practitioner acting
          with reasonable grounds and in good faith.



                                       4–38
                                       Circular 230                       § 4:7.1

likely that the meaning of those terms within section 6664 of
the Code may be applied for purposes of the Circular.83 The reason, in
part, that the meanings contained in that section may apply is that at
least part of the Circular is aimed at limiting the ability of taxpayers
to avoid penalties by relying on the advice of a Practitioner.84
    It appears, in any case, that the Practitioner may not be disciplined
under the Circular for refusing the request even if it is lawful, proper
and not protected by privilege if the Practitioner believes in good faith
and on reasonable grounds that the record or information is privileged.
“Reasonable grounds” probably means a reasoned or, perhaps, not
an unreasonable conclusion of law that it is privileged and the
Practitioner has no reason to believe it is otherwise.85 The duty of a
lawyer to honor the client confidential privilege is a high one and one
of the most protected under the law. It seems that the Practitioner
need not conclude it is more probable than not that the information or
record is privileged but only that it is reasonable to conclude (or,
perhaps, it is not unreasonable to conclude) that it may be privileged.
Nothing in the Circular protects a Practitioner who provides the
information or record that turns out to have violated the duty to his
or her client to keep the information or record confidential.
    Also, although not discussed in the Circular, it may be that a
Practitioner may not be disciplined under the Circular for failing to
provide requested records or information where the Practitioner
advises the IRS that he or she is uncertain if the record or information
is privileged and that the Practitioner will not supply it without a court
order. This should show good faith on the Practitioner ’s part, fulfilling
one of the two stated prongs needed for refusing to provide the
information or record. Furthermore, it seems that such good faith in
advising the IRS of the uncertainty of the matter should come close to
establishing conclusively that there was some reasonable ground. Two
illustrations are offered.
    The IRS requests a copy of a partnership agreement that clients of
the Practitioner have executed. The Practitioner knows of no one
(other than her clients) who has seen the agreement. Although she was
not specifically asked by her clients to keep the agreement confidential,
she knows that certain matters involving the partnership were in-
tended to be kept confidential. On the other hand, she surmises that,
perhaps, the income tax return preparer for the partnership income tax


 83.       See note 64, supra.
 84.       See, e.g., Circular 230 § 10.35.
 85.       Note that under Treas. Reg. § 1.6664-4(b), in determining if a taxpayer
           acted with reasonable cause and in good faith, “[g]enerally, the most
           important factor is the extent of the taxpayer ’s effort to assess the
           taxpayer ’s proper tax liability.”



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–39
§ 4:7.1                THE CIRCULAR 230 DESKBOOK

return (Form 1065) may have seen the agreement in connection with
preparing the return. She does not think that the income preparer has
a duty to keep the return confidential. Therefore, she simply does not
know if the agreement is confidential. It seems that it would be
appropriate for her to investigate the matter further, perhaps, by calling
the clients to ask about their expectations and whether they have
shown the agreement to anyone with whom they would not have a
privilege. These actions, even if the results are not conclusive in
determining if the agreement is privileged, show good faith and
probably, if the results are not conclusive, establish reasonable
grounds for not providing the agreement to the IRS. In addition, it
probably would be prudent for the Practitioner to advise the IRS that
she has conducted an investigation and that the issue or privilege is
not certain but that she believes there are reasonable grounds to
believe it may be.
    In another circumstance, the IRS demands the names of all clients for
whom the Practitioner has prepared irrevocable life insurance trusts.
In a situation where there is a trustee of the trust whom the Practitioner
did not represent in connection with preparing of the trust, it seems very
unlikely that the matter is privileged; a third party (the trustee who is
not a client) has already seen the trust agreement. Note, however, that if
the trustee was not represented and could reasonably have believed that
he or she was represented by Practitioner, the trustee may, in fact, be a
client, even if the Practitioner was not compensated by the trustee.
Similarly, if the Practitioner knows that the ownership of policies of
insurance on the client’s life has been changed to the trust, the existence
of the trust probably is not privileged, as its existence has been disclosed
to the insurance company that has been advised to effect that change
of ownership. Under these circumstances, it may be that the Practi-
tioner’s refusal to supply the names of the clients who have created
such trusts would not be found to have been in good faith and on
reasonable grounds.
    One step a lawyer who is a Practitioner might consider taking is
requesting the state authority in charge of issuing ethics opinion for
advice with respect to the matter and delaying providing the records or
information to the IRS until that authority has ruled. It seems that the
Practitioner would be wise to advise the IRS that he or she is seeking
the ethical opinion.
    Although an earlier version of the Circular excused compliance
with a request for information or record where the request was of
“doubtful legality,” no such exception is contained in the current
version. A request might not be “lawful” or “legal” for several reasons:
from constituting privileged attorney work product to exceeding the
IRS employee’s authority. Where the request is unlawful or beyond
the authority of the requesting person, it presumably would foreclose



                                   4–40
                                       Circular 230                             § 4:7.1

the IRS from obtaining the record or information. And it seems that a
Practitioner should not be charged with a violation of the section for
refusing to comply with the request on such grounds. But if the
Practitioner refuses to comply because he or she, in good faith and
on reasonable grounds, believes the request to be unlawful or beyond
the requestor ’s authority, but such belief turns out to be incorrect, the
Practitioner might be charged with violating the Circular under the
strict wording of the section. In other words, the express “good faith
and reasonable ground” exception is related only to the question of
privilege, and not whether the request was lawful.
   One way to “test” the legality of a request would be to refuse to
supply the requested records or information and force the IRS to seek
enforcement in court. If the court rules that the records or information
need not be supplied, then presumably the request was not lawful and,
as suggested above, it is difficult to think the Practitioner could be
successfully charged with violating the Circular. If the court rules that
the record or information must be supplied, then the Practitioner
might be charged with a violation. However, as explained elsewhere in
this chapter,86 a Practitioner may be censured, suspended or disbarred
from practice only for a willful violation of this section of the
Circular.87 Therefore, where the Practitioner has a reasonable ground
or, perhaps, only an honestly held—even if grossly negligently—belief
that he or she need not comply with the IRS request for information or
records, it does not seem he or she could be successfully charged with
violating the Circular for failing to comply with the request.88
   Section 10.20(b) places an affirmative duty on Practitioners, when
a proper and lawful request is made by the Director of Practice, to
provide the Director with any information the Practitioner has
concerning an inquiry by the Director into an alleged violation of
the Circular by any person and to testify regarding this information
in any proceeding instituted under it, unless the Practitioner believes
in good faith and on reasonable ground that the information is
privileged. The construction (or interpretation) of this rule probably
would be similar to that under section 10.20(a). It is uncertain if
section 10.20(b) applies to a Practitioner who has been charged with
the violation—for example, forcing the Practitioner to testify against
him or herself.89


 86.       See section 4:18.3.
 87.       The American Jobs Creation Act of 2004 also authorizes the Secretary of
           the Treasury to impose monetary penalties for violations of the Circular
           and proposed regulations have been issued under that new authority.
           These proposed regulations are included as Appendix P.
 88.       See section 4:15.4.
 89.       In Spevack v. Klein, 385 U.S. 511 (1967), it was held that a lawyer could
           not be disbarred for refusing to respond to inquiries in a state disciplinary



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–41
§ 4:7.1                  THE CIRCULAR 230 DESKBOOK

    Section 10.20(c) forbids a Practitioner from interfering or attempt-
ing to interfere with any proper and lawful effort by the IRS, its officers
or employees, or the Director of Practice, or his or her employees, to
obtain any record or information unless the Practitioner believes in
good faith and on reasonable grounds that the record or information is
privileged. Construction of this rule would also probably be similar to
that under section 10.20(a) and section 10.20(b). However, there are
some differences in language in section 10.20(c) that may be
important to consider. For example, section 10.20(c) is addressed to
“efforts” to obtain a record or information, which seems to encompass
more than a request for information or record to which sections
10.20(a) and (b) are addressed. Moreover, section 10.20(c) covers
efforts not just by a duly authorized officer or employee of the IRS or
by the Director of Practice, but also applies to efforts by the IRS,
apparently, based upon the language set forth in the section, distin-
guished somehow from its employees and officers, and to employees of
the Director as opposed to the Director him or herself. It nonetheless
is not clear how the efforts of the IRS could be different from efforts of
its employees and officers.
    No explanation of the meaning of “efforts” or “interfere” is offered
in the Circular. It seems that section 10.20(c) is intended to cover
efforts other than a request of the Practitioner for the information or
record. In fact, it may exclude from its scope any such request to the
Practitioner. For example, it may be that even if the Practitioner
believes that the records being requested are not privileged, the
Practitioner may wish to blunt the efforts (that is, interfere) by seeking
an injunction for another reason, such as a belief they are attorney
work product. Although it is possible that such action, if successful
(for example, the Practitioner does obtain an injunction), could con-
stitute a violation because the Practitioner would knowingly (willfully)
be interfering with the efforts, it is difficult to think a charge could be
successfully made against the Practitioner in such a case. If the action
is unsuccessful (for example, the injunction is not issued), then,
perhaps, the Practitioner could be successfully charged with violating
section 10.20(c) even if the Practitioner had reasonable grounds for
believing the request is not lawful or proper. However, as mentioned



          proceeding by invoking the Fifth Amendment. However, there are later
          cases that discuss how, in a civil proceeding, it is permissible to draw an
          adverse inference against a party invoking the privilege. In Ainsworth v.
          Risley, 244 F.3d 209 (1st Cir. 2001), the Federal Court of Appeals for the
          First Circuit seemed to read cases such as Spevack to say that there is a
          legal distinction between a prohibited automatic penalty for refusing to
          respond to an inquiry and a mere adverse inference, such as the refusal was
          not reasonable or in good faith.



                                       4–42
                                       Circular 230                              § 4:7.2

above, a Practitioner may be found guilty of violating section 10.20(c)
only if the violation is willful.
   The scope of each of sections 10.20(a) and 10.20(b), especially when
contrasted with each other, is interesting if not also important and
intentional. Unlike section 10.20(a), section 10.20(b) does not apply to
“records” but only to “information.” Unlike section 10.20(a), section
10.20(b) applies to “testimony,” as well as “information.” That may
suggest that an attorney, CPA, enrolled actuary or enrolled agent may
refuse to “testify” when requested by an IRS officer or employer in
connection with representing a taxpayer, but may not refuse to testify
when requested by the Director of Practice pursuant to a suspension or
disbarment proceeding. Nevertheless, it seems appropriate to mention
that the IRS may issue a subpoena for testimony and if refused may seek
to have it enforced in court. However, even if the court enforces the
subpoena and requires the Practitioner to testify, he or she would not be
in violation of section 10.20(a), as it does not seem to cover testimony.
On the other hand, section 10.20(b) is limited to testimony in a
proceeding and it may be that the IRS will view answering questions
as “information” within the meaning of section 10.20(a).

    § 4:7.2           Duty to Advise Taxpayer of Non-Compliance,
                      Error or Omission
   A Practitioner who, having been retained by a client90 with respect
to a matter administered by the IRS, knows that the client has not
complied with the revenue laws of the United States or has made an
error in or omission from any return, document, affidavit or other
paper, which the client submitted or executed under the revenue laws
of the United States, must advise the client promptly of the fact of
such non-compliance, error or omission.91
   The Circular does not impose a duty on the Practitioner to advise
the client to make any “correction” or to pay any underpaid tax or to
seek a refund of tax overpaid. It is uncertain whether the duty to advise
applies if the statute of limitations has expired so that no additional
tax payment (or if there were an overpayment, a claim for refund)


 90.       Although the Circular does not define “client,” it seems to mean the
           taxpayer whom the Practitioner (whether an attorney, CPA, enrolled agent
           or enrolled actuary) is representing.
 91.       Circular 230 § 10.21. Although it is beyond the scope of this treatise to
           discuss the matter in detail, it seems that a taxpayer is not required to file
           an amended tax return if the client “innocently” filed an incorrect return
           even after the taxpayer learns the return file is incorrect. Badaracco v.
           Comm’r, 464 U.S. 386, 397 (1984). See generally Kenneth L. Harris, On
           Requiring the Correction of Error Under the Federal Tax Law, 42 TAX LAW.
           515 (1989). See also Sheldon Pollack, What Obligations Do Taxpayers and
           Preparers Have to Correct Errors on Returns?, 72 J. TAX’N 90 (1990).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–43
§ 4:7.2                    THE CIRCULAR 230 DESKBOOK

could be made. Perhaps, to be on the safe side, an attorney could still
provide the advice. And, of course, with respect to gift and estate tax
matters, the level of taxable gifts made may affect the amount of gift
tax due in later years92 or, if the gift was made after 1976, the amount
of estate tax due as well.93 Similarly, although the statute of limita-
tions may have run with respect to an incorrectly reported matter on
an income tax return, that error may have later ramifications. For
example, the Practitioner notes that the taxpayer deducted an incor-
rect amount of depreciation. Depreciation, as a general rule, reduces
the income tax basis of the asset.94
    Similar results may occur with respect to many income tax matters.
For example, a CPA notices that the property with respect to which the
taxpayer took “accelerated” depreciation95 does not qualify for such
depreciation. It is uncertain if the CPA must advise the client of the
error regardless of whether the incorrect depreciation will affect the
client’s income tax in later years or whether the statute of limitations
to assess any underpaid tax is still open.
    A related question is what the lawyer, CPA or enrolled agent must
or may do where the client’s error will affect the client’s later tax
liability. For example, the CPA is hired to prepare a United States Gift
Tax Return (Form 709) for the client. The CPA, in reviewing the new
client’s prior gift tax returns, notices that her husband incorrectly
elected under section 2513 of the Code to be treated as making half of
her taxable gifts in one year. That error would result in the taxpayer
underpaying gift tax for the year for which the CPA has been hired to
prepare the return and the husband overpaying his gift tax liability. If
the statute of limitations to assess gift tax has not expired, the CPA
should tell the client of the opportunity to amend the returns and pay
the correct gift tax due on her return and to seek a refund of tax paid
with respect to the husband’s return. The amount the wife would owe
if she amends her return may not be the same as the refund to which
the husband would be entitled by reason of his overpayment of tax.
Also, the interest owed on the wife’s underpayment may be greater
than the interest paid to the husband on his overpayment, even if the
tax owed and tax due are the same. Furthermore, each spouse may
have filed his or her return at different time and the statute of
limitations with respect to the assessment of tax with respect to one
return may be open and the other closed.

 92.      I.R.C. § 2501.
 93.      I.R.C. § 2001(b). Note also that gifts made between September 8 and
          December 31, 1976, that used all or any part of the “old” $30,000 lifetime
          gift tax exemption also may affect later gift and estate tax liability. See, e.g.,
          I.R.C. § 2505(b).
 94.      I.R.C. § 1016.
 95.      See I.R.C. § 168.



                                         4–44
                                       Circular 230                           § 4:7.3

   In any event, it seems almost certain that the CPA should use the
correct information and should not “compound” the error made on
the earlier year with respect to which the client’s husband elected
under section 2513 to having made one-half of the gift. Not filing an
amended return and paying any tax that is due (because the statute of
limitations to assess the tax has expired or for any other reason) may
raise further complications. For example, in computing the gift tax on
the return currently due for the immediate past year, the gift tax
payable on all prior taxable gifts is subtracted from the gross gift tax
calculated on the sum of all lifetime taxable gifts. 96 Hence, if the CPA
increases the prior gifts of the wife to eliminate the improper election
under section 2513, the amount of gift tax to be subtracted in the
calculation may well be greater than what she actually paid. 97 There-
fore, it seems that the CPA should not increase the amount of gift tax
paid on prior gifts but should use only the gift tax paid on the prior gift
taking into account the correct application of section 2513. That
course of action seems correct if the statute of limitations to pay the
underpaid gift tax has expired. But if the statute of limitations is still
open, the determination of how to prepare the return seems more
complex. The CPA might be regarded as “approving” or “compound-
ing” the error made in earlier years if the client refuses to file an
amended return and pay the underpaid tax. The most appropriate
course of action for the Practitioner, in a circumstance where the client
will not correct the error, may be to resign from the representation. 98

    § 4:7.3           Duty of Due Diligence in Return Preparation and
                      Other Representations
   A Practitioner is required to exercise due diligence in preparing or
assisting in the preparation of, approving, and filing U.S. tax returns,
documents, affidavits, and other papers relating to IRS matters, in
determining the correctness of oral or written representations made
by the Practitioner to the Department of the Treasury, and in deter-
mining the correctness of oral or written representations made by the
Practitioner to clients with reference to any matter administered by
the IRS.99


 96.       See I.R.C. § 2501.
 97.       The amount of gift tax on taxable gifts made in prior year to be subtracted
           in calculating the gift tax on the taxable gifts for the year for which the
           return is filed is not based on what tax actually was paid on those earlier
           gifts but on an imputed amount of gift tax. See I.R.C. § 2501.
 98.       Note that under MODEL RULES OF PROF ’L CONDUCT R. 1.2(d), a lawyer
           may not counsel a client to engage, or assist a client, in conduct that the
           lawyer knows is criminal or fraudulent.
 99.       Circular 230 § 10.22. See also § 10.34 dealing with advice with respect to
           return preparation, discussed at section 4:13.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–45
§ 4:7.3                  THE CIRCULAR 230 DESKBOOK

    Although the terms “preparation,” “approving” and “filing” are
not defined in the Circular, and although “approving” and “filing”
are separated by the conjunctive “and,” it seems that this section of
the Circular applies to any such action and so may actually mean
the disjunctive “or.” In other words, if the Practitioner prepares the
return even if the Practitioner does not otherwise approve or file it, it
seems that the Practitioner must exercise due diligence in the act of
preparation.
    As mentioned just above, the term “preparation” is not defined in
the Circular. But it probably means essentially the same as a tax return
preparer.100
    The scope of “assisting in the preparation” of a return or other papers
is also not defined. It may suggest that the Practitioner must know that
the assistance he or she is providing will be used in the preparation of a
return or other paper. For example, a tax return preparer calls the
taxpayer’s lawyer and asks a question. If the Practitioner is told or
otherwise knows the information the Practitioner supplies to the return
preparer will or likely will be used in the preparation of the taxpayer ’s
return, it seems that the Practitioner must exercise the due diligence
required of this section of the Circular.
    The term “filing” also is not defined. Perhaps it means signing the
return as the taxpayer. It probably also includes the signing of the
return as preparer even if the physical act of filing is accomplished by
the taxpayer—such as where the return preparer mails the completed
return to the taxpayer with instructions for the taxpayer to sign the
return and mail it to the IRS. The meaning of “due diligence” is not
explained in the Circular except to provide one “safe harbor” under
section 10.22(b), involving reliance on others. Discussing a prior
version of the Circular, the Federal Court of Appeals for the Second
Circuit101 stated that, under old section 10.22(c), due diligence re-
quires that “a representative be honest with his client in connection
with all IRS-related matters.” The court stated that the phrasing of the
regulation suggested that the principal concern was to make represen-
tatives accountable for negligence. In addition, it stated that the term
“diligence” carries connotations of loyalty and devotion as well as care
and prudence. IRS training materials stress that failure to exercise due
diligence involves conduct that is “more than a simple error, but less
than willful and reckless misconduct.” Furthermore, in the areas of tax
planning and compliance, due diligence “requires that the Practitioner
use reasonable efforts to comply with the tax laws.”
    In any case, the requirement to exercise due diligence applies not
just to the preparation of a U.S. tax return but also to providing


100.      I.R.C. § 7701(a)(36)(A) defines income tax return preparer.
101.      Harary v. Blumenthal, 555 F.2d 1113, 1118 (2d Cir. 1977).



                                      4–46
                                       Circular 230                 § 4:7.3

assistance in preparation of and to “approving” tax returns, other
documents, affidavits and other any other papers relating to any
Internal Revenue Code matter.102 It seems that this specific due
diligence requirement applies only if the return, affidavit, etc., is filed
with the IRS. It is somewhat uncertain what “approving” means in
this context. One case where it may apply is where a Practitioner, who
is an officer of a corporation and in charge of ensuring the corpora-
tion’s tax returns are filed, approves the filing of a return even though
the Practitioner does not prepare or sign the return.
   The application of the rule in other contexts seems less certain. For
example, a client asks her CPA if her United States Income Tax Return
may be filed prior to the end of the calendar year (representing to the
CPA that she will have no more income or deduction for the year).
Technically, the CPA is not approving the return, but only “approving”
as to when a tax return may be filed. However, another part of the rule,
as mentioned above, requires the Practitioner to exercise due diligence
in determining the correctness of any oral or written representation to
a client with reference to any matter administered by the IRS. Hence,
under this latter rule, it seems certain that the CPA must exercise due
diligence in advising her client if she may file the income tax return
before the end of the calendar year involved.
   The requirement of due diligence seems to cover both legal and
factual matters. Other parts of the Circular103 prohibit a Practitioner
from relying on an unreasonable factual or legal assumption or from
relying unreasonably on representations of another. In fact, these other
parts of the Circular place an affirmative duty on the Practitioner to
consider all relevant facts that he or she knows or should know.
   Section 10.22(a)(2) of the Circular requires, as indicated above, that
the Practitioner exercise due diligence in determining the correctness
of oral and written representations made by him or her to the Treasury
Department. Although the Treasury might well include the IRS,
section 10.22(a)(2), which is discussed in more detail below, applies
only to the matters administered by the IRS (as opposed presumably to
matters administered by another part of the Treasury). It seems
uncertain why those distinctions between matters involving the
Treasury Department on the one hand and the IRS on the other are
made in section 10.22.
   As indicated, section 10.22(a)(3) requires that due diligence be
exercised in determining the correctness of oral or written representa-
tions to clients with reference to any matter administered by the IRS.
Although not explicitly stated in section 10.22(a)(3), as with other parts
of section 10.22, this may cover legal and factual representations,


102.       Circular 230 § 10.22(a)(1).
103.       See, e.g., Circular 230 § 10.37.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–47
§ 4:7.3               THE CIRCULAR 230 DESKBOOK

including procedural matters. What this seems to mean is that if a
Practitioner does not exercise due diligence in providing oral or
written representation to the client as to any IRS matter, the Practi-
tioner will have violated section 10.22 of the Circular. Perhaps, unlike
successfully sustaining a civil claim against the professional for
malpractice in rendering an opinion without exercising due diligence,
which requires a showing of damages, it seems that the Practitioner
will be deemed to have violated this section of the Circular even if no
damage to the client occurs as a result of the representation made. In
fact, it seems that a violation could be deemed to occur if the
representation is harmless to both the client and the IRS and,
perhaps, even if the representation ultimately is found to be accurate
(but not based on due diligent efforts of the Practitioner). In other
words, the adage of “no harm, no foul” may not apply.

           [A] Conditioning Statements
    Although not certain, it seems that the standard of due diligence to
which a Practitioner would be held will depend on the context in
which a particular representation is made. A written request for
information may well require a reasonable level of independent
inquiry to ascertain the facts. On the other hand, a Practitioner should
not be in violation of the section requiring due diligence if any oral
representation is adequately conditioned. For example, a response to
an IRS inquiry such as “I have no reason to believe my client
overstated that deduction” or “I think it probably will be found that
the fair market value of the property was at least as great as its income
tax basis so depreciation was not overstated” seems adequately con-
ditioned on the veracity of what is being presented to avoid violation of
the section, provided the Practitioner does not know or have reason to
think otherwise. Such statements strongly imply that the Practitioner
is not representing the truth of his or her suggestion (for example, that
it probably will be found that the client did not overstate the deduc-
tion). It does not seem that a Practitioner should be treated as violating
the due diligence rule by making such statements even though the
Practitioner, at the time the statement is made, could have determined
what the “truth” was (for example, whether, in fact, the deduction was
overstated or not) through additional pursuit. Rather, the Practitioner
is exercising due diligence in his or her statement by clarifying that he
or she does not currently know the facts. On the other hand, a more
cautious approach might be to condition statements even more—for
example, “I do not know for certain right now whether the deduction
was overstated or not, but based on my experience with this client,
I have no reason to believe she overstated that deduction.”
    Of course, memories as to oral representations of the person who
heard the statement and by the one who made it may vary. Because, as is



                                  4–48
                                       Circular 230                          § 4:7.3

explained elsewhere,104 the burden of proof will be on the IRS in
establishing that the Practitioner violated the Circular, it may be that
there is, as a general matter, only a small chance that the Practitioner
will be found to have made oral representations without adequate
diligence, where the Practitioner will aver that he or she adequately
conditioned the statement. But a finding of fact (for example, who the
trier of fact believes) may turn on the demeanor of witnesses, so the
Practitioner might be found to have made a representation without
adequate diligence because it was not made with sufficient conditioning
where the IRS employee testifies that the Practitioner’s statement was
an unconditioned representation. Hence, caution may dictate that any
statement of significant importance made orally to an IRS representative
be followed by a written statement to the representative confirming the
statement (or promptly correcting it) or that the Practitioner at least
contemporaneously prepare an internal memorandum as to what was
said. As noted above, the exercise of due diligence also extends to advice
to clients with respect to IRS matters and, therefore, at least in some
cases a writing memorializing the advice may be appropriate.105

               [B] Reliance on Others
   Section 10.22(b) provides that except as provided in sections 10.33106
and 10.34, a Practitioner will be presumed to have exercised due
diligence if the Practitioner relied on the work product of another person
and the Practitioner used reasonable care in engaging, supervising,
training and evaluating the person, taking into account the nature of
the relationship between the Practitioner and the person.
   The language used in the Circular suggests that the exception is
limited only to “work product” and not any other matter, such as a
factual representation made to the Practitioner by his or her client.
Perhaps it is intended to cover a circumstance where the Practitioner
relies on another professional, such as where a CPA relies on an
explanation or interpretation offered by the client’s lawyer as to the
meaning or effect of a legal document. However, it seems doubtful
in such a case that the CPA would be “supervising” or “training” the
attorney in the preparation of the attorney’s “work product.” Hence,


104.       See section 4:14, infra.
105.       Certainly, Practitioners cannot be expected to write down everything said
           to a client. It would be too cumbersome to be practicable. Moreover, under
           Circular 230 §§ 10.35 and 10.37, a Practitioner must adhere to certain
           special rules when writing about certain federal tax matter in some cases.
           See sections 4:13 and 4:15, infra. Lawyers, CPAs and other professionals,
           in some cases, may also want to record certain verbal advice for defensive
           purposes if a claim for malpractice arises.
106.       As discussed below, the reference to Circular 230 § 10.33 is no longer
           correct.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–49
§ 4:7.3                   THE CIRCULAR 230 DESKBOOK

the scope of the exception may be limited to a circumstance where it
is the work product of a subordinate, although that relationship would
not necessarily involve “training.” As limited as the specific words of
this safe harbor seem to be, it seems likely that they were intended
to be more encompassing. Comparison may be drawn, for instance, to
other sections of the Circular where it seems that broader reliance is
permitted.107
    Indeed, the requirement of “engaging” may suggest much more
than a situation where the work product is of a subordinate. Although
language could seem to cover a case where a superior “engages” a
subordinate, it more likely seems to involve a situation where the
person engaged is independent of the Practitioner.
    The requirement that reasonable care was used “taking proper
account of the nature of the relationship between the [P]ractitioner
and the person” also may suggest that this safe harbor encompasses
significantly more than a circumstance where the work product is one
of a subordinate to the Practitioner. For example, a CPA anxiously is
searching for a way that will allow the taxpayer to use the exclusion
under section 121 of the Code for a portion of the gain realized on the
sale of the taxpayer ’s home that was held in a trust until just before it
was sold. The CPA’s reliance on a description by the client’s lawyer of
the legal effects of the taxpayer ’s use of the home while it was held in
trust may be reasonable and satisfy the due diligence requirement if
there is no relationship between the CPA and the lawyer indicating the
lawyer wants to accommodate the CPA. (An interesting question,
perhaps, is whether a pattern of referring clients to one another might
be relevant in determining if the reliance is reasonable.) If the lawyer
worked for the CPA, the result may also be different.
    Although far from certain, it seems the safe harbor should cover any
circumstance where a Practitioner reasonably relies on another
whether the relationship between the two is superior-subordinate,
subordinate-superior or between independent parties, such as the
case where a CPA relies on the construction (interpretation) of a
document offered by the client’s attorney or an estimate of fair market
value provided by a competent and independent appraiser. It may even
include reliance on information supplied to the Practitioner by his or
her client, such as when the client provides the Practitioner with a list
or sum of charitable or business deductions. It seems that it should
cover all those situations where the Practitioner ’s reliance, under the
circumstances, is not unreasonable.
    The reference to the section 10.33 exclusion from the safe harbor is
no longer effective. At the time that the safe harbor in section 10.22
was last promulgated, section 10.33 dealt with tax shelter opinions.

107.      See, e.g., Circular 230 § 10.35(d).



                                       4–50
                                       Circular 230                               § 4:7.4

That section now deals with “best practices,” which are aspirational
(not mandatory) rules for Practitioners.108 If this section 10.33 excep-
tion has any continuing application, it probably is to section 10.35
(dealing with certain written tax advice), although the section 10.35
rules were promulgated long after section 10.22 was last amended. 109
Section 10.35 has rules on relying on opinions and representations
of others, which may cover matters broader than “work product.”

    § 4:7.4           Duty to Dispose Promptly of Pending Matters
    No Practitioner may unreasonably delay the prompt disposition of
any matter before the IRS.110
    Some courts have similar prompt disposition rules. 111 But neither
these court rules nor the rule under the Circular seems to mean that
all other personal or professional matters must take “second place” to
every IRS matter. Rather, it probably means that unreasonable delay-
ing tactics may not be used. Experience teaches that IRS personnel
treat some matters with greater urgency than others. Practitioners
ought to have the same privilege. However, the intentional failure to
dispose of an IRS matter (for example, consistent failure to agree to a
meeting or continuous canceling of scheduled meetings) could be a
violation.
    On the other hand, a Practitioner who decides that it is not in the
client’s best interest to continue to deal with a particular IRS repre-
sentative should not be found in violation if he or she relates that
to the representative, and even though this will extend the time
for disposition of the matter. For example, telling an agent who
is examining a United States Income Tax Return (for example,

108.       See section 4:17.
109.       See section 4:15.
110.       Circular 230 § 10.23. Prior versions of this section of the Circular were
           addressed to a “lawyer, CPA, enrolled agent or enrolled actuary, in practice
           before the IRS,” which would seem to have encompassed a broader group
           than just “Practitioners.” Now the section is limited to Practitioners. Other
           sections of the Circular that previously, by their terms, applied to a broader
           group of professional than Practitioners also have had their application
           similarly narrowed to Practitioners. See, e.g., Circular 230 § 10.24.
111.       The ABA Model Rules impose an affirmative duty to expedite litigation but
           only when consistent with the interests of the client. MODEL RULES OF
           PROF ’L CONDUCT R. 3.2. Also see Link v. Wabash R.R. Co., 370 U.S. 626,
           629 (1962) (“The authority of a federal trial court to dismiss a plaintiff ’s
           action with prejudice because of his failure to prosecute cannot seriously be
           doubted. The power to invoke this sanction is necessary in order to prevent
           undue delays in the disposition of pending cases and to avoid congestion in
           the calendars of the District Court.”). Cf. FED. R. CIV. P. 41(b) (“Involuntary
           Dismissal; Effect. If the plaintiff fails to prosecute or to comply with these
           rules or a court order, a defendant may move to dismiss the action or any
           claim against it. . . .”).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–51
§ 4:7.4                  THE CIRCULAR 230 DESKBOOK

Form 1040) to have a proposed deficiency (also known as a “thirty-day
letter”) issued because the Practitioner wishes to try to dispose of the
matter in controversy at the Appeals Office (also called the “Appellate
Division”) of the IRS should not be regarded as failing to dispose of
a matter promptly. Similarly, the Practitioner may decide that it is in
the client’s best interests to have the matter go directly to the Tax
Court, bypassing further dealings with the agent and bypassing the
Appeals Office,112 and simply wait for the statutory notice of deficiency
(also known as a “ninety-day letter”), which would provide the frame-
work to have the Tax Court resolve the tax issues involved.113
   In cases of doubt by the Practitioner as to whether the action he or
she is taking (or failing to take) will constitute a violation of the
prompt disposition rule, it may be appropriate to document an
attempt to dispose of the matter or why action is not being taken.
Rather than leave a telephone message for an examining agent, for
example, it may be appropriate to write to the IRS employee reciting
efforts to effect the prompt disposition or at least to prepare an internal
writing that the call was made. Past experience of the Practitioner (or
other Practitioners) may provide a guide as to which IRS employees are
more “sensitive” and “complaining” about perceived or actual failures
promptly to dispose of IRS matters. With respect to those who are so
sensitive or complaining, it may be appropriate to exercise “overkill”
and put more in writing (or at least to record in professional diaries)
the reasons for delay or that telephone calls have been made.
   It seems that the motive for not disposing of the matter before the
IRS should be considered in determining if the Practitioner has
violated the rule. For example, delaying the disposition of an IRS
matter because the Practitioner is waiting to get information that will
benefit the client in the IRS matter certainly would seem not to be a
violation in the ordinary course of things. On the other hand, failing to
prosecute the matter in the hope that the IRS personnel will forget
about or neglect it so the statute of limitations to assert additional tax
will expire may not be sufficient grounds for delay even if the
Practitioner has good reason to believe that the delay will benefit his
or her client. Certainly, medical issues, other (non-tax) legal problems,
personal matters (a planned vacation), or similar reasons (for example,
jury duty), or other professional obligations (for example, the com-
mencement of a trial) affecting the Practitioner should be viewed as


112.      For a brief description of the IRS Appeals Office (often referred to as the
          Appellate Division), see www.irs.gov/retirement/article/0,,id=135303,00.
          html.
113.      See generally Jonathan G. Blattmachr & Georgiana J. Slade, An Overview
          of Estate and Gift Tax Appeals and Litigation Procedures, C HASE REV. (Oct.
          1991).



                                       4–52
                                       Circular 230                            § 4:7.5

appropriate and legitimate reasons for delay and not be treated as a
violation of the rule. Specifically communicating to IRS personnel the
reason for the delay, especially ahead of time, should go far in avoiding
a charge of violating the prompt disposition rule.

    § 4:7.5           Duty to Avoid Working with a Suspended or
                      Disbarred Practitioner
   No Practitioner may knowingly and directly or indirectly accept
assistance from any person who is under disbarment or suspension
from practice before the IRS if the assistance relates to a matter or
matters constituting practice before the IRS. 114 The language of
the rule almost certainly encompasses any IRS matter, not just the
one that resulted in the other person’s disbarment or suspension. On
the other hand, it should not be viewed applying to non-practice
matters. For example, if a CPA who has been suspended from practice
before the IRS is an employee of an accounting firm, it does not seem
that other Practitioners should be viewed as being prohibited from
working with the CPA on non-IRS matters, such as an accounting
audit of a company, even if there is a remote chance it could ultimately
affect a tax matter (since almost all matters may ultimately have tax
effects). Similarly, it would not appear to apply to a state or local tax
matter. It even appears that a Practitioner may accept assistance from a
disbarred or suspended Practitioner to prepare U.S. tax returns, return
preparation itself does not appear to constitute practice before the IRS
within the meaning of the Circular. In any case, the prohibition seems to
apply only while the suspension from practice is in effect.
   The prohibition, as drafted, even seems to cover a circumstance
where the assistance from the suspended or disbarred Practitioner is
made without charge.
   Nevertheless, although it is not certain, it appears that one Practi-
tioner should be permitted to obtain information from and discuss a
matter with a suspended or disbarred Practitioner that he or she knows
has been suspended or disbarred. Hence, if a CPA is asked to take over
an IRS matter that was being handled by a lawyer who has been
disbarred from practice before the IRS, gathering information and


114.       Circular 230 § 10.24. A prior version of the section also prohibited the
           Practitioner from employing a suspended or disbarred Practitioner. It may
           be that the employment prohibition was eliminated because the employ-
           ment may not relate to any IRS matter, such as where a disbarred lawyer or
           CPA is hired to do other (non-IRS) work.
               Tax return preparation is now considered practice before the IRS. As a
           result, by reason of section 10.24, a Practitioner may not accept assistance
           in connection with the preparation of a return from a Practitioner who is
           disbarred or suspended for violating the Circular. See Tax Notes, statement
           by Karen Hawkins (9/30/10).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–53
§ 4:7.5                  THE CIRCULAR 230 DESKBOOK

discussing the matter with the disbarred lawyer seems entirely
appropriate and probably increases the prospects of a prompt and
appropriate resolution of the matter. It does not seem that such action
should be regarded as accepting assistance from a disbarred or sus-
pended Practitioner. In other words, the word “assistance” should be
deemed only to encompass active work on the IRS matter and not
effecting a transition from the disbarred or suspended Practitioner to
the Practitioner who will be taking over the representation. However, a
definition of “assist” is contained in section 10.25, dealing with
practice before the IRS by certain former government employees, their
partners and associates.115 That word, in that section, is defined as “to
act in such a way as to advise, furnish information to, or otherwise
aid another person, directly or indirectly.” If such a broad meaning
were applied to section 10.24, it might well foreclose a Practitioner
from obtaining files and records from the disbarred or suspended
Practitioner. That could delay or possibly prevent the proper disposi-
tion of the matter before the IRS and, therefore, it seems that such a
broad meaning should not apply to section 10.24.
   If the suspended or disbarred Practitioner insists upon being paid
for time spent in providing information to the new representative, it
would be prudent to have the taxpayer pay the suspended or disbarred
Practitioner rather than having the CPA or other Practitioner pay him
or her, as to attempt to reduce the risk of the IRS contending that the
disbarred or suspended Practitioner was assisting the Practitioner
within the meaning of the Circular.
   The prohibition on accepting assistance from a suspended or dis-
barred Practitioner appears to contain a “mens rea” or “knowing”
requirement. That is, the rule states that a Practitioner may not know-
ingly accept assistance from any person who is under disbarment or
suspension from practice before the IRS.116 There does not appear to be
any duty on a Practitioner to attempt to determine if another Practitioner
has been suspended or disbarred. Hence, a Practitioner should not be
regarded as violating this rule if he or she does not know the other
Practitioner has been disbarred or suspended. However, the IRS does
provide information on suspended and disbarred Practitioners.117
   In the “real world,” lawyers and accountants do not, as a general
rule, query each other about whether they have been suspended or
disbarred from practice before the IRS. In some locations, that type of


115.      See section 4:7.6, infra.
116.      It may also be appropriate to note that a Practitioner may be successfully
          sanctioned for violating Circular 230 § 10.24 only upon a showing that
          such violation was “willful.” See Circular 230 § 10.52(a).
117.      Information about the IRS’s Office of Professional Responsibility is avail-
          able at www.irs.gov/taxpros/agents/article/0,,id=123442,00.html.



                                       4–54
                                       Circular 230                              § 4:7.6

knowledge may well be generally known within the “tax practice”
community. But if the matter will involve a Practitioner from another
location or where a large population of Practitioners is present, it may
be appropriate to check, if there is doubt about the matter, to ensure
that the other Practitioner has not been suspended or disbarred from
practice before the IRS. But, again, it does not seem that there is an
affirmative duty on Practitioners to do so. A Practitioner might be
suspicious where another professional calls and asks the Practitioner
to take the lead on an IRS matter, saying that the caller wants to
“remain in the background” without a logical explanation.
    It may not be clear whether hiring a disbarred or suspended
Practitioner will relate to federal tax practice before the IRS. For
example, because preparation of a tax return does not appear to cause
a lawyer or CPA a Practitioner for purposes of the Circular, it may be
that hiring a disbarred or suspended Practitioner to prepare U.S.
income tax returns does not violate the rule, as that does not relate
to “matters before the IRS.”

    § 4:7.6           Practice Before the IRS by Certain Former
                      Government Employees, Their Partners,
                      Associates and Others
   Former employees of the federal government are restricted by
18 U.S.C. § 207 from certain representations before the government
in certain cases.118
   Section 10.25 of the Circular sets forth somewhat detailed rules about
prohibitions and limitations on certain former U.S. government employ-
ees with respect to practicing before the IRS.119 A government employee,
under this section, means an officer or employee of the United States or
any agency of the United States, including a special government
employee within the meaning of 18 U.S.C. § 202(a).120 Parts of these

118.       Prop. Treas. Reg. § 10.25(b)(3) of the Circular would eliminate the
           prohibition against assisting in the representation in matters in which
           the former employee had official responsibility during the former em-
           ployee’s last year of service. The preamble to the proposed regulation
           recited that existing statutes, regulations and codes of professional respon-
           sibility are adequate to protect against conflicts of interest and protect the
           integrity of the tax system, including the prohibition on representation
           contained in 18 U.S.C. § 207.
119.       Practice by former government employees, their partners and associates
           with respect to representation in specific matters where actual representa-
           tion commenced before July 26, 2002, is governed by the regulations set
           forth at 31 C.F.R. part 10, revised as of July, 2002. The burden of showing
           that representation commenced before July 26, 2002, lies with the former
           government employees, and their partners and associates. Circular 230
           § 10.25(d).
120.       18 U.S.C. deals with crimes and criminal procedure.



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§ 4:7.6                  THE CIRCULAR 230 DESKBOOK

rules contained in section 10.25 apply to such former employees as well
as certain entities and individuals affiliated with him or her.
    In fact, portions of the section appear to apply to certain former
government employees and others, apparently whether or not they
are also Practitioners under the Circular. Some of the provisions of
section 10.25 seem merely to recite limitations and restrictions con-
tained in U.S. laws. It seems that section 10.25 is intended to provide
additional guidance as to IRS matters because some of these former
government employees will be Practitioners and/or some Practitioners
will be professionally affiliated with a former government employee.
    As a general rule, under section 10.25, no former government
employee, after government employment, may represent anyone in
any matter administered by the IRS if the representation would violate
18 U.S.C. § 207 or any other laws of the United States. It will be noted
that unlike virtually every other section in the Circular, this rule
contained in section 10.25 applies not only to Practitioners but to
any former government employee. Perhaps, because 18 U.S.C. § 207
applies to more than just Practitioners, the recital of the rule in
section 10.25 merely “parrots” what the U.S. Code provides. But, of
course, as a general rule, the Circular applies only to Practitioners
within the meaning of the Circular.
    The section distinguishes between “rule” and “transaction” and
has different prohibitions and limitations with respect to each. A
“transaction,” which is defined in section 10.25(a)(8), is “any decision,
determination, finding, letter ruling, technical advice, Chief Counsel
advice, or contract or the approval or disapproval thereof, relating to a
particular factual situation or situations involving a specific party or
parties whose rights, privileges, or liabilities under laws or regulations
administered by the Internal Revenue Service, or other legal rights, are
determined or immediately affected therein and to which the United
States is a party or in which it has a direct and substantial interest,
whether or not the same taxable periods are involved.”
    Despite the complicated wording, it seems that “transaction” en-
compasses only matters administered by the IRS. It seems to cover, for
example, matters relating to a taxpayer who has requested a private
letter ruling (often, called a “letter ruling”) or with respect to whom an
IRS employee has requested a national office technical advice memo-
randum (often, called “technical advice” or TAM). It does not appear to
apply to an identically situated taxpayer; in other words, one with the
same tax issues but for whom no ruling or advice was sought. The
reason, it seems, for the inclusion of letter ruling and technical advice,
is that the matter applies only or is binding only upon or with respect
to the taxpayer or taxpayers involved.121

121.      See I.R.C. § 6110(k)(3).



                                     4–56
                                       Circular 230                  § 4:7.6

    However, the definition also encompasses other legal rights deter-
mined or immediately affected in a decision. It may be that the term
“decision” encompasses court decisions which could affect rights
beyond the collection or refund of tax or the imposition of interest
or penalties with respect to tax. For example, a finding of the U.S. Tax
Court could constitute collateral estoppel (a finding that another
person could use against someone who was a party to the Tax Court
case) to the Tax Court proceeding. Indeed, this “addition” seems to
apply only with respect to matters in which the “United States is a
party or in which it has a direct and substantial interest.” The phrase
“whether or not the same taxable periods are involved” indicates the
term “transaction” only applies to a federal tax matter.
    It will be noted that certain IRS written statements, such as field
service advice, that apply to a particular taxpayer are not encompassed.
It seems that they should fall within the scope of “transaction” but the
explicit list of what is covered suggests that all other items are excluded.
    The term “transaction” explicitly excludes “rule.” Section 10.25(a)(7)
defines “rule” to include Treasury Regulations, whether issued or
under preparation for issuance as Notices of Proposed Rule Making
(for example, a proposed Treasury Regulation) or as a Treasury
Decision (for example, the adoption of final or temporary Treasury
Regulations), and revenue rulings and revenue procedures published
in the Internal Revenue Bulletin. “Rule” does not include “transac-
tion” as defined above. The term “rule” does not cover many common
publications of the IRS, such as IRS Notices and Announcements,
even though, at least to a limited degree, taxpayers must follow them
or face potential penalties in some cases, and may rely on them.
    No former government employee (as defined above), who partici-
pated in a transaction (as defined above), may represent or knowingly
assist any person who is or was a specific party to that transaction,
under a prohibition contained in section 10.25(b)(2). “Assist” means to
advise, furnish information to, or otherwise aid another person,
directly or indirectly.122 “Participate” means substantial involvement
by making decisions, or preparing or reviewing documents with or
without the right to exercise a judgment of approval or disapproval, or
participating in conferences or investigations, or rending advice of a
substantial nature.123
    This prohibition under section 10.25(b)(2) of a former government
employee from representation or knowing assistance would encom-
pass, having drafted a technical advice memorandum with respect to a
taxpayer. The former government employee is prohibited from repre-
senting (or providing advise to) that taxpayer with respect to the


122.       Circular 230 § 10.25(a)(1).
123.       Circular 230 § 10.25(a)(6).



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§ 4:7.6               THE CIRCULAR 230 DESKBOOK

technical advice or matters relating to it. For example, if the taxpayer
disagrees with the technical advice, the taxpayer may have a court
determine the tax liability with respect thereto. It seems that the
former government employee could not represent the taxpayer in that
court proceeding or provide assistance with respect to it. Indeed, the
prohibition appears to be so broad that the former government
employee could not render even procedural advice (for example, advice
as to which court the former government employee believes is most
likely to render a decision in the taxpayer ’s favor). It also seems, based
upon the definition of “transaction,” that the former government
employee could not render advice with respect to the same matter
but with respect to a different tax year. (For example, a technical advice
relating to entitlement to a tax credit was requested for 2005 for
foreign taxes paid.) It seems, based upon the inclusion in the definition
of “transaction” of “whether or not the same taxable periods are
involved,” that the former government employee who worked on the
technical advice may not provide advice as to such credit for a different
tax year.
    However, if different factual circumstances existed than the facts
involved in the technical advice, the prohibition would not seem to
apply.
    Moreover, the prohibition contained in section 10.25(b)(2) seems to
apply only with respect to the tax matter involved. For instance, if the
taxpayer received a private letter ruling with respect to whether
a transfer to the taxpayer ’s spouse at death would qualify for the
estate tax marital deduction, it seems the former government em-
ployee would be permitted to prepare a will or trust implementing the
“approval” specified in the private letter ruling.
    As mentioned, this prohibition applies only with respect to the
taxpayer who is or was a “specific party” to the transaction. That
suggests, for example, that the former government employee appar-
ently could represent the taxpayer ’s spouse if the spouse was not
involved in the request for private letter ruling and even if the spouse
files a joint return with the spouse who requested the ruling and even
if there is some impact on the spouse’s own tax liability as a result.
However, it seems that the IRS might disagree with such a “technical”
reading of the prohibition. A similar circumstance could arise where
an individual has obtained a private letter ruling with respect to a
matter that will affect the estate tax due upon his or her death.
Literally, as phrased, because the taxpayer and not the taxpayer ’s
estate was the specific party to the request for ruling (indeed, the
estate was not yet in existence), the former government employee may
be able to represent the estate (literally, the executor or administrator




                                  4–58
                                       Circular 230                              § 4:7.6

of the estate)124 even though it involves application of the private letter
ruling. Again, however, the IRS may contend that such a distinction is
not appropriate.125
    This prohibition seems to involve the former government employee’s
direct involvement (participation) in the transaction while servicing as
such government employee. Another rule applies where the involve-
ment as the former government employee was not direct but where he or
she had official responsibility for the transaction. Under this “official
responsibility” rule, a former government employee, who within one
year prior to termination of the government employment, had official
responsibility for the transaction, may not, within two years after the
employment ended, represent or knowingly assist in that transaction
any person who is or was a specific party to that transaction. Although
not specified in detail, this prohibition would seem to cover, for example,
the branch manager of the IRS in whose branch a private letter ruling
was issued.
    No former government employee, under a prohibition contained in
section 10.25(b)(4), within one year after the employment ends, may
appear before any employee of the Treasury Department in connection
with the publication, withdrawal, amendment, modification or inter-
pretation of a rule in the development of which the former government
employee participated or for which, within one year before the
government employment ended, he or she had official responsibil-
ity.126 For example, a former government employee who assisted in the
drafting of a Treasury Regulation could not appear before any employee
of the Treasury Department about the modification or interpretation
of the regulation. Nevertheless, the prohibition does not preclude the
former government employee from appearing on his or her own behalf
or representing a taxpayer involving the application or interpretation
of such a rule with respect to that transaction provided the former


124.       Under I.R.C. § 2002, the executor is responsible for filing the United
           States Estate (and Generation-Skipping Transfer) Tax Return (Form 706)
           and paying the tax.
125.       In such a case, it seems somewhat unlikely that the IRS could establish
           that the Practitioner ’s violation of the section was “willful,” a requirement
           under Circular 230 § 10.52, for the Practitioner to be disciplined. But
           because large portions of § 10.25 reflect prohibitions contained in the U.S.
           Code (e.g., 18 U.S.C. § 207), it may be prudent for a Practitioner to call
           “close” questions relating to matters under Circular 230 § 10.25 against
           himself or herself and decline the representation.
126.       “Rule” is defined in Circular 230 § 10.25(a)(7) as including “Treasury
           Regulations, whether issued or under preparation for issuance as Notices
           of Proposed Rule Making or as Treasury Decisions; revenue rulings; and
           revenue procedures in the Internal Revenue Bulletin. Rule does not
           explicitly include a transaction as defined in [Circular 230 § 10.25(a)(8).]”
           (emphasis in original).



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§ 4:7.6                  THE CIRCULAR 230 DESKBOOK

employee does not use or disclose any confidential information acquired
by the former government employee in the development of the
rule.127 However, this limited exception apparently applies only with
respect to the application of interpretation of the rule, as opposed to the
publication, withdrawal, amendment or modification of it. In any event,
the entire restriction lapses one year after termination of employment.
   Section 10.25(c) provides restrictions with respect to members of a
firm of which a former government employee is a member. “Member
of a firm” is a sole Practitioner or an employee or associate thereof, or a
partner, stockholder, associate, affiliate or employee of a partnership,
joint venture, corporation, professional association or other affiliation
of two or more Practitioners who represent nongovernmental par-
ties.128 Because the definition apparently applies where the “firm” has
a sole Practitioner, it appears to cover individuals who are not Practi-
tioners. That would seem inconsistent if the scope of the prohibition
with respect to the members of the firm, other than the former
government employee himself or herself, is limited to matters before
the IRS which would constitute practice before the IRS, thereby
making such a member a Practitioner under the Circular.
   Indeed, the prohibition under section 10.25(b)(2) forbidding a
former government employee from ever representing or knowingly
assisting a person who was a specific party to the transaction (for
example, a private letter ruling) extends, under section 10.25(c)(1), to
any (other) member of the firm. For example, the former government
employee is an associate attorney at a law firm. No other associate (or
partner) may represent a person who was a specific party with respect
to any transaction in which the former government employee partici-
pated. However, this prohibition with respect to another member of
the firm does not apply if the firm “isolates the former government
employee in such a way to ensure that the former government
employee cannot assist in the representation.”

             [A] Proof of Isolation
    Isolation must be established by the execution by the former
government employee and another member of the firm acting on
behalf of the firm of a written statement under oath (for example, an
affidavit). The statement must “clearly” identify the firm, the former


127.      Circular 230 § 10.25 does not provide a definition of “confidential
          information.” But see Guerra v. Guajardo, 466 F. Supp. 1046 (S.D. Tex.
          1978) (“confidential” within the meaning of 18 U.S.C. § 1905 applies to
          information release of which is likely to impair the government’s ability
          to obtain necessary information in the future or cause substantial harm to
          the competitive position of persons from whom information is obtained).
          See also United States v. Wallington, 889 F.2d 573 (5th Cir. 1989).
128.      Circular 230 § 10.25(a)(3).



                                      4–60
                                       Circular 230                               § 4:9

government employee, and the transaction(s) requiring isolation, and
be filed with the Director of Practice and such other place and in such
manner as the Director may prescribe by “rule or regulation.”129

§ 4:8          Restrictions on Practitioner Certification of Certain
               Documents and Information
   Section 10.26 of the Circular provides that a Practitioner may not
take acknowledgments, administer oaths, certify papers, or perform
any official act as a notary public with respect to any matter adminis-
tered by the IRS and for which the Practitioner is employed as counsel,
attorney, or agent, or in which he or she may be in any way interested.
   The scope of this prohibition seems broad in that it applies to any
matter administered by the IRS. However, the heading of the section
(“Notaries”) and the phrase “or perform any official act as a notary
public” may mean it is limited solely to situations where the Practi-
tioner would be acting as a notary public. But attorneys, at least, may
do certifications other than in the capacity of a notary public.
   For example, a certified copy of the decedent’s Will is required to be
attached to the United States Estate (and Generation-Skipping Trans-
fer Tax) Return (Form 706) of the decedent’s estate. Under New York’s
Civil Practice Law and Rules (CPLR),130 an attorney is permitted to
certify documents. It is common practice, at least for the estate of
New York decedents, for the attorney for the executor to certify a copy of
the decedent’s Will pursuant to CPLR for the purpose of completing the
Form 706. Although the attorney is not making the certification as a
notary public, it is a certification. It is simply unclear whether a
Practitioner is permitted to do that under section 10.26 of the Circular.
   Perhaps there is a way around that rule. For example, the Practitioner
who is responsible for preparing the return and/or who is designated as
the representative of the executor pursuant to and on Part IV of the Form
706 asks a lawyer who is not a Practitioner to effect the certification
pursuant to CPLR. Because the Circular is addressed to individuals, and
not firms, as a general rule, having a non-Practitioner within the same
firm make the certification seems to result in compliance, even if the
scope of section 10.26 extends beyond actions as a notary public.

§ 4:9          Fees
   The Circular imposes rules and limitations, in some cases, on
Practitioners regarding the level of and the conditions under which

129.       It is nearly certain that the word “rule” in this phrase does not mean “rule”
           as defined in § 10.25(a)(7), as that definition itself includes Treasury
           Regulations.
130.       N.Y. C.P.L.R. 2105.



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§ 4:9.1                  THE CIRCULAR 230 DESKBOOK

fees may be charged for representing a taxpayer with respect to any IRS
matter.131

   § 4:9.1         General Rule
   Under section 10.27, a Practitioner may not charge an “uncon-
scionable fee” for representing a client in a matter before the IRS.
Although no definition is provided in the Circular, “unconscionable”
generally means affronting the sense of justice, decency, or reason-
ableness, or having no conscience or being unscrupulous. 132 Absent
guidance in the Circular on what factors make a fee unconscionable,
assume “unconscionable” conveys something more offensive than
unreasonableness. In other words, something may be unreasonable
but not severe enough to rise to the degree of being unconscionable.133
Hence, the requirement in section 10.27 of the Circular is less strict
than the American Bar Association Code of Professional Responsi-
bility rules applicable to lawyers which prohibit charging an unreason-
able fee.134
   A Practitioner charging a fee that is charged, even if only occasion-
ally, in the community by other Practitioners should foreclose any
reasonable contention that the fee is unconscionable. For example,
consider a case where a Practitioner is asked to represent a taxpayer in
a complex tax shelter matter where, in similar cases, the IRS has
resisted settlement, demanded extensive documents and other evi-
dence, and has acted in what many regard as a hostile manner. In
similar situations, some other Practitioners have demanded a rela-
tively high non-refundable fee as a condition to accepting the repre-
sentation and the Practitioners will receive additional fees (such as
normal hourly time charges) for any time expended on the matter.
Because of the complexity of these cases, these fee arrangements would
appear to be reasonable. Thus, it may be that the same factors used to
determine what an attorney should be paid would be used to deter-
mine if a fee is unconscionable.135



131.      MODEL CODE OF PROF ’L CONDUCT 1.5 also contains rules on attorney
          fees.
132.      See BLACK’S LAW DICTIONARY (7th ed.).
133.      For example, prenuptial agreements generally are enforceable, subject to
          other exceptions, if reasonable and fair when made and not unconscion-
          able when taking effect. See, e.g., N.Y. DOM. REL. LAW § 236.
134.      MODEL CODE OF PROF ’L RESPONSIBILITY 2-106.
135.      MODEL CODE OF PROF ’L RESPONSIBILITY DR 2-106 provides in part:
            A fee is clearly excessive when, after a review of the facts, a lawyer of
            ordinary prudence would be left with a definite and firm conviction
            that the fee is in excess of a reasonable fee. Factors to be considered
            as guides in determining the reasonableness of a fee include the



                                       4–62
                                       Circular 230                              § 4:9.2

    § 4:9.2           Contingent Fees
    Generally, a “contingent fee” is a fee that is based, in whole or in
part, on whether a position taken on a tax return or other filing avoids
challenge by the IRS or is sustained by the IRS or in litigation. 136 The
fee charged would be contingent in a situation where the Practitioner
suggests to the taxpayer (or agrees at the request of the taxpayer) to
prepare a U.S. tax return so that certain expenses incurred are
deducted for tax purposes, or certain receipts are not reported as gross
income, or certain receipts are treated on the return as a type of
income more favorably taxed under the Code (for example, as long-
term capital gain rather than as ordinary interest income), and the
Practitioner’s fee for such advice is dependent, in whole or in part, on
such treatment being sustained.
    A specific example would be a situation in which the taxpayer
agrees to pay the Practitioner an additional sum when the statute of
limitations for assessing tax with respect to the return expires if the
treatment is not challenged by the IRS by that time. A fee would also
be considered a contingent fee if it is to be paid if the IRS initially
challenges the position but eventually allows it, in whole or in part, or
if a court allows it, in whole or in part.
    A fee is also contingent under the section if the Practitioner agrees
to return all or a portion of a fee previously paid if a position taken on a
tax return or other filing is challenged. This provision for the return of
the fee applies whether it is pursuant to an indemnity agreement, a
guarantee, rescission rights, or any other arrangement with a similar
effect. It would not seem to cover a promise by the Practitioner to




              following: (1) The time and labor required, the novelty and difficulty
              of the questions involved, and the skill requisite to perform the legal
              service properly. (2) The likelihood, if apparent to the client, that
              the acceptance of the particular employment will preclude other
              employment by the lawyer. (3) The fee customarily charged in the
              locality for similar legal services. (4) The amount involved and the
              results obtained. (5) The time limitations imposed by the client or
              by the circumstances. (6) The nature and length of the professional
              relationship with the client. (7) The experience, reputation, and
              ability of the lawyer or lawyers performing the services. (8) Whether
              the fee is fixed or contingent.
136.       See John P. Muldoon v. W. End Chevrolet, 153 N.E.2d 882 (Mass. 1958),
           for a discussion of why a fee consisting of a fixed fee plus “additional
           compensation in an amount that would constitute fair, adequate, and just
           compensation for services rendered” was not a contingent fee within the
           meaning of the Circular. For a detailed discussion of the case, see Burgess
           J.W. Raby & William L. Raby, Contingent Fees and Circular 230, 111 TAX
           NOTES 43 (Apr. 3, 2006).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–63
§ 4:9.3                  THE CIRCULAR 230 DESKBOOK

defend any challenge for no additional charge or to do so at a reduced
fee, however.137
   Finally, a fee based on a percentage of the refund reported on a
return, or based on a percentage of the taxes saved, can be character-
ized as a contingent fee. However, the fee need not be specifically tied
to the amount involved or the amount of tax saved or estimated to be
saved. A “flat” fee, if contingent upon the outcome of a position taken
on a tax return, is a contingent fee, because contingent fees include
those fees that are dependent on the results attained in a matter.
Currently proposed regulations138 further clarify what constitutes a
“contingent fee” in this context.
   Unlike the current language of section 10.27(c)(1), which states
that contingent fees are fees dependent on results of a matter generally,
the proposed regulations specifically state that the relevant result is the
tax result rather than other non-tax contingencies (like the closing of a
transaction, for example). Non-tax contingencies do not pose the same
concerns as tax-related contingent fees, and the proposed language of
10.27(c)(1) clarifies that a contingent fee includes, but is not limited
to, any fee that depends on the specific tax result obtained in a
transaction.

   § 4:9.3         Contingent Fees Under Section 10.27 As
                   Amended by Notice 2008-43
   Section 10.27 provides rules with respect to contingent fees,
permitting some and prohibiting others. Under section 10.27(b)(1),
the broad general rule is that a Practitioner may not charge a
contingent fee for services rendered in connection with any matter
before the IRS, but for the exceptions provided for in 10.27(b)(2)–(4).
On March 26, 2008, the IRS issued Notice 2008-43,139 indicating that
section 10.27(b)(2) will be amended to clarify when a Practitioner may
charge a contingent fee for services rendered in connection with any
matter before the IRS, including the preparation or filing of a tax
return, amended return or claim for refund or credit. Under the
section as clarified and amended, there are several exceptions to the
general rule.
   A Practitioner may charge a contingent fee when services are ren-
dered in connection with an IRS challenge or examination with respect
to an original return under section 10.27(b)(2)(i). A contingent fee may
also be charged for services rendered in connection with a challenge or


137.      Other sections of the Circular have additional rules with respect to such
          “Contractual Protection.” See, e.g., Circular 230 § 10.35(b)(7). See also
          section 3:2.1[A][3], supra.
138.      See infra section 4:9.3, note 139.2, and accompanying text.
139.      I.R.S. Notice 2008-43, 2008-1 C.B. 748.



                                      4–64
                                       Circular 230                              § 4:9.4

examination by the IRS of an amended return or claim for refund or
credit, filed prior to the taxpayer receiving a written notice of examina-
tion or challenge to the original return (or no later than 120 days after
receiving such written notice), under section 10.27(b)(2)(ii).139.1 There
are also additional exceptions: when services are rendered in connection
with a refund claim concerning interest or penalties (under section
10.27(b)(3)); where services are rendered in connection with the pursuit
of a whistleblower claim under section 7623 (under section 10.27(b)(4));
or where services are rendered in a judicial proceeding (under new
section 10.27(b)(5)).139.2
   The interim rules in Notice 2008-43 apply to fee arrangements
entered into after March 26, 2008 and will remain in effect until
additional proposed regulations are finalized.

    § 4:9.4           Contingent Fees Under Proposed Regulations
   The initial prohibition against contingent fee arrangements in
section 10.27 attempted to prevent exploitation of the audit selection
process. The prohibition also attempted to prevent compromising a
Practitioner’s independent judgment by disallowing fee structures
contingent on a specific ruling by the IRS. Currently, there are
additional proposed regulations relating to contingent fees being
considered. The proposed revisions to section 10.27 are consistent
with the clarifications provided in Notice 2008-43, and further detail
the limited instances in which a Practitioner can charge a contingent
fee for services rendered in connection with a matter before the IRS.
   Section 10.27(b)(2)(i) of the proposed regulations permits a Practi-
tioner to charge a contingent fee for services rendered in connection
with the IRS’s examination or challenge of an original tax return.
Section 10.27(b)(2)(ii) of the proposed regulations further explains the
120-day exception to the rule found in Notice 2008-43, clarifying that
a Practitioner may charge a contingent fee for services related to the
IRS examination or challenge of an amended tax return or claim for
refund or credit as long as one of three situations applies: a contingent


139.1.     Notably, the IRS is not required to provide such written notice. I.R.S.
           Notice 2008-43 clarifies that if such notice is provided, the
           120-day limit applies. However, a Practitioner may charge a contingent
           fee for services rendered in an IRS examination or challenge to an amended
           tax return without prerequisite issuance of notice by the IRS. If necessary,
           the 120 days are computed from the time a written notice of the
           examination (if any) is issued, or a written challenge to the original return,
           whichever is earlier.
139.2.     See generally Burgess J.W. Raby & William L. Raby, Contingent Fees and
           Circular 230, 111 TAX NOTES 43 (Apr. 3, 2006) and Michael D. Mulligan &
           Adrienne J. Davis, Recent Prop. Regs. to Circular 230 Address Sanctions
           and Fees, 33 EST. PLAN. No. 7 (July 2006).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–65
§ 4:10                 THE CIRCULAR 230 DESKBOOK

fee may be charged if the amended return or claim is filed prior to the
taxpayer ’s receipt of written notice of examination or challenge to the
original return, if the taxpayer never receives such written notice of
examination or challenge, or if the amended return or claim is filed
within 120 days of the taxpayer ’s receipt of written notice of examina-
tion or challenge of the original return. Essentially, the IRS is not
required to furnish a taxpayer with a written notice of examination
before a Practitioner may charge a contingent fee for services rendered
in connection with the IRS’s examination or challenge of an amended
return; rather, the 120-day time limitation applies only if such a notice
is issued in order to prevent Practitioners from entering into contin-
gent fee arrangements late in the examination process.
    The proposed regulations also permit Practitioners to charge con-
tingent fees for services rendered in connection with a taxpayer ’s claim
for refund or credit of interest and penalties as assessed by the IRS in
section 10.27(b)(3), and for services rendered in connection with
whistleblower claims under section 7623 in section 10.27(b)(4).
Finally, a contingent fee may be charged for services rendered in
connection with judicial proceedings arising under the Internal Rev-
enue Code under section 10.27(b)(5) in the proposed regulations.

§ 4:10        Practitioner Conflict of Interests
   The Circular contains rules relating to conflicts of interests. Like
the Disciplinary Rules, and unlike the Ethical Considerations con-
tained in the ABA Model Rules of Professional Responsibility for
Lawyers,140 these rules are mandatory for Practitioners, whether
lawyers or not.

   § 4:10.1        Introduction
   The Circular includes ethical rules for Practitioners. One area of
concern for many professional groups is the prohibition of represent-
ing persons where a conflict of interest may or does exist. Section 10.29
of the Circular provides these rules for Practitioners. To the extent, if
any, that they conflict with state law and are more restrictive, the rules
in the Circular probably are controlling because federal law trumps
state law.141 The Circular ’s rules control over state rules in all areas
covered by the Circular, not just in the area of conflicts of interests.




140.     The ABA Model Rules of Professional Responsibility can be found at
         www.law.cornell.edu/ethics/aba/mcpr/MCPR.htm.
141.     Supremacy Clause, Article 6, sec. 2, U.S. Constitution. But note that
         5 U.S.C. § 601 provides:



                                   4–66
                                       Circular 230                          § 4:10.2

    § 4:10.2            Overview
   Section 10.29 provides a general rule that a Practitioner may not
represent a client in his or her practice before the IRS if the representa-
tion of that client will be directly adverse to another client or there is a
significant risk that the representation of one or more clients will be
materially limited by the Practitioner ’s responsibilities to another
client, a former client or a third person or by a personal interest of
the Practitioner. This rule is similar but far from identical to some
contained in the ABA Model Rules.142
   An exception to the foregoing prohibition in section 10.29 is
provided where
    (1)   the Practitioner reasonably believes that he or she will be able
          to provide competent and diligent representation to each
          affected client;
    (2)   the representation is not prohibited by law; and
    (3)   each affected client gives informed consent, confirmed in
          writing.143
(Copies of the written consents must be retained for at least thirty-six
months after the end of the representation of the affected clients and
these consents must be provided to the IRS upon request.)
   Note that the “exception” is not conditioned on obtaining the
written consent of any “third person” to whom the Practitioner has
“responsibilities.”


              Sec. 4. Special requirements for preemption. Agencies, in taking
              action that preempts State law, shall act in strict accordance with
              governing law.
               (a) Agencies shall construe, in regulations and otherwise, a Federal
                   statute to preempt State law only where the statute contains an
                   express preemption provision or there is some other clear
                   evidence that the Congress intended preemption of State law,
                   or where the exercise of State authority conflicts with the
                   exercise of Federal authority under the Federal statute.
               (b) Where a Federal statute does not preempt State law (as ad-
                   dressed in subsection (a) of this section), agencies shall con-
                   strue any authorization in the statute for the issuance of
                   regulations as authorizing preemption of State law by rulemak-
                   ing only when the exercise of State authority directly conflicts
                   with the exercise of Federal authority under the Federal statute
                   or there is clear evidence to conclude that the Congress
                   intended the agency to have the authority to preempt State law.
142.       MODEL RULES OF PROF ’L CONDUCT R. 1.7.
143.       Prop. Treas. Reg. § 10.27 of the Circular would clarify that a Practitioner
           must obtain consents to conflicting representation in writing rather than
           obtaining the consent orally and then confirming the consent in writing.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–67
§ 4:10.3                  THE CIRCULAR 230 DESKBOOK

   The information given to the client so the consent is “informed”
probably should be recited in the consent that the client signs. The
Disciplinary Rules of the American Bar Association allow a client to
consent to the representation where the lawyer himself or herself does
or may have a conflicting interest “after disclosure,”144 which seems
similar to the “informed consent” contained in the Circular.
   A lawyer may represent multiple clients even if a conflict of interest
exists, if it is obvious to her that she can adequately represent the
interests of each, and each consents after disclosure. These rules of the
Circular and the ABA Model Rules seem quite similar, in general. In
any case, a Practitioner who is a lawyer would be required to follow the
“stricter” of the two. That is, if either would forbid the representation,
such an attorney Practitioner would have to decline or resign from the
representation. Moreover, he or she would have to follow the “stricter”
of the disclosure rules of each in order to take on or maintain the
representation.145

   § 4:10.3           CPA Conflict of Interest Rules
   The American Institute of Certified Public Accountants (AICPA)
sets rules of practice by CPAs.146 The Council of the American
Institute of Certified Public Accountants is authorized to designate
bodies to promulgate technical standards under the rules, and the
bylaws require adherence to those rules and standards.

§ 4:11          Solicitation of Work by Practitioners
  Section 10.30 of the Circular contains rules about advertising for
and solicitation of work by Practitioners related to any IRS matter.147

   § 4:11.1           Advertising and Solicitation Restrictions
                      Imposed by the Circular
   A Practitioner may not, with respect to any IRS matter, in any way
use or participate in the use of any form of public communication or
private solicitation containing a false, fraudulent, coercive, misleading
or deceptive statement or claim.
   Enrolled agents, in describing their professional designation, may
not use the term “certified” or imply an employer/employee relation-
ship with the IRS.


144.       MODEL CODE OF PROF ’L RESPONSIBILITY DR 5-101(A).
145.       See MODEL RULES OF PROF ’L CONDUCT R. 1.7.
146.       The AICPA has adopted a Code of Professional Conduct. This can be
           found at http://aicpa.org/about/code/index.html.
147.       Much of this section of the Circular seems to have been derived from the
           MODEL CODE OF PROF ’L RESPONSIBILITY DR 2-101.



                                       4–68
                                       Circular 230                 § 4:11.3

   The section permits descriptions such as “enrolled to represent
taxpayers before the IRS,” “enrolled to practice before the IRS” and
“admitted to practice before the IRS.” It seems that such descriptions
are specifically for enrolled agents, although the phrase “admitted to
practice before the IRS” could apply to other Practitioners, such as
lawyers and CPAs.

    § 4:11.2            Limitations of Uninvited Solicitations by
                        Practitioners
    A Practitioner may not make any direct or indirect, uninvited, written
or oral solicitation of employment in matters related to the IRS if the
solicitation would violate federal or state law or other applicable rules.
For example, a lawyer is prohibited under the Circular from making a
solicitation not permitted by rules applicable to the conduct of attorneys
in the state the lawyer is licensed to practice. As indicated above with
respect to conflicts of interests, a lawyer would be prohibited from
representing a client before the IRS even if not prohibited by the Circular
if the attorney would be required to decline or resign from representation
under the applicable professional rules of his or her state. Any lawful
solicitation made by or on behalf of a Practitioner must clearly identify
itself as a solicitation and, if applicable, identify the source of the
information used in choosing the recipient of the solicitation.

    § 4:11.3            Fee Information in Solicitations and
                        Advertisements
   A Practitioner may publish the availability of a written schedule of
fees and disseminate certain information about them. Note that the
section apparently allows a Practitioner to offer in a solicitation or
advertisement to provide a written schedule of fees or to actually set
forth the fees in the solicitation or advertisement.
   The fee information may consist of fixed fees for specific “routine
services.” No guidance is provided as to what is a routine service.
Perhaps it would include a charge for an initial meeting with the client
or to attend a first meeting on the taxpayer ’s behalf before the IRS. The
Circular does not appear to foreclose a Practitioner from charging a
fixed fee for something that is not routine. However, section 10.30
appears to foreclose reciting fixed fees in a solicitation or advertise-
ment for anything other than routine services.
   The fee information may also include hourly rates. It is appropriate
for Practitioners to mention whether the hourly fees are subject to
change, although not required by the Circular. Moreover, in any
engagement with a taxpayer, it probably is prudent to recite that the
fees are subject to change, if that will be the case, and also to advise the
client when and if any such change has occurred.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–69
§ 4:11.4              THE CIRCULAR 230 DESKBOOK

    The fee information may also include a range of fees for particular
services. This seems to cover more than just routine fees. This range
might include, for example, a certain fixed fee for an initial consultation
and a minimum charge (with hourly rate charges if greater) for reviewing
client information, such as tax returns. The section explicitly permits
the fee information to include a recital of what the fee would be for an
initial consultation.
    Any statement of fee information in which costs (for example,
disbursements) may be incurred must include a statement disclosing
whether clients will be responsible for such costs. Although the Circular
does not list what these costs may be, they might include charges for
photocopying, typing, travel expenses (including meals), secretarial
or other services, fees paid to outside consultants hired by the Practi-
tioner on behalf of the taxpayer (such as an appraiser or an actuary), and
a fee paid to the IRS to obtain, for example, a private letter ruling.

   § 4:11.4        Limit on Changing Fees
    As mentioned above, it is appropriate to mention if the fees may be
changed periodically. Section 10.30(b)(2) provides that a Practitioner
may charge no more than the rate or rates published by him or her for
at least thirty days after the last date on which the schedule of fees was
published. It appears that this thirty-day time limit applies even if the
solicitation or advertisement expressly states that it is subject to
change. On the other hand, if the solicitation or advertisement
expressly states that on a date (even if within thirty days) fees will
change, that should be permitted. For example, if an advertisement
run at the beginning of December recites an hourly rate of $250 but
expressly states that it will become $260 at the beginning of the next
year, the Practitioner ought to be permitted to charge $260 after the
current calendar year ends. Although not mentioned expressly, it may
be that this time limit on changing fees also applies to an engagement
letter because that letter may be viewed as solicitation. If so, the fees
recited in the engagement letter could not be changed (even with
notice) until thirty days after the engagement letter is sent (unless,
perhaps, the engagement letter recites new rates that will take effect
within thirty days).

   § 4:11.5        Permitted Fee Dissemination Information by
                   Practitioners
   Fee information may be mentioned in professional lists, telephone
directories, print media, mailings, electronic mail, facsimile, flyers,
radio, television and any other method. It presumably includes
information on the Practitioner ’s website, if any. In any case, the
information must be truthful, not deceptive or otherwise in violation



                                  4–70
                                       Circular 230                 § 4:11.7

of the Circular ’s rules, and the method chosen must not cause it to
become so.

    § 4:11.6            Unwanted Solicitation
   A Practitioner may not persist in attempting to contact a prospec-
tive client if such person has made it known to the Practitioner that
the prospective client does not want to be solicited. As stated, this rule
appears to apply only to prospective clients and not one who is
currently a client. But the purpose of the rule might be found to apply
also to a prior client. In fact, it may be that anyone, including a current
client, is a prospective client because the matter is a new one.
Although the burden of this rule clearly falls on the Practitioner,
prospective clients might consider advising the Practitioner in writing
that the solicitation is not desired.

    § 4:11.7            Records of Advertisements
   Although the rule is set forth in the section of the Circular dealing
with the dissemination of fee information, it seems that any actual
radio or television broadcast constituting a solicitation or advertise-
ment (apparently, even if it does not contain fee information) must be
retained by the Practitioner for at least thirty-six months from the date
of the last transmission. This appears to be the case because the third
sentence of section 10.30(c) is solely a prohibition on unwanted
solicitation without any reference to fees. It seems that this require-
ment should apply only if the broadcast deals directly with
IRS matters. For example, a Practitioner, who is a CPA, advertises
information about audit work. It seems that because the auditing has
virtually nothing to do, at least directly, with IRS matters that the
record of advertisement rule contained in the Circular should not
apply to it. Similarly, if a Practitioner, who is a lawyer, advertises about
estate planning services she offers, it seems the Circular rules on
broadcast should not apply unless the advertisement indicates services
that almost certainly would become IRS matters.
   In case of direct mail, and apparently email, solicitations and adver-
tisements, again probably limited to those mentioning IRS matters, a
copy of the actual communication (and a list or description of those to
whom it was sent) also must be kept for at least thirty-six months.
   Many Practitioners now have websites that may be accessed
through the Internet. No special mention of websites is made. And
some Practitioners not infrequently change their websites. It is unclear
if each version of the website must be maintained for thirty-six
months. But a prudent Practitioner may wish to do so, at least with
respect to any fee information contained therein, and any portions
dealing with representation in IRS matters.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–71
§ 4:11.8                    THE CIRCULAR 230 DESKBOOK

   § 4:11.8            Ban of Accepting Assistance That Would Be
                       Improper If Done by Practitioner
    In any matter related to the IRS, a Practitioner may not assist or accept
assistance from any person or entity who, to the Practitioner ’s knowl-
edge, obtains clients or otherwise practices in a manner forbidden by
section 10.30. The wording of this section (10.30(d)) is somewhat
different than many other sections of the Circular. Many speak in terms
of an “IRS matter,” but this section is phrased in terms of “any matter
related to the IRS.” It is uncertain whether the sweep of section 10.30(d) is
intended to be broader than other provisions (for example, section 10.30(a)
on advertising and solicitation, dealing with “any Internal Revenue
Service matter”). Nothing suggests a broader scope is intended for a
matter described in section 10.30(d), and the section probably reflects a
different drafting style rather than an intended substantive difference.
    In any case, the prohibition contained in section 10.30(d) is applic-
able only if the Practitioner knows that the person or entity obtains
clients or otherwise practices in a manner forbidden by section 10.30.
The person or entity need not be a Practitioner it seems, because
Practitioner includes only an individual, and section 10.30(d) applies
also to entities (which are not Practitioners). Read broadly, the rule
contained in section 10.30(d) would seem to prevent a Practitioner from
assisting a trust company, which by definition would not be a Practi-
tioner, in an IRS matter if the trust company advertises or solicits
business in a manner prohibited by that section (for example, the trust
company does not maintain a list of those to whom it solicits business
and the solicitation may include IRS matters). This would seem to cover
too much. It seems that section 10.30(d) should be deemed to cover
situations where the Practitioner knows the other person or entity is
soliciting to provide referrals to the Practitioner or the Practitioner is
assisting someone (for example, a bank) in running advertisements or
soliciting business, directly or indirectly, for the Practitioner.

   § 4:11.9            Registered Tax Return Preparers
   With the adoption of the concept of a registered tax return pre-
parer,147.1 a concern arose about creating the impression that the
preparer was endorsed by the Service. Under the amendment, the
registered preparer may not use the term “certified” or otherwise imply
that there is an employee/employer relationship with the Service. The
following description is, however, expressly authorized: “designated as
a registered tax return preparer by the Internal Revenue Service.”



147.1.     For provisions relating to a registered tax return preparer, see sections 10.4(c)
           and 10.3(f).



                                          4–72
                                       Circular 230                § 4:13

§ 4:12           Negotiation of Taxpayer Checks
   Section 10.31 prohibits Practitioners who prepare tax returns from
endorsing or otherwise negotiating any check issued to a client by the
government with respect to a federal tax liability. This rule probably
applies only to a client of the particular Practitioner involved as
opposed to a client of another Practitioner. But suppose another
Practitioner who does not prepare tax returns practices at the same
firm and is able to negotiate the check? It is uncertain how a
Practitioner, other than through deceit, could negotiate or endorse a
check on behalf of the client. But, perhaps a bank or another institu-
tion would accept the Practitioner ’s authority if the Practitioner had
been named as the taxpayer ’s attorney-in-fact for certain tax matters.
In any case, the prohibition, by the literal terms of the section, would
apply even if the client expressly authorized the Practitioner to endorse
or otherwise negotiate the check. But that too proves too much. There
should be no violation if the client expressly authorizes the Practi-
tioner to negotiate the check. It seems that the prohibitions should be
limited to situations where the client has not expressly authorized the
Practitioner to negotiate the check.
   In any case, the prohibition seems to be limited to a check relating
to a federal tax liability. This might include, for example, a refund
check or a check that the client has delivered to the IRS for tax
payment (although, again, it is difficult to see how the Practitioner
could endorse or negotiate the latter without committing deceit).

§ 4:13           Section 10.34
    [Authors’ Note: Section 10.34 was amended in 2007 and in 2011.
The reader should make reference to sections 4:13.4 and 4:13.5,
respectively, for a discussion of these amendments.]
    There are three critical provisions in Circular 230 applicable where
advice is provided: sections 10.34, 10.35 and 10.37. Section 10.34 was
first promulgated in 1994. The other two provisions were not promul-
gated until 2004. While section 10.34 can apply in the case of oral or
written advice, sections 10.35 and 10.37 only apply where the advice is
in writing. The duties that these sections impose on the Practitioner
escalate, with section 10.34 imposing the least onerous duties, section
10.37 imposing more onerous duties and section 10.35 imposing even
further duties. These duties are cumulative in the sense that a Practi-
tioner does not avoid the duties imposed under section 10.34 merely
because one of the other sections happens to become applicable. Like-
wise, the duties imposed under section 10.37 remain intact even though
section 10.35 is triggered (although, as will be discussed, section 10.35
explicitly reiterates the requirements contained in section 10.37).




(Circ. 230 Deskbook, Rel. #12, 3/12)      4–73
§ 4:13                   THE CIRCULAR 230 DESKBOOK

  Section 10.34, which largely mirrors the approach taken in section
6694 of the Code (dealing with preparer penalties), 148 applies where



148.     A Practitioner who violates I.R.C. § 6694 becomes liable for the penalties
         the section imposes. In addition, under I.R.C. § 7407, a preparer who
         repeatedly violates section 6694 can be enjoined from preparing returns.
         The injunction can be designed to prevent the Practitioner from preparing
         returns or from engaging in specific forms of misconduct. See United
         States v. Cruz, __ F.3d __, 2010 WL 2789253 (11th Cir. 2010) (upholding
         district court’s refusal to grant an injunction banning the Practitioner from
         preparing returns, though acknowledging that such relief could be appro-
         priate in different circumstances). Note that, in determining whether an
         injunction should be issued under I.R.C. § 7407, the courts take into
         account normal equity principles. See id. (indicating that the statute does
         not displace these principles).
             When the government seeks an injunction or seeks to enforce a
         summons based on an alleged violation of section 6694 (or a violation of
         section 6700 or 6701), the Practitioner may be able to assert a defense based
         on the First Amendment. The defense, however, is not available if the speech
         in question is commercial in nature and is false. See United States v.
         Davison, 691 F. Supp. 2d 1033 (W.D. Mo. Dec. 18, 2009) (“Thus, if it is
         ultimately determined that some or all of the arrangements detailed above
         constitute unlawful activities or that Davison’s speech relating thereto was
         fraudulent or misleading, the First Amendment will offer Davison no
         refuge.”); see also United States v. Davison, __ F. Supp. 2d __ (W.D. Mo.
         May 11, 2010) (granting an injunction but on a limited basis because of the
         First Amendment). The Eighth Circuit, in affirming Davison in an
         unpublished opinion, narrowed the scope of the injunction. See United
         States v. Davison, __ F.3d __, 2011 WL 285203 (8th Cir. 2011). See also
         United States v. Stover, 731 F. Supp. 2d 887 (W.D. Mo. 2010) (granting
         narrow injunction after trial and discussing how even a “huckster” has a
         First Amendment right to give accurate information to a client); United
         States v. Sommerstedt, 2010 WL 4180971 (D. Nev. 2010), aff’d in part and
         rev’d in part, 2010 WL 2181190 (9th Cir. 2011) (granting injunction against
         preparer over First Amendment argument). Nor will the defense be available
         if the speech assists another in committing unlawful activity. In Chief
         Counsel Notice 2006-022, the Chief Counsel reviews the application of
         the First Amendment in this context and sets forth the kind of evidence
         that the government should secure before deciding to seek an injunction or
         a summons where speech issues are implicated. The Notice makes clear
         that neither injunctive relief nor a summons would be appropriate where a
         Practitioner has done nothing more than advocate an incorrect position. A
         mere good-faith mistake, in other words, should not lead to a request for
         an injunction or a summons. See United States v. Davison, supra
         (indicating that section 6694 standards are relevant in determining
         whether a violation of section 6700 has occurred). See also United States
         v. Stover, __ F. Supp. 2d __, 2010 WL 1690038 (W.D. Mo. 2010) (refusing
         to grant an injunction on the government’s motion for summary judgment
         based on an alleged violation of I.R.C. § 6700, even though there was an
         outstanding revenue ruling that was contrary to the promoted plan, where
         the promoter stopped recommending the plan after the IRS issued a notice
         making it a Listed Transaction).



                                      4–74
                                       Circular 230                                § 4:13

advice is given in connection with the preparation of a return. 148.1


               In United States v. Stover, 650 F.3d 1099 (8th Cir. 2011), the court
           affirmed the injunction issued by the district court. The Eighth Circuit
           reviewed the scope of section 6700 and found that Stover, a tax attorney,
           had violated it. In doing so, the court carefully examined the requirement
           in the section that the statement at issue be false or fraudulent. Stover had
           argued that this requirement could only be satisfied if a tax professional
           would conclude that there was a zero percent chance that the taxpayer
           could prevail on the merits. Id. at 1109–10. Finding such a standard too
           narrow, the court held that a violation of the section can occur if the person
           making the statement “knew or had reason to know they were untrue.” Id.
           In finding this standard satisfied, the court emphasized that Stover had
           untruthfully conveyed to clients the impression that the transaction did
           not have to have economic substance. Id. The court went on to indicate
           that a failure to advise a client about the requirements for a proper
           deduction can also constitute a violation of the section. Finally, the court
           found that one can violate the section by informing a client that there is no
           need to make disclosure about a Listed Transaction that has been
           the subject of an IRS Notice (finding that specious reasoning about the
           applicability of such a Notice can be a sufficient basis for invoking the
           section). Id. at 1010–11. But compare United States v. Hand-Bostick,
           (N.D. Tex. Sept. 12, 2011) (finding that there was no willfulness sufficient
           to find a violation of section 6700 where the Practitioner had advised the
           client to enter into a tax shelter, but finding a question of fact as to whether
           section 6694 had been violated). See also United States v. Littrice, 2011
           WL 3555812 (N.D. Ill. 2011) (granting an injunction against a preparer
           who had been previously convicted).
148.1.     Under proposed regulations (issued on August 23, 2010), section 10.34
           would be amended. The amendment is designed to make the section
           conform with section 6694 of the Code. As a result, conduct that is subject
           to penalty under section 6694 would, as a general matter, expose the preparer
           to sanctions under the Circular. There are, however, some important
           differences between section 6694 and the proposed version of section 10.34.
               First, while section 6694 has a reasonable-cause defense, there is no
           such defense under section 10.34. Instead, section 10.34 would only apply
           if the Practitioner acted willfully, recklessly or with gross incompetence.
           Similarly, whereas section 6694 can apply to a single, unintentional error
           that is not willful, reckless or the product of gross incompetence,
           section 10.34 cannot apply in this context. Thus, sanctions under
           section 10.34 will not be imposed unless there is a conclusion that there
           was willfulness, recklessness or gross incompetence; in contrast, under
           section 6694, no such inquiry is made. In this regard, the text of section
           10.34 provides that the presence of a pattern of misconduct will be taken
           into account in determining if there was willfulness, recklessness or gross
           incompetence. The preamble to the proposed regulations states: “Thus, a
           practitioner liable for a penalty under section 6694 is not automatically
           subject to discipline under § 10.34(a).”
               Second, while section 6694 cannot apply if the taxpayer ’s liability is
           not understated, there is no corresponding provision in section 10.34. To
           illustrate, assume that the taxpayer ’s understatement is offset by an
           overpayment on account of another position on the return. In this case,
           given the absence of taxpayer liability, section 6694 cannot apply. However,
           section 10.34 can apply in these circumstances.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–75
§ 4:13.1                   THE CIRCULAR 230 DESKBOOK

More specifically, the section applies to Practitioners who sign or
prepare a return or give advice regarding a position to be taken on a
return—whether the advice is oral or in writing.148.2 The section
would appear to be applicable to amended, as well as original, returns,
although it does not explicitly discuss amended returns. As will be
discussed, under a recent amendment, section 10.34’s reach
was broadened to include post-return submissions.149 Although, as
indicated, the section is patterned after section 6694 of the Code, it
has a wider scope. Under the amendment, section 10.34 applies to
post-return submissions, a subject that section 6694 generally does
not address (though it does address claims for refund).
   In essence, the section contains three components. First, it pre-
cludes Practitioners from advising a taxpayer to take a return position
that is legally untenable. Second, it imposes a duty on Practitioners
not to accept at face value the information supplied by the taxpayer.
Third, it requires the Practitioner to make certain disclosures to the
taxpayer regarding the possible imposition of penalties should the
position not be sustained. In addition, under the amendment,
the Practitioner also has certain duties regarding the submission of
non-return documents, as discussed below in section 4:13.4.

   § 4:13.1            Realistic-Possibility Standard
   In terms of the duty to make certain that the return position is not
legally untenable, the section creates a two-tier framework—one for
Practitioners who sign the return and another for non-signers who


               Third, section 10.34 requires a minimum standard of a reasonable
           basis in all cases. Thus, even if for some reason section 6694 is inapplic-
           able, section 10.34 can apply if there was no reasonable basis for the
           position. A possible illustration would be the case where the professional
           gives advice prior to the consummation of the transaction. In this case,
           section 6694 cannot apply. See Treas. Reg. § 301.7701-15(b)(2)(i). But
           section 10.34 could apparently apply in this context, with a reasonable-
           basis standard being applicable.
               Fourth, whereas only one person in a firm can be held responsible for
           the section 6694 penalty, all of the people involved can be charged with a
           violation of section 10.34.
148.2.     Practitioners who write opinions for the purpose of providing penalty
           protection for the client should appreciate the possibility that a referral to
           OPR for a violation of section 10.34 could occur if it is ultimately
           determined that the taxpayer ’s substantive position is incorrect but that
           the penalty should be abated by reason of the taxpayer ’s reliance on the
           opinion. In December 2011, Karen Hawkins, Director of OPR, indicated
           that OPR is interested in situations where Appeals has rejected the
           taxpayer’s substantive position but nonetheless abated the penalty on
           account of a professional’s opinion. See 2011 TNT 234-3 (Dec. 5, 2011).
149.       See REG-122380-02, 71 Fed. Reg. 6421-01, 2006-10 I.R.B. 563 (Feb. 8,
           2006).



                                         4–76
                                       Circular 230                            § 4:13.1

merely give advice about a return position. In the case of a Practitioner
who signs the return, the Practitioner must satisfy himself or herself
that the position has “a realistic possibility of being sustained on its
merits.” A position is deemed to have such a possibility if a person
having knowledge of the tax law would conclude that there is approxi-
mately a one-in-three (or greater) likelihood that it would be sus-
tained.150 In making this assessment, the authorities referenced in
Treasury Regulations section 1.6662-4(d)(3)(iii) are to be considered.
Thus, as the regulation indicates, consideration should be given to the
following authorities:
   •     statutory provisions;
   •     proposed, temporary and final regulations;
   •     revenue rulings and revenue procedures;
   •     treaties, related regulations and official explanations of a treaty;
   •     court decisions;
   •     legislative history contained in committee reports;
   •     joint explanatory statements made by managers included in a
         conference committee report;
   •     floor statements made prior to enactment by one of the bill’s
         managers;
   •     general explanation of legislation prepared by the Joint Com-
         mittee on Taxation (the Blue Book);
   •     certain private letter rulings, technical advice memoranda,
         actions on decision and general counsel memoranda; 150.1 and
   •     other IRS notices, announcements and press releases.151
   The section explicitly directs that the following audit-lottery factors
not be considered in making the assessment: the likelihood of audit;
the likelihood that the issue will be raised if an audit were to occur; and
the likelihood that the issue could be compromised if it were raised on
audit. Does this suggest that a Practitioner may not discuss the low
likelihood of an audit on a particular issue when the client is considering
a transaction or how to report a transaction already consummated?
Reading the section as prohibiting such a discussion seems inappropri-
ate. The section precludes the Practitioner from taking audit-lottery


150.       See Circular 230 § 10.34(d)(1).
150.1.     The Tax Court has held, however, that a field service advisory does not
           constitute substantial authority. See Brown v. Comm’r, T.C. Memo 2011-83.
151.       Cf. Treas. Reg. § 1.6694-2(b)(3) (giving examples that illustrate the kinds of
           authorities that may be considered in making the reasonable-possibility
           assessment for purposes of I.R.C. § 6694).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–77
§ 4:13.1                   THE CIRCULAR 230 DESKBOOK

considerations into account in determining whether the realistic-possi-
bility standard is satisfied. It does not purport to limit the nature of the
conversation between the Practitioner and client. Indeed, if it did so,
First Amendment questions might be raised.152 Thus, it would seem
that Practitioners remain unconstrained in their ability to give clients
accurate information about audit-lottery considerations.
    A Practitioner who signs the return can avoid the realistic-possibi-
lity standard if: (1) the return adequately discloses the position, and
(2) the position is not a frivolous one 153 (that is, not patently
improper).154 The section does not mandate any particular form of
disclosure for a Practitioner seeking to avoid the realistic-possibility
standard. It would seem advisable, however, to comply with the
requirements for disclosure that apply under section 6694. 155 While,
as indicated, in setting forth the realistic-possibility standard, the


152.       See J. Blattmachr, M. Gans & T. Bentley, The Application of Circular 230
           in Estate Planning, 107 TAX NOTES 61 (Apr. 4, 2005).
153.       Note that, in ABA Opinion 85-352, a realistic-possibility standard is
           imposed (requiring good faith that the position is warranted in existing
           law or a good-faith argument for a modification or reversal in existing law
           and “a realistic possibility of success if the matter is litigated”). For a
           discussion of this Opinion, see Dennis J. Ventry, Lowering the Bar: ABA
           Formal Opinion 85-352, TAX NOTES, available at www.taxanalysts.com as
           Doc 2006 TNT 128-15 (July 3, 2006). In other words, under the ABA
           Opinion, there is no opportunity for a Practitioner to argue, based on
           disclosure, that he or she satisfied the not-frivolous standard. This incon-
           sistency between state-level ethical rules and Circular 230 (as well as
           I.R.C. § 6694) is somewhat surprising. It is explained, however, by the fact
           that the Opinion was issued before I.R.C. § 6694 and Circular 230 § 10.35
           adopted the lower not-frivolous standard. Indeed, it would appear that a
           lawyer who complies with the not-frivolous standard does not violate ABA
           Opinion 85-352. See Report, Statements of Tax Practice Statement, 54
           TAX LAW. 185 (Fall 2000). For a discussion of the inconsistency between
           the Circular and the ABA and AICPA ethical rules, see John R. Dorocak,
           The Clintons’ Legal Defense Fund: Income from Payment of Legal Ex-
           penses by Another and Deductibility of Such Expenses, 2003 TNT 122-22
           (June 25, 2003). See also Jasper Cummings, The Range of Legal Tax
           Opinions, with Emphasis on the “Should” Opinion, TAX NOTES, 2003
           TNT 33-19 (Feb. 17, 2003). Note also that, while a Practitioner may be
           able to avoid penalty or sanction via the not-frivolous standard if disclosure
           is made, the client may well remain subject to penalty if a return position
           is taken on the basis of equivocal professional opinion. See Kaplan v.
           Comm’r, T.C. Memo 2006-16; see also Cummings, supra. Finally, the
           Practitioner ’s interest in making disclosure may conflict in some
           circumstances with the client’s interest in not making it. See Report, 54
           TAX LAW. at 190. Where such a conflict occurs, the Practitioner should
           explain the nature of his or her interest in making disclosure and suggest
           that independent advice be secured before the client makes a final decision.
154.       See Circular 230 § 10.34(d)(2).
155.       See Treas. Reg. § 1.6694-2(c)(3) (indicating that, in making disclosure
           designed to trigger the not-frivolous standard for section 6694 purposes,



                                         4–78
                                       Circular 230                           § 4:13.1

section explicitly excludes from consideration audit-lottery factors, it
fails to address the possible relevance of these factors in the context of
the not-frivolous standard.156 It therefore remains unclear whether a
Practitioner could successfully argue that a return position was not
frivolous given, for example, the low likelihood of audit. If a Practi-
tioner concludes that a return position is of questionable merit, it
would seem prudent not to sign the return unless the client makes the
necessary disclosure. For while it might seem that the difference
between a realistic-possibility standard and a not-frivolous standard
is a rather theoretical one, the distinction could prove to have practical
significance if the Practitioner were accused of violating section 10.34
(or section 6694 of the Code): A Practitioner would more easily be able
to refute an accusation of giving improper advice if the not-frivolous
standard, rather than the realistic-possibility standard, were
applied.157
    Moreover, as a practical matter, the fact that the position is
disclosed would seem to diminish the likelihood of any accusation
of impropriety by the Practitioner, even assuming that the position
could possibly be viewed as a frivolous one. A Practitioner who is
viewed as forthright and not seeking to conceal a questionable position
will obviously be viewed differently from one who artfully seeks to
mislead the IRS.158 In short, even assuming a position is arguably


           it must be made in accordance with Treas. Reg. § 1.6662-4(f), thus
           requiring that the disclosure be made on Form 8275 or 8275-R, as
           appropriate, or on the return itself in accordance with any applicable
           revenue procedure).
156.       See also Treas. Reg. § 1.6694-2(b)(1) (excluding similar audit-factor con-
           siderations in the context of the realistic-possibility standard but not
           discussing the relevance of these considerations in the context of the
           not-frivolous standard).
157.       In the KPMG indictment, the government alleged that the defendants had
           given more-likely-than-not opinions which did not reflect their sincere
           views about the merit of the position. Had the opinions used a lower
           standard (for example, a not-frivolous standard), one would assume that
           the government would not have gone forward with this aspect of the
           indictment (though the indictment did allege that the position was in fact
           frivolous). See also ABA Opinion 346 (indicating that an opinion which
           minimizes the threat of legal arguments that the IRS could make could be
           viewed as an unethical false opinion, thereby creating the specter of
           malpractice liability as well). It would also seem that a Practitioner who
           gives an opinion at a confidence level that he or she does not sincerely hold
           might also arguably be guilty of criminal mail or wire fraud (as well as
           aiding and abetting a tax fraud).
158.       In the KPMG indictment, the government alleged that the defendants
           caused two separate tax-return entries to be netted in order to mislead the
           IRS. This kind of “netting,” if designed to mislead the IRS, can apparently
           (at least in the view of the government) result in criminal liability. The
           indictment is reproduced as Appendix K.



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§ 4:13.1                   THE CIRCULAR 230 DESKBOOK

frivolous, it seems rather unlikely that a Practitioner would be accused
of violating section 10.34 (or section 6694 of the Code) where
disclosure is made.
    Parenthetically, it should be noted that disclosure of a not-frivolous
position may not always fully insulate the Practitioner. While such
disclosure does satisfy the requirements of section 10.34 and would
therefore preclude the imposition of a sanction under this section, a
penalty could nonetheless possibly be imposed on the Practitioner
under section 6694(b) of the Code. Unlike section 6694(a) (and unlike
section 10.34), section 6694(b), which imposes a penalty on a preparer
who recklessly disregards a rule or regulation, 159 can apply even if
disclosure is made and even if the not-frivolous standard is satisfied.
Where a preparer recklessly or intentionally disregards a regulation,
the section 6694(b) penalty will be imposed unless:
   (1)     the position is not frivolous;
   (2)     adequate disclosure is made; and
   (3)     the position is based on a good-faith challenge to the validity of
           the regulation.160
In contrast, in the case of a preparer who intentionally or recklessly
disregards a revenue ruling, disclosure will suffice if the not-frivolous
standard is satisfied—that is, there is no requirement that the
challenge to the validity of the ruling have a good-faith basis. 161
The good-faith requirement in the case of a challenge to a regulation
is not contained in the Code itself. It is rather supplied in Treasury
Regulations section 1.6694-3(c)(2). The regulation offers no example
illustrating the import of the good-faith requirement, thus leaving
questions about the relationship between this requirement and the
not-frivolous standard. In other words, if a position is based on an
argument that a regulation is invalid and the position is not a
frivolous one, it would seem somewhat unreasonable to conclude
that there is no good-faith basis for taking the position. Yet the
regulation, without any further clarification or illustration, provides
that both the not-frivolous and good-faith standards must be satisfied
in this context in order for disclosure to defeat the penalty. On the
other hand, as indicated, there is no similar good-faith requirement in
section 10.34.

159.       See Treas. Reg. § 1.6694-3(f) (defining a rule or regulation for this purpose
           as including the Code, temporary or final regulations, a revenue ruling,
           and a notice (other than a notice of proposed rule making)).
160.       See Treas. Reg. § 1.6694-3(c)(2), (d) (ex. 4).
161.       See Treas. Reg. § 1.6694-3(c)(2). Consistent with Circular 230 § 10.34,
           even if disclosure is not made, the penalty can nonetheless be avoided for a
           challenge to a ruling if the realistic-possibility standard is satisfied.



                                        4–80
                                       Circular 230                           § 4:13.1

   A Practitioner who gives advice about a position to be taken on a
return cannot escape the requirements of section 10.34 through the
simple expedient of not signing the return. The section applies to signers
and non-signers alike. Nonetheless, the section does make an important
distinction in this context, creating, as indicated, a two-tier framework.
In the case of a non-signer,162 unlike a signer, the not-frivolous standard
can be triggered even if disclosure is not in fact made on the return. In
order to trigger the not-frivolous standard, the non-signer need only
advise the client of any opportunity to avoid the accuracy-related
penalties imposed by section 6662163 through disclosure,164 and of the
requirements that must be satisfied in order for a disclosure to be
deemed adequate.165 The section does not specify whether the advice
must be in writing. Given the section’s failure to address this issue, it
would appear that the advice can be given either orally or in
writing.166 Nonetheless, it would seem prudent to include the advice
in any writing containing substantive advice. And where the preparer
gives oral advice, prudence dictates that the advice concerning dis-
closure be provided in writing in order to avoid any question about
whether the advice about disclosure was in fact given. If the disclosure
advice is given orally, at the very least, a memo to the file should be


162.       This includes any non-signing Practitioner who gives advice about a return
           position or who prepares a portion of the return but does not sign it.
163.       The penalty imposed on taxpayers who disregard a rule or regulation
           (I.R.C. § 6662(b)(1)) can be defeated by appropriate disclosure. See Treas.
           Reg. § 1.6662-3(a). On the other hand, the negligence penalty (imposed by
           the same provision) cannot be defeated in this fashion. See Rev. Proc.
           2005-75. The inconsistent treatment of these two penalties is difficult to
           rationalize, though it should be noted that Congress affirmatively decided
           to eliminate the disclosure defense to the negligence penalty in 1993 while
           leaving it intact for the disregard penalty. Like the disregard penalty, the
           substantial-understatement penalty (I.R.C. § 6662(b)(2)) can be defeated
           by disclosure. See Treas. Reg. § 1.6662-4(a).
164.       There are cases where disclosure will not insulate the client from a penalty.
           For example, the penalty imposed for disregard of a regulation or rule
           under I.R.C. § 6662(b)(1) can only be defeated by disclosure if there is a
           reasonable basis for the return position. See Treas. Reg. § 1.6662-7(c).
           Also, the negligence penalty cannot be defeated by disclosure. See Rev.
           Proc. 2005-75. It has been suggested that, in situations such as these, a
           non-signing Practitioner discharges the duties imposed under Circular 230
           § 10.34 by advising the client that disclosure will not be effective in
           defeating the penalty. See Report, Statements of Tax Practice Statement,
           54 TAX LAW. 185 (Fall 2000).
165.       See Circular 230 § 10.34(a)(2).
166.       Cf. Treas. Reg. § 1.6694-2(c)(3)(ii)(A), which discusses the ways in which
           advice about disclosure may be given in order to defeat the penalty under
           I.R.C. § 6694(a). Note that, under this regulation, if the substantive advice
           is in writing, the disclosure advice must also be in writing. No similar
           requirement is contained in Circular 230 § 10.34.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–81
§ 4:13.2                   THE CIRCULAR 230 DESKBOOK

prepared confirming the fact that it was provided to the client. 167
Parenthetically, it should be noted that, under the proposed amend-
ment, a non-signer would appear to qualify for the not-frivolous
standard even if advice about disclosure is not given.
    In sum, under the two-tier framework that section 10.34 creates,
Practitioners who sign the return can only qualify for the not-
frivolous standard if disclosure is in fact made. In contrast, Practi-
tioners who give tax advice about a position to be taken on a return
but who do not sign it can qualify for the not-frivolous standard
even if disclosure is not made as long as they advised the client
about the opportunity to make disclosure and the consequences of
doing so.

   § 4:13.2            Reasonably Likely Penalties
    Two additional aspects of section 10.34 require comment. First,
subsection (b) requires Practitioners who sign or prepare returns, as
well as non-signing Practitioners who merely give advice, to inform
the client about penalties “reasonably likely to apply.” The client must
also be informed of: (1) any opportunity to avoid such penalties
through disclosure, if relevant, and (2) the nature of the disclosure
required in order to secure penalty protection. 168 Note that this
requirement does not apply in every case. It only applies where it is
“reasonably likely” that a penalty will be imposed. The reasonably
likely standard is not further defined. As a result, it is not clear if the
Practitioner is required to provide this information if, for example,
there is only a 20% likelihood that a penalty would be imposed. What
if the likelihood were 30%, or 50%? Note also that there is no stated
requirement that the client be given the information in writing, thus
suggesting that it could be given orally. Nonetheless, cautious Practi-
tioners will provide the disclosure information in all cases in order to
qualify for the not-frivolous standard and will do so in writing to avoid
any question about compliance.168.1


167.       Cf. Treas. Reg. § 1.6694-2(c)(3)(ii)(A), indicating, in the context of the
           § 6694(a) penalty, that such a memo might establish that the advice to
           disclose was in fact given.
168.       See also Circular 230 § 10.21 (requiring the Practitioner to advise the
           client of the consequences of failing to correct an error or omission).
           Interestingly, there is no requirement in the section that the Practitioner
           advise the client of the consequences of making the correction.
168.1.     It has been suggested that, if a professional believes that a client will not be
           able to rely on the professional’s opinion to defeat a penalty under
           section 6664 of the Code by reason of the professional’s conflict or interest
           in the transaction, section 10.34 requires that this be disclosed to the
           client. See Joe Walsh, Tax Court Administers a Painful Root Canal without
           Anesthesia, 86 PRAC. TAX STRATEGIES 196 (May 2011).



                                          4–82
                                       Circular 230                           § 4:13.3

    § 4:13.3            Information Supplied by the Client
   Second, section 10.34(c) permits a signing or non-signing Practi-
tioner who gives return advice to rely in good faith on information
supplied by the client. The subsection goes on to provide that the
Practitioner does not have a duty to verify the accuracy of the
information. This makes sense given the rather onerous burden that
would be imposed on preparers and advisers were they required to
verify independently the accuracy of the client’s representations. So,
for example, if the client informs a preparer that she incurred a
medical expense of a certain amount, the Practitioner is permitted
to reflect this amount as part of the itemized deduction without any
concern about due-diligence obligations and apparently without any
need to ask about supporting documentation.169
   What if, instead, the taxpayer asked the Practitioner to report a
charitable contribution deduction on the return? Is the Practitioner


169.       Cf. Treas. Reg. § 1.6694-1(e)(2) (giving a similar example in the context of
           § 6694). In 2010, the IRS provided questions and answers concerning the
           duty of a preparer, which surprisingly intimates that preparers may have
           some duty to examine back-up documentation. The IRS stated:
           Can a tax return preparer rely upon documentation that hasn’t been
           verified?
               Generally the answer is yes. Both § 10.34(d) of Circular 230 and
           Treasury Regulation § 1.6694-1(e)(1) provide, in part, that a tax return
           preparer generally may rely in good faith without verification upon
           information furnished by a taxpayer. A tax return preparer also may rely
           in good faith and without verification upon information and advice
           furnished by another advisor, another tax return preparer or other third
           party (including another advisor or tax return preparer at the tax return
           preparer’s firm). A tax return preparer, however, may not ignore implica-
           tions of information furnished to the tax return preparer or actually known
           by the preparer. A tax return preparer must make reasonable inquiries if the
           information as furnished appears to be incorrect or incomplete. Addition-
           ally, some provisions of the Code or regulations require that specific facts
           and circumstances exist (for example, that a taxpayer maintains specific
           documents) before a deduction or credit may be claimed. A tax return
           preparer must make appropriate inquiries to determine the existence of
           facts and circumstances required by a Code section or regulation as a
           condition for claiming a deduction or credit.
           Does a tax return preparer have to audit books and records prior to
           preparing a tax return?
               No. Treasury Regulation § 1.6694-1(e)(1) provides, in part, that a tax
           return preparer is not required to audit, examine or review books and
           records, business operations, documents or other evidence to indepen-
           dently verify information provided by a taxpayer, advisor, other tax return
           preparer or other party. As discussed above, a tax return preparer may not
           ignore implications of information furnished to the tax return preparer or
           actually known by the tax return preparer and must make reasonable
           inquiries if the information as furnished appears to be incorrect or
           incomplete.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–83
§ 4:13.3                   THE CIRCULAR 230 DESKBOOK

required to make affirmative inquiry as to whether the client has
received the necessary documentation from the charity to support the
deduction?170 While the section does not address this question, the
regulations under section 6694—which are otherwise similar to sec-
tion 10.34(c)—do impose an obligation on the Practitioner to make
this inquiry.171 Similarly, while the regulations require the Practitioner


               Does a tax return preparer have an obligation to make inquiries of a
           taxpayer?
               Yes, a tax return preparer must make inquiries of a taxpayer in order to
           prepare an accurate tax return. Inquiries may be general in some situations,
           such as asking questions about whether or not the taxpayer made charitable
           contributions or if they own their own home. These questions are crucial to
           determining whether or not the taxpayer is entitled to certain deductions.
           Similarly, the tax return preparer must make general inquiries or have
           existing knowledge of the taxpayer's sources of income, such as whether or
           not the taxpayer received alimony, a refund of state taxes in the previous year,
           or received interest or dividends, and for Schedule C taxpayers, a more in-
           depth discussion to include what accounting method the taxpayer uses. Tax
           return preparers should ask for taxpayer records where appropriate, such as
           asking for the previous year’s tax return or copies of depreciation schedules
           for Schedule C or E taxpayers or stock basis for Schedule D taxpayers. These
           are fundamentally necessary in order to ascertain enough information about
           a taxpayer in order to prepare their tax return.
               During these normal exchanges or discussions, the tax return preparer
           will gain a good deal of knowledge about the taxpayer. Treasury Regulation
           § 1.6694-1(e)(1) states, in part, that a tax return preparer may not ignore
           the implications of information furnished to the tax return preparer or
           actually known by the tax return preparer. The tax return preparer must
           make reasonable inquiries if the information as furnished appears to be
           incorrect or incomplete. Additionally, as discussed above, some provisions
           of the Code or regulations require that specific facts and circumstances
           exist (for example, that the taxpayer maintains specific documents) before
           a deduction or credit may be claimed. The tax return preparer must make
           appropriate inquiries to determine the existence of facts and circumstances
           required by a Code section or regulation as a condition of the claiming of a
           deduction or credit.
               The following is an illustrative example. Client visits Tax Return
           Preparer to have his tax return prepared and filed. Client tells Tax Return
           Preparer that he is married and has three children. Client hands Tax
           Return Preparer a piece of paper that lists the social security number and
           date of birth for each of his children.
               Client also tells Tax Return Preparer that he has one W-2 for $60,000,
           but that he failed to bring it with him. Client then says that his wife has
           her own business and that, while she did not have any gross income, she
           incurred $20,000 in expenses. Tax Return Preparer prepares Client’s tax
           return as a married filing joint return with three exemptions, EITC, and a
           Schedule C loss (showing $0 gross income) without asking any questions
           or reviewing additional documentation. Tax Return Preparer has neither
           exercised due diligence, nor met the standards prescribed by Treasury
           Regulations.”
170.       See I.R.C. § 170(f)(8).
171.       See Treas. Reg. § 1.6694-1(e)(1).



                                          4–84
                                       Circular 230                           § 4:13.4

to inquire about whether the taxpayer satisfies all of the elements and
conditions of a Code section, no such obligation is contained in
section 10.34(c). Thus, it would appear the Practitioner ’s obligations
in terms of information gathering are broader under section 6694 than
under section 10.34(c).
   What if the information supplied by the client appears to be
incorrect, inconsistent, or incomplete—or if the Practitioner actually
knows that the information contains such a defect? In these circum-
stances, section 10.34(c) requires the Practitioner to make further
inquiry. The Practitioner, in other words, may not ignore implications
that are apparent on the face of the information. Nor may the
Practitioner ignore information that is inconsistent with an assumed
fact.172 What if the tax treatment of an item depends on the presence
of a business purpose? Is the Practitioner permitted to accept at face
value the client’s representation on this issue and to prepare the return
(or give advice concerning the return) on the assumption that the
client had such a purpose? It would seem that, as long as the
Practitioner is not confronted with information that is inconsistent
with the assumption or that would make it appear inaccurate, there is
no violation of section 10.34(c). In contrast, as the Practitioner ’s
duties escalate under section 10.37, and then section 10.35, the
Practitioner may not be permitted to make such an assumption
without supporting information or verification.173

    § 4:13.4            2007 Amendment to Section 10.34
   As indicated, section 10.34 was amended in 2007.
   Under the pre-amendment version, the section only applied to a
Practitioner who signed the return; a Practitioner who gave advice
about a position to be taken on the return; or a Practitioner who
prepared a portion of the return but did not sign it. Under new


172.       See also Circular 230 § 10.22, which imposes a due-diligence obligation on
           Practitioners. Note that, while this section permits the Practitioner to rely
           on information supplied by others, it cross-references Circular 230
           § 10.34. In doing so, it apparently contemplates an exception: such
           reliance is impermissible if the Practitioner has a duty to verify client-
           supplied information under § 10.34(c).
173.       See Circular 230 § 10.35(c)(1)(ii), which provides: “For example, it is
           unreasonable to assume that a transaction has a business purpose or that a
           transaction is potentially profitable apart from tax benefits.” Compare
           Circular 230 § 10.35(c)(1)(iii), which provides: “For example, a Practitioner
           may not rely on a factual representation that a transaction has a business
           purpose if the representation does not include a specific description of the
           business purpose or the Practitioner knows or should know that the
           representation is incorrect or incomplete.” Note also that Circular 230
           § 10.37 provides that a Practitioner may not render advice on the basis of
           unreasonable factual assumptions.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–85
§ 4:13.4                   THE CIRCULAR 230 DESKBOOK

subsection (b), section 10.34 is applicable in the case of any writing
submitted to the Service. Thus, unlike the pre-amendment version of
the section, the amended version imposes duties on a Practitioner who
assists a client in preparing a document submitted to the Service at
any time, even in the case of a post-return submission.174
   Where the Practitioner provides advice about a position to be taken
in such a document, the Practitioner is held to the not-frivolous
standard. And even where the Practitioner does not provide any advice
about a position taken in the document, the Practitioner may not
recommend that it be submitted if:
   (1)     the purpose of the submission is to impede or delay tax
           administration;
   (2)     the submission is frivolous; or
   (3)     the document contains or omits information that “demon-
           strates an intentional disregard of a rule or regulation” unless
           the Practitioner also advises the client to submit a document
           that evidences a good-faith challenge to the rule or regulation.
   This change is, of course, reminiscent of the criminal charges
recently brought against KPMG, where the government maintains
that the firm’s privilege assertion was improperly interposed for the
purpose of undermining the Service’s ability to collect the tax from the
client before the expiration of the statute of limitations. In enlarging
the scope of the section, new subsection (d) also extends the duty to
make further inquiry regarding problematic facts supplied by the client
to post-return submissions.
   Under subsection (c), as revised, a Practitioner must give penalty
advice in connection with any document submitted to the Service. It
would appear that this provision would encompass a post-return

174.       It should be noted the Practitioner ’s obligation to exercise due diligence
           under Circular 230 § 10.22(a) can also apply in the case of a post-return
           submission. There is, however, an important difference between the
           amendment to § 10.34 and § 10.22(a): Whereas the latter imposes a
           due-diligence obligation without elaboration, the former specifically pro-
           hibits the submission of a document that takes a frivolous position.
           Compare Code section 6701 (imposing, under current law, a penalty on
           Practitioners who assist in filing not only a return but also any affidavit or
           document). See also Kevin E. Packman, Reporting Foreign Accounts:
           Treasury Applies the Carrot and the Stick, 112 J. TAX’N 334 (June 2010)
           (indicating that the due-diligence obligation requires a preparer to affirma-
           tively discuss with taxpayers whether they have a foreign bank account).
               In United States v. Cruz, 618 F. Supp. 2d 1372 (S.D. Fla. 2008),
           reversed on other grounds, __ F.3d __, 2010 WL 2789253 (11th Cir.
           2010), the court indicated that an injunction based on violations of section
           6694 would be inappropriate if the preparer appropriately relied on
           information supplied by the taxpayer.



                                         4–86
                                       Circular 230                            § 4:13.5

submission. If this is the case, however, it is not clear what kind of
penalty might be imposed on a client in the case of a such submission
in that the accuracy-related penalties apply with respect to return
positions, not post-return submissions.175
   Finally, under a proposed amendment also issued in 2007,176 the
realistic-possibility-of-success and not-frivolous standards would be
brought into conformity with the 2007 amendment to Code section
6694, a subject that is considered in the next section. (Surprisingly,
given the way in which the proposed amendment is framed, it is not
entirely clear whether the old standards remain in effect while the
proposal is pending.)

    § 4:13.5            2011 Amendment to Section 10.34
   Section 10.34 now provides that a Practitioner who signs a return
or a refund claim or who gives advice about a position to be taken on a
return or refund claim may violate the section if:176.1
    (1)   the position is not supported by a reasonable basis;
    (2)   the position constitutes an unreasonable position within the
          meaning of section 6694(a)(2) of the Code; or
    (3)   taking the position is, within the meaning of section 6694(b)(2)
          of the Code, a willful attempt to understate the tax liability



175.       Perhaps the new duty could apply where a frivolous submission is made
           to the Service and a court. See I.R.C. § 6673 (imposing a penalty on court
           submissions that are frivolous or groundless or made for the purpose of
           delay). Or perhaps it could apply to the penalty that can be imposed on
           the taxpayer under I.R.C. § 6702 in connection with certain frivolous
           post-return submissions (but note that, as indicated in § 6702(b), this
           penalty only applies in limited contexts). For a discussion of this provi-
           sion, see Chief Counsel Notice 2011-004. Finally, it might apply in the
           case of a refund claim (i.e., under I.R.C. § 6676, a 20% penalty is imposed
           on the taxpayer in connection with a refund claim for income tax to
           the extent that the claim is unsuccessful, unless it is established that the
           claim had a reasonable basis). See ILM 200747020 (indicating that the
           penalty will be imposed to the extent that a claim is disallowed absent a
           reasonable basis).
176.       72 Fed. Reg. 54,621-01, 2007-45 I.R.B. 977.
176.1.     Practitioners who write opinions for the purpose of providing penalty
           protection for the client should appreciate the possibility that a referral to
           OPR for a violation of section 10.34 could occur if it is ultimately
           determined that the taxpayer ’s substantive position is incorrect but that
           the penalty should be abated by reason of the taxpayer ’s reliance on the
           opinion. In December 2011, Karen Hawkins, Director of OPR, indicated
           that OPR is interested in situations where Appeals has rejected the
           taxpayer ’s substantive position but nonetheless abated the penalty on
           account of a professional’s opinion. See 2011 TNT 234-3 (Dec. 5, 2011).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–87
§ 4:13.5                   THE CIRCULAR 230 DESKBOOK

           or a reckless or intentional disregard of rules and
           regulations.176.2
   Two qualifications should be noted. First, in the case of a signing
Practitioner, a violation only occurs if the Practitioner knew or
reasonably should have known that the return or refund claim
contained the problematic position. There is no similar rule applicable
to a non-signing Practitioner who gives advice about the position. This
distinction is a sensible one in that, in the case of a non-signing
advisor, it could not reasonably be contended that the Practitioner was
unaware of the position about which the advice was given. Second, in
the case of a signing as well as a non-signing Practitioner, a violation of
the section only occurs if it occurred on account of willfulness,
recklessness or gross incompetence. In this regard, section 10.34(a)(2)
provides that a pattern of conduct will be taken into account in
determining whether the Practitioner acted in a willful, reckless or
grossly incompetent manner.
   In effect, the section incorporates by reference the language of
section 6694 of the Code as well as the regulations issued under
that section.176.3 While the two provisions therefore largely overlap,
there are some important differences.176.4
   First, while section 6694 has a reasonable-cause defense, 176.5
there is no such defense under section 10.34. Instead, as indicated,
section 10.34 only applies if the Practitioner acts willfully, recklessly
or with gross incompetence.176.6 Thus, whereas section 6694 can


176.2.     It should be noted that section 10.36 now provides that any Practitioner
           who has oversight responsibility within a firm regarding tax return prepara-
           tion and advice must take affirmative steps to make certain that people
           within the firm are complying with section 10.34. See section 10.36(b). Note
           also that, just as a preparer may be able to avoid penalties under section 6694
           of the Code if disclosure is made, so, too, sanctions under section 10.34 can
           be avoided if the requisite disclosure is made. If, for example, the preparer
           attaches a Form 8275 to the return making full disclosure with respect to a
           position, this should defeat not only the penalty under section 6694, see
           Treas. Reg. § 1.6694-2(d)(3)(i)(B), but also any sanction under section 10.34
           given that the two provisions are now congruent.
176.3.     In the preamble, explicit reference is made to Notice 2009-5, which
           explains the treatment of tax shelters and discusses the meaning of
           “substantial authority” for purposes of section 6694 of the Code.
           See T.D. 9527. Indicating that section 10.34 is designed to incorporate
           the rules applicable under section 6694, the preamble explicitly incorpo-
           rates Notice 2009-5, 2009-1 C.B. 309.
176.4.     For an argument that it was inappropriate as a policy matter to expand the
           scope of section 10.34 to make it congruent with section 6694 of the Code,
           see Richard M. Lipton, New Circular 230 Guidance Is Broad—and May
           Prove to Be Controversial, __ J. TAX’N __ (Aug. 2011).
176.5.     See Treas. Reg. § 1.6694-2(e).
176.6.     See Circular 230 § 10.34(a).



                                         4–88
                                       Circular 230                        § 4:13.5

apparently apply to a single, unintentional error that is not willful,
reckless or the product of gross incompetence, section 10.34 cannot
apply in such a context. In the Treasury Decision adopting the
amendment to section 10.34, the preamble confirms this aspect of
the relationship between section 6694 of the Code and section 10.34:
“Thus, a practitioner liable for a penalty under section 6694 is not
automatically subject to discipline under § 10.34(a).” 176.7
   Second, section 10.34 requires a minimum reasonable-basis stan-
dard in all cases. Thus, if for some reason section 6694 is inapplicable,
section 10.34 can still apply if there was no reasonable basis for the
position.
   The following examples illustrate how the reasonable-basis standard
in section 10.34 may apply even where section 6694 is not violated.

       Example 1: Assume the Practitioner gives advice prior to the
       consummation of the transaction. In this case, section 6694
                     176.8
       cannot apply.       But perhaps section 10.34, which does not
       contain a parallel pre-transaction-advice exception, could apply
       in this context, with a reasonable-basis standard being applicable.
       On the other hand, it could perhaps be argued that a Practitioner
       who gives pre-transaction advice should not be subject to section
       10.34 on the ground that the section only applies where there is
       some proximity between the advice and the preparation of the
       return—that is, that pre-transaction advice is too remote from the
       preparation and filing of the return to constitute advice about a
       position to be taken on the return.

       Example 2: Assume a non-signing Practitioner gives advice about
       a position to be taken on a return, but the item does not constitute
       a substantial portion of the return. In such a case, the Practitioner
                                        176.9
       is not subject to section 6694,         but could be subject to the
       reasonable-basis standard in section 10.34.

       Example 3: Assume there is no underpayment on the return.
       While section 6694 cannot apply if the taxpayer ’s liability is
                         176.10
       not understated,         there is no corresponding provision in section
       10.34. To illustrate, assume that the taxpayer ’s understatement
       attributable to advice given by a professional is offset by an over-
       payment on account of another, unrelated position on the return. In
       this case, given the absence of taxpayer liability, section 6694 cannot
       apply, but the reasonable-basis standard in section 10.34 apparently
       does apply.



176.7.     See   T.D. 9527.
176.8.     See   Treas. Reg. § 301.7701-15(b)(2)(i).
176.9.     See   Treas. Reg. § 301.7701-15(a).
176.10.    See   Treas. Reg. § 1.6694-1(c).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–89
§ 4:13.6                   THE CIRCULAR 230 DESKBOOK

       Example 4: Assume several people within the firm are involved
       in preparing the return. While only one person in a firm can be
                                                      176.11
       held responsible for the section 6694 penalty,        all of the people
       involved can be charged with a violation of section 10.34—thus
       triggering the reasonable-basis standard in section 10.34.

       Example 5: Assume a Practitioner prepares her own return.
       Although it is clear that section 6694 can only apply in the case of
       a Practitioner who receives compensation for preparing the return or
                     176.12
       refund claim,        it is not clear whether section 10.34 can apply in
       the case of a Practitioner who prepares a return for herself. None-
       theless, because there is no provision in section 10.34 that makes its
       application hinge on the question of compensation, it would appear,
       surprisingly, that a Practitioner who takes a position on her own
       return that is not supported by a reasonable basis can be subject to
                                         176.13
       sanction under this provision.

   § 4:13.6            I.R.C. Section 6694
              [A] Introduction
   Section 6694 of the Code is closely related to section 10.34 of the
Circular. The Small Business and Work Opportunity Tax Act of 2007
(the “Act”), which was contained in the Iraq Accountability Appro-
priations Act and signed by President Bush on May 25, 2007, made
substantial changes in the standards applicable under section 6694(a)
of the Code.177 The section imposes a penalty on return preparers
who fail to comply with the standards it sets forth. In general, the Act



176.11.    See Treas. Reg. § 1.6694-1(b) (indicating that “only one individual within a
           firm who is primarily responsible for each position on the return” is
           subject to penalty under section 6694).
176.12.    See Treas. Reg. § 1.6694-1(b)(1) (cross-referencing Treas. Reg. § 301.7701-15
           for the definition of a return preparer, which provides that a person is not a
           return preparer unless the return is prepared for compensation). Note that
           the for-compensation requirement in section 6694 may not be present in
           other contexts. See Swaney v. United States, 2011 WL 6153604 (M.D. Fla.
           2011) (holding that the penalty under section 6701 can be imposed on a
           person who is not a paid preparer); see also Carlson v. United States, 2011
           WL 6153207 (M.D. Fla. 2011) (exploring the relationship between section
           6694 and section 6701 and indicating that Ҥ 6701 is not aimed at simply
           preparing a tax return, but instead, focuses on aiding, assisting, procuring, or
           advising ‘with respect to, the preparation or presentation of any portion of a
           return, affidavit, claim, or other document’”).
176.13.    Perhaps, it should not be surprising that taking a position lacking a
           reasonable basis on one’s own return is subject to sanction. After all, a
           failure to file one’s own return is clearly subject to sanction. See Circular
           230 § 10.51(a)(6).
177.       References to the “Code” are references to the Internal Revenue Code of
           1986.



                                          4–90
                                       Circular 230                             § 4:13.6

heightened the standards, making it more difficult for preparers to
avoid the penalties that the section imposes.
    Prior to the Act, in the event that the amount of income tax on a tax
return or a claim for refund was understated,178 the preparer could be
subject to penalty under section 6694 if the preparer failed to comply
with the standards contained in that section. For this purpose, a
person was deemed to be a preparer if he or she, for compensation,
(i) prepared and signed the return or claim for refund,179 or (ii) gave
advice about a return-related or claim-related position.180 In addition,
preparers and non-signing advisers could be sanctioned for failing to
meet the requisite standard under Circular 230.181
    Section 6694(a), before it was amended, imposed its penalty if a
position taken on a return or claim for refund did not have a realistic
possibility of success (at least a one-in-three possibility of being
sustained on the merits).182 If, however, in the case of a signing
preparer, adequate disclosure concerning the position was made on
the return, the standard was lower: no penalty was imposed if the
position was not frivolous (that is, not patently improper). In the case
of a non-signing adviser, the lower standard was applicable if the
adviser had advised the client about any opportunity to avoid penalties
through disclosure.183 In any case, a preparer would not be subject to



178.       If it ultimately is determined that no underpayment of tax occurred, no
           penalty is imposed. See I.R.C. § 6694(d).
179.       In I.R.S. Notice 2008-13, such a person is referred to as a “signing
           preparer.” Throughout this section, such a person is usually referred to
           simply as a “preparer.”
180.       In I.R.S. Notice 2008-13, such a person is referred to as a “non-signing
           preparer” rather than a “non-signing adviser.” Throughout this section,
           such a person is usually referred to simply as an “adviser.”
181.       Where a Practitioner gave tax advice prior to the consummation of the transac-
           tion, section 6694 was inapplicable. See Treas. Reg. § 301.7701-15(a)(2)(i). In
           contrast, section 10.34 of the Circular does not have an explicit exception
           for such pre-transaction advice. It applies where the Practitioner signs the
           return (or prepares a portion of it) or advises the client to take a position
           on the return. In the case of pre-transaction advice, it was not clear (and
           remains unclear) whether section 10.34 applies. Nonetheless, if the pre-
           transaction advice was in writing, section 10.37 would apply since its
           scope is much broader: it applies to written advice “concerning one or
           more Federal tax issues” (and section 10.35 could apply, as well, if the
           advice was in writing and constituted a Covered Opinion within the
           meaning of that section).
182.       See Treas. Reg. § 1.6694-2(b) (“A position is considered to have a realistic
           possibility of being sustained on its merits if a reasonable and well-
           informed analysis by a person knowledgeable in the tax law would lead
           such a person to conclude that the position has approximately a one in
           three, or greater, likelihood of being sustained on its merits.”).
183.       See Treas. Reg. § 1.6694-2(c)(3)(ii).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–91
§ 4:13.6                   THE CIRCULAR 230 DESKBOOK

the penalty with respect to any position if the preparer did not know
of the position (and reasonably should not have known). 184
   While section 6694 only applied in the income tax setting, section
10.34 of Circular 230 imposed a parallel obligation—using the same
two standards—on all Practitioners preparing returns or giving advice
about return-related or refund-related positions. Thus, for example, a
Practitioner signing an estate tax return or giving advice about a
position taken on the return had been required to comply with these
standards by virtue of section 10.34 of the Circular (even though
section 6694 of the Code was inapplicable).

              [B]    Act Changes
   Under the Act, section 6694 is amended in three ways. First, the
standards are elevated. As amended, the section makes the penalty
inapplicable if the preparer or adviser reasonably believed that the
position was more likely than not correct (thus importing the more-
likely-than-not standard from the Covered Opinion rules in section
10.35 of the Circular). If, however, disclosure is in fact made on the
return (or, in the case of a non-signing adviser, advice about disclosure
is given), the penalty is not imposed if there is a reasonable basis for
the position (a standard that appears to be less rigorous than the one-
in-three formulation applicable under pre-Act law).185 There is a




184.       It seems clear that, under section 6694, more than one person may be the
           preparer of the same return. For example, a person who prepares an
           appraisal which becomes part of an estate tax return would not be a
           preparer with respect to some other position taken on the return (e.g., a
           deduction for interest incurred during the administration of the estate)
           and, therefore, would not be subject to the penalty if it turns out that the
           interest should not have been deducted, even if the appraiser is treated as a
           preparer of the return for other purposes.
185.       See generally Gould, Giving Tax Advice—Some Ethical, Professional and
           Legal Considerations, 97 TAX NOTES 523 (Oct. 28, 2002) (discussing ABA
           ethics opinions 314 and 85-352 and, in this context, explaining how the
           realistic-possibility standard requires a higher degree of certainty than the
           reasonable-basis standard); see also Cummings, The Range of Legal Tax
           Opinions, with Emphasis on the Should Opinion, 98 TAX NOTES 1125
           (Feb. 17, 2003) (canvassing other articles in which the author took the
           view that the reasonable-basis standard required less certainty of success
           than the realistic-possibility standard). Notice 2008-13 provides that
           whether or not the reasonable-basis standard is satisfied is controlled by
           Treas. Reg. § 1.6662-3(b)(3). As the cited regulation indicates, the reason-
           able-basis standard is significantly higher than the pre-Act not-frivolous
           standard but not as high as the substantial-authority standard. In order to
           satisfy the reasonable-basis standard, the return position must be based on
           one or more of the authorities listed in Treas. Reg. § 1.6662-4(d)(3) (after
           taking into account the persuasiveness and relevance of the authorities and



                                        4–92
                                       Circular 230                            § 4:13.6

pending amendment to section 10.34 that would make it consistent
with these new standards in section 6694(a).186
   Second, section 6694 will now apply to preparers and advisers
outside of the income tax setting. Unlike the change in standards,
this aspect of the Act should not affect day-to-day practice for any
Practitioner covered by Circular 230 inasmuch as he or she presumably
has been complying with the parallel obligation under section 10.34
(which, as indicated, has not been limited to the income tax setting).187
   Third, the amount of the penalty has been increased from $250 to
the greater of (i) $1,000 or (ii) one-half of the preparer ’s fee with
respect to the return (or claim for refund). In the case of a willful or
reckless understatement, the subsection (b) penalty is increased from
$1,000 to the greater of (i) $5,000 or (ii) one-half of the preparer ’s fee.

               [C] Expansion of Those Treated As Return Preparers
   Under section 7701(a)(36) of the Code, as amended by the Act, a
“tax return preparer” includes any person who prepares for compensa-
tion a tax return or claim for refund or a substantial portion of a tax
return or claim for refund. Thus, for example, as amended, section
6694 can apply in the case of an estate tax return. In contrast, prior to
the Act, as indicated, the section did not apply outside of the income-
tax setting. As under pre-Act law, the section applies to persons who do
not actually sign or prepare the return but merely give advice about a
position to be taken on the return. It might, for example, cover a divorce


           subsequent developments). (Note that this may not suggest that the
           preparer must research the issue to establish the reasonable-basis stan-
           dard; rather, it seems to suggest that the reasonable-basis standard is an
           objective determination, just as the substantial-authority standard seems
           to be. But see example 10 in Notice 2008-13, discussed elsewhere herein.)
           Like the pre-Act version of section 6694, section 10.34 of the Circular had
           imposed a realistic-possibility standard, under which a one-in-three like-
           lihood of success had to be present. See section 10.34(e). But with
           Congress’s adoption of the reasonable-basis standard in section 6694,
           the Treasury Department has proposed an amendment to section 10.34 of
           the Circular that would eliminate the one-in-three standard and thereby
           make it consistent with section 6694. See 72 Fed. Reg. 54,621-01, 2007-45
           I.R.B. 977 (Sept. 26, 2007). Whether the adoption of the reasonable-basis
           standard will ultimately be viewed as substantively different from the pre-Act
           realistic-possibility-of-success standard remains to be seen.
186.       See 72 Fed. Reg. 54,621-01, 2007-45 I.R.B. 977 (Sept. 26, 2007).
187.       Note, however, that there is an important difference between the scope of
           section 10.34 of the Circular and section 6694. A Practitioner who does not
           sign the return but merely gives advice about a transaction before it is
           consummated is not subject to section 6694. See Treas. Reg. § 301.7701-15;
           see also I.R.S. Notice 2008-13 (indicating that this provision continues to
           apply under the amended version of section 6694). In contrast, there appears
           to be no similar exception for pre-transaction advice in section 10.34.



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–93
§ 4:13.6                   THE CIRCULAR 230 DESKBOOK

lawyer who advises a client that certain payments made to the client’s
spouse constitute alimony deductible under section 215 of the Code,
even though that attorney never prepares returns and knows that the
client’s income tax return will be prepared by another professional.

              [D]    New Penalty for Erroneous Claims for Refund
   The Act also imposes a new penalty on taxpayers, as opposed to the
preparer or adviser, for filing an erroneous claim for income tax refund
or credit. Under new section 6676 of the Code, if the taxpayer files a
claim for refund or credit of income tax that is determined to be
excessive, it will no longer simply be denied, but a penalty equal to
20% of the “excessive amount” will be imposed. Note that, unlike
section 6694, this section only applies in the income tax context. A
claim is excessive to the extent it seeks more than the amount properly
refundable except for a credit under section 32 of the Code (that is, the
earned income credit).187.1 The provision is designed to deter taxpayers
from taking aggressive positions on a risk-free basis: No penalty could be
imposed under pre-Act law if the refund claim was denied, thus
permitting taxpayers to take an aggressive position without concern
about any downside risk. In contrast, a taxpayer taking an aggressive
position on a return would have to weigh the risk of the accuracy-related
penalty in section 6662 and the fraud penalty in section 6663 of the
Code. This new provision eliminates the disparity between taxpayers
taking aggressive positions in a refund claim and taxpayers taking such a
position on a return. And, as suggested, it eliminates the opportunity
taxpayers previously enjoyed to take aggressive positions on a risk-free
basis via a refund claim.
   As the IRS has indicated, it will impose the penalty if the claim is
excessive and is denied.188 In other words, the claim is deemed
excessive and the penalty is automatically imposed in any case where
the claim is not allowed unless there was a “reasonable basis” for the
claim.189 Thus, to the extent the IRS denies the claim and determines
that it lacked a reasonable basis, it will impose the penalty even if the
taxpayer chooses not to commence litigation on the claim. 190



187.1.     The penalty does not apply where the penalty under section 6662 would
           otherwise apply. See Chief Counsel Advice 201018002. Thus, a return
           claiming a refund based on over-withholding does not cause the penalty to
           apply given the potential applicability of section 6662. See id.
188.       See, e.g., ILM 200747020.
189.       See id. Note that, again, the determination of whether there was a
           reasonable basis for the claim seems to be an objective one.
190.       Note that the penalty is reduced for any penalty imposed by section 6662
           (an accuracy-related penalty) or by section 6663 (civil fraud penalty). Note
           also that it does not apply in the case of the earned income credit.



                                        4–94
                                       Circular 230                           § 4:13.6

   In terms of reasonable basis, it would seem that the taxpayer ’s
subjective belief about the merit of the claim is irrelevant. For the
section does not cross-reference section 6664 of the Code (which may
permit a taxpayer to defeat penalties under section 6662 based, in part,
on such a subjective belief) or otherwise provide for such a defense. 190.1
Thus, even if a preparer advises the taxpayer that the position taken in
the refund claim has a reasonable basis, the taxpayer may still be liable
for the penalty if the IRS and the courts conclude otherwise, although
the taxpayer might be able to sue the preparer or adviser in malpractice
if he or she did not fully inform the taxpayer about the risk of the
penalty and the underlying weaknesses in the position taken in
the claim.
   This penalty will likely strengthen the IRS’s hand in terms of
refund claims. As the IRS has already suggested, it will seek to impose
the penalty in all cases where it denies the claim (unless it determines
that there was a reasonable basis for the claim). Perhaps it will use the
penalty to deter taxpayers from commencing litigation on the refund
claim by offering an abatement of the penalty if the taxpayer agrees not
to sue. To the extent the penalty has the effect of closing the court-
house door on taxpayers, it will be unfortunate. On the other hand,
taxpayers should not be able to abuse the system with meritless claims
on a risk-free basis. But ultimately one is left to wonder why judicial
sanctions would not sufficiently deter frivolous litigation of refund
claims.191 Perhaps these concerns could be ameliorated if the Code
were amended to provide that the penalty would be negated if the
claim satisfied the lower, not-frivolous standard.191.1




190.1.     See Program Manager ’s Tax Advice (PMTA) 2010-005 (indicating that
           whether or not there is reasonable basis must be determined without
           regard to the taxpayer ’s state of mind). Thus, both spouses making a
           refund claim in connection with a joint return are liable for the penalty
           even though only one of the spouses knew the claim was false. See id.
191.       See FED. R. CIV. P. 11.
191.1.     The Service has issued guidance on the administration of the section 6676
           penalty. See SBSE-20-0111-001 (12/30/10). Practitioners should be aware
           that the guidance indicates that the examiner has the responsibility to
           consider pursuing a section 6694 penalty on the preparer if the determina-
           tion is made that the penalty should be imposed on the taxpayer. The
           guidance states: “If a paid Tax Return Preparer prepared the claim for
           refund or credit return, it is the examiner ’s responsibility to investigate
           and coordinate with his/her respective business unit’s Return Preparer
           Coordinator (RPC) to ensure no return preparer violations exist. Penalty
           Approval Form (SB/SE w/p 300-1.1) has a preparer penalty section that
           should be completed to document that return preparer penalties were
           considered.”



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–95
§ 4:13.6                   THE CIRCULAR 230 DESKBOOK

              [E]    Notice 2007-54 “Suspended” the Act Changes
                     for 2007
   As indicated, the Act was signed on May 25, 2007, and the
amendment to section 6694 became effective immediately. However,
in Notice 2007-54,192 the IRS provided transitional relief. It essentially
suspended the application of the new provisions with respect to
income tax returns due on or before December 31, 2007. That is,
pre-Act law continued to apply during this time frame. Oddly, Notice
2007-54 treated preparers and advisers of other returns (such as
estate and gift tax returns) more harshly. Although the Notice sus-
pended the application of the amendments for income-tax-return
preparers and advisers in their entirety, it required preparers and
advisers with respect to non-income-tax returns to use the “reasonable
basis” standard during the transition period. Thus, during this period,
in order for a non-income-tax preparer or adviser to avoid the penalty,
he or she had to establish that there was a reasonable basis for the
return position. And even if disclosure was made, the reasonable-basis
standard remained applicable. In this regard, the 2007 Notice was “out
of sync” with section 10.34 of the Circular, which provided that a
Practitioner could take a position on a return if it was not frivolous as
long as disclosure was made (or, in the case of a non-signing adviser,
advice about disclosure was given).193 Hence, it seems that, in the case
of a return not involving income tax, a preparer or adviser who was a
Practitioner could face a penalty under section 6694 during the transi-
tion period even though he or she was in compliance with the Circular.

              [F]    Notice 2008-13
    On December 31, 2007, the Service issued Notice 2008-13 (the
“Notice”).194 In the Notice, the Service clarified its intentions regard-
ing the enforcement of section 6694 pending further guidance (which,
it indicates, will be issued during 2008). In the case of someone who
for compensation signs a return or gives advice with respect to a return
where there is an understatement of tax liability, the Notice provides,
as does the statute itself, that the penalty is not imposed if the person
had a reasonable belief that the position would more likely than not be

192.       I.R.S. Notice 2007-54 I.R.B. 12.
193.       While there is a pending amendment to section 10.34 that would make it
           consistent with section 6694 (see 72 Fed. Reg. 54,621-01, 2007-45 I.R.B.
           977 (Sept. 26, 2007)), it was not effective during the transition period.
194.       I.R.S. Notice 2008-13, 2008-1 I.R.B. 282. As a general matter, the Notice
           is effective on January 1, 2008 (i.e., it is effective with respect to returns
           filed and advice provided after January 1). There is an exception for 2007
           employment and excise tax returns. The reasonable-basis exception does
           not apply if the claim is denied by reason of the economic substance
           doctrine. See section 6676(c).



                                         4–96
                                       Circular 230                             § 4:13.6

sustained on the merits. In order to meet this standard, the preparer or
adviser must analyze the appropriate authorities195 and, as a result, in
good faith, reasonably hold the belief that the likelihood of the
taxpayer succeeding is greater than 50%.196

               [F][1] Reasonable Basis Exceptions
   The absence of such a belief is, however, not necessarily fatal. The
Notice makes a distinction between preparers and advisers. For pre-
parers, no penalty is imposed if there is a reasonable basis for the
position,197 even if the preparer does not reasonably conclude that
the position is more likely than not to be sustained, if, as discussed in
part in more detail below: (1) the required disclosure form disclosing
the position is in fact filed with the return; (2) there is no substantial
authority for the position but the preparer provides the taxpayer with a
return that includes the disclosure form (even if, apparently, the
taxpayer removes it before filing the return); (3) there is substantial
authority for the position and the preparer advises the taxpayer of the
difference between the penalty standards applicable to the taxpayer
under section 6662198 and those applicable to the preparer under
section 6694 and contemporaneously documents that this advice
was given, even though apparently no disclosure form was prepared


195.       Practitioners and other preparers may well wish to record in writing what
           authorities they considered in reaching their conclusions. Among other
           things, this may show that the preparer acted in good faith, which, along
           with reasonable cause for the understatement, will vitiate the penalty
           otherwise imposed by section 6694(a).
196.       See I.R.S. Notice 2008-13, ¶ D. In analyzing the merit of the position, the
           preparer may rely in good faith on the facts and schedules prepared by the
           taxpayer or another adviser. Thus, there is no duty independently to verify
           the accuracy of the information supplied. If, however, the information
           supplied appears to be incorrect or incomplete, the preparer must make
           further inquiry. Also, the preparer may not ignore information in his or her
           possession or any implications suggested by such information.
197.       I.R.S. Notice 2008-13, ¶ F, indicates that the term “reasonable basis” has, for
           purposes of the Notice, the same meaning as in Treas. Reg. § 1.6662-3(b)(3).
           See note 185, supra, for a discussion of this regulation. Paragraph F goes on
           to provide that, in assessing the facts, the preparer may rely on information
           supplied by the taxpayer or another adviser. There is no duty independently
           to investigate. However, a duty does arise if the information is incomplete or
           inaccurate. A preparer may not ignore information or the implication of
           such information.
198.       Perhaps, in order to provide the taxpayer with a full explanation of section
           6662, the preparer must explore with the taxpayer the penalty for dis-
           regarding a rule or regulation and the taxpayer ’s ability to defeat it by
           making disclosure (provided there is a reasonable basis for the position).
           See Treas. Reg. § 1.6662-3(c). Thus, cautious Practitioners will include a
           discussion of this penalty and the opportunity to defeat it by disclosure in
           their explanation of the penalties.



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or filed; or (4) the position relates to a tax shelter199 and the preparer
advises the taxpayer of the penalty standards applicable to the taxpayer
under section 6662(d)(2)(C)200 and the difference, if any, between
those standards and the standards under section 6694 and contem-
poraneously documents that this advice was given, even though
apparently no disclosure form was prepared or filed. In the case of
an adviser, on the other hand, if there is a reasonable basis, the penalty
can be avoided by explaining the opportunities for the taxpayer to
avoid penalties through disclosure.
   Significantly, the Notice, in example 10, appears to undercut the
statute, making it easier for preparers to escape the penalty in
close cases. The example suggests that the penalty can be avoided
where the preparer researches an issue, concludes that there is a
reasonable basis for the position, but cannot “handicap” whether the
position is more likely than not correct. In the example, no penalty is
imposed in these circumstances,201 even though no disclosure of the
position was made on the return. The example does not provide any
explanation for its conclusion. Nor does it indicate how extensively
the preparer had researched the issue (though prudent preparers
seeking to rely on the example will presumably research the issue
thoroughly and contemporaneously record their efforts). One might
reasonably read the example as implying that, in any case where the
issue is researched and it is impossible to precisely quantify the
likelihood that the taxpayer will succeed, the benefit of the doubt
goes to the preparer (that is, no penalty is imposed). Even though this
example in effect rewrites the statute—the statute contemplates that
the penalty is to be imposed if there is no disclosure and the preparer
did not reasonably believe that the position would more likely than not
be sustained—it is a welcome development from the Practitioner ’s
perspective. After all, preparers will often have a difficult time
quantifying the likelihood of success with precision. Perhaps this
example will be clarified when final regulations are issued.
   Another aspect of the example requires clarification. The example
posits that the preparer had concluded, after doing legal research, that


199.       A tax shelter for this purpose is defined as a partnership or other entity, any
           investment plan or arrangement or any other plan or arrangement if a
           significant purpose of such partnership, entity, plan or arrangement is the
           avoidance of federal income tax. See section 6662(d)(2)(C)(ii).
200.       Section 6662(d)(2)(C) in effect provides that, in the case of a tax shelter,
           neither substantial authority nor disclosure enables the taxpayer to avoid
           the substantial-understatement penalty under section 6662.
201.       The example does not specify whether the preparer concluded it was
           impossible to quantify or whether, in fact, it was impossible to quantify.
           This difference, obviously, could be important. Perhaps it will be clarified
           in regulations.



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                                       Circular 230                 § 4:13.6

the position had a reasonable basis. It goes on to assume, based on this
posited fact, that the position was in fact supported by a reasonable
basis. If, however, the reasonable-basis standard is an objective one, as
seems to be indicated in Treas. Reg. § 1.6662-3(b)(3), the preparer ’s
belief as to the merits of the position should be irrelevant. One is left to
wonder if the example was intended to incorporate a subjective
element of analysis into the reasonable-basis inquiry. It must be
conceded, however, that a subjective reading is a difficult one to reach,
given that paragraph E of the Notice indicates that the term “reasonable
basis” is to be defined with reference to Treas. Reg. § 1.6662-3(b)(3)
(which, in defining the term, does not make the taxpayer ’s subjective
belief a relevant factor).
   In any event, as suggested, example 10 will likely prove to have
enormous practical value. To illustrate, consider a preparer who is
required to determine what portion of an investment adviser ’s fee
incurred by a trustee is subject to the two-percent “haircut” rule under
section 67. In Knight v. Commissioner,202 the Supreme Court held
that, as a general matter, such fees are subject to the rule. The Court
acknowledged, however, that in some cases a trustee might be able to
establish that the trust has an “unusual investment objective” or a
need to invest in a manner that will balance the interests of the
beneficiaries. If the trustee is able to show such need, the resulting
incremental fees are not subject to the rule. It would seem that given
the amorphous nature of the inquiry the Court contemplates, pre-
parers will find it impossible to precisely quantify the likelihood of
success when claiming deductions for the portion of the fee attribut-
able to an unusual investment objective or a need to balance the
beneficiaries’ interests. Example 10 offers a helpful defense to pre-
parers facing this difficult task.

               [F][2] Inconsistency Between the Code and the Notice
   The Notice is somewhat inconsistent with the statute in another
important respect. As indicated, if it is determined that the position
was supported by substantial authority, the penalty is not imposed
if the preparer had explained to the client the differences between
the penalty standards applicable to preparers and advisers under
section 6694 and the penalty standards applicable to the client
under section 6662 (with the preparer or adviser required to record
contemporaneously in the file the fact that the explanation was
provided). This aspect of the Notice is rather surprising given that
the statute clearly contemplates a contrary result: unlike the Notice,
the statute does not contain a substantial-authority exception to the


202.       Knight v. Comm’r, 128 S. Ct. 782 (2008).



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general rule requiring disclosure where the preparer or adviser does not
reasonably believe that the more-likely-than-not standard has been
satisfied.
    This deviation from the statute was presumably driven by concern
about the conflict-of-interest issue inherent in the statute: if there is
substantial authority, the client has no exposure to the section 6662(d)
penalty and therefore has no need to disclose in order to avoid the
penalty, whereas the preparer would nonetheless have an incentive to
make disclosure on the return in order to qualify for the lower,
reasonable-basis standard under section 6694. Under the Notice,
this conflict is avoided because it eliminates the preparer ’s incentive
to insist that the return contain the disclosure. This aspect of the
Notice will likely prove to be of great practical significance. For in
those cases where the taxpayer is unwilling to disclose, the preparer
nonetheless will be able to sign the return even though the more-
likely-than-not belief standard is not satisfied. Under the Notice, no
penalty will be imposed as long as it is ultimately determined
(apparently, on an objective basis and not based upon the belief of
the preparer or adviser) that there was substantial authority support-
ing the position, the preparer explained the differences in the penalty
standards, and the preparer contemporaneously documented the fact
that the explanation had been given.
    It should be noted that the requirement that the preparer explain
the difference in penalty standards under sections 6662 and 6694
seems rather odd. Given the premise that there is substantial author-
ity, disclosure on the taxpayer ’s return is not required under the
Notice in order for the preparer to avoid the section 6694 penalty
(that is, as indicated, under the Notice, if there is substantial
authority, the preparer can avoid the penalty even if the taxpayer
does not make disclosure) or for the taxpayer to avoid the substantial-
understatement penalty under section 6662(d) (that is, if there is
substantial authority, the substantial-understatement penalty will not
apply).203 If disclosure were required to avoid the preparer penalty,
it might be appropriate for him or her to explain that there could be
a conflict of interest between the preparer and the client: the
preparer would want disclosure to avoid the penalty but the client
may wish not to disclose. But, as stated, there does not seem to be
such a conflict in this case. So the reason for the requirement of the
explanation to the client does not seem apparent.


203.       See I.R.S. Notice 2008-13, ¶ G. Disclosure must be made in accordance with
           Treas. Reg. § 1.6662-4(f)(2) (requiring that a Form 8275 or Form 8275R
           (where there is a contrary regulation) be attached to the return unless the
           Service has indicated in its annual revenue procedure that a particular form
           of disclosure on the return itself obviates the need to attach the form).



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                                       Circular 230                            § 4:13.6

    If the preparer cannot reasonably reach a more-likely-than-not
conclusion and there is no substantial authority, he or she may still
avoid the section 6694(a) penalty if it is determined that the position
had a reasonable basis and either of the following occurs: (1) the return
is in fact filed with the necessary disclosure204 or (2) the preparer
presents the taxpayer with a signed return that contains the necessary
disclosure—in which case the preparer is not subject to penalty even if
the taxpayer removes the disclosure before filing the return. The latter
alternative makes some sense in that a preparer ’s fate should not be
made to hinge on the client’s independent decision.
    But it does raise this question: Is it permissible for the preparer to
advise the client (1) that the disclosure form has been attached to the
return in order to permit the preparer to qualify for the reasonable-basis
standard and (2) that the client may delete the disclosure form before
filing the return? While some might suggest that allowing the preparer
to give such advice is an invitation to impropriety, prohibiting the
preparer from giving the advice is even more problematic. After all,
clients have a right to make the decision to include or omit the
disclosure form on an informed basis. And a preparer who fails to
explain the options may be guilty of misleading the client. Thus, it
would seem that a preparer has not merely the right but, indeed, the
duty to provide a full explanation. As a practical matter, however,
preparers will find it relatively easy to qualify for the reasonable-basis
standard by attaching the disclosure form to the return and advising the
client about the option to delete it. Should this practice be adopted on a

204.       I.R.S. Notice 2008-13, ¶ G, provides that the preparer ’s obligations under
           section 6694 are satisfied in these circumstances if the “preparer provides
           the taxpayer with the prepared tax return that includes the disclosure.” In
           addition, Notice 2008-12, 2008-1 C.B. 280, provides that preparers must
           sign the return before presenting it to the taxpayer in order to avoid a
           penalty under section 6695 (relating to duties of return preparers to sign
           returns, provide copies to taxpayers and maintain copies and lists). Thus,
           in order to avoid penalties in the circumstances posited in the text, the
           preparer must include the requisite disclosure and sign the return before
           providing it to the taxpayer. In Rev. Proc. 2008-14, the Service, updating
           earlier guidance, indicates that taxpayers can satisfy the disclosure require-
           ment in certain contexts by providing the necessary information on the
           return without filing a separate disclosure form. But, as the Rev. Proc.
           provides, the abridged version of disclosure that it contemplates does not
           apply for purposes of defeating the disregard penalty. Nor does it apply for
           purposes of section 6694 in the case of a non-income tax return. See also
           Rev. Proc. 2010-15 (updating the information required on the return in
           order to be treated as having made disclosure without filing Form 8275);
           see also Rev. Proc. 2011-13 (providing a similar update for 2011). Thus,
           taxpayers who are concerned about the possible imposition of the disregard
           penalty should use Form 8275, rather than relying on the Rev. Proc.
           Similarly, preparers of non–income tax returns should, if they conclude
           that disclosure is necessary, make it on the separate form.



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widespread basis, the more-likely-than-not standard will only apply to
the few preparers who, out of ignorance, fail to utilize it.
   In this context, the Notice fails to eliminate a possible conflict of
interest. Assume, for example, that an issue arises in the course of
preparing an estate tax return. Assume further that, while the preparer
believes that there is reasonable basis for the position, the preparer
concludes that it is not supported by substantial authority and
that it cannot satisfy the more-likely-than-not standard. Because
this is an estate tax issue, not an income tax issue, the substantial-
understatement penalty under section 6662(d) cannot apply. Thus, if
the position is not sustained, the IRS could not assert the substantial-
understatement penalty. It could, however, assert the negligence
penalty. Under the Notice, the preparer would be subject to the section
6694 penalty if the return is prepared and filed without disclosure. Yet
the taxpayer has no incentive to make the disclosure because, unlike
the substantial-understatement penalty, the negligence penalty cannot
be defeated through disclosure. Thus, in this case, the preparer ’s and the
taxpayer’s incentives are not aligned, creating the potential for a conflict
that the Notice fails to avert.205

              [F][3] Reasonable Basis Exception for Advisers
   In the case of a non-signing adviser, until further guidance is issued,
the penalty can be avoided even if he or she could not reasonably
conclude it was more likely than not the position would be sustained
on the merits as long as there is a reasonable basis for the position and the
adviser informed the taxpayer of any opportunity to avoid penalties
under section 6662 through disclosure (and the requirements for any
such disclosure). However, if the advice is given to another preparer,
instead of advising about avoiding penalties under section 6662, the non-
signing adviser must simply advise that a disclosure under section 6694
(a) may be required. Contemporaneously prepared documentation by
the adviser of the advice is sufficient to establish that the advice was
given.
   Finally, as the statute itself provides, the section 6694(a) penalty is
not imposed if it is shown that there is reasonable cause for the
understatement and that the preparer/adviser had acted in good faith.206


205.       Note, however, that if the preparer implicitly or explicitly advises the
           taxpayer that there is a reasonable basis, in the preparer ’s view, for the
           position, this should be sufficient to preclude the IRS from imposing
           the negligence penalty on the estate. See Melnik v. Comm’r, T.C. Memo
           2006-25 (indicating that a reasonable-basis opinion can be a predicate for
           defeating the negligence penalty by reason of section 6664).
206.       The factors relevant to determining whether the preparer acted in good
           faith are set forth in Treas. Reg. § 1.6694-2(d). I.R.S. Notice 2008-13, in
           part F, provides that those factors will continue to apply except that a



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                                       Circular 230                           § 4:13.6

               [G] Some Lessons from the Examples
    The several examples contained in Notice 2008-13 provide illustra-
tions of when a preparer or adviser will or will not be subject to the
penalty under section 6694(a). As indicated above, example 10 sug-
gests that if the preparer researches the issue and it is impossible to
reach a precise “quantification” of whether the position is more likely
than not correct, no penalty is imposed even if no disclosure is made.
It seems, although it is not certain, that the lack of precise quantifica-
tion is an objective question, not based upon the preparer ’s belief that
there is not a precise quantification to determine if the position is more
likely than not correct. It may be that the conclusion that a precise
quantification cannot be made is based upon evenly “conflicting”
authority (for example, one U.S. Court of Appeals has sustained the
position and another has ruled to the contrary and that is the only
authority dealing with the issue) or simply that there is a lack of
developed authority—that is, it is simply uncertain.
    Preparers may rely, in good faith, on the information, schedules or
documents supplied by the taxpayer or another adviser.207 Thus, a
preparer/adviser may rely on such third-party material in order to
satisfy the reasonable-basis and more-likely-than-not standards. If,
however, the information appears to be incomplete or inaccurate, or
the preparer/adviser knows of contrary information, or there are
problematic implications in the supplied material, the penalty can
be imposed. Consider this case: The executor of a decedent’s Will
has engaged an appraiser to determine the estate tax value of an
asset included in the decedent’s gross estate for estate tax purposes.
The appraised value is used to determine the amount of estate tax due.
The preparer, who is someone other than the appraiser, does not
have the expertise to determine if the appraised value is more likely
than not correct but concludes in good faith, after reviewing the
appraisal, that it seems reasonable. The penalty will not be imposed
in this case as long as the preparer had no knowledge of any contra-
dictory information, the appraisal did not imply that there were
problematic issues and it did not appear to be inaccurate or incom-
plete. Nevertheless, it would seem, the appraiser could well be subject
to the section, as it applies to a person who prepares a “substantial
portion” of the return, which includes “a schedule, entry, or other
portion of a tax return or claim for refund that, if adjusted or



           preparer will be treated as having acted in good faith if the preparer relied
           on the advice of a third party who is not in the same firm as the preparer
           and whom the preparer had reason to believe was competent to render the
           advice. The burden of proof that the advice was received is on the preparer.
207.       See I.R.S. Notice 2008-13, ¶¶ D and E.



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disallowed, could result in a deficiency (or disallowance of refund
claim).”208
   In certain cases, the preparer may have a duty to make affirmative
inquiry. In example 8, a preparer is advised by the taxpayer that he
made a charitable contribution of real estate worth $50,000. In fact,
the contribution had not been made, although nothing in the example
suggests that the preparer was aware of that. However, the preparer did
not inquire about the existence of a qualified appraisal (a requirement
under section 170(f)(11) to take a charitable deduction for income tax
purposes) or prepare the Form 8283 (a form necessary to substantiate
the contribution). The example concludes that the preparer is subject
to penalty under section 6694(a). Hence, it seems that whenever a
special form or information is required for a return position, a preparer
who neglects to inquire of the client or who fails to prepare the
form will be subject to the penalty if there is a resulting understate-
ment in tax.

              [H]     Treatment of Tax Shelters
   Finally, in the case of a tax shelter,209 provided that there is a
reasonable basis for the position, the Notice provides that the preparer
is not subject to the section 6694 penalty if the client is given an
explanation of the differences between the 6694 and 6662 penalties
(with the preparer again being required to contemporaneously
document the fact that the explanation was given). Thus, even though
there is no substantial authority and the preparer did not reasonably
conclude the position was more likely than not correct, the penalty can
be avoided by explaining the differences in the penalties. While such
solicitous treatment of tax shelters may, at first, seem odd, it begins to
make sense when one considers the potential conflict of interest that
the Notice apparently seeks to avert.
   By way of background, as a general matter, if there is a substantial
understatement of income tax attributable to any position that does
not constitute a tax shelter, the taxpayer may avoid the substantial-
understatement penalty if (i) there is a reasonable basis for the position
and disclosure is made, or (ii) there is substantial authority for the
position. But, in the case of a tax shelter, neither of these safe harbors


208.       Someone who does not sign the return may nonetheless be viewed as a
           preparer. A person is a preparer if he or she, for compensation, prepares “a
           schedule, entry, or other portion of a tax return or claim for refund that, if
           adjusted or disallowed, could result in a deficiency determination (or
           disallowance of refund claim) that the preparer knows or reasonably should
           know is a significant portion of the tax liability reported on the tax return (or,
           in the case of a claim for refund, a significant portion of the tax originally
           reported or previously adjusted).” See I.R.S. Notice 2008-13, ¶ B.
209.       Tax shelter is defined in section 6662(d)(2)(C).



                                         4–104
                                       Circular 230                 § 4:13.6

is available. In other words, in the case of a tax shelter, neither the
presence of substantial authority nor the taxpayer ’s disclosure will
enable the taxpayer to avoid the penalty.
    Because disclosure will not protect the taxpayer in the case of a tax
shelter, it is apparent that the Notice was drafted to avoid situations in
which the preparer has an incentive to insist that disclosure be made
while the client has no penalty-protection incentive to make the
disclosure. This is similar to another aspect of the Notice already
discussed and also presumably driven about a conflict-of-interest con-
cern: the provision allowing the preparer to avoid the section 6694
penalty if there is substantial authority even if disclosure is not in fact
made by the taxpayer.
    To illustrate the different treatment under the Notice of tax shelters
and non-tax-shelter cases, compare two situations where the position
taken on the return has a reasonable basis but there is no substantial
authority or a more-likely-than-not belief. If one is a tax shelter and
the other is not, the conclusions that the Notice produces might, at
first blush, appear surprising. In the case of the tax shelter, no penalty
is imposed on the preparer if an explanation about penalties is
provided even though the preparer prepares and signs the return
without disclosure and the taxpayer does not in fact make disclosure.
In sharp contrast, in the non-tax-shelter case, if the taxpayer decides
not to include the disclosure on the return and the preparer provides
the taxpayer with a signed return that does not contain the disclosure,
the preparer will be subject to the section 6694 penalty.
    The more favorable treatment of tax shelters, while seemingly
aberrational, is understandable given the conflict of interest between
the preparer and the taxpayer that might otherwise result. As indicated,
in the case of a tax shelter, the taxpayer gains nothing by making
disclosure and may therefore choose not to make it. On the other
hand, under the statute, as written, the preparer has an incentive to
insist on taxpayer disclosure in order to qualify for the lower, reasonable-
basis standard. Thus, had the Notice simply enforced the statute, as
written, preparers would have been motivated to insist on disclosure
even though it would not enhance the taxpayer ’s interest. In order to
eliminate this conflict, the Notice understandably allows the preparer to
qualify for the lower standard—even though the taxpayer chooses not
to disclose—by explaining to the client that disclosure will not be
effective as a penalty defense and that the preparer will be able to avoid
penalties under section 6694 by reason of giving this explanation.
    As indicated, those who give tax advice for compensation about a
return position but who do not sign the return or otherwise prepare
it may be subject to section 6694. This was the case prior to the 2007
amendment, and it remains the case. Notice 2008-13 provides that,
in the case of such a non-signing adviser, the penalty will not apply if



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(1) the adviser had a reasonable belief that the position would more
likely than not be sustained on the merits, or (2) it is ultimately
determined that there was a reasonable basis for the position and the
adviser informed the taxpayer of any opportunity to avoid penalties
under section 6662 through disclosure (and of the requirements
for disclosure).210 If the advice is in writing, the information about
disclosure must also be in writing. If it is not in writing, the disclosure-
related advice can be given orally (but the Practitioner must make a
contemporaneous record, apparently in writing, that the information
was given). If a non-signing adviser gives the advice to a preparer,
rather than directly to the taxpayer, similar rules apply: no penalty will
be imposed if (1) the adviser had reasonably believed that the more-
likely-than-not standard would be satisfied, or (2) the adviser indicated
to the preparer that disclosure under section 6694 could be required
(again, it can be given orally or in writing, depending on whether the
substantive advice was in writing, and a contemporaneous record
must also be made).

              [I]   Guidance on Identifying Preparers
   Finally, Notice 2008-13 provides guidance in terms of who consti-
tutes a return preparer, an important issue given that section 6694
applies only to preparers. As suggested, the Notice provides, as did
prior law,211 that a non-signing adviser is subject to the section.212
Echoing, however, a preexisting regulation,213 the Notice also provides
that someone who gives advice about tax issues prior to the consum-
mation of the transaction is not a preparer and, therefore, is not
subject to the section. The Notice illustrates the pre-transaction-
advice concept in two examples, example 3 and example 5. When
considered together, these examples make it quite certain that any
post-transaction advice renders the person a preparer and, as a result,
subject to the section. Indeed, as example 5 suggests, a person who
gives pre-transaction advice and then merely gives post-transaction
advice about how much to report on the return is a preparer. Thus,
those seeking to avoid the section run via the pre-transaction-advice


210.       If the preparer is a Practitioner subject to Circular 230, it may be better to
           do a separate memorandum that the oral advice was given rather than
           enter it into so-called “time sheets” in which the Practitioner records time
           spent on matters. Not infrequently, clients will ask for such time sheets in
           connection with receiving a bill from the Practitioner. If the time sheets
           delivered contain information about advice given, it may be that the time
           sheets themselves could be a Covered Opinion subject to the requirements
           of section 10.35 of Circular 230.
211.       See I.R.S. Notice 2008-13, ¶ B (incorporating Treas. Reg. § 301.7701-15(b)(1)).
212.       See Treas. Reg. § 301.7701-15(b)(1).
213.       See Treas. Reg. § 301.7701-15(a)(2)(ii).



                                        4–106
                                       Circular 230                § 4:13.6

concept may need to be careful about giving post-transaction assis-
tance to the client.

               [J]   Returns Covered and Not Covered
   The Notice contains three Exhibits. The first (Exhibit 1) lists those
income, estate and gift, employment and miscellaneous returns that
cause someone who prepares or provides advice with respect to the
return for compensation to be subject to the provisions of section 6694(a).
These include Forms 1040 (U.S. Individual Income Tax Return);
706 (U.S. Estate (and Generation-Skipping Transfer) Tax Return); 709
(U.S. Gift (and Generation-Skipping Transfer) Tax Return); and 990-PF
(Return of a Private Foundation), among many others. The second
(Exhibit 2) lists those information returns that cause someone who
prepares the return for compensation to be subject to the provisions of
section 6694(a) if it affects an entry or entries on a tax return and
constitutes a substantial portion of the tax return or claim for refund.
These include, among several others, Forms 1065 (U.S. Return of
Partnership Income), including Schedules K-1, and 1120S (U.S.
Income Tax Return for an S Corporation), including Schedule K-1.
As mentioned above, the Notice interprets the term “substantial
portion” to mean a schedule, entry or other portion of a tax return
of claim for refund that, if adjusted or disallowed, could result in a
deficiency determination (or disallowance of refund claim) that the
preparer knows or reasonably should know is a significant portion of
the tax liability report on the return (or, in the case of a claim for
refund, a significant portion of the tax originally reported or previously
adjusted). The Notice states that this interpretation “clarifies that any
determination as to whether a person who prepared a substantial
portion of a tax return and thus is considered a tax return preparer will
depend on the relative size of the deficiency attributable to the
schedule, entry or other portion.” It appears that whether the entry
is substantial or not is an objective one, not based upon the belief or
knowledge of the preparer of such information return that it is
substantial. The third (Exhibit 3) lists forms that would not subject
someone who prepares such a form for compensation to the provisions
of section 6694 unless it was prepared willfully in a manner to
understate tax liability on a refund or claim for refund or in a reckless
or intentional disregard of rules or regulations—which would trigger a
violation of section 6694(b). These forms include, but are not limited
to, Forms 1099 and W-2.

               [K] Written Advice to Taxpayers About the Penalty
                   Standards
  As discussed, the Notice, in some cases, requires a preparer or
adviser to advise a taxpayer about certain penalties. Some preparers



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§ 4:13.6                THE CIRCULAR 230 DESKBOOK

and advisers may wish to set forth the basic rule relating to these
penalties in an engagement letter. If this is done, a detailed description
of the penalties (as interpreted by the Notice) will have been delivered
in writing to the client. Sample language for inclusion in the engage-
ment letter is set forth below:

     In connection with our representation, we may be providing you
     advice about one or more positions with respect to a tax return you
     may file or we may prepare or may participate in the preparation of
     such a return. In certain circumstances, Circular 230 will require
     that we advise you about certain penalties that may apply with
     respect to such a return and circumstances under which you may
     be able to avoid one or more tax penalties. Also, section
     6694 of the Internal Revenue Code of 1986, as amended, imposes
     penalties on preparers of certain Federal tax returns and on those
     who provide advice with respect to such returns. We intend, in
     representing you, to comply fully with Circular 230 and to
     render any advice with respect to any tax return you may file
     and to prepare or participate in the preparation of any such return
     in a manner so that no penalty is imposed upon us by
     section 6694.
     In some situations, we will be required to advise you about certain
     tax penalties and how disclosure of a return position may avoid
     the imposition of penalties. Many penalties are imposed by
     section 6662. The penalties under section 6662 are imposed on
     any portion of an underpayment of tax required to be shown on a
     return if the underpayment is attributable to one of more of
     (1) negligence or disregard of rules or regulations; (2) any sub-
     stantial underpayment of income tax; (3) any substantial valua-
     tion misstatement for income tax purposes; (4) any substantial
     overstatement of pension liabilities; or (5) any substantial estate or
     gift tax valuation understatement. The penalty for negligence does
     not apply if the taxpayer ’s position has a reasonable basis or the
     position has substantial authority. The penalty for disregard of
     rules or regulations does not apply if the position is disclosed on
     the return and there is a reasonable basis for the position. Similarly,
     the penalty for substantial understatement of income tax will not be
     imposed if the position is disclosed and it is determined that the
     position has a reasonable basis. The substantial-understatement
     penalty can also be avoided if there is substantial authority for the
     position. However, neither the substantial-authority nor the dis-
     closure exception will apply if the transaction constitutes a tax
     shelter within the meaning of section 6662(d)(2)(C). It is important
     to note, however, that under section 6664(c), no penalty under
     section 6662 is imposed if there was a reasonable cause and the
     taxpayer acted in good faith. There are many other penalties that
     may be imposed on a taxpayer under the Internal Revenue Code. For
     example, a penalty on taxpayers (not preparers or advisers) under




                                    4–108
                                       Circular 230                          § 4:13.6

       section 6676 is imposed for filing an erroneous claim for income tax
       refund or credit.
       As indicated above, section 6694 imposes penalties on return
       preparers and advisers when the return understates the tax actu-
       ally due where preparer or adviser was aware (or should have been
       aware) that the position in question was taken on the return. The
       penalty is not imposed, however, if the preparer or adviser had a
       reasonable belief that the position would more likely than not be
       sustained on the merits or there was a reasonable basis for the
       position and it was adequately disclosed on the return. There may
       be cases in which a preparer or adviser can avoid the section 6694
       penalty even though the more-likely-than-not standard is not
       satisfied and disclosure is not made by the client provided that
       the preparer/adviser provides the client with information about the
       opportunities to avoid taxpayer penalties by making disclosure.
       For example, the preparer/adviser will not be subject to penalty
       under 6694 if there is substantial authority for the position and
       the preparer advises the taxpayer of the difference between the
       penalty standards applicable to the taxpayer under section 6662 and
       those applicable to the preparer under section 6694, and contem-
       poraneously documents that this advice was given. If the position
       relates to a tax shelter, the preparer will not be subject to the section
       provided that the preparer advises the taxpayer of the penalty
       standards applicable to the taxpayer under section 6662(d)(2)(C)
       and the difference, if any, between those standards and the
       standards under section 6694, and contemporaneously docu-
       ments that this advice was given. In the case of an adviser, if
       there is a reasonable basis for the tax position, the section 6693
       penalty can be avoided by explaining the opportunities for the
       taxpayer to avoid penalties through disclosure. We anticipate that
       the IRS will change the standards for avoiding penalties in the
       future. As a general rule, the defenses for both taxpayers and
       preparers/advisers that require disclosure mean that a properly
       completed IRS Form 8275 or 8275R must be attached to the
       return. We specifically note to you that, in some cases, it will
       be in the best interests of the preparer or adviser for the disclosure
       form to be attached to the return so he or she may avoid
       the penalty imposed by section 6694, but the taxpayer may not
       be required to have the disclosure form attached to avoid a
       penalty under section 6662 or will not wish to do so even if it
       would avoid a penalty under that section.
       We appreciate that these rules are complex. Nevertheless, to avoid
       penalties it is necessary in some cases for us to have advised you
       about them. Accordingly, we may refer you to this discussion from
       time to time during our representation. Needless to say, if you
       have any question about penalties or any related matter, please
       contact us.




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§ 4:13.7                  THE CIRCULAR 230 DESKBOOK

              [L] Summary and Conclusions
   Notice 2008-13 creates greater safe harbors from the penalty under
section 6694(a) for preparers of tax returns and advisers on return-
related matters than are more generous than the section itself. For
preparers, who can be anyone who prepares schedules or reports that
are part of the return, the penalty can be avoided not just by reasonably
concluding that the position is more likely than not correct but, if
there is at least a reasonable basis for it, (1) by having a disclosure
form attached to the return; (2) by giving the taxpayer a return
with the disclosure form attached (even if the client removes it)
even if there is no substantial authority for the position; (3) by
explaining the difference to the taxpayer in penalties under sections
6662 and 6664 if there is substantial authority for the position and
contemporaneously documenting that this advice was given; or (4) in
the case of a tax shelter, by advising the taxpayer of the penalty
standards applicable to the taxpayer under section 6662(d)(2)(C) and
the difference, if any, between those standards, and contemporaneously
documenting that this advice was given. A non-signing adviser can avoid
the penalty as long as there is a reasonable basis for the position and the
adviser informs the taxpayer of any opportunity to avoid penalties under
section 6662 through disclosure and the requirements of such
disclosure.
   The upshot is that, as a practical matter, preparers will in many
cases insist on disclosure—and advisers will give disclosure-related
information—in order to reduce the likelihood that they will trigger
section 6694. At the same time, taxpayers may often conclude that
disclosure is in their interest as well, in that it will reduce the
likelihood of penalties under section 6662.

   § 4:13.7           Proposed Regulations Under I.R.C. Section
                      6694
              [A] Introduction
   In May 2007, Congress amended section 6694 of the Code,214
strengthening the preparer penalties it imposes in three ways.
   First, it expanded the section so that it now applies to preparers of
non-income-tax returns.
   Second, it heightened the standards that preparers must satisfy in
order to avoid the penalty. As a general rule, as amended, the section
requires that a preparer reasonably conclude, in good faith, that it is
more likely than not that the position will be sustained on the merits.


214.       All references to section 6694 of the Code refer to the Internal Revenue
           Code of 1986, as amended.



                                      4–110
                                       Circular 230                           § 4:13.7

Prior to the amendment, the preparer was only required to conclude
that the position had a realistic possibility of succeeding. Under the
section, as amended, as well as prior to the amendment, an exception
is made where the position is disclosed. Under the amendment, there
must be a reasonable basis for the position—apparently, a 10%
probability of success215—in order for the exception to be available.
Prior to the amendment, the exception could be invoked as long as the
position was not a frivolous one.
   Third, the amendment increased the amount of the penalty.
   In January 2008, the IRS issued Notice 2008-13, 216 which provides
interim guidance concerning the amendment.217 As the Notice in-
dicates, it will remain effective until further guidance is issued. On
June 17, 2008, the Treasury Department, along with the Service,
issued proposed regulations that, once finalized, will replace existing
regulations and the Notice. Until they are made final, however, the
guidance in the Notice will remain in effect.218


215.       The proposed regulations define the term “reasonable basis” by cross-
           referencing the definition in Treas. Reg. § 1.6662-3. See Prop. Treas. Reg.
           § 1.6694-2(c)(1). And, according to the IRS, the term “reasonable basis,”
           when used in Treas. Reg. § 1.6662-3, requires a 10% probability of success.
           See I.R.S. FACT SHEET NO. 2008-19, AVOIDING PENALTIES AND THE TAX GAP
           (Mar. 2008). Interestingly, the IRS contemplates that this test can only be
           satisfied if there is “some authority supporting the position.” See id. This
           should be contrasted with Example 1 in Prop. Treas. Reg. § 1.6694-2(b)(4),
           discussed below, where the conclusion is reached that the more-likely-than-
           not standard can be satisfied on the basis of a well-reasoned construction of
           the statute, even if there is no other supporting authority.
216.       2008-3 I.R.B. 282.
217.       For background about the section and Notice 2008-13, see Jonathan G.
           Blattmachr et al., Circular 230 and Preparer Penalties: Evil Siblings for
           Practitioners, 119 TAX NOTES 397 (Apr. 28, 2008); Mitchell M. Gans &
           Jonathan G. Blattmachr, Notice 2008-13 Offers Interim Guidance on Tax
           Return Preparation and Advice, 22 DAILY TAX REP. (Feb. 4, 2008).
218.       The Notice provides that, until the regulations are revised, it will remain
           effective. In the proposed regulations, the preamble indicates that it will
           not become effective until the regulations are made final and, in no event,
           prior to December 31, 2008. Note that the proposed regulations do not
           invite reliance. Thus, until they become final, they are not binding and,
           indeed, have no precedential value. See, e.g., Boeing Co. v. United States,
           537 U.S. 437, 453 n.13 (2003); Square D Co. v. Comm’r, 121 T.C. 168,
           205 (2003); Garvey v. United States, 726 F.2d 1569, 1571–72 (Fed. Cir.
           1984); Yocum v. United States, 66 Fed. Cl. 579 (Cl. Ct. 2005). But see
           Elkins v. Comm’r, 81 T.C. 669 (1983) (finding an abuse of discretion where
           the final regulations changed the meaning of the term used in the proposed
           regulations and the taxpayer had relied on the proposed regulations).
           Nevertheless, in some cases, the IRS has, when final regulations have
           been adopted, stated that taxpayers could rely on any reasonable inter-
           pretation of the proposed regulations before the final regulations became
           effective. See, e.g., T.D. 8395, 1992-16 I.R.B. 5.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–111
§ 4:13.7                   THE CIRCULAR 230 DESKBOOK

   While the proposed regulations follow the general pattern estab-
lished in the Notice, they would make some important changes.

              [B]    Different Preparers Can Be Responsible for
                     Different Positions on the Return
   In the most important of these changes, the proposed regulations
adopt the AICPA recommendation that a single return can have
multiple preparers within the same firm. Under existing regula-
tions,219 one person in the firm is responsible for all of the positions
taken on the return.220 In contrast, under the proposed regulations,
each preparer giving advice about the return can be responsible for the
section 6694 penalty for the position about which he or she gave
advice.221 In other words, the signing preparer and a non-signing
adviser in the same firm are both potentially subject to the preparer
penalty. For example, assume A signs the return but relies on a
schedule prepared by co-employee B, who is primarily responsible
for the schedule-related position. Only B would be responsible for the
position in terms of the penalty if it results in an understatement of
tax. A, as the signing preparer, would remain responsible for the other
positions taken on the return.
   The same approach does not, however, apply where more than one
firm is involved. If, in this example, A and B were employed by
different firms, they could both be treated as responsible preparers
with respect to the position about which B gave advice: A, as the signer,
and B, as a non-signing adviser, if the advice given by B constitutes
the preparation of a substantial portion of the return.222 Thus, both
could be subject to penalty in connection with the same position.


219.       See Treas. Reg. § 1.6694-1(b)(1).
220.       Under existing regulations, as a corollary to the rule that there can only
           be one preparer within a firm, a preparer may not avoid responsibility for
           the penalty by establishing reliance on another preparer or adviser within
           the same firm. See Treas. Reg. § 1.6694-2(d)(5). The Notice implicitly
           began to deviate from this approach. In Example 6 of the Notice, a signing
           preparer relied on a schedule prepared by another person in the same firm.
           The schedule did not appear to be incorrect or incomplete. Indicating that
           the signing preparer was not required to audit or verify independently the
           information contained in the schedule, the Example concludes that the
           signing preparer would not be subject to penalty. Thus, the Notice tacitly
           contemplated what the proposed regulations make explicit: that each
           preparer within a firm should be responsible for the position about which
           he or she gave advice.
221.       See Prop. Treas. Reg. § 1.6694-1(b).
222.       The proposed regulations are not entirely clear as to whether the non-
           signing adviser who is within the same firm as the signing preparer should
           be viewed as a preparer if the advice could not have a substantial impact on
           the taxpayer’s liability. Prop. Treas. Reg. § 301.7701-15(b)(2) defines a
           non-signing preparer as one who “who prepares all or a substantial portion



                                       4–112
                                       Circular 230                             § 4:13.7

Nonetheless, A would be permitted to defend against the imposition
of the penalty by establishing reliance on B’s advice 223 —an
expanded concept under the proposed regulations. 224 While in theory
both A and B would be viewed as preparers, only B would be subject to
the penalty as a practical matter if A could establish the necessary
elements of reliance.225 In short, the net effect of treating both
as preparers while allowing A to defeat the penalty by showing reliance
on B is to force A to establish the elements of reliance—whereas
A would not have to make such a showing were they part of the
same firm.



           of a return.” This would suggest that if a person gives advice about an
           insubstantial portion of the return, he or she would not be deemed a
           preparer. However, Prop. Treas. Treas. Reg. § 1.6694-1(b), in establishing
           the concept that there may be multiple preparers within the same firm,
           appears to contemplate that a person giving advice to a co-employee who
           signs the return is a preparer without regard to the substantiality of the
           position. Even though Prop. Treas. Reg. § 1.6694-1(b) cross-references the
           definition of return preparer in Prop. Treas. Reg. § 301.7701-15, it would
           seem that an adviser giving advice to a co-employee should be treated as a
           preparer without regard to the substantial-portion rule. For, under Treas.
           Reg. § 1.6694-1(b), the signing preparer is not responsible for the penalty
           in these circumstances. As a policy matter, it does not seem appropriate to
           treat all positions not constituting a substantial portion of the return as
           immune from the preparer penalty simply because signer received advice
           from a co-employee. On the other hand, if the position is insubstantial,
           the prospect of such immunity is not terribly alarming. Indeed, it is
           arguable that even a signing preparer should not be liable for the penalty
           if the error is insubstantial. But note that, in Prop. Treas. Reg. § 1.6694-2,
           the materiality of the error is only one factor to consider in determining if
           there was reasonable cause and good faith, thus implying an intent to
           enforce the penalty in some cases even though it does not have a
           significant impact on the taxpayer ’s liability.
223.       See Prop. Treas. Reg. § 1.6694-1(e).
224.       Unlike the Notice, the proposed regulations provide that a preparer may
           rely on a prior return prepared by someone else. See Prop. Treas. Reg.
           § 1.6694-1(e)(2). For example, when preparing an estate tax return, the
           preparer may rely on prior gift tax returns in computing the amount of
           adjusted taxable gifts without independently verifying the accuracy of
           those returns after confirming that there was no adjustment through audit
           or otherwise. See id. However, the preparer may not ignore the implica-
           tions of information furnished to the preparer or actually known by the
           preparer. And if the furnished information appears to be incorrect or
           incomplete, the preparer must make further inquiry. See id.
225.       The proposed regulations fail to consider whether a signing preparer can
           rely on a non-signing adviser where the advice is not unequivocal. For
           example, if a non-signing adviser gives the signing preparer an opinion that
           there is a reasonable basis for taking the position—complying with Prop.
           Treas. Reg. § 1.6694-2(c)(3)(ii)(B) by indicating to the signer that disclosure
           may be required—can the signer avoid the penalty by claiming reliance on
           the advice?



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–113
§ 4:13.7                  THE CIRCULAR 230 DESKBOOK

    Surprisingly, the proposed regulations appear to contemplate the
possibility that no preparer—neither the signer nor any adviser—
would be responsible for the penalty in connection with certain
positions. To illustrate, assume that A, the signer, and B, a non-
signing adviser, are employed by different firms. In this two-firm
context, a non-signing adviser can only be responsible for the penalty
if he or she knew or had to reason to know of the position and it
constitutes a substantial part of the return. If, in this example, the
position does not constitute a substantial part of the return, B could
not be responsible for the penalty. At the same time, A could avoid the
penalty by showing reliance on B’s advice.
    While the proposed regulations only tacitly endorse this no-penalty
position in the context of these posited facts, they do explicitly accept
this outcome in another context. In Prop. Treas. Reg. § 1.6694-1(f),
Example 3, the signing preparer relied on advice given by a co-employee.
Because the co-employee gave the advice before the transaction was
consummated and because a person giving such pre-transaction
advice is not viewed as a return preparer and is therefore not subject
to the penalty, no penalty could be imposed on the co-employee. Nor, the
Example concludes, would the signing preparer be subject to penalty in
connection with this position, assuming reliance on the co-employee
is established. Thus, as suggested, this Example explicitly accepts the
notion that there are contexts in which no preparer can be penalized for
the position.

              [C]    Different Treatment for Preparers of
                     Non–Income Tax Returns
   In another important change from the Notice, the proposed
regulations create a new exception for non–income tax returns, under
which the preparer may qualify for the reasonable-basis standard even
though there is no substantial authority and no disclosure form
attached to the return. Under the Notice, absent substantial authority
in a case not involving a tax shelter, the preparer had only one choice:
attach the necessary disclosure to the return.226 Giving the client
advice about the potential for taxpayer penalties under section 6662
was not sufficient. The penalty-disclosure approach only protected
the preparer from penalty if there was substantial authority for the
position.227 As a result, while the Notice was designed to ameliorate



226.       Whether the client filed the return with the disclosure attached or instead
           deleted it apparently is not relevant for preparer-penalty purposes.
227.       Under the Notice, as well as the proposed regulations, a preparer may be
           able to avoid penalty in certain contexts even though the more-likely-than-
           not standard is not satisfied by giving the client advice about taxpayer



                                       4–114
                                       Circular 230                          § 4:13.7

conflicts between preparer and client, it caused a misalignment of
interests in this context.
    To illustrate, assume that, in preparing an estate tax return, the
preparer determined that a position was supported by a reasonable
basis but lacked substantial authority. If the preparer advised the client
of his or her conclusions, taxpayer penalties under section 6662 could
not apply. This is because a reasonable-basis opinion should enable a
taxpayer to defeat the negligence penalty.228 Thus, the taxpayer would
have no incentive to make disclosure on the return. After all, unlike an
income tax return, where the substantial-understatement penalty
can be avoided by making disclosure, this penalty is not imposed in
the estate tax context and there would be, therefore, no value to the
taxpayer in making the disclosure. Indeed, a client might well prefer
not to make disclosure in order to reduce the risk of audit. But under
the Notice, the preparer would be subject to the section 6694 penalty
in these circumstances if the disclosure were not attached to the return
(as delivered to the client). Hence, a conflict under the Notice would
arise: it would be in the preparer ’s interest to attach the disclosure
form to the return in order to avoid having to comply with the “more
likely than not” standard and instead use the lower, reasonable-basis,
standard—with the preparer, perhaps, advising the taxpayer about the
opportunity for the taxpayer to remove the disclosure form before
filing the return—but it might well be in the client’s interest not to
make the disclosure.
    Reflecting a concern about this conflict, the proposed regulations
create an exception for non–income tax returns. They permit the
preparer of such a return to qualify for the lower standard if certain
advice about taxpayer penalties is given. In creating this exception, they
eliminate the conflict by realigning the client and the preparer ’s inter-
ests: the failure to attach the disclosure to the return adversely affects
neither one of them. Although this discrimination between preparers of
income and non–income tax returns is clearly contrary to the statute—
which sets the same standards for preparers of all returns—it is a



           penalties (provided there is a reasonable basis for the position). Compare
           Prop. Treas. Reg. § 1.6694-2(c)(3) with section G of the Notice (both
           permitting the preparer to avoid the penalty by giving penalty advice but
           requiring, in certain contexts, different kinds of advice). If a preparer
           penalty is assessed or proposed, it would seem that the preparer would
           be permitted to defend by establishing that the penalty advice had been
           given. The fact that the advice was subject to privilege should not prevent
           the preparer from making this defense. See, e.g., RESTATEMENT (THIRD) OF
           LAW GOVERNING LAWYERS § 83 (2000) (permitting a lawyer to disclose
           privileged information in order to defend against a charge of wrongdoing in
           the course of the representation).
228.       See, e.g., Melnik v. Comm’r, T.C. Memo 2006-25.



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§ 4:13.7                  THE CIRCULAR 230 DESKBOOK

welcome change given the preparer-client conflicts that would otherwise
occur.
   Note, however, that although the proposed regulations take this
preparer-friendly approach, they also make unavailable an exception
that preparers of income tax returns can continue to enjoy. Whereas the
preparer of an income tax return can avoid penalties if there is a
reasonable basis for the position by attaching the disclosure form to
the return, even if the taxpayer removes it before filing the return, the
preparer of a non–income tax return can only qualify for this lower
standard through disclosure if, in fact, the return is filed with the
disclosure attached. While, at first blush, it might seem that this creates
a significant disadvantage for the non–income tax return preparer, it
does not. As indicated, unlike the preparer of an income tax return, the
preparer of a non–income tax return can qualify for the reasonable-basis
standard simply by giving the taxpayer penalty advice.

              [D]   Tax Shelters
   Another change that the proposed regulations make involves tax
shelters. Under the Notice, in the case of a tax shelter, the preparer
need only give the client advice about taxpayer penalties in order to
avoid preparer penalties. 229 Under the proposed regulations, in
contrast, absent disclosure, preparer penalties can only be avoided in
the case of a tax shelter via the reasonable basis standard if the preparer
advises the client: (1) that, at a minimum, there must be substantial
authority supporting the position in order to avoid taxpayer penalties;
(2) that the client must reasonably believe that the position taken on
the return is more likely than not correct in order to avoid the taxpayer
penalties under sections 6662(d)230 and 6662A;231 and (3) that dis-
closure of the position on the return is not sufficient to defeat taxpayer
penalties. It is somewhat surprising that the proposed regulations
impose these additional requirements. After all, there are no regula-
tions currently in place under either section 6662 or section 6662A
that require a taxpayer using a tax shelter to meet such stringent
requirements in order to avoid penalties. Thus, unless such regulations
are adopted, the proposed regulations require a preparer to give penalty
advice to the client that may not be accurate.232



229.       The Notice requires advice about the penalty standards applicable to the
           taxpayer and the difference, if any, between these standards and the
           standards applicable to the preparer under section 6694.
230.       This section imposes a penalty on the substantial understatement of
           income tax.
231.       This section imposes a penalty on Reportable and Listed Transactions.
232.       Under current regulations, heightened standards are imposed on corporate
           taxpayers investing in tax shelters. See Treas. Reg. § 1.6664-4(f). No



                                      4–116
                                       Circular 230                           § 4:13.7

               [E]    Penalty Advice: No Boilerplate
   In terms of the method by which penalty advice is to be given to
clients, the proposed regulations take aim at recommendations made
in the wake of the Notice’s issuance. Some (including some of the
authors of this book) had suggested that the advice the Notice required
could be included in the engagement letter, thus preventing the
preparer from inadvertently failing to comply with the penalty-advice
requirements in the Notice during the engagement.233 The proposed
regulations, however, provide that a general disclaimer of this type is
not sufficient.234 Nonetheless, they do permit the preparer to include
the penalty advice relating to all of the positions in question in one
document or to instead treat each such position in a separate docu-
ment.235 The no-general-disclaimer rule is presumably driven by a
concern that the penalty advice might not be given serious considera-
tion by the client unless it is provided in the context of a discussion of
the particular position.

               [F] Critical Example Revisited
   The proposed regulations eliminate a controversial example con-
tained in the Notice. In Example 10 of the Notice, the signing preparer
researches an issue and concludes that there is a reasonable basis for
the position to be taken. The preparer cannot, however, reach a more-
likely-than-not conclusion “because it was impossible to make a
precise quantification regarding whether the position would more
likely than not be sustained on the merits.” Nonetheless, the Example
concludes, the preparer is not subject to penalty even if no disclosure
is made and the preparer gives no penalty advice to the taxpayer. It
is difficult to square this Example with the statute. After all, the
statute requires disclosure if the more-likely-than-not standard is not
satisfied, making no exception for difficult cases involving a close call.
Yet, one can easily understand the IRS’s willingness to provide relief
for a preparer who, in good faith, carefully considers the issue and is



           similar regulation applies in the case of an individual. See 106 LTD., David
           Palmlund v. Comm’r, 136 T.C. No. 3 (2010) (indicating that, in the case of
           a non-corporate taxpayer, a more-likely-than-not opinion may not be
           necessary in order to invoke a section 6664 defense to a penalty). And
           while penalties imposed on individuals under section 6662A do trigger
           heightened standards (see section 6664(d)), this section does not appear to
           apply to all tax shelters, but only arrangements that are deemed to
           constitute a Reportable or Listed Transaction.
233.       See Jonathan G. Blattmachr et al., Circular 230 and Preparer Penalties:
           Evil Siblings for Practitioners, 119 TAX NOTES 397 (Apr. 28, 2008).
234.       See Prop. Treas. Reg. § 1.6694-2(c)(3)(iii).
235.       See id.



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simply unable to reach the rather artificial more-likely-than-not
conclusion.
   Although, as indicated, the proposed regulations do not carry over
this Example, they do continue to reflect sympathy for the plight of
such a preparer. They give preparers who are required to make a close
call two grounds upon which to defend against the penalty. First, in
setting forth the more-likely-than-not standard, they make the follow-
ing factors relevant: the preparer ’s level of experience; the preparer ’s
diligence in reaching the conclusion; the complexity of the issue; and
the preparer ’s familiarity with the area of tax law that is implicated in
the taxpayer ’s affairs.236 Second, in fleshing out the reasonable cause
and good faith defense contained in the statute, they explicitly provide
that the complexity and/or technical nature of the issue are to be
considered.237 They go on to provide that there may be justification for
invoking the defense if the complex or technical nature of the issue is
such that a competent preparer would have made the same error.238
(The defense is based on a variety of enumerated factors, with no
single factor given determinative weight.) Thus, even though Exam-
ple 10 is not part of the proposed regulations, the principles underlying
the example have not been entirely disavowed.
   The proposed regulations also address a problematic implication in
another example in the Notice. In Example 3, an attorney gives tax
advice regarding a proposed transaction. After it is consummated, the
attorney gives no additional advice concerning the tax treatment of the
transaction. Consistent with the provision in existing regulations, 239
the Example concludes that such pre-transaction advice does not
render the attorney subject to preparer penalties. The difficulty, of
course, is the implication that if the attorney had a short post-
transaction conversation with the taxpayer or the person preparing
the return about the treatment of the transaction on the return, he or
she would be deemed a preparer for purposes of the penalty. The
proposed regulations provide a salutary remedy.240 As long as the time
incurred in giving the post-transaction advice is less than 5% of the
total time incurred with respect to the position, such post-transaction
advice does not constitute activity that is subject to the penalty. As a
practical matter, this will make it important for preparers to keep
accurate time records. Unfortunately, however, there is—at least at the


236.       See Prop. Treas. Reg. § 1.6694-2(b). Surprisingly, the proposed regulations
           fail to utilize the same factors for purposes of determining whether the
           reasonable-basis standard has been satisfied. See Prop. Treas. Reg.
           § 1.6694-2(c)(2). Perhaps this was an inadvertent omission.
237.       See Prop. Treas. Reg. § 1.6694-2(d).
238.       See id.
239.       Treas. Reg. § 301.7701-15(a).
240.       Prop. Treas. Reg. § 301.7701-15(b)(2).



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                                       Circular 230                           § 4:13.7

time of this writing—no similar pre-transaction exception in Circular
230 (which contains the ethical rules applicable to attorneys and CPAs
who practice before the Service).241

               [G] The Weight of Authority and the More-Likely-
                   Than-Not Standard
   Unlike the Notice, the proposed regulations explore how the more-
likely-than-not standard is to be applied in the context of different kinds
of authorities.242 Of the four examples contained in the proposed
regulations, three are of particular interest. 243 First, Example 1
(Prop. Treas. Reg. § 1.6694-2(b)(4)) indicates that the preparer ’s well-
reasoned construction of a newly enacted Code section can satisfy the
standard. Thus, even if there is no existing authority to support the
argument, it may be possible to reach a more-likely-than-not conclusion
based on a reading of the statute alone.
   Second, Example 3 (same regulation) considers a case where the
preparer, in filing the 2007 return, finds three private letter rulings,
issued in 2002 and 2003, which support the taxpayer ’s position.
However, after these rulings had been issued, temporary regulations
were promulgated that took a contrary position. The Example con-
cludes that the preparer may not rely on the private letter rulings
in making the more-likely-than-not assessment. The interesting
implication, of course, is that had the temporary regulations not
been issued, the three rulings might well have constituted sufficient
authority to satisfy the standard (and would presumably satisfy the
reasonable-basis standard as well).244
   Third, in Example 4 (same regulation), there are five circuit court
cases relevant to the issue in circuits other than where the client
resides, three of which were won by the taxpayer. The preparer


241.       Section 10.34 of the Circular, which imposes standards similar to those
           contained in section 6694 of the Code, fails to provide a pre-transaction-
           advice exception. Thus, while Practitioners may be immune from penalties
           under the Code for such advice, they may nonetheless remain subject to
           sanction under the Circular.
242.       See Prop. Treas. Reg. § 1.6694-2(b)(4). No such guidance is given in the
           portion of the proposed regulations dealing with the reasonable-basis
           standard (see Prop. Treas. Reg. § 1.6694-2(c)), other than to cross-reference
           Treas. Reg. § 1.6662-3(b)(3).
243.       The Example not considered in our discussion is straightforward. In the
           Example (Example 2), the Code is amended to unambiguously deny the
           treatment sought by the taxpayer. The preparer concludes that the new
           provision is inequitable as applied to the taxpayer. The Example concludes
           that the preparer could not satisfy the more-likely-than-not standard.
244.       The proposed regulation does cross-reference Treas. Reg. § 1.6662-4,
           which explicitly provides that private letter rulings may be considered in
           determining whether the substantial-authority standard has been satisfied.



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determines that the client’s factual position is more similar to these
three cases than to the other two won by the government. The
Example concludes that the more-likely-than-not standard is satisfied.
Unfortunately, the Example raises more questions than it answers. For
example, if all five decisions had been based on identical facts, would
the preparer be precluded from reaching a more-likely-than-not con-
clusion? And what if there is only one taxpayer-friendly circuit court
decision? Can such a single authority serve as a predicate for a more-
likely-than-not conclusion? What if there is authority in the circuit
where the taxpayer resides?245 And, finally, could such home-circuit
authority enable a preparer to reach a more-likely-than-not conclusion
if other circuits had taken a contrary view? Perhaps, some, or all, of
these questions will receive attention in the final regulations.

              [H]    Conclusion: Avoiding Preparer Penalties
   Preparers must take seriously an important theme in the proposed
regulations: that willful violations or a pattern of errors will be treated
more harshly than isolated or innocent mistakes. The proposed
regulations reflect this theme at three different junctures. First, in
discussing the potential overlap between section 6694 and Circular
230,246 the preamble indicates that a violation of section 6694 will not
automatically lead to a referral to the Office of Professional Respon-
sibility.246.1 In the absence of a pattern or willful behavior, in other
words, a referral—and the potential threat of disbarment from practice
before the IRS that such a referral poses—is inappropriate. Second, in
explicating how the more-likely-than-not standard will be


245.       Note that, in Treas. Reg. § 1.6662-4, the presence of home-circuit
           authority can prove to be critical for purposes of determining whether
           there is substantial authority for the taxpayer ’s position: a favorable
           decision in the home circuit constitutes substantial authority, while
           unfavorable authority in other circuits does not preclude the taxpayer
           from making a substantial-authority showing. While the proposed regula-
           tions cross-reference Treas. Reg. § 1.6662-4, they do not make any
           reference to the portion of the regulation that deals with home-circuit
           authority.
246.       Section 10.34 of the Circular will, once pending amendments are finalized,
           mirror the two-tier approach in section 6694, requiring the preparer to
           reach either a reasonable-basis conclusion if disclosure is made or a more-
           likely-than-not conclusion if it is not. Interestingly, however, section 10.34
           is not perfectly congruent with the proposed regulations. Most signifi-
           cantly, unlike the proposed section 6694 regulations, it does not, at least
           under the pending amendment, permit the preparer to qualify for the lower
           standard by giving the client penalty advice. Perhaps they will be made
           congruent once the section 6694 regulations are finalized.
246.1.     See LMSB-4-0310-012 (indicating that a referral to OPR should only be
           made in the case of a pattern of section 6694(a) failures, whereas, in the
           case of a violation of section 6694(b), a referral to OPR is mandatory).



                                        4–120
                                       Circular 230                         § 4:13.8

enforced, the proposed regulations focus on, among other things,
the level of the preparer ’s experience, the preparer ’s familiarity
with the client’s affairs and whether the provision at issue is of a
complex or technical nature. Third, the factors that must be consid-
ered under the proposed regulations where a preparer invokes the
reasonable-cause-and-good-faith defense similarly reflect this
theme: frequency of errors; the materiality of the errors; reliance on
the advice of others; the technical or complex nature of the Code
provision; and the firm’s review practices.247 As this list of factors
reveals—particularly the last factor mentioned—preparers who imple-
ment appropriate review practices and who diligently attempt to
comply with the requirements of section 6694 will find the likelihood
of penalty—or referral to the Office of Professional Responsibility—
greatly reduced. In short, more than anything else, the proposed
regulations make clear the need for preparers to start instituting and
enforcing policies that will enable them to demonstrate good faith
when errors do occur.

    § 4:13.8            2008 Legislation and Final Regulations Under
                        I.R.C. Section 6694
               [A] 2008 Amendment to I.R.C. Section 6694
   After the proposed regulations were issued, Congress again
amended section 6694 of the Code in the Tax Extenders and Alter-
native Minimum Tax Relief Act of 2008 (the “2008 Act”),248 which
was enacted in October 2008. The effect of this amendment is twofold.
First, it generally confirms the validity of the approach taken in the
proposed regulations. Second, it elevates the standard applicable to tax
shelters.
   Commentators had been critical of the 2007 amendment because of
the potential it created for conflicts of interest between the preparer
and the taxpayer. To illustrate, assume a taxpayer was advised by his or
her preparer that there was substantial authority for the contemplated
position. Because the penalty for the substantial understatement of
income tax imposed on the taxpayer under section 6662 of the Code
makes an exception where the position in question is supported by
substantial authority, the taxpayer might well have decided not to
make disclosure about the position. In other words, given the ability of
the taxpayer to defeat the penalty if substantial authority exists, the
taxpayer would have gained nothing by making disclosure and would
have ordinarily been reluctant to do so given the increased likelihood
of an audit if disclosure were made. At the same time, the preparer

247.       See Prop. Treas. Reg. § 1.6694-2(d).
248.       Div. C. of Pub. L. No. 110-343, 122 Stat. 3765 (Oct. 3, 2008).



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could reduce the standard applicable for preparer-penalty purposes
from the more-likely-than-not standard to the reasonable-basis stan-
dard if the taxpayer were to make disclosure. Thus, in this case, while
the preparer would have gained an advantage—that is, would have
been subject to a lower standard for preparer-penalty purposes—if
disclosure were made, the taxpayer would have gained no advantage by
making disclosure; indeed, the taxpayer would have suffered the
disadvantage of an increased likelihood of audit.
   In order to realign the taxpayer ’s and the preparer ’s incentives
regarding disclosure and thereby eliminate the conflict of interest, the
proposed regulations permitted the preparer to utilize the substantial-
authority standard—rather than the more rigorous more-likely-than-
not standard—if the preparer made certain penalty-related informa-
tion available to the taxpayer even if the taxpayer chose not to make
disclosure on the return. In taking this approach, the proposed
regulations diminished the potential for taxpayer-preparer conflict.
In order to accomplish this objective, the proposed regulations had to
rewrite the statute to permit the preparer to avoid the penalty where
the substantial-authority standard—rather than the more rigorous
more-likely-than-not standard—was satisfied. In effect, the proposed
regulations ignored the more-likely-than-not standard contained in
the statute, permitting preparers to avoid the penalty if substantial
authority was present and the preparer provided the penalty-related
information to the taxpayer.

           [B]   2008 Act and Its Substantial-Authority Provision
    In the 2008 Act, Congress in effect embraced the substantial-
authority standard. Under the amendment, as a general rule, preparers
need only have substantial authority in order to defeat the penalty.
Thus, the new amendment continues the approach taken under the
proposed regulations, with one exception: while the preparer could
only qualify for the substantial-authority standard under the proposed
regulations if he/she supplied the penalty-related information to the
taxpayer, the substantial-authority standard now controls even if no
penalty-related information is supplied to the taxpayer. In terms of the
reasonable-basis standard, the amendment makes no change. That is,
if disclosure is made, the reasonable-basis standard continues to apply.
    The change made by the 2008 Act that relates to tax shelters is
more substantive. Under the proposed regulations, in the case of a tax
shelter, the preparer could qualify for the reasonable-basis standard by
providing the taxpayer with the requisite penalty-related information.
This provision in the proposed regulations was also driven by a
concern about conflicts of interest: A taxpayer investing in a tax
shelter could not defeat the substantial-understatement-of-income-
tax penalty by making disclosure. Thus, such a taxpayer would have



                                4–122
                                       Circular 230                           § 4:13.8

had no incentive to make disclosure, while, at the same time, the
preparer would have been anxious to make disclosure in order to
qualify for the reasonable-basis standard, rather than the more-likely-
than-not standard. In order to again realign the incentives and thereby
diminish the potential for conflict, the proposed regulations permitted
the preparer to qualify for the reasonable-basis standard in the case of a
tax shelter by giving the taxpayer the penalty-related information.
   While the proposed regulations thus eliminated the conflict, they
created a rather odd result: they permitted the preparer to qualify for
the lower reasonable-basis standard in the case of a tax shelter, while
holding preparers to the higher more-likely-than-not standard where a
tax shelter was not involved if penalty-related information was not
supplied (or to the substantial-authority standard if it was supplied).
The amendment corrects this. Under the amendment, in the case of a
tax shelter, the preparer is required to satisfy the more-likely-than-not
standard.
   Even if the taxpayer makes disclosure, the preparer remains subject
to this high standard. In making this change, Congress apparently
adopted the premise that taxpayers investing in tax shelters must satisfy
a more-likely-than-not standard in order to defeat the substantial-
understatement-of-income-tax penalty. It then imposed the same stan-
dard on preparers in order to avoid conflicts. While it makes sense to
hold taxpayers investing in tax shelters, along with their preparers, to a
higher standard and while it also makes sense to apply the same
standard to both the preparer and the taxpayer in order to avoid
conflicts, Congress’s premise is somewhat questionable in that it is
not entirely clear that taxpayers investing in a tax shelter must satisfy
the more-likely-than-not standard in order to avoid penalties. Although
section 6664(d) of the Code does impose the more-likely-than-not
standard on taxpayers in the case of a Reportable or Listed Transaction,
no section of the Code currently imposes this standard with respect to a
tax shelter that is neither a Reportable nor Listed Transaction.249

               [C] Interim Guidance Under the 2008 Act
   Surprisingly, in interim guidance under the 2008 Act, the Service
treats some tax-shelter investors more favorably than the statute con-
templates. In Notice 2009-5,250 which carries the interim guidance, the
Service makes an exception to the more-likely-than-not standard that is



249.       But see Treas. Reg. § 1.6662-4(g); Notice 2009-5, 2009-3 I.R.B. 309
           (requiring preparers seeking to qualify for the substantial-authority stan-
           dard in the case of a tax shelter to advise taxpayers about the applicability
           of the more-likely-than-not standard).
250.       2009-3 I.R.B. 309.



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contained in neither the statute nor the final regulations.251 The
Service’s generosity is attributable to its concern that, in the absence
of this exception, preparers would be inclined to take an over-inclusive
approach: applying the more-likely-than-not standard to any transaction
that might arguably be viewed as tax-motivated in order to avoid
penalties under section 6694. Given that Congress intended in enacting
the 2008 Act to impose the substantial-authority standard as a general
rule, the Service understandably did not want to indirectly force
preparers to use the higher more-likely-than-not standard for all trans-
actions that might arguably be viewed as a tax shelter. Thus, until the
Service provides further guidance about the meaning of a tax shelter for
this purpose, preparers are given some latitude.
   Under the exception, in the case of a tax shelter that is not a Listed
Transaction or a Reportable Transaction having tax avoidance or
evasion as a significant purpose, the preparer need only satisfy the
substantial-authority standard. The exception only applies, however, if
the following information is given to the taxpayer and the preparer
contemporaneously documents that the information was provided:
   (1)     the penalty standards that would apply to the taxpayer if the
           transaction is found to have tax avoidance or evasion as a
           significant purpose; and
   (2)     if a finding of such purpose is ultimately made, the penalty
           under section 6662(d) would apply unless, at a minimum:
           (a)   substantial authority exists for the position,
           (b)   the taxpayer possesses a reasonable belief that the
                 claimed treatment was more likely than not the proper
                 treatment, and
           (c)   the taxpayer ’s disclosure of the position would not
                 immunize the taxpayer against the penalty under sec-
                 tion 6662(d).
The notice also provides that, if the Practitioner does not sign the return
but rather gives advice to another Practitioner about the transaction, the
advising Practitioner need only satisfy the substantial-authority stan-
dard if he/she advises the other Practitioner about the penalty standards
under section 6694 and contemporaneously documents that the advice



251.       Under the final regulations, no such exception is provided. Treas. Reg.
           § 1.6694-2(a) makes clear that, in the case of all tax shelters the more-
           likely-than-not standard applies. The preamble, however, makes reference
           to Notice 2009-5, indicating that the final regulations do not provide
           substantive guidance under the 2008 Act and that the Notice will control
           until further guidance is provided.



                                      4–124
                                       Circular 230                           § 4:13.8

about section 6694 was given. If the exception is inapplicable—either
because the preparer/adviser fails to give the necessary penalty-related
information or because the transaction is a Listed Transaction or a
Reportable Transaction having tax evasion or avoidance as a significant
purpose—the more-likely-than-not standard applies to the preparer.

               [D] Final Regulations
    The final regulations largely follow the proposed regulations. There
are, however, several qualifications and modifications. Given the ear-
lier discussion of the proposed regulations, consideration is here given
only to the qualifications and modifications. 252

               [D][1] One Position per Preparer
   First, the final regulations retain the concept that, within a firm,
different preparers can be responsible for different positions taken on
the return. In other words, within a firm, there is only one individual
who is responsible for each position taken on the return: the individual
having primary responsibility for the position is deemed the preparer
for purposes of section 6694.253 The final regulations clarify how this
concept will be applied. They establish the general rule that the signing
preparer is deemed to be primarily responsible for all positions on the
return.254 In some cases, however, the signing preparer will not be the
individual in the firm who is primarily responsible for a particular
position. For example, another individual in the firm may be respon-
sible for researching and analyzing a particular position and may
advise the signing preparer about its proper treatment. In such a
case, the non-signing preparer within the firm who has overall super-
visory responsibility for the position will bear responsibility for the
penalty with respect to that position unless it can be concluded that
another non-signing preparer within the firm is primarily responsible
for the position.255 If the evidence would support the conclusion that
either the signing preparer or the non-signing preparer within the firm
is primarily responsible for the position, the IRS can assert the penalty


252.       Note that, in connection with issuing the final regulations, the Service also
           issued Rev. Proc. 2009-11, 2009-3 I.R.B. 313, listing the type of returns for
           which the preparer can be liable for the section 6694 penalty. For the
           significance of this revenue procedure, see Treas. Reg. § 301.7701-15(b)(4)
           (providing that a person is a preparer of a return, rendering section 6694
           applicable, only in the case of the type of returns identified in published
           guidance).
253.       See Treas. Reg. § 1.6694-1(b)(1).
254.       See Treas. Reg. § 1.6694-1(b)(2). Note, however, that the Tax Court has
           indicated that a field service advisory does not constitute substantial
           authority. See Brown v. Comm’r, T.C. Memo 2011-83.
255.       See Treas. Reg. § 1.6694-1(b)(3).



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against either preparer, but in no case can the penalty be asserted
against both.256
   What if there is no signing preparer within the firm? For example,
assume that an accountant, who prepares and signs the return,
receives advice from a law firm about a position on the return. Which
employee or partner in the law firm is responsible for the penalty with
respect to the position? As in the case where the non-signing advisor
and signing preparer are in the same firm, the final regulations provide
that the person in the law firm having overall supervisory responsi-
bility for the position will be responsible for the penalty unless it is
determined that another person in the law firm is primarily respon-
sible for the position.257 Note that, in this case, the accountant
remains responsible for the position for purposes of section 6694 even
though an attorney in the law firm provided the advice. Unlike the
case where the signing preparer and non-signing advisor are in the
same firm, both can be responsible for the penalty where they are in
different firms. As a practical matter, however, this may be a distinction
without much significance in that the accountant would likely be able
to defend against the penalty by establishing reliance on the
attorney.258

              [D][2] Pre-Transaction Advice
   Second, the final regulations make a change in the definition of a
preparer in the case where advice is given prior to the consummation


256.       See Treas. Reg. § 1.6694-1(b)(4).
257.       See Treas. Reg. § 1.6694-1(b)(3).
258.       See Treas. Reg. § 1.6694-1(e). So, in the example posited in text, the
           accountant would only be able to defeat the penalty by establishing
           appropriate reliance on the attorney. But, in order to succeed with such
           a defense, the accountant would need to prove that he/she did not ignore
           the implications of information furnished by the attorney. See id. In
           contrast, if the accountant and the attorney were in the same firm, it
           would seem that the accountant could not be subject to the penalty in the
           first instance given that the attorney would be the individual in the firm
           with primary responsibility for the position, thus making Treas. Reg.
           § 1.6694-1(e) (and its prohibition against ignoring the implications of
           information supplied by another advisor) irrelevant. It should be conceded,
           however, that the regulations are somewhat unclear in this context. On the
           one hand, they provide that, if the attorney and the accountant are in the
           same firm and if the attorney has primary responsibility for the position,
           the accountant cannot be subjected to the section 6694 penalty. See Treas.
           Reg. § 1.6694-1(b)(2) (making the attorney rather than the accountant
           responsible for the penalty in this example if the attorney is primarily
           responsible for the position). On the other hand, they contemplate that a
           signing preparer may need to establish the elements of a reliance defense,
           as provided in Treas. Reg. § 1.6694-1(e), even where he/she has deferred to
           the advice given by another person in the same firm.



                                       4–126
                                       Circular 230                           § 4:13.8

of the transaction. In this context, under a de minimis rule adopted in
the proposed regulations, such pre-transaction advice would not render
the advisor a preparer for purposes of the section 6694 penalty if the
amount of post-transaction time incurred by the advisor was less than
5% of the total amount of time incurred on the matter. So, for example,
if an attorney gave advice about the creation of a trust and then drafted
the trust, he/she would not become subject to the penalty simply
because post-transaction advice was given about the proper treatment
of the transaction on the return if the 5% test was satisfied. Under the
final regulations, however, pre-transaction advice will be taken into
account—thus potentially exposing the attorney in this example to the
penalty—if the position causing the understatement is primarily
attributable to the pre-transaction advice, the advice was substantially
given prior to the transaction primarily to avoid the section 6694
penalty and there was some post-transaction confirmation of the
advice for the purpose of preparing the return.259
    Given this change in the final regulations, it will be important for
Practitioners who intend to rely on the pre-transaction-advice rule in
order to eliminate their exposure to section 6694 to avoid giving any
post-transaction advice. So, in this example, if the attorney wanted to
avoid the section 6694 penalty but nonetheless wanted to provide the
client with advice about how to treat the transaction for tax purposes,
he/she could do so by giving all of the advice (including advice about
the proper treatment of the transaction on the return) before the
transaction was consummated. Interestingly, as suggested in the
discussion of the proposed regulations, were the attorney to do this
and thereby qualify for the pre-transaction-advice rule, it would seem
that no preparer would have section 6694 responsibility for the
position.260

               [D][3] Disclosure
   Third, the final regulations make a change in the disclosure rules,
reflecting the change effected in the 2008 Act. Under the 2008 Act, as
indicated, disclosure is generally not required if there is substantial
authority supporting the position. Under the proposed regulations,
disclosure of penalty-related information was required if there was
substantial authority but the preparer could not reach the more-likely-
than-not standard. In accordance with the 2008 Act, under the final


259.       See Treas. Reg. § 301.7701-15(b)(2)(i).
260.       If the attorney gave advice about the proper return treatment of the
           transaction, the person who prepared and signed the return could avoid
           the penalty by establishing that he/she relied on the attorney ’s advice. See
           Treas. Reg. § 1.6694-1(e). At the same time, the attorney could not be
           subjected to the penalty in the absence of some post-transaction advice.



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§ 4:13.8                   THE CIRCULAR 230 DESKBOOK

regulations, there is generally no need for disclosure where substantial
authority is present. (The final regulations do not explain how a
preparer is to determine whether substantial authority is present; 261
interim guidance has been provided on this issue.)262 Where substan-
tial authority is, however, not present, the preparer may still be able to
avoid the section 6694 penalty in certain circumstances by instead
satisfying the lower reasonable-basis standard. Following the pattern
of the proposed regulations, the final regulations provide that a
preparer who signs the return need only satisfy the reasonable-basis
standard if a tax shelter is not involved and if disclosure is made in
accordance with one of the following three methods: 263
   (1)     the return is filed along with disclosure in accordance with
           regulations under section 6662;264
   (2)     the preparer includes the necessary disclosure but the taxpayer
           removes the disclosure before filing it;265 or
   (3)     for returns or claims for refund that are not subject to the
           substantial-understatement-of-income-tax penalty under sec-
           tion 6662(d), the preparer explains to the taxpayer the penalty
           standards applicable to the taxpayer under section 6662 (and
           the preparer contemporaneously documents that the explana-
           tion was given).266



261.       Treas. Reg. § 1.6694-2(c) is reserved for this purpose.
262.       See Notice 2009-5, 2009-3 I.R.B. 309. Under the notice, the term
           “substantial authority” has the same meaning as under Treas. Reg.
           § 1.6662-4(d)(2).
263.       See Treas. Reg. § 1.6694-2(d)(3)(i).
264.       See Treas. Reg. § 1.6662-4(f)(2). Under this regulation, disclosure may be
           made on a Form 8275, a Form 8275-R (where a regulation is challenged as
           invalid) or in accordance with (where permissible) an annual revenue
           procedure.
265.       As suggested in the discussion of the proposed regulations, it would seem
           that a preparer should inform the client that the return contains the
           disclosure and that the client has the right to remove the disclosure before
           filing the return. Assuming that the preparer has the right—indeed,
           perhaps an obligation—to give this information to the client, preparers
           will find it relatively easy to qualify for the less stringent reasonable-basis
           standard by attaching the disclosure and then fully informing the client
           about the disclosure and the client’s right to remove it. Were the regula-
           tions amended to preclude preparers from providing this information,
           the First Amendment would be implicated. See Hersh v. United States
           ex rel. Mukasey, 553 F.3d 743, 2008 WL 5255905 (5th Cir. 2008)
           (discussing the First Amendment right of an attorney to counsel a client
           to engage in conduct that is not criminal).
266.       The proposed regulations provided that a boilerplate explanation or gen-
           eral disclaimer would not be sufficient. While the final regulations retain



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                                       Circular 230                           § 4:13.8

    In the case of a non-signing preparer, again assuming a tax shelter is
not involved, the preparer qualifies for the reasonable-basis standard if
the taxpayer actually makes disclosure on the return in accordance
with the regulations under section 6662.267 In the alternative, the
non-signing preparer can qualify for the reasonable-basis standard by
providing certain penalty-related information.268
    Thus, as suggested in the discussion of the proposed regulations, it is
relatively easy for a preparer to qualify for the less stringent reasonable-
basis standard. In the case of a non–income tax return, the reasonable-
basis standard applies if the preparer provides the penalty-related
information. In other words, echoing the taxpayer-penalty rules in
section 6662, which in general do not give taxpayers making disclosure
any penalty-related advantage in the case of a non–income tax return,
the final (as well as the proposed) regulations allow preparers to qualify
for the lower standard in this context without regard to whether the
taxpayer makes disclosure on the return.
    It is also seemingly easy for the preparer to qualify for the lower
standard in the case of income tax returns. In this context, as
suggested in the discussion of the proposed regulations, the preparer
need only attach the necessary disclosure to the return. Even if the
taxpayer chooses to remove the disclosure before filing the return—
based, perhaps, on the preparer ’s advice that the taxpayer has the right
to remove it—the preparer still qualifies for the reasonable-basis
standard.
    In sum, to the extent that section 6694 makes preparer penalties
hinge on the client’s choice about disclosure, it is problematic. For it is
fundamentally wrong to take into account in imposing penalties
imposed on one person (the preparer) the decisions made by another
person (the taxpayer). The regulations fortunately ameliorate this
glitch, permitting a preparer to qualify for the reasonable-basis stan-
dard by attaching the disclosure form to the return even if the taxpayer



           this rule, see Treas. Reg. § 1.6694-2(d)(3)(iii), they also provide that a
           preparer “may rely on established forms or templates in advising clients
           regarding the operation of the penalty provisions of the Internal Revenue
           Code.” See id.
267.       See id.
268.       If the non-signing preparer gives advice to the taxpayer, the preparer must
           advise the taxpayer about opportunities to avoid taxpayer penalties under
           section 6662, if relevant, and about the standards for disclosure to the
           extent applicable. See Treas. Reg. § 1.6694-2(d)(3)(ii)(A). In addition, the
           preparer must contemporaneously document that the information was
           given. See id. If the non-signing preparer gives advice to another preparer,
           he/she must tell the other preparer that disclosure under section 6694 may
           be required. See Treas. Reg. § 1.6694-2(d)(2)(ii)(B). Again, there must be
           contemporaneous documentation that the advice was given. See id.



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chooses to remove it. Preparers concerned about minimizing their
penalty risks will presumably, in many cases, attach the disclosure
form and then explain to the taxpayer that it can be removed before
filing. To the extent this occurs, one is left to wonder whether gains in
taxpayer compliance will really be achieved by reason of the recent
flurry of amendments to section 6694.

              [D][4] Reliance on Others
   Fourth, the final regulations make a few changes to the rules that
allow a preparer to rely on others for information or advice used in
preparing or giving advice about the preparation of the return. 268.1
Under the proposed regulations, the preparer was not permitted to rely
on a legal conclusion provided by the taxpayer. Some had suggested
that this would be problematic in the case of a mixed question of law
and fact. For example, whether a taxpayer is legally married or owns
certain property could present a question of law. In the final regula-
tions, prohibition against relying on the taxpayer ’s legal conclusions is
removed. But the preamble reiterates that preparers must continue to
meet certain due diligence standards before accepting as truthful or
valid information supplied by the taxpayer.269 The final regulations
also clarify that a preparer may be able to defeat the penalty through a
reliance defense even where the preparer relies on an advisor in the
same firm.270

              [D][5] Appraisers Are Subject to I.R.C. Section 6694
   Fifth, questions had been raised about the potential application of
section 6694 to appraisers. As drafted, the proposed regulations
contemplated that an appraiser could be subject to the section, for a
person who gives advice for compensation with respect to an item
constituting a substantial portion of the return is deemed a preparer
subject to the section.271 The argument had been made that appraisers
are subject to a separate penalty under section 6695A of the Code and
that there is therefore no need to impose on them the additional burden
of the section 6694 regime. The preamble to the final regulations


268.1.     In United States v. Hand-Bostick (N.D. Tex. Sept. 12, 2011), the court held
           that an advisor could avoid the penalty under section 6694 and therefore
           an injunction if, at trial, it could be shown that the advisor had relied on
           others in recommending the tax shelter.
269.       See Treas. Reg. § 1.6694-1(e)(1).
270.       This seems rather odd given that a person who relies on an advisor within
           the same firm is not viewed as a preparer, thus rendering the penalty and the
           reliance defense irrelevant to such a person. See Treas. Reg. § 1.6694-1(b)(1)
           (indicating that a person is not a preparer with respect to a position if another
           person in the firm is primarily responsible for the position).
271.       See Treas. Reg. § 301.7701-15.



                                         4–130
                                       Circular 230                           § 4:13.8

rejects this argument. As a result, appraisers may want to consider
including in their appraisals a warning about penalties (that is, that
disclosure under section 6694 may be required). For, as indicated, a non-
signing advisor can qualify for the lower reasonable-basis standard by
giving such a warning to the signing preparer.272 In the absence of the
warning, the appraiser would be held to the more stringent substantial-
authority standard.

               [D][6] Preparer’s Sophistication As a Relevant Factor
   Sixth, the proposed regulations provided that, in determining
whether a preparer has satisfied the more-likely-than-not standard,
the preparer ’s diligence must be taken into account. They further
provided that the preparer ’s level of experience would be relevant in
assessing the preparer ’s diligence. Some questioned whether this
would create a two-tier system, under which less sophisticated
Practitioners would find it easier than more sophisticated Practitioners
to escape the penalty. The preamble to the final regulations states that
there was no intention to create such a two-tier system. But, at the
same time, the level of the Practitioner ’s experience does remain a
factor to be taken into account in determining whether the Practi-
tioner was sufficiently diligent. The meaning of the preamble is not
entirely clear; for, while it disclaims any intent to create a two-tier
system, that may well be its effect to the extent it retains level of
experience as a relevant consideration.

               [D][7] Disregard of Regulations, Revenue Rulings or
                      Notices
   Seventh, the final regulations clarify the operation of the penalty
under section 6694(b) in terms of a reckless or intentional disregard of
a regulation, revenue ruling or notice.273 Where a signing preparer
takes a position that is contrary to a regulation, the section 6694


272.       See Treas. Reg. § 1.6694-2(d)(3)(ii)(B).
273.       The penalty for disregarding a rule or regulation is addressed in Treas. Reg.
           § 1.6694-3. The regulation provides that the penalty applies to the
           disregard of the Code, regulations, revenue rulings or a notice (other
           than a notice of proposed rulemaking). See Treas. Reg. § 1.6694-3(f).
               In United States v. Hand-Bostick (N.D. Tex. Sept. 12, 2011), the court
           indicated that the recklessness standard in section 6694(b) is equivalent to
           a negligence standard. The court stated:
              . . . with respect to whether the Moving Defendants recklessly
              prepared tax returns understating their customers’ tax liability, the
              parties agree that courts interpret the ‘reckless or intentional dis-
              regard of rules’ language under section 6694(b) as a negligence
              standard. See, e.g., United States v. Bailey, 789 F. Supp. 788, 812–13
              n.17 (N.D. Tex. 1992) (‘The legislative history of Code section 6694



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§ 4:13.8                   THE CIRCULAR 230 DESKBOOK

penalty can be avoided if disclosure is in fact made on the return (by
attaching a Form 8275-R) and there is a reasonable basis supporting
the challenge.274 In the case of a non–income tax return, the penalty
can be avoided even if the return does not contain the disclosure as
long as the preparer gives the necessary penalty-related information to
the taxpayer (provided, again, that there is a reasonable basis for the
position).275
    Interestingly, as drafted, if the disclosure is not in fact attached to
the return, the penalty applies to the preparer even if the preparer
attached the disclosure but the client removed it before filing the
return.276 (This is to be contrasted with the regulation under section
6694(a), which explicitly makes the preparer penalty inapplicable in
these circumstances.)277 Whether the regulation can be enforced on
these terms is questionable.278 After all, it doesn’t seem appropriate to
impose a penalty on the preparer simply because the client decides to
remove the disclosure before filing. Nor does it seem appropriate for
the preparer to attach the disclosure without informing the client that
it is attached and that the client has the right to remove it. Indeed, as
suggested, to the extent that the regulations—or the statute itself—
make the preparer ’s penalty depend on the client’s decision to remove
the disclosure, they are questionable as a policy matter.
    Where a preparer takes a position that is contrary to a revenue
ruling or notice, the preparer is given an additional route by which to
avoid the penalty. In addition to the methods applicable in the case of a
challenge to a regulation, the preparer can also defeat the section 6694(b)
penalty in the case of a revenue ruling or notice if there is substantial


              also supports this interpretation [of a negligence standard].’).
              Negligence is defined as including ‘any failure to make a reasonable
              attempt to comply with the provisions of [the Internal Revenue
              Code].’ I.R.C. § 6662(c); Bailey, 789 F. Supp. at 812–13.
274.       See Treas. Reg. § 1.6694-3(c)(2). In any case where a regulation is
           challenged, it must be made in good faith. See id. This requirement seems
           superfluous in that the penalty applies where a regulation is challenged if
           the position is not supported by a reasonable basis—thus imposing a more
           stringent standard on the preparer than the good-faith standard.
275.       See id.
276.       In the case of a non-signing preparer, a challenge to a regulation supported
           by a reasonable basis is permissible, even if disclosure is not in fact made on
           the return, provided the preparer gives the necessary penalty-related infor-
           mation to the client or, where appropriate, the signing preparer. See id.
277.       See Treas. Reg. § 1.6694-2(d)(3), which is discussed supra.
278.       Note that, if a non-signing advisor gives advice to the taxpayer about
           challenging the validity of a regulation, the preparer need only give the
           taxpayer penalty-related information in order to qualify for the reasonable-
           basis standard. See Treas. Reg. §§ 1.6694-3(c)(3), 1.6694-2(c)(3)(ii). In
           other words, in this context, it is not necessary that disclosure actually be
           made on the return.



                                        4–132
                                       Circular 230                           § 4:13.9

authority for the position, even if disclosure is not made,278.1 as long as
the transaction is not a Reportable Transaction subject to taxpayer
penalty under section 6662A.279

               [D][8] Burden of Proof
   Finally, the final regulations alter the approach taken in the
proposed regulations regarding the burden of proof. Under the
proposed regulations, in the case of a penalty assessment under
section 6694, the preparer was to bear the burden of proof on
various issues.280 In removing this provision from the final regula-
tions, the preamble explains that other Code provisions and case
law will control the burden of proof as well as the burden of
production.281

    § 4:13.9            Proposed Amendment to Sections 10.34(a)
                        and 10.34(e)
    On September 23, 2007, the Treasury Department issued a pro-
posed amendment to sections 10.34(a) and 10.34(e) of the Circular.
The amendment addresses the standards applicable to return pre-
parers and, as the preamble indicates, is designed to bring the Circular
into compliance with the recent amendment to section 6694.
    Under the proposed amendment, in order to comply with the
Circular, a Practitioner who prepares a return or who gives advice
concerning a return position must satisfy one of two standards:
(i) the Practitioner must have a reasonable belief that the tax treatment
of a position is more likely than not the proper tax treatment, or
(ii) the position must have a reasonable basis and it must be ade-
quately disclosed to the Service. In order to satisfy the first of these two
standards, the Practitioner must reasonably, and in good faith, reach
the conclusion (after examining the relevant facts and legal authorities)
that there is greater than a 50% likelihood that the position would be
sustained were the Service to challenge it. The Practitioner may consider
the authorities referenced in Treas. Reg. § 1.6662-4(d)(3)(iii) (dealing


278.1.     But compare Palm Canyon X Investments, LLC, et al. v. Comm’r, T.C.
           Memo 2009-288 (suggesting that the existence of a notice may make it
           more difficult to argue that there was substantial authority).
279.       See Treas. Reg. § 1.6694-3(c)(3).
280.       See Prop. Reg. § 1.6694-2(e).
281.       While the preamble, in referencing case law, does not cite any authority, it
           does cite two Code sections: section 7491(c) for the proposition that the
           Secretary bears the burden of production in any court proceeding involving
           a penalty assessment against an individual; and section 7427 for the
           proposition that the Secretary bears the burden of proof where an assess-
           ment is made against a preparer based on a willful attempt to understate a
           tax liability.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–133
§ 4:13.10             THE CIRCULAR 230 DESKBOOK

with the penalty for the substantial understatement of income tax). The
second standard is satisfied if the position is reasonably based on the
these same authorities. Prior to the proposed amendment, section 10.34
provided that the reasonable-basis standard was satisfied if the position
had a one-in-three chance of being sustained. Under the proposal, the
one-in-three standard will no longer be available.
   Instead, the proposal merely indicates that the reasonable-basis
standard is a relatively high standard and that it is not satisfied where
the position is “arguable” or the claim is “colorable.” As under current
section 10.34, audit-lottery factors may not be considered in deter-
mining whether the reasonable-basis standard has been satisfied.
   It should be emphasized that the proposal would make a significant
change in the standards applicable to a non-signing adviser. Under the
current version of section 10.34, a non-signing Practitioner can qualify
for a lower standard by giving advice about the opportunity to avoid
penalties through disclosure (that is, under the current provision, a
non-signing adviser can avoid the realistic-possibility standard and
qualify instead for the lower, not-frivolous standard by giving the
penalty-related advice). For a parallel rule under the existing regula-
tions under section 6694, see Treas. Reg. § 1.6694-2(c)(3)(ii).
   Surprisingly, under the proposed amendment, a non-signing adviser
can only reduce the applicable standard (from a reasonable belief that
there is a more-likely-than-not chance that the position will be
sustained to the reasonable-basis standard) if disclosure is in fact
made. Thus, it would appear that even if a non-signing adviser gives
the taxpayer penalty-related advice, the Practitioner will remain sub-
ject to the higher standard if the taxpayer should choose not to make
disclosure. As a result, it would seem that, as a practical matter,
prudent non-signing advisers would not be comfortable utilizing the
lower standard unless they were able to verify that the return in fact
contained the necessary disclosure.

   § 4:13.10        Service’s Procedures in Estate and Gift Tax
                    Context with Respect to Section 6694
   In IRS SB/SE Memorandum (SBSE-04-0509-009),281.1 dated May 8,
2009, the Small Business/Self-Employed Division of the IRS provided
interim guidance to IRS Estate Tax Attorneys (who are the IRS employ-
ees charged with auditing United States Gift Tax Returns (Forms 709)
and United States Estate (and Generation-Skipping Transfer) Tax
Returns (Forms 706)) about procedures for the assertion against pre-
parers of such returns of penalties under sections 6694 (relating to



281.1.   This memorandum is reproduced as Appendix EE.



                                 4–134
                                       Circular 230                         § 4:13.10

penalties on paid return preparers) and 6695 (relating to the require-
ment that paid return preparers sign the returns they prepare).281.2
    Among other things, the memorandum instructs IRS Estate Tax
Attorneys that each Form 709 and Form 706 examination is separate
and distinct from the question of return preparer penalties under
sections 6694 and 6695. It also advises that no IRS Estate Tax
Attorney may discuss the penalty with the taxpayer and that only
limited information about the taxpayer may be disclosed to the
preparer. (If the taxpayer is the preparer, then it seems the prohibition
and limitation do not apply.)
    The memorandum expressly advises IRS Estate Tax Attorneys about
the statute of limitations, pointing out that the penalties under sections
6694(a) and 6695 (as opposed, for example, to section 6694(b)) may be
imposed, as a general rule, only within three years of the filing of the
return. It also points out that no penalty may be imposed if there is no
underpayment of tax due and provides guidance where the issue of
additional tax liability is unresolved, such as where the IRS has issued a
statutory notice of tax deficiency, but the tax liability issue is still
unresolved when expiration of the time to assess additional estate tax
is imminent.281.3
    Some detailed guidance is provided about procedures to follow and
forms to file when an IRS Estate Tax Attorney believes that a penalty
might properly be imposed.
    Although not expressly stated, it seems that, as a general rule, IRS
Estate Tax Attorneys are not to use the threat of a preparer penalty to


281.2.     See also LMSB 04-0308009, where such procedures are discussed in the
           non-transfer-tax context. See Treas. Reg. § 1.6695-2 (providing due dili-
           gence rules for preparers of returns claiming the earned income credit and
           imposing due diligence obligations on the preparer ’s firm in such cases).
281.3.     Regulations under I.R.C. § 2053 issued in 2009 provide that no deduction
           may be taken on an estate tax return for certain claims or expenses if they
           are the subject of a contest (or are otherwise contingent). Once the contest
           is resolved, the deduction is allowed (assuming it occurs while the statute
           of limitations is still open). See Treas. Reg. §§ 20.2053-1; 20.2053-4.
           Thus, if the deduction is taken on the return despite a pending contest but
           the claim is resolved before the audit is concluded, the deduction will be
           allowed even though it was improperly taken in the first instance. It would
           appear that the preparer cannot be sanctioned under I.R.C. § 6694 in these
           circumstances because there is ultimately no understatement of tax given
           the availability of the deduction at the time of audit. See Treas. Reg.
           § 1.6694-1(c) (indicating that the I.R.C. § 6694 penalty is only imposed in
           the case of an understatement of tax liability). This raises the question,
           then, as to how the IRS will be able to enforce these new regulations under
           I.R.C. § 2053. Perhaps, the IRS will choose to enforce the I.R.C. § 2053
           regulations via § 10.34 of the Circular. For, unlike I.R.C. § 6694, § 10.34
           imposes sanctions on a Practitioner without regard to whether there is an
           understatement of tax liability.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–135
§ 4:14                  THE CIRCULAR 230 DESKBOOK

obtain concessions with respect to the estate or gift tax return under
examination. It is uncertain whether or not that will happen in a case
where the preparer is also representing the taxpayer in the examina-
tion of the filed return and realizes that a concession that additional
tax is due provides a situation where a preparer penalty may be
imposed and the preparer asks the IRS representative if he or she is
considering seeking to have a preparer penalty imposed.
   In any event, the memorandum may suggest that preparers of gift
and estate tax returns should anticipate an increase in proposed
preparer penalties, keeping in mind that section 6694 was not ex-
panded beyond income tax returns until 2007.

§ 4:14        Section 10.37
    A Practitioner who gives tax advice in writing becomes subject to
the more stringent duties of section 10.37. The duties imposed by
section 10.34 do not, however, become inapplicable simply because
the advice is embodied in a writing. Thus, even though section 10.37
is triggered because written advice is provided, the Practitioner ’s
advice must still satisfy the realistic-possibility standard (or, where
appropriate, the not-frivolous standard).282 Note, however, that, while
section 10.34, in its pre-amended version, applies only where pre-filing
advice is given about a position to be taken on the return, section 10.37
would appear to apply in any case where written tax advice is given—
even presumably where the advice is given after the return has been
filed.283 Thus, in the case of post-return written advice, section 10.37
applies, but not the pre-amended version of section 10.34. On the other
hand, in the case of pre-return written advice, both sections apply.
    What is the practical significance for the Practitioner of avoiding
section 10.34 if section 10.37 remains applicable? A Practitioner who
gives post-return written advice need not, given the inapplicability of
section 10.34 (the pre-amended version of the section), be concerned
about whether the realistic-possibility or not-frivolous standard is
satisfied.284 For section 10.37 does not require the Practitioner to
reach any particular level of confidence before giving advice. 285 This

282.     See section 4:13.1, supra.
283.     In contrast, Circular 230 § 10.35 contains an exception for post-return
         advice.
284.     Nor should such a Practitioner be concerned about the penalties imposed
         by I.R.C. § 6694, which only applies in connection with the preparation of
         a return.
285.     Circular 230 § 10.37 does provide that the Practitioner may not make any
         unreasonable legal assumptions. As will be discussed, however, this merely
         requires an honest assessment of the strengths and weaknesses of the legal
         arguments, but does not require that the Practitioner reach his or her
         conclusions at any particular level of confidence.



                                    4–136
                                       Circular 230                                  § 4:14

less rigorous approach in the post-return context makes sense inas-
much as there is obviously less practical need for the Practitioner to
serve as the system’s gatekeeper when giving post-return advice. This,
in turn, raises the question why section 10.37 should have any
application in the case of post-return advice. Aren’t background ethical
principles (state ethical rules and more general provisions in Circular
230)286 and the potential for malpractice exposure a sufficient con-
straint on the Practitioner giving post-return advice?287 Nonetheless,
under the pending amendment to section 10.34, post-return advice
would become subject to the not-frivolous standard.
    Given the fact that section 10.37 is only triggered where tax advice is
provided in writing, consideration must be given to the meaning of the
term “advice.” Although sections 10.34 and 10.35 are also rendered
inapplicable if advice is not provided, the Circular surprisingly fails to
define the term. Regulations under section 6664, in providing that
taxpayers who rely on professional advice may be able to avoid penalties,
defines the term broadly: any communication, without regard to its
form, that sets for an analysis or conclusion on which a taxpayer actually
relies with respect to penalties imposed under section 6662.288 Thus, if
this definition is utilized in applying the Circular, a Practitioner might
violate its provisions even though he or she could not have reasonably
anticipated that the taxpayer would rely on the information supplied,
provided the taxpayer does in fact rely on it.289
    What if the Practitioner provides the client with a transactional
document or a so-called term sheet that contains tax-relevant
information—does section 10.37 become applicable? Or, similarly,
does a letter of transmittal that accompanies a transactional docu-
ment trigger the section? It would seem that the Practitioner is not
providing advice in any of these cases. 290 Cautious Practitioners
may, however, choose to assume that the section does apply in each
of these cases—and therefore seek to satisfy themselves that such


286.       See Circular 230 § 10.22(a)(3) (requiring Practitioners to exercise due
           diligence as to the accuracy of any written or oral representations made to
           a client regarding a tax matter).
287.       After Circular 230 § 10.35 was originally promulgated, it was amended to
           create an exception for post-return advice. See Circular 230 § 10.35(b)(2)(ii)(C).
           It would seem that consideration ought to be given to the adoption of a similar
           amendment to § 10.37. For ethical rules applicable in the post-return context,
           see ABA Opinion 314.
288.       See Treas. Reg. 1.6664-4(c)(2).
289.       But see Circular 230 § 10.35(b)(5)(i) (indicating that, if a Practitioner has
           no reason to know that the advice will be shared with others, it is not a
           Marketed Opinion and will therefore not be a Covered Opinion on this
           ground).
290.       Cf. Samuels and Wollman, TAX NOTES, Aug. 15, 2005 (indicating that, in
           the context of section 10.35, such documents do not constitute advice).



(Circ. 230 Deskbook, Rel. #12, 3/12)      4–137
§ 4:14                   THE CIRCULAR 230 DESKBOOK

documents comply with the requirements of the section—at least
until Treasury provides further clarification on the meaning of the
term.
   The use of the term “advice” in section 10.37 raises another issue.
If the Practitioner includes a disclaimer to the effect that nothing
stated in the document should be understood to constitute advice and
that the client may not rely on it for any purpose (whether for penalty
protection or otherwise), does section 10.37 become inapplicable? As a
matter of state law, such a disclaimer would in all likelihood be
ineffective as a defense in a malpractice claim and might indeed raise
ethical issues.291 By a parity of logic, it would probably be viewed as
ineffective for purposes of the Circular.292 Indeed, as will be discussed,
in fashioning section 10.35, Treasury intentionally decided that, in
certain cases, Practitioners could not opt out of its provisions by giving
the client a disclaimer concerning penalty protection. There is no
indication that Treasury contemplated the availability of such an
opt-out disclaimer in the context of section 10.37. Nonetheless, it
does seem that a Practitioner ought to be able to provide the client
with a thought-piece memo without becoming subject to section 10.37
(or, for that matter, potential malpractice claims or state law ethical
prohibitions): analyzing on a preliminary basis certain issues and
reaching provisional conclusions, with a statement to the effect
that further research should be undertaken and that it would be
inappropriate for the client to rely on the memo in the absence of
further work.
   Section 10.37, in focusing on written advice, will likely have a
perverse effect on tax practice. Once Practitioners realize that their
ethical duties under the Circular can be lessened—that they can avoid
the more stringent duties that section 10.37 imposes—by giving oral
advice, rather than written advice, they will begin to respond
accordingly. It can be expected that Practitioners will become increas-
ingly disinclined to incorporate their advice in a writing (or an
email293 or perhaps even a voice mail).294 This, of course, will likely


         But see Sheryl Stratton, Fixing Circular 230 Rules Remains High Priority,
         Treasury Says, 2005 TNT 180-2 (Sept. 19, 2005) (indicating that Practi-
         tioner’s unanswered letters, such as the Samuels and Wollman letter, are
         not to be taken as an indication of government policy).
291.     See, e.g., RESTATEMENT (THIRD) OF LAW GOVERNING LAWYERS § 54 cmt. b;
         but see id. § 19 cmt. c (indicating that a lawyer may in certain contexts
         limit the scope of the representation and thereby avoid liability).
292.     But see Treas. Reg. § 1.6664-4(c)(2) (defining advice as something on
         which the client can rely).
293.     Circular 230 § 10.37(a) explicitly defines written advice to include electronic
         communication.
294.     ABA MODEL RULES OF PROF ’L CONDUCT R. 1.0(n) provides that an audio
         is deemed a writing for purposes of the Model Rules.



                                      4–138
                                       Circular 230                                § 4:14

produce enforcement problems for the government in that clients
may well be tempted to take more questionable return positions
after receiving cautionary advice orally, whereas they would
presumably feel more constrained if confronted with the advice in
writing.295
    These enforcement concerns aside, Practitioners who give oral
advice may want to protect themselves from the possibility of mal-
practice claims (or any argument that they violated section 10.34)
predicated on the client’s recollection of what was orally stated at the
time the advice was given. It would seem that Practitioners ought to be
able to secure such protection by recording in the file (as physicians do)
a recitation of the advice provided and any cautions given. Similarly,
where it is anticipated that oral advice may be used by the client to
defend against the imposition of a penalty, documenting it in this
fashion will preclude the Service from questioning whether the
advice had in fact been provided.296 Although section 10.37 does
not address this question, it would seem that a Practitioner who
makes such a record in his or her own file is not giving the client a
writing.297
    As suggested, prudent Practitioners may also want to document in
some fashion their advice about the client’s opportunity to avoid
penalties through disclosure in order to trigger section 10.34’s not-
frivolous standard. While the fact that such advice was given may be
similarly recorded in the file, conservative Practitioners will, as sug-
gested, likely give the disclosure to the client in writing. If section 10.37
is not otherwise applicable, giving such a disclosure to the client in
writing should not trigger the section. For the section appears to
contemplate that the duties it imposes apply with respect to the written
advice given to the client—not necessarily about all advice given with
respect to the transaction. For example, if a Practitioner gives written


295.       See J. Blattmachr, M. Gans & T. Bentley, The Application of Circular 230
           in Estate Planning, 107 TAX NOTES 61 (Apr. 4, 2005).
296.       Under I.R.C. § 6664, taxpayers are permitted to defeat a penalty on the
           basis of professional advice. See Treas. Reg. § 1.6664-4. Neither the Code
           nor the regulation requires that the advice be in writing. In Long Term
           Capital Holdings v. United States, 330 F. Supp. 2d 122 (D. Conn. 2004),
           aff ’d, 150 F. App’x 40 (2d Cir. 2005) (unpublished), the district court
           refused to permit the taxpayer to base a § 6664 defense on oral advice even
           though the Practitioner had sent himself a contemporaneous email con-
           firming the advice. The court concluded that the taxpayer failed to prove
           that the oral advice had sufficiently considered the issues and had not
           made any unreasonable assumptions. See 330 F. Supp. 2d at 206–08. Had
           the email set forth the analysis in full and had it considered all of the issues
           without making any unreasonable assumptions, the taxpayer ’s § 6664
           defense would have presumably succeeded.
297.       See id.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–139
§ 4:14.1                   THE CIRCULAR 230 DESKBOOK

advice about whether the transaction will produce a deduction and gives
oral advice about the year in which the deduction may be taken, the
section would appear to apply only with respect to the advice about the
availability of the deduction but not the advice about the timing issue. If
this reading is correct, giving written advice about disclosure would
certainly not render substantive oral advice subject to the section.
Moreover, even if this reading proves to be incorrect, any argument
that a Practitioner who gives disclosure advice in writing in order to
make certain that section 10.34’s not-frivolous standard applies thereby
becomes subject to section 10.37 would seem untenable. Indeed, given
the government’s interest in encouraging Practitioners to give disclosure
advice—as evidenced by its willingness to subject Practitioners to the
lower not-frivolous standard when they do so—it would be surprising if
it were to take the position that doing so triggers additional duties under
section 10.37.

   § 4:14.1            Section 10.37’s Heightened Duties
   In essence, the section imposes seven critical duties. First, the
Practitioner may not make unreasonable legal assumptions. Second,
the Practitioner may not make unreasonable factual assumptions.
Third, the Practitioner may not unreasonably rely on representations
or statements made by others. Fourth, the Practitioner must consider
all relevant facts in formulating the advice. Fifth, the Practitioner is
required to apply the law to the facts. Sixth, the Practitioner must
reach conclusions regarding the law and facts. And, seventh, as in the
case of section 10.34, constraints are imposed regarding the considera-
tion of audit-lottery issues.
   Interestingly, section 10.37 does not require that the written advice
reflect the fact that the duties it imposes were in fact discharged. 298 For
example, the writing might state the Practitioner ’s ultimate conclu-
sion (a deduction can be taken for an item as a medical expense)
without stating any of the facts or considering any of the
legal authorities. As long as the Practitioner in fact properly considered
the law and the facts and otherwise discharges the duties that
the section imposes, there is no violation of the section.
Nonetheless, cautious Practitioners may, in many cases, decide to
write a backup memo for the file supporting the conclusions reached
in the writing given to the client. If this practice is followed, it


298.       The preamble states: “Section 10.37, unlike § 10.35, does not require that
           the Practitioner describe in the written advice the relevant facts (including
           assumptions and representations), the application of the law to those facts,
           or the Practitioner ’s conclusion with respect to the law and the facts.” See
           69 Fed. Reg. 75,839-01 (Dec. 20, 2004). For a discussion of Circular 230
           § 10.35, see section 4:15, infra.



                                        4–140
                                       Circular 230                            § 4:14.2

would seem more difficult for the government to raise questions
about the Practitioner ’s compliance with the section. On the other
hand, in the case of a limited inquiry, such a backup memo would
seem to be unnecessary. For example, if a client sends an email
asking about the deductibility of mortgage interest on a residence
and the answer can be found in the Code itself, an immediate
response by email would not (or at least should not) require a backup
memo.299

    § 4:14.2            Unreasonable Legal Assumptions
    Section 10.37 provides that the Practitioner may not make un-
reasonable legal assumptions. In imposing this duty, the section
unfortunately fails to elaborate on the nature of the duty or to provide
contours. It is therefore useful to consider how the similar concept in
Treasury Regulations section 1.6664-4(c)(1)(ii) has been applied. Under
the regulation, a taxpayer seeking to defend against the imposition
of a penalty under section 6662 on the ground that the taxpayer
reasonably relied in good faith on professional advice must establish,
among other things, that the advice was not based on an unreasonable
legal assumption. In Long Term Capital Holdings v. United
States,300 the taxpayer argued that it had reasonably relied in good
faith on the opinion it had received from a law firm (King & Spaulding).
The district court rejected the taxpayer ’s argument. It concluded that
the opinion was based on unreasonable legal assumptions301 in that it
failed: (i) to consider pertinent Second Circuit authority (even though,
because of the taxpayer ’s residence, an appeal to the Second Circuit



299.       The preamble states: “The scope of the engagement and the type and
           specificity of the advice sought by the client, in addition to all other facts
           and circumstances, will be considered in determining whether a Practi-
           tioner has failed to comply with the requirements of § 10.37.” See 69 Fed.
           Reg. 75,839-01 (Dec. 20, 2004).
300.       Long Term Capital Holdings v. United States, 330 F. Supp. 2d 122
           (D. Conn. 2004), aff ’d, 150 F. App’x 40 (2d Cir. 2005) (unpublished).
           See also Michael L. Cook & Corby Brooks, Determining Whether
           Substantial Authority Exists in Facts and Circumstances Cases, J. TAX’N
           (Sept. 2009) (discussing the different standards used by the courts in
           assessing whether substantial authority is present after the taxpayer has
           lost on the substantive issue based on a finding of fact).
301.       The court first concluded that the opinion was not received before the
           filing of the return and that it therefore could not serve as a basis for
           invoking § 6664 as a defense to the § 6662 penalties. It then went on to
           reach the alternative conclusion that, even if timely received, it was
           insufficient because it was based on unreasonable legal assumptions. See
           Long Term Capital Holdings, 330 F. Supp. 2d at 209. See also 106 LTD.,
           David Palmlund v. Comm’r, 136 T.C. No. 3 (2010) (rejecting a section
           6664 defense based on the quality of the legal opinion).



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–141
§ 4:14.2                   THE CIRCULAR 230 DESKBOOK

would be likely), and (ii) to analyze carefully a critical Supreme Court
decision.302
   While it may seem odd that a taxpayer ’s defense under
section 6664 can be undermined by deficiencies in the Practitioner ’s
analysis, 303 the decision in Long Term Capital Holdings does
provide some guidance about how section 10.37’s duty not to make
unreasonable legal assumptions will be applied. Thus, the duty would


302.       The district court also criticized the opinion because it relied on the
           taxpayer ’s representation that there was a business purpose for the
           transaction without analyzing the issue. See Long Term Capital Holdings,
           330 F. Supp. 2d at 210.
               While, unlike section 10.35, section 10.37 does not explicitly require
           the Practitioner to consider judicial doctrines, advice that fails to take these
           doctrines into account may violate section 10.37’s prohibition on making
           unreasonable legal assumptions. Thus, whenever written advice is pro-
           vided, the Practitioner should include these doctrines in the analysis
           (though, as indicated, there is no requirement in section 10.37 that the
           analysis be in writing).
303.       Long Term Capital Holdings raises the question whether it is appropriate to
           hold the taxpayer responsible for a Practitioner ’s poor analysis. The
           district court read the regulation (Treas. Reg. § 1.6664-4(c)(1)(ii)) as
           precluding a taxpayer from invoking the § 6664 penalty defense predicated
           on professional advice that is based on unreasonable legal assumptions.
           Literally read, the regulation does appear to make the taxpayer bear the
           burden of the Practitioner ’s failures. Perhaps this is an appropriate alloca-
           tion of responsibility, in that the taxpayer ’s inability to invoke the § 6664
           defense by reason of the Practitioner’s failure should presumably result in
           the Practitioner being held ultimately responsible in a malpractice action.
           In affirming the district court decision, however, the Second Circuit, in its
           unpublished opinion, implicitly refused to endorse this understanding of
           the regulation. The court read the district court decision as rejecting the
           taxpayer’s § 6664 argument on the ground that the inadequacies in the
           opinion revealed that it was based on outcome-determinative assumptions
           suggested by the taxpayer. See Long Term Capital Holdings, 150 F. App’x at
           n.1. In other words, the Second Circuit, unlike the district court, refused to
           decide whether the regulation should be given a literal reading. Compare
           Southgate Master Fund, L.L.C. v. United States, 659 F.3d 466 (5th Cir.
           2011) (indicating that, in determining whether a legal opinion contains
           unreasonable assumptions for purposes of section 6664, the focus should
           be on the knowledge of the taxpayer and not the knowledge of the advisor).
           Instead, it read the district court’s negative assessment of the professional
           advice as implying that the taxpayer was culpable. See also Stobie Creek
           Invs. v. United States, 82 Fed. Cl. 636 (Fed. Cl. 2008) (adopting in effect a
           similar inference). See also Patricia A. Kelly v. Comm’r, T.C. Summ. Op.
           2010-4 (rejecting the taxpayer ’s I.R.C. § 6664 defense to a penalty because
           the taxpayer ’s reliance on the return preparer was unreasonable given that
           she failed to provide the preparer with all relevant documents). In Canal
           Corp. & Subsidiaries v. Comm’r, 135 T.C. No. 9 (2010), the court refused
           to permit the taxpayer to invoke the I.R.C. § 6664 defense, citing Long
           Term Capital and pointing to what it called “specious legal assumptions”
           in a so-called “should opinion.” The significance of this decision is



                                         4–142
                                       Circular 230                            § 4:14.2

appear to require the Practitioner to make a full and accurate assess-
ment of the legal arguments supporting the taxpayer ’s position and
the legal arguments supporting the government’s position. If, for
example, the Practitioner ’s opinion fails to consider authority that
would support the government’s position, a violation of the section
would occur. Or if the Practitioner considers pro-government authority
but inappropriately minimizes the risk that the government could


           somewhat unclear. On the one hand, the court bases its conclusion on the
           unreasonable legal assumptions made in the opinion. But, on the other
           hand, the court in n.16 explains that the decision should not be read as
           requiring a taxpayer to secure a second legal opinion in order to invoke
           I.R.C. § 6664. Instead, the court says in the footnote that the Practitioner’s
           inherent conflict was critical to its decision (the Practitioner had received
           what the court deemed to be an excessive fee of $800,000 for the opinion–
           the court concluding that the opinion was in the nature of a policy insuring
           against the tax risk). Parenthetically, in prior cases cited by the court, the
           I.R.C. § 6664 defense was rejected because the taxpayer had relied on an
           opinion procured by a promoter of the transaction. See 106 LTD., David
           Palmlund v. Comm’r, 136 T.C. No. 3 (2010) (defining the concept of
           promoter in the context of the notion that a legal opinion supplied by a
           promoter is not sufficient to defeat a penalty.) Here, the court extends
           these cases to apply where the Practitioner ’s conflict is predicated on an
           excessive fee for rendering the opinion. For an article that explores in
           policy terms the relationship between the Circular and the section 6664
           defense, see Deborah H. Schenk, The Circular 230 Amendments: Time to
           Throw Them Out and Start Over, 110 TAX NOTES 1311, 2006 TNT 54-24
           (Mar. 20, 2006). Compare Emblez Longoria v. Comm’r, T.C. Memo 2009-162
           (indicating that a taxpayer may be able to defeat a penalty by invoking
           § 6664 even where the taxpayer ’s CPA had failed to adequately examine
           the issue). It should also be noted that, in Thompson v. Comm’r, 499
           F.3d 129 (2d Cir. 2007), the court reversed the Tax Court and remanded
           for a determination whether the estate had reasonably relied on an
           appraisal it had secured, thus suggesting that an estate does not auto-
           matically immunize itself from valuation penalties by securing an ap-
           praisal. See also Whitehouse Hotel Ltd. Partnership v. Comm’r, 131 T.C.
           112 (2008) (indicating that a penalty could be imposed despite the
           reliance on an appraisal in the case of an income tax deduction for a
           charitable contribution, which is the subject of special rules under
           I.R.C. § 6664(c)). See Rovakat, LLC v. Comm’r, T.C. Memo 2011-225
           (rejecting a section 6664 defense in the face of two legal opinions, with the
           court indicating that it will scrupulously examine such defenses in the tax
           shelter context); Candyce Martin 1999 Irrevocable Trust v. United States, __
           F.3d __, 2011 WL 4635048 (N.D. Cal. 2011) (rejecting section 6664 defense
           in tax shelter context because legal opinion was “too good to be true”);
           Gustashaw, Jr. v. Comm’r, T.C. Memo 2011-195 (holding the taxpayer
           negligent and rejecting a section 6664 defense where the taxpayer had relied
           on a law firm compensated by the promoter of the shelter). But see Van
           Wickler v. Comm’r, T.C. Memo 2011-196 (permitting the taxpayer to invoke
           section 6664 where he had relied on his CPA in connection with a tax shelter
           given the court’s finding that the CPA had been duped by the promoter of the
           shelter).



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–143
§ 4:14.2                   THE CIRCULAR 230 DESKBOOK

successfully invoke it in connection with the client’s transaction, a
violation would also occur.304 In neither case, however, would the
violation necessarily lead to a sanction or discipline.305
    What is the relationship between the realistic-possibility standard
(or the not-frivolous standard) in section 10.34 and the duty under
section 10.37 not to make unreasonable legal assumptions? The
question is an interesting one given the fact that section 10.37, unlike
section 10.34, does not contain a substantive standard. In other
words, it simply prohibits the Practitioner from making an unreason-
able legal assumption, but does not require the Practitioner to state an
opinion at any particular confidence level. Although the Circular does
not shed any light on this question, it would seem that the duty not to
make unreasonable legal assumptions requires: (i) an appropriate
consideration of relevant authorities regarding the position the tax-
payer intends to take, and (ii) a fair and honest judgment about the
likelihood that the position will be sustained.
    For example, a Practitioner who has considered all relevant author-
ity might conclude in a written opinion that the return position the
client intends to take is not a frivolous one. Assuming it is determined
that the Practitioner’s not-frivolous assessment is accurate, there is no
violation of the duty not to make unreasonable legal assumptions. On
the other hand, if the Practitioner stated that the position was more
likely than not to be sustained and if this assessment were determined
to be inflated—that is, the relevant authorities warranted a not-
frivolous opinion but not a more-likely-than-not opinion—the Practi-
tioner would be viewed as having made an unreasonable legal assump-
tion.306 Practitioners might also be subject to other types of sanctions


304.       See also Circular 230 § 10.51(k) (indicating that, if a Practitioner were to
           assert a position known to be unwarranted under existing law, the
           Practitioner could be sanctioned for providing a false opinion).
305.       See Circular 230 § 10.51(l) (suggesting that sanctionable conduct entails a
           knowing or reckless violation or gross incompetence or involves a pattern
           of misconduct). Note that, in describing sanctionable conduct, this section
           is not exhaustive; it merely describes certain kinds of misconduct that
           would be sanctionable. It would appear therefore that the government
           might be able to seek a sanction successfully even if it is not the type of
           conduct described in the section.
306.       The violation would not necessarily result in a sanction. Circular 230
           § 10.50 provides for sanctions (including censure and disbarment) where,
           as prescribed in § 10.51 or § 10.52, the conduct is engaged in knowingly (or
           willfully), recklessly or with gross incompetence. Circular 230 § 10.51(a)(13)
           focuses on Practitioners who provide false or incompetent opinions. It
           indicates that a Practitioner who asserts a position that is known to be
           unwarranted under existing law is guilty of the kind of conduct that is
           sanctionable under § 10.50. Thus, in the example in the text, the violation
           would only be sanctionable if it could be found that the Practitioner knew the
           position was unwarranted.



                                        4–144
                                       Circular 230                        § 4:14.4

(other than those imposed by the Circular) when rendering an inflated
opinion.307
   Even though, unlike section 10.34, section 10.37 does not require
that the Practitioner ’s opinion be stated at any particular level of
confidence, it does contain the same kind of audit-lottery prohibition
that section 10.34 imposes. Thus, a Practitioner may not rely on audit-
lottery factors in forming the opinion. So, in the example just consid-
ered, the Practitioner could not, consistent with section 10.37, consider
in reaching the not-frivolous conclusion—or the more-likely-than-not
conclusion—the probability that the issue would be noticed on audit.

    § 4:14.3            Unreasonable Factual Assumptions
   Like section 10.35, section 10.37 provides that Practitioners may
not make unreasonable factual assumptions. While section 10.37 does
not elaborate, section 10.35 does provide some explanation of the rule.
Presumably, the prohibition in section 10.37 can be read as incorpor-
ating the explanation provided in section 10.35. Thus, as section 10.35
indicates, a Practitioner may not, consistent with section 10.37,
accept at face value the client’s conclusory representation that there
is a valid business purpose for entering into the transaction. 308 The
Practitioner must instead make further inquiry to determine the
nature of the business purpose.309 In addition, the Practitioner may
not rely on the client’s business-purpose representation if the Practi-
tioner knows or should know that it is incomplete or inaccurate. 310
In contrast, it would seem that, under section 10.34, as long as the
Practitioner does not have information suggesting the business-
purpose representation is inaccurate or incomplete, the Practitioner
could accept the representation without further inquiry.

    § 4:14.4            Type of Engagement
   In determining whether the Practitioner has complied with the
section, the scope of the engagement, as well as the nature of the
advice sought by the client, can be relevant. 311 The section appears to


307.       In the KPMG indictment, one of the allegations was that a more-likely-
           than-not opinion was provided by a Practitioner who did not sincerely
           believe it to be accurate. Also, such a Practitioner might be sanctioned
           under state ethics rules for giving a false opinion. See ABA Opinion 346.
308.       See Circular 230 § 10.35(c)(1)(ii), (iii).
309.       See id.
310.       See id.
311.       See T.D. 9165 (indicating in the preamble that “The scope of the engage-
           ment and the type and specificity of the advice sought by the client, in
           addition to all other facts and circumstances, will be considered in
           determining whether a Practitioner has failed to comply with the require-
           ments of § 10.37.”).



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–145
§ 4:15                   THE CIRCULAR 230 DESKBOOK

contemplate that a Practitioner who renders an extensive opinion after
doing a substantial amount of research and analysis will be held to
higher standard than a Practitioner who gives a quick, unconsidered
response to a client’s email inquiry. Similarly, the section calls for
heightened scrutiny where the Practitioner has reason to know that
the opinion will be used by others as a basis for recommending a
transaction “a significant purpose of which is the avoidance or evasion
of any tax.”

§ 4:15        Section 10.35
   There are two issues at the core of section 10.35. The threshold
question is one of definition. In what circumstances will the Practi-
tioner ’s advice be considered a Covered Opinion? The second question
is one of consequence. Assuming the advice constitutes a Covered
Opinion, what are the requirements under the section that the
Practitioner must satisfy in rendering it?312 Since the section imposes
greater duties on the Practitioner than section 10.37 (or section 10.34),
Practitioners will ordinarily prefer to avoid Covered Opinion status.
The discussion will first focus on the question of definition and then
turn to the question of consequences.

   § 4:15.1          What Is a Covered Opinion?
    A Covered Opinion is written advice (including electronic commu-
nication) concerning a federal tax issue313 if it falls within any one of six
categories, unless it is the subject of a so-called exclusion.314 Inasmuch as
the written-advice trigger in this section and section 10.37 is the same, the
discussion of section 10.37 should be consulted. Simply put, if the
Practitioner’s opinion is either not in writing or does not concern a
federal tax issue, it is not a Covered Opinion and need not comply with
the requirements of section 10.35.315 Thus, for example, even where a
client seeks an opinion for penalty protection purposes, the Practitioner
may be able to provide it while avoiding the need to comply with

312.     Circular 230 § 10.35 is patterned after ABA Opinion 346, which imposed
         certain requirements on Practitioners providing an opinion regarding tax
         shelters. Where advice is considered a Covered Opinion under § 10.35, the
         requirements that the Practitioner must satisfy in rendering the advice are
         similar to the requirements in the ABA opinion.
313.     A federal tax issue is defined as “a question concerning the federal tax
         treatment of an item of income, gain, loss, deduction, or credit, the
         existence or absence of a taxable transfer of property, or the value of
         property for Federal tax purposes.” See Circular 230 § 10.35(b)(3).
314.     See Circular 230 § 10.35(b)(2)(ii), discussed infra (indicating that certain
         opinions constituted “Excluded Advice”).
315.     But see Circular 230 § 10.22 (imposing a due diligence obligation on
         Practitioners without regard to whether a writing is involved).



                                     4–146
                                       Circular 230                            § 4:15.2

section 10.35’s requirements as long as the advice is not given in
writing.316
   Advice is within the scope of the first two categories if the tax issue
arises from:
    (1)   a transaction that is the same, or substantially similar to, a
          transaction identified by the Service as a Listed Transaction
          pursuant to Code section 6011,317 or
    (2)   an investment, arrangement, plan, partnership or other entity
          having as its principal purpose the avoidance or evasion of any
          tax imposed under the Code.318
   Advice is within the scope of the remaining four categories if the tax
issue arises from an investment, arrangement, plan, partnership or
other entity having as a significant purpose the avoidance or evasion of
any tax imposed under the Code and the opinion is:
    (3)   a reliance opinion;
    (4)   a Marketed Opinion;
    (5)   subject to Conditions of Confidentiality; or
    (6)   subject to Contractual Protection.
   Each of these six categories is analyzed below.

    § 4:15.2            Listed-Transaction Category
   The scope of the first category, the Listed-Transaction category, is
not uncertain. If the Service has identified the transaction in pub-
lished guidance as a Listed Transaction,319 any written advice con-
cerning a federal tax issue arising from the transaction constitutes a
Covered Opinion unless it qualifies as excluded advice (discussed


316.       As indicated in the discussion of this issue in the context of Circular 230
           § 10.37, if the Practitioner were to orally advise the client that there was a
           reasonable basis for the return position, this should enable the client to
           invoke successfully I.R.C. § 6664 and thereby defeat the I.R.C. § 6662
           penalty. In order to establish that the advice was in fact given, the
           Practitioner should consider a backup memo to the file.
317.       See Treas. Reg. § 1.6011-4(b)(2) (defining Listed Transaction). See also
           infra for a further discussion of Listed Transactions.
318.       See United States v. Thompson/Ctr. Arms Co., 504 U.S. 505, 511 n.4
           (1992) (distinguishing between the right of a taxpayer to legally avoid or
           minimize tax liability and illegal tax evasion in violation of the Code).
319.       In terms of defining a Listed Transaction, Circular 230 § 10.35(b)(2)(i)(A)
           cross-references Treas. Reg. § 1.6011-4(b)(2). The regulation defines a
           Listed Transaction as one determined by the Service to be a tax-avoidance
           transaction and identified by the Service in published guidance as a Listed
           Transaction. This is to be distinguished from so-called Reportable



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–147
§ 4:15.3                   THE CIRCULAR 230 DESKBOOK

below).320 Only where the Practitioner must decide whether the
transaction is substantially similar to a Listed Transaction is any
judgment required about categorizing the advice. Note that, if the
Service identifies the transaction as a Listed Transaction after the
advice is rendered, it does not thereby become a Covered Opinion.

   § 4:15.3            Principal-Purpose Category
   Unless the advice qualifies for the safe harbor or constitutes
excluded advice, a written opinion concerning a federal tax issue
constitutes a Covered Opinion where the arrangement or plan has
tax avoidance or evasion as its principal purpose. Even if the advice
clearly states that the client may not rely on it for penalty protection
purposes, it is nevertheless a Covered Opinion and must comply with
section 10.35. As will be discussed, however, if the advice does not
reach any conclusion supporting the taxpayer ’s position, it will con-
stitute excluded advice that need not comply with the section. 321
Thus, for example, assuming the safe harbor does not apply, written
advice given about a federal tax issue concerning a principal-purpose
transaction is a Covered Opinion even if the Practitioner merely
concludes that a return position is not frivolous and even if the advice
warns that it cannot be used for penalty protection purposes.
   Unlike the Listed-Transaction category, the scope of the second
category, the principal-purpose category, is inherently uncertain, given
its focus on the client’s subjective motivation. It requires the Practi-
tioner to make a difficult determination as to the client’s purpose in
entering into the transaction. In the vast majority of cases where tax
advice is sought before the transaction is consummated, the client’s
desire to reduce or avoid tax will be apparent. After all, the very fact
that the client is seeking pre-transaction advice suggests that a
tax-related motive is substantial. Nonetheless, if, as will typically be
the case, the client has more than one motivation, the Practitioner will
have the difficult task of determining which of the motivations is the

           Transactions, which the Service does not identify as listed but are
           nonetheless subject to the reporting requirements under the regulation.
           See Treas. Reg. § 1.6011-4(b)(3), (4), (5), (6) and (7) (defining non–Listed
           Transactions that are reportable).
320.       Under Circular 230 § 10.35(b)(2)(ii), an exception is created for certain
           kinds of advice. Thus, for example, if the Practitioner gives written
           advice concerning a Listed Transaction to a client after the return has
           been filed solely for use by the client, the advice is not a Covered Opinion.
           See Circular 230 § 10.35(b)(2)(ii)(C). Similarly, if the advice concerning the
           Listed Transaction reaches a negative conclusion (i.e., does not resolve the
           tax issue in the client’s favor), it is not a Covered Opinion. See Circular
           230 § 10.35(b)(2)(ii)(E). These exceptions are discussed further below.
321.       See Circular 230 § 10.35(b)(2)(ii)(E). Excluded advice is discussed further
           below.



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                                       Circular 230                          § 4:15.3

most important, or principal, one.322 In the case of post-transaction
advice, the tax-related motive may tend to be less substantial. If, for
example, after incurring a travel cost, the client asks the Practitioner
whether it is deductible, the client’s tax motive in incurring the travel
cost would not appear to be the principal motive—even though the
client has a tax-related motive in seeking the advice. In other words,
in considering the client’s principal purpose, the Practitioner must
focus on the client’s purpose for entering into the transaction, rather
than the client’s purpose in consulting the Practitioner.
   This could have proven to be particularly difficult for Practitioners
who work in the estate planning area, where tax avoidance is often the
client’s predominant, if not exclusive, motivation. Traditional estate
planning covers the transmission of property at death but deals with
much more, including choice of guardians for minor children; selec-
tion of other fiduciaries; planning for successive management of a
closely held business; burial instructions; marital arrangements; and
retirement planning. Almost always, for individuals of significant
means, it includes planning to reduce gift, estate, and generation-
skipping transfer taxation. Indeed, everyday decisions, such as provid-
ing for the education or healthcare of descendants, involve tax
considerations—from establishing educational accounts under Code
section 529 to paying tuition for another directly to an educational
institution so as to fall under the nontaxable transfer rule of Code
section 2503(e) to avoid gift tax. The timing and form of so-called
annual exclusion gifts to a loved one may be motivated by a desire to
avoid the gift tax (or perhaps the generation-skipping tax). Structuring
of wills and trusts often is dictated primarily by tax considerations,
such as having a trust contain terms so it may qualify for the marital
deduction or making a bequest to use the taxpayer ’s remaining estate
tax exemption in a manner so that the bequest will not be included in
the gross estate of the taxpayer ’s surviving spouse (or perhaps a
descendant).
   Is tax avoidance the principal purpose, within the meaning of the
Circular, of those kinds of typical estate-planning arrangements or
transactions? One might, it seems, reasonably argue that tax avoidance
is secondary to the non-tax purpose in each of the posited cases. For
example, it is certainly arguable that the tax motive in making an
annual-exclusion gift is not as important as the desire to make a gift to


322.       Section 10.35(b)(10) defines “principal purpose” as the “purpose that
           exceeds any other purpose” for entering into the investment, partnership,
           entity, plan or arrangement. Under a somewhat similar test used for
           purposes of determining whether a sale generates capital gain, see Malat
           v. Riddell, 383 U.S. 569 (1966); disputes between taxpayers and the Service
           frequently cannot be resolved without litigation.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–149
§ 4:15.4                   THE CIRCULAR 230 DESKBOOK

the donee. But, perhaps, such an argument might be more difficult to
maintain when an arrangement that is specifically designed to avoid tax,
such as a grantor retained annuity trust (GRAT) or a qualified personal
residence trust (QPRT), is employed. Fortunately, the safe harbor will
prevent advice concerning many of these transactions from falling
within the scope of section 10.35.

   § 4:15.4            Safe Harbor
   Perhaps recognizing the practical difficulties in determining a
client’s principal motivation, the Treasury has created an important
safe harbor. As originally promulgated, section 10.35 would have
applied even in the case of a noncontroversial transaction if the
taxpayer’s principal purpose was tax avoidance or evasion. For example,
if a Practitioner had recommended an annual-exclusion gift, any
written advice about the transaction would have been subject to the
Covered Opinion rules if, as seems somewhat likely, the taxpayer ’s
principal purpose was tax avoidance. Apparently, recognizing that it
would be inefficient to apply the rules when the Code contemplates the
tax benefit in question, Treasury added a clarification to the term
“principal purpose” that is designed to narrow the rules’ focus.323 In
effect, the clarification creates a safe harbor. If a transaction has as its
purpose the “claiming of tax benefits in a manner consistent with the
statute and Congressional purpose,” it will not be treated as a
principal-purpose transaction.324 Thus, an annual-exclusion gift moti-
vated solely by a tax-avoidance purpose is not subject to section 10.35,
given Congress’s intent to permit the exclusion without regard to the
taxpayer ’s motive.325
   As a matter of well-ingrained substantive law, where there is literal
compliance with the Code, the Service may nonetheless argue that the
taxpayer should not be permitted the benefit sought on the ground
that it would be inconsistent with Congress’s purpose.326 In creating
two prongs—requiring consistency with both the Code and Congress’s

323.       See Circular 230 § 10.35(b)(10), added May 18, 2005.
324.       Even though, under the safe harbor, it will not be treated as a principal-
           purpose transaction, it may nonetheless, as a theoretical matter, be a
           Covered Opinion assuming tax avoidance is a significant purpose. For the
           safe harbor does not apply in the case of a significant-purpose transaction.
           Thus, for example, as will be discussed, if the advice reaches a more-likely-
           than-not conclusion on any Significant Federal Tax Issue, Circular 230
           § 10.35 apparently applies even though the tax benefit appears to be
           consistent with the Code and its purpose—though, in such a case, it seems
           unlikely that a Significant Federal Tax Issue would be involved.
325.       See Estate of Cristofani v. Comm’r, 97 T.C. 74 (1991) (indicating that the
           taxpayer’s motive is irrelevant).
326.       See Gregory v. Helvering, 293 U.S. 465 (1935); see also Santa Monica
           Pictures LLC v. Comm’r, T.C. Memo 2005-104.



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                                       Circular 230                           § 4:15.4

purpose—the safe harbor may be understood as seeking to mirror this
substantive rule. Not explicitly referencing the substantive rule, how-
ever, the preamble indicates that the contours of the safe harbor were
borrowed from a regulation dealing with penalties. 327
   While the introduction of the safe harbor was a welcome develop-
ment, questions will inevitably arise about its application when the
meaning of a Code provision is unsettled. On one hand, it would seem
that, if the IRS has conceded the issue in published guidance (for
example, in a revenue ruling), the Treasury should be precluded from
arguing that an outcome favoring the taxpayer is inconsistent with the
terms of the statute or Congress’s purpose.328 On the other hand,
when the IRS has not made such a concession, the analysis is more
difficult. If, for example, the IRS has issued a series of taxpayer-friendly
private letter rulings329—but there is no decision or published guid-
ance on the issue—can a Practitioner take the view that the rulings are
equivalent to a published revenue ruling in applying the safe harbor?
Or if there is a split in the circuits about the meaning of a provision,
can a Practitioner rely on language in a taxpayer-friendly decision to
the effect that the Code contemplates the benefit in question? Or what
if the circuit in which the taxpayer resides has rejected the IRS’s
position while other circuits have adopted it?330 In short, while it
would seem that Practitioners should be able to treat an IRS conces-
sion in published guidance as a definitive resolution of the Code’s
meaning, the scope of the safe harbor remains unclear when the issue
is unsettled.331


327.       See Treas. Reg. § 1.6662-4 (adopting a similar safe harbor for taxpayers
           seeking to avoid the penalties under I.R.C. § 6662 in the case of a tax
           shelter).
328.       The Tax Court has held that, as long as a taxpayer-friendly revenue ruling
           has not been revoked, it will not permit the IRS to make a contrary
           argument. See Rauenhorst v. Comm’r, 119 T.C. 157 (2002); Baker v.
           Comm’r, 122 T.C. 143 (2004); Dover v. Comm’r, 122 T.C. 324 (2004).
           But see Black & Decker Corp. v. United States, 436 F.3d 431 (4th Cir.
           2006) (intimating that a taxpayer-friendly revenue ruling may not be
           binding on the Service). For a further discussion of this issue, see
           chapter 1 of this treatise.
329.       Neither a private letter ruling nor a National Office technical advice
           memorandum may be cited or used as precedent. I.R.C. § 6110(k)(3).
           On the other hand, it may constitute substantial authority for purposes of
           I.R.C. § 6662. See Treas. Reg. § 1.6662-4(d).
330.       Cf. Long Term Capital Holdings v. United States, 330 F. Supp. 2d 122
           (D. Conn. 2004), aff ’d, 150 F. App’x 40 (2d Cir. 2005) (unpublished)
           (finding an opinion secured by the taxpayer from counsel problematic in
           terms of a penalty defense in part because it failed to consider authority in
           the circuit where the taxpayer resided).
331.       All of the examples provided in Treas. Reg. § 1.6662-4 are of the clear-cut
           variety.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–151
§ 4:15.4                   THE CIRCULAR 230 DESKBOOK

    The preamble indicates that the safe harbor is borrowed from the
exception in Treasury Regulations section 1.6662-4(g)(2)(ii). Perhaps,
therefore, a better understanding of the contours of the safe harbor can
be obtained by examining it through the prism of that regulation.
Under section 6662, a taxpayer who invests in a tax shelter must
satisfy a more rigorous standard to avoid the substantial understate-
ment penalty. The regulation defines the term “tax shelter” with
reference to the taxpayer ’s principal purpose in entering into the
transaction.332 In the language borrowed by the Circular, the regula-
tion goes on to provide that a transaction will not be treated as a tax
shelter if the transaction has as its purpose the claiming of “tax
benefits in a manner consistent with the statute and Congressional
purpose.” Although the regulation provides no further clarification as
to the meaning of that phrase, it does contain a list of examples of
qualifying transactions or elections: investments in tax-exempt bonds
designed to qualify for the exclusion under section 103; investments
designed to produce accelerated depreciation deductions under section
168; investments designed to produce percentage depletion deductions
under sections 613 and 613A; investments designed to produce a
deduction for intangible drilling expenses under section 263(c); estab-
lishment of a qualified retirement plan in accordance with sections
401–09; or subchapter S elections.
    Given the nature of the items included in that list, one might
reasonably infer that only transactions that the Code explicitly vali-
dates can qualify. One might further infer that, because the Circular
borrows the concept from the regulation, that limited interpretation of
the regulation should apply with equal force in the context of the
Circular ’s safe harbor. In other words, transactions will qualify for the
safe harbor under this view only if the Code explicitly validates the tax
benefit in question. Thus, an annual-exclusion gift333 would qualify
for the safe harbor because the Code explicitly validates the exclusion.
    Even assuming that this limited interpretation of the safe harbor is
correct, questions still remain. Consider, for example, the application
of the safe harbor in the case of a grantor retained annuity trust (GRAT).
Section 2702 explicitly authorizes the use of a GRAT. It would seem,
therefore, that advice concerning a GRAT would fall under the safe
harbor. But what if the GRAT is structured so that the value of the
remainder is zeroed out? The IRS has indicated that, in its view,
Congress did not contemplate that taxpayers would be permitted to


332.       The statute no longer uses the principal-purpose test, but rather a
           significant-purpose test. The regulation has not yet been conformed to
           that Code change.
333.       See I.R.C. § 2503(b) (permitting an exclusion for certain gifts for gift tax
           purposes).



                                       4–152
                                       Circular 230                       § 4:15.4

zero out a GRAT.334 The question thus becomes whether, in the context
of a tax benefit the Code explicitly authorizes, the safe harbor can be
rendered inapplicable because an unsettled issue is implicated.
    As another example, consider an annual-exclusion gift of a limited
partnership interest. What if, as in Hackl v. Commissioner,335 under
the partnership agreement, a sale of the gifted interest by the donee
would not confer full partnership status on the purchaser (for example,
the purchaser would become a mere assignee)? Would the safe harbor
apply on the rationale that the taxpayer was seeking to qualify for a
Code-authorized benefit—the annual exclusion? Or is it rendered
unavailable by the decision in Hackl or, on the premise that Hackl
was wrongly decided, by the unsettled nature of the issue?
    That question, in turn, raises a question about the meaning of the
tax shelter regulation itself. Consider, for example, a taxpayer who
acquires an asset to secure the benefits of accelerated depreciation (a
benefit explicitly referenced in Treasury Regulations section 1.6662-4).
Assume the taxpayer uses a depreciable life of, say, ten years, but the
court ultimately concludes that the taxpayer should have used a
fifteen-year life. Will the taxpayer be subjected to the more rigorous
tax shelter standard on the penalty question because the deduction
was not, under the court’s holding, permissible? Or will the taxpayer
be able to argue that, even though it was not able to sustain its position
on the substantive issue, the transaction was not a tax shelter for
purposes of the penalty analysis, because accelerated depreciation is a
Code-authorized benefit? If the taxpayer in that example is held to the
tax shelter standard because of the defeat on the substantive issue, the
regulation’s exception for Code-authorized transactions has no mean-
ing.336 In other words, if taxpayers who lose on the substantive issue
cannot take advantage of the exception, no taxpayer will be able to do
so, inasmuch as penalties are not imposed on taxpayers who prevail.
Thus, to avoid rendering the exception meaningless, it must be
understood as applying when, in the context of a transaction involving
a Code-authorized benefit, the taxpayer fails to prevail.
    By a parity of logic, the safe harbor clarification just added to the
Circular should apply in the context of the zeroed-out GRAT and
partnership-gift examples. In both cases, the transaction involves a
Code-authorized benefit. The possibility that the taxpayer might not
prevail in either case should not render the safe harbor unavailable—
just as a failure to prevail in the depreciation example should not
render the tax shelter regulation’s exception inapplicable.


334.       See Tech. Adv. Mem. 20024503.
335.       Hackl v. Comm’r, 335 F.3d 664 (7th Cir. 2003).
336.       See J. Blattmachr, M. Gans & T. Bentley, The Application of Circular 230
           in Estate Planning, 107 TAX NOTES 61 (Apr. 4, 2005).



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§ 4:15.4                   THE CIRCULAR 230 DESKBOOK

   While, as suggested, it would seem appropriate to interpret the safe
harbor against the backdrop of the regulation’s exception, it is entirely
plausible that the safe harbor was drafted without any intent to make
the two concepts mirror each other. It is even possible, moreover, that
no thought was given to the problematic way in which the exception is
drafted. After all, no clarification is provided concerning the exception in
the preamble to the proposed or final regulations under section 6662.
Thus, while it is hoped that the conclusions reached in the zeroed-out
GRAT and partnership-gift examples appear sound, Practitioners may
well find it difficult to rely on that reading without further clarification
from the Treasury. Indeed, given the nature of the comments that
inspired the safe harbor—suggesting that compliance with the rules
would be unnecessary in the case of a Code-authorized benefit even if tax
avoidance is the taxpayer ’s principal purpose—it may well be that
Treasury intended that it would apply only when the issue is entirely
noncontroversial (for example, advice that a client make an annual-
exclusion cash gift).
   But, of course, if the intent was to limit the safe harbor to non-
controversial issues, it is not very meaningful. For noncontroversial
issues will presumably not constitute a Significant Federal Tax
Issue.337 And since section 10.35 only requires that Significant Federal
Tax Issues be addressed in a Covered Opinion,338 a determination that
the issue is not controversial would permit the Practitioner not to
address it even in the absence of the safe harbor.339
   Even when the IRS has conceded the issue in published guidance,
factual issues may make it difficult for the Practitioner to comfortably
invoke the safe harbor. For example, while the IRS has conceded that a
Crummey power creates a present interest,340 the annual exclusion
will be denied if the court finds that there was an understanding that
the power-holder would not exercise the power.341 Thus, even though


337.       See Circular 230 § 10.35(b)(3), defining a Significant Federal Tax Issue as
           one with respect to which the Service would have “reasonable basis for a
           successful challenge.”
338.       See Circular 230 § 10.35(c)(3).
339.       Although not entirely clear, it would, however, appear possible that, in the
           absence of the safe harbor, an opinion dealing with a noncontroversial
           issue could remain subject to the other requirements of Circular 230
           § 10.35 (i.e., other than the requirement in Circular 230 § 10.35(c)(3)
           that all Significant Federal Tax Issues be addressed). So, for example, in
           the case of a principal-purpose transaction involving only a noncontro-
           versial issue, the opinion would still have to address the facts in
           accordance with § 10.35—even though there was no Significant Federal
           Tax Issue—in the absence of the safe harbor.
340.       See, e.g., Rev. Rul. 85-24, 1985-1 C.B. 329.
341.       See Estate of Cristofani v. Comm’r, 97 T.C. 74 (1991), acq. in result 1996-
           29 I.R.B. 4.



                                       4–154
                                       Circular 230                           § 4:15.4

the courts have not been particularly receptive to the IRS’s argument
that an understanding had been reached with the power-holder, 342 it
might be difficult for a Practitioner to rely comfortably on the safe
harbor when it is nearly certain that the power will not be exercised. 343
In other words, given the critical nature of the factual question and the
difficulty in assuming that the power may be exercised, the safe harbor
may be of little assistance in this context.
   It would seem that if a Practitioner relies on the safe harbor, he or
she should not be sanctioned if, after the advice is rendered, the
Supreme Court adopts the taxpayer ’s position, as the tax benefit was
in fact claimed in a manner consistent with the Code and congres-
sional purpose. Similarly, a Practitioner should not be sanctioned for
relying on the safe harbor when a post-advice revenue ruling favorable
to the taxpayer is issued. Conversely, a post-advice Supreme Court
decision adopting the IRS view may preclude the Practitioner from
invoking the safe harbor in the disciplinary context because, as it turns
out, the tax benefit was not claimed in a manner consistent with the
Code and congressional purpose. As a consequence, conservative
Practitioners will likely not rely on the safe harbor in any case where
the issue is unsettled.
   Nonetheless—and this is perhaps the most critical point—if a
Practitioner relies on the safe harbor in a context in which the issue
is not entirely settled but is definitively settled against the taxpayer by
some post-advice decision (for example, a Supreme Court decision),
the Practitioner may be able to avoid sanctions by establishing a lack of
willfulness, recklessness, or gross incompetence. 344 For example,
assume that, at the time the advice is given, there are a series of
private letter rulings that uniformly adopt the taxpayer ’s position and


342.       See Estate of Kohlsaat v. Comm’r, T.C. Memo 1997-212.
343.       Cf. Long Term Capital Holdings v. United States, 330 F. Supp. 2d 122
           (D. Conn. 2004) (applying a penalty after finding, on the facts, the
           taxpayer could not establish the necessary profit motive); Santa Monica
           Pictures, LLC v. Comm’r, T.C. Memo 2004-104 (adopting a similar
           analysis); Stobie Creek Invs. v. United States, 82 Fed. Cl. 636 (Fed. Cl.
           2008) (adopting a similar analysis).
344.       Circular 230 § 10.52 does not provide a definition of the term “willful.”
           Presumably, it will be given content based on an analogy to its counterpart
           concept in the criminal tax evasion context. See, e.g., Cheek v. United
           States, 498 U.S. 192 (1991) (defining the term to mean a violation of a
           known legal duty and indicating that a subjective good-faith belief, even if
           objectively unreasonable, will preclude a finding of willfulness). See Office
           of Prof ’l Responsibility v. Chandler, Complaint No. 2006-23 (adopting the
           suggested approach). However, Circular 230 § 10.51, which is cross-
           referenced, does define the terms “reckless” and “gross incompetence.”
           The definition of reckless in Circular 230 § 10.51 appears to make
           community standards a relevant determinant (inquiring whether the
           conduct was “an extreme departure from the standards of ordinary care



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–155
§ 4:15.5                   THE CIRCULAR 230 DESKBOOK

that, based on those rulings, the Practitioner relies on the safe harbor.
As suggested, a post-advice definitive decision could appear to preclude
the Practitioner from invoking the safe harbor in a disciplinary
proceeding. On those facts, however, a finding that the Practitioner
was willful, reckless, or grossly incompetent would seem difficult, if not
impossible, to sustain.345 Still, it would be helpful if the Circular were
amended to provide that a Practitioner who relies on existing decisions
(or even a private letter ruling or the literal provisions of the Code or a
regulation), in invoking the safe harbor, should not be subject to
sanction if that decision is ultimately overturned or not followed.

   § 4:15.5            Significant-Purpose Category
   The third category is where the advice concerns one or more federal
tax issues arising from any arrangement when a significant purpose is
the avoidance or evasion of any tax imposed by the Code. As in the
principal-purpose context, the question is whether the client has the
requisite purpose in entering, not whether the client has a tax-related
motive in seeking the advice. In this category, the advice will consti-
tute a Covered Opinion only if it falls within one (or more) of four
subcategories: “reliance opinions”; “Marketed Opinions”; advice that
is subject to Conditions of Confidentiality; and advice that is subject



           that a Practitioner should observe”). See also Treas. Reg. § 1.6662-3(b)(2)
           (providing that a disregard of a rule or regulation “is reckless if the taxpayer
           makes little or no effort to determine whether a rule or regulation exists,
           under circumstances which demonstrate a substantial deviation from the
           standard of conduct that a reasonable person would observe”). And while
           the definition of gross incompetence does not as explicitly reference the
           community standard, it would nonetheless seem to be an implicit bench-
           mark (gross incompetence “includes conduct that reflects gross indiffer-
           ence, preparation which is grossly inadequate under the circumstances,
           and a consistent failure to perform obligations to the client”). The section
           explicitly contemplates that, in applying those definitions, a pattern of
           misconduct will weigh against the Practitioner—implying perhaps that,
           conversely, an isolated violation will be viewed as an innocent one not
           warranting sanction. Finally, it should be noted that the definitions in
           Circular 230 § 10.51 appear to be drafted, in large part, with a narrow
           focus on Practitioners who give misleading advice (that is, advice that
           affirmatively misrepresents or omits material information). It does not, in
           other words, focus specifically on the kind of violation addressed in the
           text: when Practitioners erroneously conclude that their advice does not
           violate the rules contained in the Circular. Circular 230 § 10.51 is further
           discussed below. But note that a field service advisory apparently does not
           constitute substantial authority. See Brown v. Comm’r, T.C. Memo 2011-83.
345.       It would seem that a post-advice decision that rejects the approach taken
           in the private letter rulings should not render the Practitioner culpable. Cf.
           Treas. Reg. § 1.6662-4(d) (indicating that private letter rulings may
           constitute substantial authority in the context of a section 6662 penalty).



                                         4–156
                                       Circular 230                           § 4:15.5

to Contractual Protection.346 Those four subcategories are discussed
below.347
               [A] Reliance Opinions
   A reliance opinion, the first subcategory, is advice that concludes at
a confidence level of “more-likely-than-not” (that is, a greater than
50% likelihood) that one or more Significant Federal Tax Issues would
be resolved in the taxpayer ’s favor.348
   Two questions arise in determining whether the advice constitutes a
Reliance Opinion: first, whether the advice addresses a federal tax
issue, and, second, whether the tax issue is a significant one.
   As to the first question, a federal tax issue is a question concerning
the federal tax treatment of an item. It includes a question concerning
“the existence or absence of a taxable transfer of property” or “the
value of property for federal tax purposes.”349
   As to the second question, a federal tax issue is significant if the IRS
has a reasonable basis for a successful challenge 350 and its resolution
could have a significant impact, whether beneficial or adverse, under
any reasonably foreseeable circumstance, on the overall federal tax
treatment of the transaction(s) or matter(s) addressed in the writ-
ing.351 It may be difficult for Practitioners to determine whether the
IRS has a reasonable basis for a successful challenge. Perhaps “every-
day” advice such as assuring the taxpayer that a gift of $11,000 of cash
to a grandchild qualifies for the annual exclusion is not the type of
issue the IRS would have a reasonable basis to challenge. But in
rendering that advice, the Practitioner perhaps should consider that
the taxpayer may have made or might make other gifts to her grand-
child that year. Given that birthday and holiday presents seem likely to
be made, can the Practitioner reasonably rely on the client’s state-
ments in determining whether the issue is a significant one? With that
consideration in mind, how confident can a Practitioner be that the
IRS has no reasonable basis for a successful challenge? As will be



346.       See Circular 230 § 10.35(b)(2)(i)(C).
347.       For an article suggesting that the scope of the significant-purpose category
           is narrow, see Kip Dellinger, How Broad Is the Scope of “Significant
           Purpose”?, 111 TAX NOTES 1503 (June 26, 2006).
348.       See Circular 230 § 10.35(b)(4)(i).
349.       See Circular 230 § 10.35(b)(3).
350.       It should be noted that this standard is phrased differently from the
           realistic-possibility-of-success threshold (at least one chance in three)
           required for return preparers and signers under § 10.34, discussed above.
           See Circular 230 § 10.34(d)(1) (establishing the one-in-three standard). No
           definition of the “reasonable basis for a successful challenge” is offered in
           the Circular.
351.       See Circular 230 § 10.35(b)(3).



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–157
§ 4:15.5                   THE CIRCULAR 230 DESKBOOK

discussed, a threshold for factual reliance must be complied with when
delivering a Covered Opinion. But the Circular does not explicitly
require that the Practitioner use any particular factual threshold when
assessing whether the IRS would have a reasonable basis for challenge
in the context of determining if a Significant Federal Tax Issue is at
stake. Nevertheless, it seems prudent for Practitioners to employ the
higher factual-reliance standards for all purposes in applying the
Covered Opinion rules.352
   In making the definition of “Significant Federal Tax Issue” turn
on whether the IRS would have a reasonable basis for challenge, the
Circular fails to clarify how that test will be applied. While the
definition would appear to create an objective standard—focusing on
whether a disinterested party or Practitioner would conclude that there
was a reasonable basis for an IRS challenge—it would seem that
Practitioners holding a good-faith subjective belief that any IRS
challenge would fail to satisfy the reasonable-basis standard should
not be sanctioned.353 Nonetheless, given the absence of guidance on
the objective-subjective issue, it might be appropriate for Practitioners
to use caution in concluding that the IRS would not have a successful
basis for challenge.354 It might also be appropriate, when a Practitioner
does reach such a conclusion, to explicitly state it in the written advice
to provide a contemporaneous record of the Practitioner ’s good-faith
attempt to comply.
   It is worth noting that there is no counterpart in the context of a
significant-purpose transaction to the safe harbor that applies with

352.       Treas. Reg. § 1.6694-1(e), which deals with the penalty imposed on the
           preparer of an income tax return, provides that Practitioners may rely “in
           good faith without verification” on information supplied by the client. The
           preparer must, however, make appropriate inquiries of the client to
           ascertain whether the client is entitled to the tax treatment claimed.
           The regulations include an example involving a charitable contribution,
           requiring the Practitioner to inquire whether the client has received a
           receipt from the charity. Compare Circular 230 § 10.34(c), which as
           indicated in the discussion of § 10.34 may impose a less onerous burden
           on Practitioners. Thus, assuming the standard in regulations under I.R.C.
           § 6694 was adopted for purposes of determining whether a Significant
           Federal Tax Issue was present, in the annual-exclusion example in the text,
           it would seem that the Practitioner would be required to inquire about
           other gifts and would be permitted to accept the client’s response as
           accurate.
353.       Treas. Reg. § 1.6694-2(d), which deals with the penalty imposed on the
           preparer of an income tax return, adopts such an objective standard. The
           regulation goes on, however, to permit a Practitioner to avoid the penalty,
           even if the objective standard is violated, based on a subjective good-faith
           showing (though the Practitioner must also establish “reasonable cause”).
354.       The Code itself, in an unrelated context, uses a similar test that focuses on
           the taxpayer ’s subjective belief as to whether the IRS would have a
           reasonable basis for a challenge. See I.R.C. § 6603(d)(3)(A).



                                        4–158
                                       Circular 230                            § 4:15.5

regard to principal-purpose transactions. Thus, even if the Practitioner
were to conclude that the tax result the taxpayer seeks is consistent
with the Code and its purpose, the advice may nonetheless constitute
a Covered Opinion. As a practical matter, however, it would seem
that it could not constitute a Reliance Opinion. For given the noncon-
troversial nature of the tax benefit, it would seem difficult to conclude
that a Significant Federal Tax Issue is involved.355 And, in the absence of
such an issue, Reliance Opinion status is necessarily negated.
   Even assuming that the written advice relates to a significant-
purpose transaction that implicates a Significant Federal Tax Issue,
it may nonetheless not be a Reliance Opinion on two separate
grounds: if it does not reach a more-likely-than-not opinion on a
Significant Federal Tax Issue, or if it contains a disclaimer with regard
to the client’s ability to rely on it for penalty protection purposes. 356
Thus, unlike the case where the advice concerns a principal-purpose or
Listed Transaction, the Practitioner can avoid falling into Reliance
Opinion status either by including the disclaimer or by not using the
more-likely-than-not standard. As a practical matter, Practitioners
appear to be including the disclaimer in all documents and correspon-
dence (including email) in order to make certain that they do not
inadvertently render a Reliance Opinion.

               [A][1] Confidence Lower Than More-Likely-Than-Not
   If the advice does not reach a more-likely-than-not conclusion with
respect to a Significant Federal Tax Issue, it is not a Reliance Opinion.
Consider the case where a client seeks advice in order to create a defense
against the possibility of the Service imposing a penalty. If the defense
can be established by advice stating that there is a reasonable basis
for the taxpayer’s position,357 there is no need for the Practitioner to
provide a more-likely-than-not conclusion. It is therefore possible for
the Practitioner to provide advice that is not a Reliance Opinion but
nevertheless insulates the client from the imposition of a penalty.358


355.       See Kip Dellinger, How Broad Is the Scope of “Significant Purpose”?, 111
           TAX NOTES 1503 (June 26, 2006) (making this argument).
356.       See Circular 230 § 10.35(b)(4)(ii) (indicating that, if the advice does not
           relate to a principal-purpose or Listed Transaction, a prominently dis-
           played penalty-protection disclaimer will defeat Reliance Opinion status).
357.       See Melnik v. Comm’r, T.C. Memo 2006-25 (permitting the taxpayer to
           defeat the penalty because of a Practitioner ’s reasonable-basis opinion); but
           see Kaplan v. Comm’r, T.C. Memo 2006-16 (rejecting the taxpayer ’s
           penalty defense because the Practitioner advised that there was “substan-
           tial risk” the Service would prevail).
358.       Note, however, that if the client’s principal purpose is tax avoidance or
           evasion, the advice is a Covered Opinion and therefore subject to the
           requirements of Circular 230 § 10.35 even if the Practitioner uses the
           reasonable-basis standard.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–159
§ 4:15.5                    THE CIRCULAR 230 DESKBOOK

   For several reasons, however, a client may be dissatisfied with a
reasonable-basis opinion. For example, a client interested in doing a
transaction that has some tax risk might not be comfortable unless
the Practitioner is willing to provide advice that contains a conclusion
at a higher confidence level. In other words, the client may be
interested not only in penalty protection but reassurance in terms
of the substantive issue as well.359 If the client asks the Practitioner to
use the more-likely-than-not or higher standard and tax avoidance is
a significant purpose for doing the transaction, compliance with
section 10.35 becomes necessary even though there is no penalty-
protection need for such an opinion.360

              [A][2] Statement That Advice Cannot Be Used for
                     Penalty Protection
   Advice which creates an appropriate disclaimer in terms of penalty
protection will not constitute a Reliance Opinion. Section 10.35(b)(4)(ii)
provides that the advice will not be treated as a Reliance Opinion if the
“Practitioner prominently discloses in the written advice that it was not
intended or written by the Practitioner to be used, and that it cannot be
used by the taxpayer, for the purpose of avoiding penalties.”361 That
approach will presumably be taken in many cases. But, of course, if tax
avoidance is the client’s principal purpose, not merely a significant
purpose, this approach will not be effective. For, in the case of a
principal-purpose transaction, such a disclaimer does not take the
advice outside of the scope of the section.
   However, the issue can become more complicated if, as suggested,
the client is concerned not merely about penalty protection but also
about the possibility of tax liability. It appears that, if the advice is


359.       For example, a client may be interested in creating a GRAT (grantor
           retained annuity trust) but may be unwilling to take the risk of gift tax
           liability should it be determined that it fails to satisfy the rules in I.R.C.
           § 2702 applicable to such trusts. In such a situation, even assuming there
           is no concern about possible penalties, the client may not be willing to
           create the trust if there is any chance that it would trigger gift tax liability.
360.       It is at least arguable that the “significant purpose,” if not the “principal
           purpose,” categories should be limited to circumstances where a more-
           likely-than-not opinion is required for penalty-protection purposes. See
           I.R.C. § 6664(d) (requiring a more-likely-than-not opinion in order to
           defeat the I.R.C. § 6662A penalty imposed on certain tax shelters). But the
           Treasury Department has concluded otherwise.
361.       Circular 230 § 10.35(b)(8) defines the term “prominently disclosed.” The
           critical inquiry, under this provision, is whether the disclosure would be
           “readily apparent” to the reader. In making this judgment, the reader ’s
           sophistication and the length of the document are to be taken into account.
           The provision goes on to require that, at a minimum, the disclosure be set
           forth in a separate section (and not as a footnote) and that the typeface be no
           smaller than the typeface used in other portions of the document.



                                         4–160
                                       Circular 230               § 4:15.5

provided in two separate writings, the client’s objectives could be
satisfied without causing the opinion to be a Covered Opinion: one
reaching a reasonable-basis conclusion and a second reaching a more-
likely-than-not or even higher-level conclusion. The first is not a
Reliance Opinion and therefore need not comply with the Covered
Opinion rules (unless it must comply for some other reason) because it
does not reach a more-likely-than-not conclusion—and all the taxpayer
needs to avoid a negligence penalty is to have a reasonable-basis
conclusion. The second writing may carry the penalty-protection
disclaimer; if it does, it will not be a Reliance Opinion, so that it,
too, need not comply with the Covered Opinion rules (unless it must
do so for a reason other than being a Reliance Opinion). The client in
theory does not need to derive penalty protection from this second
writing—the taxpayer receiving the necessary protection in that regard
from the reasonable-basis writing. But the taxpayer will have received
the Practitioner ’s advice about what he believes to be the likely
outcome, which might be used by the taxpayer to bring an action
against the Practitioner if the advice turns out to be incorrect and the
taxpayer incurs tax liability (even though, by virtue of the reasonable-
basis opinion, a penalty may not be imposed).
   With proper counseling, clients may find such a two-writing
strategy attractive. However, there may be a downside. First, the IRS
may frown on Practitioners who try to “thread the needle” to avoid
compliance with the section. Indeed, it might argue, analogizing to the
step transaction doctrine, that the two opinions should be integrated.
Second, a Practitioner might be criticized by a client for not dotting all
the i’s and crossing all the t’s in accordance with the section even
though the Practitioner chose a route that did not require such
compliance. The client may be advised by another Practitioner that
the IRS would be more reasonable in settling an issue, for example, if
the Practitioner providing the written advice had complied. Perhaps
Practitioners should ask the client what route he or she wants the
adviser to follow in providing written advice. Complying with the
Covered Opinion rules will obviously result in higher fees because of
the stringent requirements. Some clients may well accept the two-
letter approach in order to reduce the fee.

               [B] Marketed Opinions
   Written advice is a Marketed Opinion if the Practitioner knows or
has reason to know that it will be used or referred to by a person other
than the Practitioner (or someone affiliated with his or her firm) in
promoting, marketing, or recommending an arrangement to one or
more taxpayers.362 It should be emphasized that, unlike the Reliance

362.       See Circular 230 § 10.35(b)(5)(i).



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§ 4:15.5                   THE CIRCULAR 230 DESKBOOK

Opinion rules, the Marketed Opinion rules apply without regard to the
confidence level the Practitioner uses in stating the opinion. Also,
Marketed Opinion status does not turn on whether the advice ad-
dresses a Significant Federal Tax Issue. Thus, even though the Practi-
tioner does not reach a more-likely-than-not conclusion and does not
address a Significant Federal Tax Issue, the advice may nonetheless
constitute a Marketed Opinion (assuming, of course, it satisfies the
definitional criteria).
    Unless it relates to a Listed Transaction or to an arrangement the
principal purpose of which is tax avoidance, a writing is not a
Marketed Opinion, under an important exception, if it prominently
discloses363 in the written advice that: the advice was not intended or
written by the Practitioner to be used, and that it cannot be used by
any taxpayer, for the purpose of avoiding penalties that may be
imposed on the taxpayer; the advice was written to support the
promotion or marketing of the transaction(s) or matter(s) addressed
in the written advice; and the taxpayer should seek advice based on the
taxpayer ’s particular circumstances from an independent tax advis-
er.364 In other words, if it is known or there is reason to know that
others will refer to or use the opinion in promoting an arrangement, it
is a Marketed Opinion if it relates to a Listed Transaction or its
principal purpose is tax avoidance even if it contains the above
disclosures.
    The scope of what constitutes a Marketed Opinion seems very broad
and may cover routine advice. For example, a lawyer is engaged to write a
statement to be included in a brochure about trusts to be distributed by a
local bank or its customers, a brochure for a national brokerage firm
about individual retirement accounts, or a brochure for a charity about
ways to make gifts to the organization. In each case, the Practitioner
knows that the client will use the brochure in “promotion” and, because
some tax issue no doubt will be discussed, each might easily be viewed as
a Marketed Opinion. In order to avoid Marketed Opinion status, the
document should contain the necessary disclosures.
    It is uncertain whether a writing constitutes a Marketed Opinion if
the Practitioner merely prepares text that the client inserts in its
brochure without attribution. As indicated, a Marketed Opinion is
written advice that “will be used or referred to by a person other than
the Practitioner . . . in promoting, marketing or recommending” an
arrangement. One might conclude that “will be used” contemplates
the use of the written advice even if it is not attributed to the


363.       For a definition of the term “prominently disclosed,” see Circular 230
           § 10.35(b)(8), which is discussed in note 361, supra.
364.       See Circular 230 § 10.35(b)(5)(ii). The latter two requirements are repeated
           in § 10.35(e)(2), relating to certain required disclosures.



                                       4–162
                                       Circular 230                           § 4:15.5

Practitioner, such as where a charity sends its donors a brochure that
explains deferred giving without identifying the Practitioner. If that is
so, would paraphrasing the Practitioner ’s work, again without attribu-
tion, also make it a Marketed Opinion? On the other hand, it would
seem that a writing prepared by the Practitioner should not be viewed
as a Marketed Opinion when the writing itself is not used in “promo-
tion” and there is no reference to the Practitioner.
   It is possible that a Marketed Opinion could include an article
written about federal tax issues that is to be published in a commercial
publication or distributed at a seminar sponsored by someone other
than the Practitioner (or the Practitioner ’s firm).365 As written, it may
even cover email responses on a listserve and possibly even email
or other correspondence between two Practitioners in different
firms working jointly on a client matter. While the scope of the rule
remains uncertain, if the government reads it expansively, “free
speech” issues under the First Amendment may well arise. For
example, if the IRS were to determine that publishing an article in a
professional journal constituted a Marketed Opinion and that it
violated the Circular because of the failure to reach a more-likely-
than-not conclusion, it seems unlikely that the courts would sustain
the sanction of the author over a First Amendment challenge. 366 For
while the government can compel or prohibit disclosures to prevent
fraud, it must appropriately tailor such a regulation to its fraud-based
concern in order to avoid a First Amendment violation.367
   The ability to exclude a writing from the Marketed Opinion
category by making the three disclosures could prove to be important
in terms of the Practitioner ’s ability to limit the scope of the opinion.
A Marketed Opinion must address all Significant Federal Tax Issues. A
Limited Scope Opinion (discussed below), in contrast, need not

365.       It is uncertain whether a seminar sponsored by the Practitioner ’s firm and
           attended by others might cause a writing that is distributed to be viewed as
           a Marketed Opinion. Presumably, the answer will turn on whether the
           firm reasonably knows that an attendee will use or refer to the writing in
           recommending or promoting a transaction to taxpayers.
366.       There have been indications that the government intends to read the
           provision narrowly so that it does not impinge on the publication of
           articles. See Sheryl Stratton, Fixing Circular 230 Rules Remains High
           Priority, Treasury Says, 2005 TNT 180-2 (Sept. 19, 2005).
367.       See Illinois ex rel. Madigan v. Telemarketing, 538 U.S. 600 (2003)
           (upholding a fraud claim, over First Amendment argument, but reaffirm-
           ing that certain government-compelled disclosures regarding charitable
           solicitation constituted a violation of the First Amendment). See also
           Zauderer v. Office of Disciplinary Counsel of Supreme Court, 471 U.S.
           626 (1985) (upholding a requirement that an attorney make certain
           affirmative disclosures in order to avoid the possibility of deception);
           Milavetz, Gallop & Milavetz, P.A. v. United States, ___ U.S. ___, 2010
           WL 757616 (2010) (explaining Zauderer).



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–163
§ 4:15.5                   THE CIRCULAR 230 DESKBOOK

address all such issues.368 If the advice, however, constitutes a Mar-
keted Opinion, it may not qualify as a Limited Scope Opinion. 369
Thus, if the three required disclosures are made in order to avoid
Marketed Opinion status, the Practitioner may issue a Limited Scope
Opinion that addresses specified issues. For example, a brochure
prepared for a charity about effective ways to give to the organization
that constitutes a Marketed Opinion would have to address all
Significant Federal Tax Issues.370 However, if the brochure contained
the three disclosures, it would not constitute a Marketed Opinion and
could therefore address only certain issues. Nevertheless, it seems
appropriate to emphasize that this exclusion from being a Marketed
Opinion does not apply to an arrangement that involves a Listed
Transaction or where the principal purpose is tax avoidance or evasion.
   Practitioners are likely to find awkward one of the three disclosures
necessary in order to avoid Marketed Opinion status: that advice is
given in order to support the promotion or marketing of the transac-
tion or matter that is the subject of the advice. Obviously, in the vast
majority of cases, a Practitioner providing advice to a client does so for
the exclusive benefit of the client, not in service of some larger
promotion. As a result, in most cases, a Practitioner who makes this
disclosure knows it to be false, as does the client. What is worse, this
false disclosure has become ubiquitous as Practitioners have incorpo-
rated it in all communications (even email).
   There is an alternative that some Practitioners have adopted. If
the writing indicates that the client may not share it with anyone else
without the prior consent of the Practitioner, it does not seem possible
that it could constitute a Marketed Opinion. For unless the Practi-
tioner has reason to believe that it will be shared with others, it cannot
satisfy the definition of a Marketed Opinion. Thus, even if the three
disclosures are not made, advice containing this legend should not
be viewed as a Marketed Opinion.371 Moreover, the three-disclosure
rule does not apply if the advice relates to a Listed Transaction or a
principal-purpose transaction.372 Yet, even if the three disclosures are


368.       See Circular 230 § 10.35(c)(3)(v)(A).
369.       See Circular 230 § 10.35(c)(3)(v)(A)(2).
370.       Indeed, in the case of a Marketed Opinion, the Practitioner must resolve
           each Significant Federal Tax Issue in favor of the taxpayer at a more-likely-
           than-not confidence level. If the Practitioner is unable to do so, the opinion
           may not be issued. See Circular 230 § 10.35(c)(3)(iv).
371.       As will be discussed, advice that is subject to a condition of confidentiality
           is a Covered Opinion that is subject to the requirements of Circular 230
           § 10.35. See Circular 230 § 10.35(b)(6). Thus, where the approach
           described in the text is used, it is necessary to clarify that there is no
           contractual duty to maintain confidentiality with regard to the transaction
           or the way in which it is structured.
372.       See Circular 230 § 10.35(b)(5(ii).



                                        4–164
                                       Circular 230                § 4:15.5

not made and even if a listed or principal-purpose transaction is
involved, it should not fall within the definition of a Marketed
Opinion if the client is not permitted to make disclosure to others
(assuming there is no understanding that the restriction will be
ignored).

               [C] Conditions of Confidentiality
   Written advice regarding one or more federal tax issues that is
subject to Conditions of Confidentiality is a Covered Opinion and
must therefore comply with the requirements of section 10.35. 373
Such a condition of confidentiality will be deemed present if the
Practitioner imposes a duty on the recipient not to disclose the tax
treatment or tax structure of the transaction, regardless of whether the
limitation is legally binding. A claim that a transaction is proprietary
or exclusive is not a limitation if the Practitioner indicates to all
recipients that there is no limitation on disclosure of the tax treatment
or tax structure of the underlying transaction.374 The section does not
state that this indication must be stated in the advice or even if it must
be in writing. Nonetheless, it would seem that if the Practitioner hopes
to prevent the confidentiality rule from applying by specifying that
there is no limit on disclosure, it should be included in the written
advice itself.
   This is reminiscent of one of the parts of the Reportable Transac-
tions regulation issued under section 6011.375 There are six Reportable
Transactions under those regulations, one of which deals with con-
fidential transactions. Unlike the confidentiality transaction that is
contained in the Reportable Transactions regulation, the confidenti-
ality rule in section 10.35 is not limited to income tax transactions.
   It should be noted that the confidentiality rule applies even if the
federal tax issue is not significant and regardless of the level of con-
fidence (if any) used by the Practitioner in stating his or her conclusion.

               [D] Contractual Protection
   Written advice that is subject to contractual protection is a Covered
Opinion and subject to section 10.35.376 Contractual protection is
deemed to be present where the taxpayer has the right to a full or
partial refund of fees paid to the Practitioner if all or part of the
intended tax consequences from the matters addressed are not sus-
tained, or if the fees are contingent on the taxpayer ’s realization of tax
benefits. Like the provision applicable in the case of confidentiality,


373.       See   Circular 230 § 10.35(b)(6).
374.       See   id.
375.       See   Treas. Reg. § 1.6011-4.
376.       See   Circular 230 § 10.35(b)(6).



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–165
§ 4:15.6                    THE CIRCULAR 230 DESKBOOK

this provision is reminiscent of the regulations relating to Reportable
Transactions under section 6011.377 Section 10.35(b)(6) indicates that
“any agreement to provide services without reasonable compensation”
is a factor to be considered in determining whether the fee is refund-
able or contingent. Although the meaning of this phrase is not entirely
clear, it would seem that it is intended to target agreements that are
in substance contingent. It should be noted that, in 2002, the
Treasury Department addressed certain contingent fee issues.378 And
while these issues are beyond the scope of this chapter, it is worth
noting that they are in some tension with the Covered Opinion rules
in that they flatly prohibit the kind of contingent fee arrangement that,
under the Covered Opinion rules, constitutes contractual protection.

   § 4:15.6             Excluded Advice
  There are five categories of excluded advice. If the advice falls into
any one of these five categories, it does not constitute a Covered
Opinion. The five categories are:
   •   preliminary advice;379
   •   pension, bond and SEC document advice;380
   •   certain written advice after a tax return is filed;381
   •   certain advice provided to an employer by in-house counsel; 382
       and
   •   certain written statements in which the Practitioner concludes
       that a transaction is not appropriate or that one or more federal
       tax issues will not be resolved in the taxpayer ’s favor.383
Although each of these exclusions, as discussed below, is somewhat
limited, none fails to apply by reason of relating to a Listed Transaction
or a principal-purpose transaction (with an exception in the case of the
exclusion for pension, bond and SEC advice).

             [A] Exclusion for Preliminary Advice
  The first exclusion is written advice provided during the course of
an engagement if the Practitioner is reasonably expected to provide
subsequent written advice to the client that will satisfy the require-
ments for Covered Opinions. It seems that it is appropriate to consider


377.       See   Treas. Reg. §   1.6011-4.
378.       See   Circular 230    § 10.27(b).
379.       See   Circular 230    § 10.35(b)(2)(ii)(A).
380.       See   Circular 230    § 10.35(b)(2)(ii)(B).
381.       See   Circular 230    § 10.35(b)(2)(ii)(C).
382.       See   Circular 230    § 10.35(b)(2)(ii)(D).
383.       See   Circular 230    § 10.35(b)(2)(ii)(E).



                                            4–166
                                       Circular 230                             § 4:15.6

including in any such “exempt” writing a recital that it is intended to
be preliminary advice; that it is expected that the adviser will provide
subsequent written advice; and that such subsequent writing will
comply with the Covered Opinion rules unless it is determined that
such subsequent writing is not a Covered Opinion. It would seem that,
given the limited scope of this exclusion, a Practitioner may not avoid
the requirements of section 10.35 by indicating that the advice is
preliminary in the absence of an expectation that follow-up advice that
complies with the section will be provided.

               [B] Exclusion for Pension, Bond and SEC Document
                   Advice
    The second broad exception, which does not apply to Listed Transac-
tions or any arrangement the principal purpose of which is tax avoid-
ance, applies to advice that concerns qualification of a qualified plan, a
state or local bond opinion,384 or is included in documents required to be
filed with the Securities and Exchange Commission.385

               [C] Written Advice After the Return Is Filed
   A written statement is excluded when it is provided after the
taxpayer has filed a tax return with the IRS if it is solely for use by
the taxpayer and if the Practitioner neither knows nor has reason to
know that the advice will be used by the taxpayer to take a position on
a tax return (including an amended return that claims “tax benefits”
not reported on a previously filed return) filed after the date on which
the advice is provided to the Practitioner.
   The requirement of this exclusion that the advice be solely for the
use by the taxpayer seems somewhat reminiscent of the definition of a
Marketed Opinion386 (which is a written statement the Practitioner
knows or has reason to know will be used or referred to by a person
other than the Practitioner in promoting, marketing, or recommend-
ing an arrangement to one or more taxpayers). In any case, there are at
least two ways to construe the term “solely” in this context.
   Under one construction, if the written statement ultimately is used
by someone other than the client to whom it was rendered (for example,
the client shares it with another), the exclusion does not apply (as it has


384.       Proposed regulations regarding municipal-bond opinions have been issued.
           See 31 C.F.R. part 10, 69 Fed. Reg. 75,887 (Dec. 20, 2004). Under
           proposed Circular 230 § 10.35(b)(9), an opinion qualifies as excluded
           advice if it relates only to certain designated tax issues (it can also address
           state law issues) and if the Practitioner supplies written advice to the issuer
           that complies with proposed Circular 230 § 10.39. These proposed
           regulations are reproduced in Appendix P.
385.       See Circular 230 § 10.35(b)(2)(ii)(B).
386.       For a discussion of a Marketed Opinion, see section 4:15.5[B], supra.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–167
§ 4:15.6                  THE CIRCULAR 230 DESKBOOK

failed the “solely” requirement) even if the Practitioner did not know or
have reason to know that the client would allow another to use it. That
would be a harsh result, as the Practitioner would then be found to have
failed to comply with the Circular even though he or she had no reason
to know it would be so used. Perhaps the Practitioner in such a case
could easily defend a disciplinary charge for such a violation, given the
lack of knowledge that it would be so used.
    Under the second, more sensible construction, the Practitioner ’s
view or understanding would be determinative. In other words, the
Practitioner ’s state of mind or understanding with regard to the
advice, rather than the taxpayer ’s intentions, would be the critical
determinant.

              [D]    Written Advice Provided by Taxpayer’s In-House
                     Counsel
   Written advice provided to an employer by a Practitioner in the
Practitioner’s capacity as an employee solely for purposes of determin-
ing the tax liability of the employer is excluded. The exclusion is,
however, a limited one. It does not, for example, exclude a written
statement made by an employee that is to be used to educate other
employees of the employer (for example, an in-house trust counsel of a
bank who prepares a memorandum about Circular 230) or for dis-
tribution to others (for example, an in-house lawyer who prepares a
brochure for her employer that is a charitable organization about how
donors may contribute to the organization and that mentions tax
consequences of the contribution).387

              [E]    Negative Written Advice
   The exclusion for written advice provided to a taxpayer that
concludes that a transaction is not appropriate or that one or more
federal tax issues will not be resolved in the taxpayer ’s favor applies
only if the statement does not reach a conclusion that suggests at
any level of confidence that the taxpayer might prevail. For example,
the negative advice exclusion does not apply if the Practitioner con-
cludes that the treatment in favor of the taxpayer is not frivolous, that
the taxpayer has a realistic possibility of success, that there is a
reasonable basis for taking the position, or that there is substantial

387.       The Circular ’s apparent scope is so broad that merely describing a
           particular tax arrangement without explicitly stating any tax result (for
           example, “[s]ome individuals may wish to consider creating a trust for his
           or her own benefit the remainder of which will pass to our organization on
           the death of the individual”) might be regarded as making a written
           statement about a federal tax issue, because there is an implication of a
           federal tax effect (for example, a deduction for the value of the remainder
           created for charity).



                                       4–168
                                       Circular 230                            § 4:15.8

authority for the position. In other words, merely because the Practi-
tioner reaches a confidence level lower than more-likely-than-not that
the taxpayer would prevail does not necessarily make this exclusion
available.
   If the advice addresses more than one federal tax issue and the
opinion is otherwise subject to section 10.35, the Practitioner must
comply with the section insofar as the other issues are concerned. 388

    § 4:15.7            Summary
   It is worth emphasizing that, in the case of a principal-purpose
transaction, the Practitioner cannot avoid Covered Opinion status,
unless the opinion is excluded advice or falls within the safe harbor.
(Advice concerning a Listed Transaction is treated similarly except that
the safe harbor is not available.)389 On the other hand, in the case of a
significant-purpose transaction, the Practitioner has the ability to
defeat Covered Opinion status. Advice will not constitute a Reliance
Opinion unless the Practitioner reaches a more-likely-than-not con-
clusion with regard to a Significant Federal Tax Issue. 390 Thus, if this
confidence level is not used, the advice will not fall into this category.
Also, if advice contains a prominent disclaimer to the effect that it
may not be relied upon by the client for penalty protection purposes,
it will again not be within this category.391 Marketed Opinion status is
easily avoided if the advice restricts the ability of the recipient to share
it with others without the consent of the Practitioner (unless perhaps
there is some indication that, despite this restriction, the Practitioner
believed it would be shared with others). Finally, both the confidenti-
ality and contractual-protection rules are easily avoided by omitting
from the advice the targeted provisions. The practical upshot is that,
assuming the advice does not concern a principal-purpose or Listed
Transaction, the Practitioner can control whether section 10.35 ap-
plies. Most critically, however, assuming the advice is not subject to
the requirements of section 10.35, the Practitioner must nonetheless
discharge the duties imposed by section 10.37 where the advice is in
writing.392

    § 4:15.8            Section 10.35’s Requirements
   Where section 10.35 applies, the Practitioner must comply with
several requirements. In general, there are six duties imposed on the


388.       See Circular 230 § 10.35(b)(2)(ii)(E) (last sentence).
389.       The safe harbor only applies for purposes of determining whether tax
           avoidance or evasion is the principal motive. See Circular 230 § 10.35(b)(10).
390.       See Circular 230 § 10.35(b)(4)(i).
391.       See Circular 230 § 10.35(b)(4)(ii).
392.       See Circular 230 § 10.35(f)(2).



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Practitioner. First, the Practitioner must identify and determine the
relevant facts and must not make any unreasonable factual assump-
tions.393 Second, the Practitioner must apply the law to the facts and not
make any unreasonable legal assumptions.394 Third, as a general rule,
the Practitioner must address each Significant Federal Tax Issue.395
Fourth, the Practitioner must indicate an overall conclusion as to the
likelihood that the transaction (or the issues addressed in the opinion)
will be sustained for tax purposes.396 Fifth, the Practitioner must be
competent to render the opinion.397 And, sixth, the opinion must
contain certain mandated disclosures.398
   In some respects, the duties imposed on the Practitioner under
section 10.35 are similar to the duties imposed by section 10.37. 399
There is, however, a critical distinction between the two sections.
Unlike section 10.37, section 10.35 requires that the analysis be
included in the writing. So, for example, if written advice is given to a
client that is not subject to section 10.35, section 10.37 will apply.400
However, there is no requirement in section 10.37 that the writing
contain a description of the facts, an analysis that applies the law to
the facts or Practitioner ’s conclusions as to the law and facts.401 It
would seem, in other words, that a Practitioner would not violate
section 10.37 were the writing to contain nothing more than the
ultimate conclusion. In contrast, under section 10.35, the Practi-
tioner must include a discussion of each of these elements in the
writing.402

              [A] Factual Matters
   A Practitioner must use reasonable efforts to identify and ascertain
the facts, which may relate to future events if a transaction is
prospective or proposed, and to determine which of the facts are


393.       See Circular 230 § 10.35(c)(1).
394.       See Circular 230 § 10.35(c)(2).
395.       See Circular 230 § 10.35(c)(3).
396.       See Circular 230 § 10.35(c)(4).
397.       See Circular 230 § 10.35(d).
398.       See Circular 230 § 10.35(e).
399.       For a discussion of the duties under Circular 230 § 10.37, see
           section 4:14.1, supra. Given the similarity between §§ 10.35 and 10.37,
           the discussion of both sections should be considered in terms of any
           overlapping issue.
400.       See Circular 230 § 10.35(f)(2).
401.       See T.D. 9165 (indicating in the preamble that “Section 10.37, unlike
           § 10.35, does not require that the Practitioner describe in the written
           advice the relevant facts (including assumptions and representations), the
           application of the law to those facts, or the Practitioner ’s conclusion with
           respect to the law and the facts.”).
402.       See id.



                                        4–170
                                        Circular 230              § 4:15.8

relevant. Apparently, whether the Practitioner did or did not use
reasonable efforts is an objective one. In other words, the fact that
the Practitioner honestly and perhaps even reasonably believed he had
made reasonable efforts to identify and ascertain the facts may not be
found to be sufficient if it turns out the efforts were not objectively
reasonable.
    The Practitioner must not base the opinion on any unreasonable
factual assumption (including any with respect to future events). 403 An
unreasonable factual assumption is one the Practitioner knows or
should know is incorrect or incomplete.404 As an illustration, the
Circular states that it is unreasonable to assume that a transaction has
a business purpose or is potentially profitable apart from tax bene-
fits.405 However, if a specific description of the business purpose is
included and the Practitioner does not know and has no reason to
know that the business-purpose representation is inaccurate, the
Practitioner may rely on it.406
    The Circular also states that it is unreasonable to rely on a projec-
tion, financial forecast of appraisal if the Practitioner knows or should
know it is incorrect, incomplete, or prepared by a person lacking the
necessary skill.407 This imposes a duty on the Practitioner to consider
carefully any such projection, forecast or appraisal. If, for example, an
appraisal were based on a concept that the courts had rejected, the
Practitioner would presumably violate his or her duties under
section 10.35 if the opinion were based on the appraisal or referenced
it. In short, it would seem that, when rendering a Covered Opinion, the
Practitioner will be required to examine diligently any supporting or
related documents.
    The Practitioner is required to state in a separate section of the
opinion all factual assumptions relied upon in rendering the advice. 408
In addition, the Practitioner must also state in a separate section of the
opinion all factual representations, statements or findings supplied by
the client.409

               [B] Relating the Law to the Facts
  The Practitioner, in rendering a Covered Opinion, must relate the
applicable law to the facts.410 Applicable law includes “potentially



403.       See   Circular   230 § 10.35(c)(1)(ii).
404.       See   id.
405.       See   id.
406.       See   Circular   230 § 10.35(c)(1)(iii).
407.       See   Circular   230 § 10.35(c)(1)(ii).
408.       See   id.
409.       See   Circular   230 § 10.35(c)(1)(iii).
410.       See   Circular   230 § 10.35(c)(2)(i).



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applicable judicial doctrines.”411 Although not specified, those may
include the sham doctrine, the substance-over-form doctrine, the
business purpose doctrine, the economic substance doctrine, and the
step transaction doctrine. Cautious Practitioners will carefully con-
sider each of these doctrines before providing the opinion. Indeed, it
may be prudent to discuss each of the doctrines explicitly even if the
conclusion is reached that the doctrine is entirely irrelevant.412
   The Practitioner cannot assume the favorable resolution of any
Significant Federal Tax Issue except in the case of a Limited Scope
Opinion and in those circumstances in which the Practitioner is
permitted to and does rely on the opinion of another Practitioner.
While there is an implication that, if a question is not a Significant
Federal Tax Issue,413 the Practitioner may make a favorable assump-
tion, the Practitioner is in no circumstances permitted to make an
unreasonable legal assumption.414 As a practical matter, if the issue is
sufficiently noncontroversial so that it does not constitute a Significant
Federal Tax Issue, it would seem unlikely that a Practitioner could be
viewed as making an unreasonable legal assumption in assuming a
favorable resolution.
   Consideration should be given to the interaction between the duty
not to make unreasonable legal assumptions and the more-likely-
than-not standard. As the standard utilized in the advice is raised
from, say, a reasonable-basis conclusion to a more-likely-than-not
conclusion, the potential for a violation of the duty not to make
unreasonable legal assumptions is concomitantly increased. For, as
discussed in the context of section 10.37,415 the use of a high standard
suggests that the taxpayer ’s arguments are strong and that the
government’s countervailing arguments are weak. If it is ultimately
found that the Practitioner minimized the strength of the govern-
ment’s arguments in order to reach a more-likely-than-not conclusion,
a violation of the duty not to make unreasonable legal assumptions
will likely be established. If in the same circumstances, however, the
Practitioner merely provided a reasonable-basis opinion, a finding




411.       See id.
412.       Cf. Long Term Capital Holdings v. United States, 330 F. Supp. 2d 122
           (D. Conn. 2004), aff ’d, 150 F. App’x 40 (2d Cir. 2005) (unpublished)
           (finding that the professional opinion secured by the taxpayer was not
           sufficient to defeat a penalty because it failed to consider authority in the
           circuit where the taxpayer resided involving a judicial doctrine). A discus-
           sion of the judicial tax doctrine is reproduced in Appendix I.
413.       See Circular 230 § 10.35(c)(2)(ii) (indicating that, in the case of a
           Significant Federal Tax Issue, favorable resolution may not be assumed).
414.       See id.
415.       See section 4:14, supra.



                                        4–172
                                       Circular 230                            § 4:15.8

might very well be made that the Practitioner did not minimize the
strength of the government’s argument and that therefore no violation
of the duty occurred.
   Finally, the opinion must not contain internally inconsistent legal
analyses or conclusions.416 For example, a conclusion that the actuar-
ial value of the remainder interest in a charitable remainder was less
than 10% seems inconsistent with a conclusion that the value of the
remainder is deductible for income and gift tax purposes. 417

               [C] Evaluation of the Significant Federal Tax Issues
    The opinion must consider all Significant Federal Tax Issues (with
two important exceptions to be discussed, one for Limited Scope
Opinions and the other for opinions that rely on the opinion of another
Practitioner).418 It is interesting to note that it is theoretically possible
for an opinion to constitute a Covered Opinion even though it does not
discuss any Significant Federal Tax Issue. For example, in the case of a
principal-purpose transaction, written advice will be a Covered Opinion
if it is not excluded advice and if it is not within the safe harbor. Thus,
even if no Significant Federal Tax Issue is implicated, the requirements
of section 10.35 must be satisfied—with the surprising result that
the opinion need not discuss any federal tax issue because none is
significant. As a practical matter, however, it seems unlikely for this to
occur. After all, if there is no Significant Federal Tax Issue, it would seem
that the safe harbor should apply: if the issues are sufficiently noncon-
troversial so as not to constitute a Significant Federal Tax Issue, it would
seem that the Practitioner ought to be able to conclude concomitantly
that the tax benefits sought are consistent with the Code and its purpose
(the safe-harbor test).419
    In any event, for each Significant Federal Tax Issue considered in
the opinion, the Practitioner must provide a conclusion as to the
likelihood that the taxpayer will prevail on the merits. 420 If the
Practitioner is unable to reach a conclusion as to one or more of
those issues, the opinion must so state.421 The opinion must describe
the reasons for the conclusions, including the facts and analysis, or
describe the reasons the Practitioner is unable to reach a conclusion as




416.       See Circular 230 § 10.35(c)(2)(iii).
417.       To constitute a “qualified” charitable remainder trust under I.R.C. § 664, the
           actuarial value of the remainder must be at least 10%. I.R.C. § 664(d)(1)(D).
418.       See Circular 230 § 10.35(c)(3).
419.       See section 4:15.4, supra, for a discussion of the safe harbor.
420.       See Circular 230 § 10.35(c)(3)(ii).
421.       See id.



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to one or more issues.422 As in the case of sections 10.37 and 10.34,
the Practitioner may not consider, in evaluating the legal issues, audit-
lottery probabilities.423
   If the Practitioner cannot reach a more-likely-than-not level of
confidence regarding one or more Significant Federal Tax Issues, the
opinion must prominently disclose 424 that fact and must also
prominently disclose that “the opinion was not written, and cannot
be used by the taxpayer, for the purpose of avoiding penalties that may
be imposed on the taxpayer.”425 In the case of a Marketed Opinion,
however, if the Practitioner cannot reach a more-likely-than-not con-
clusion with respect to each Significant Federal Tax Issue, the opinion
may not be issued.426

              [D]    Overall Conclusion
   The opinion must provide the Practitioner ’s overall conclusion as
to the likelihood that the federal tax treatment of the arrangement is
the proper treatment and the reasons for that conclusion. 427 If the
Practitioner is unable to do so, an explanation must be provided. 428
Note that the overall conclusion can be reached without using the
more-likely-than-not standard. In the case of a Marketed Opinion,
however, the overall conclusion must be based on this standard. 429 If
the Practitioner cannot reach that level of confidence for a Marketed
Opinion, the opinion may not be issued without violating the Circular.
Thus, the Circular makes an important distinction between a Mar-
keted Opinion and other Covered Opinions in this context.



422.       See id.
423.       See Circular 230 § 10.35(c)(3)(iii); see also section 4:14.2, supra, for a
           discussion of this issue in the context of Circular 230 §§ 10.37 and 10.34.
424.       For a definition of “prominently disclose,” see Circular 230 § 10.35(b)(8).
425.       See Circular 230 §§ 10.35(c)(3)(ii) and 10.35(e)(4). For a somewhat
           analogous approach taken for financial accounting purposes, see John
           Gamino, 105 J. TAX’N 227 (2006) (discussing the more-likely-than-not
           requirement under FASB Interpretation No. 48).
426.       See Circular 230 § 10.35(c)(3)(iv). Note, however, that if it is not a
           principal-purpose or Listed Transaction, a Marketed Opinion may none-
           theless be issued if the three disclosures set forth in § 10.35(b)(5)(ii) are
           included. See Circular 230 § 10.35(c)(3)(iv). Also, if the Practitioner has no
           reason to believe that the opinion will be shared with anyone other than
           the client, it would seem that it cannot be a Marketed Opinion. Thus, as
           suggested in the discussion of Marketed Opinions, a Practitioner con-
           cerned about the possibility that the advice will constitute a Marketed
           Opinion may be able to eliminate the concern by restricting the client’s use
           of the advice.
427.       See Circular 230 § 10.35(c)(4).
428.       See id.
429.       See Circular 230 § 10.35(c)(4)(ii).



                                        4–174
                                       Circular 230                          § 4:15.8

               [E]    Competency to Render the Opinion
               [E][1] Practitioner’s Competence and Reliance on
                      Other Practitioners
   As a general matter, the Practitioner must be knowledgeable in all
aspects of federal tax law relevant to the opinion. 430 Practitioners
may, however, rely on the opinion of another professional regarding a
Significant Federal Tax Issue, provided the Practitioner has no basis
for knowing that it would be inappropriate to rely on the other
opinion.431 Where a Practitioner does rely on another Practitioner ’s
opinion, the Practitioner must identify the other opinion and indicate
what conclusions were reached in the other opinion.432

               [E][2] Limited Scope Opinions
   As indicated, as a general rule, section 10.35 requires that the
Practitioner address all Significant Federal Tax Issues.433 Under an
important exception, Practitioners may provide a so-called Limited
Scope Opinion:434 one that considers less than all of the Significant
Federal Tax Issues. A Limited Scope Opinion can be used if:
    (1)   the Practitioner and the taxpayer agree that the scope of the
          opinion and the taxpayer ’s ability to rely on it for penalty
          protection purposes are limited to the federal tax issues
          addressed in the opinion;
    (2)   the opinion does not involve a Listed Transaction or a principal-
          purpose transaction; and
    (3)   it is not a Marketed Opinion.
In addition, a Limited Scope Opinion must prominently disclose 435
that
    (1)   the opinion is limited to the issues considered;
    (2)   there are additional issues that could affect the federal tax
          treatment of the transaction and they are not considered; and
    (3)   the client may not use the opinion for penalty protection purposes
          regarding any Significant Federal Tax Issue not considered.436



430.       See Circular 230 § 10.35(d)(1).
431.       See id.
432.       See id.
433.       See Circular 230 § 10.35(c)(3).
434.       See Circular 230 § 10.35(c)(3)(v).
435.       For a definition of “prominently disclose,” see Circular 230 § 10.35(b)(8).
436.       See Circular 230 § 10.35(e)(3).



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§ 4:15.8                  THE CIRCULAR 230 DESKBOOK

When issuing a Limited Scope Opinion, the Practitioner may make
reasonable assumptions about the favorable resolution of a federal tax
issue but must identify, in a separate section of the opinion, all issues
for which the Practitioner has made such an assumption. 437

              [F]    Required Disclosure on Promoter Relationship
   Each Covered Opinion must prominently disclose438 any compen-
sation arrangement or referral agreement between the Practitioner
(or the Practitioner’s firm) and any person (other than the client for
whom the opinion is prepared) under which the transaction, entity or
plan that is the subject of the opinion will be promoted, marketed
or recommended.439
   The scope of the disclosure rule concerning promoter relationships
could prove to be quite broad. For example, an attorney occasionally
refers individuals to an insurance sales representative who, in turn,
typically recommends that the customer engage the attorney to draft a
trust to hold the policy. The sales representative occasionally refers
other customers who are acquiring policies to that same attorney. If
the attorney prepares a Covered Opinion regarding an insurance trust
for a client recommended by the insurance representative, must the
lawyer include the required disclosure of the relationship with the
insurance representative? The answer is not certain.

              [G]    A Few Points About Form of Covered Opinions
    It also seems appropriate in issuing a Covered Opinion to state that
it is a Covered Opinion and perhaps to state why (for example, that it
involves a Listed Transaction). It may also be appropriate in one
section of the opinion or in appropriate parts to state what Circular
230 requires the opinion to contain. For example, in the section
involving assumptions about favorable resolution of certain federal
tax issues in a Limited Scope Opinion, it may be appropriate to make a
statement to the following effect:

       This, as stated earlier, is a Limited Scope Opinion within the
       meaning of Circular 230. The Circular permits a Practitioner to
       make reasonable assumptions about the favorable resolutions of
       one or more federal tax issues in reaching conclusions on a tax
       issue addressed in the opinion. In reaching certain opinions herein,
       we make those assumptions. The Circular requires that we set
       forth those assumptions in a separate section of our opinion letter.
       In this section of this letter, we will set forth those assumptions.



437.       See Circular 230 § 10.35(c)(3)(v)(B).
438.       For a definition of “prominently disclose,” see Circular 230 § 10.35(b)(8).
439.       See Circular 230 § 10.35(e)(1).



                                       4–176
                                       Circular 230                               § 4:16

§ 4:16           Section 10.33
   Section 10.33 sets forth so-called best practices. As the preamble
indicates in discussing its adoption, the section is entirely aspira-
tional.439.1 Thus, a Practitioner who fails to comply with its provisions
will not be disciplined.440 Nonetheless, it would seem that non-
compliance could conceivably be cited by a client in the context of a
malpractice claim,441 although the standards are so vague that they
may prove to be entirely meaningless.
   The section imposes several best-practice standards on Practi-
tioners. First, Practitioners should communicate with clients about
the terms of the engagement in a clear manner. Second, Practitioners
should evaluate the facts, determine which ones are relevant, and
consider whether any assumptions are reasonable. Third, the Practi-
tioner should apply the law, including judicial doctrines, to the facts.
Fourth, the Practitioner should arrive at conclusions that are consis-
tent with the law and facts. Fifth, the Practitioner should advise the
client of the import of the conclusions reached, including a discussion
as to whether the client may rely on the advice for penalty protection
purposes. Sixth, the Practitioner should act fairly and with integrity
in practice before the Service. Finally, Practitioners having supervisory
responsibility in the firm’s tax department should take reasonable
steps to ensure that there are procedures in place that are consistent
with the goal of causing employees and firm members to follow the
best-practice standards.
   Section 10.36 was expanded in 2011 to require firm management
to take affirmative steps to ensure the firm’s compliance with the
Circular ’s duties. Prior to this amendment, this section required such
steps to be taken only in connection with the preparation of a Covered
Opinion. Under the amendment, the duty to take such steps is now
imposed in connection with tax-return-preparation practice. Thus,




439.1.     See T.D. 9165. However, as discussed elsewhere, section 10.50 of the
           Circular does not exempt section 10.33 from sanction. It is not certain,
           but it seems that it was merely a matter of inadvertence that section 10.50
           was not amended at the same time that the current section 10.33 was
           promulgated, so as to exclude a violation of that section—indicated to be
           aspirational standards only—from being sanctionable.
440.       See id.
441.       See RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 52(2)(c)
           (“[P]roof of a violation of a rule or statute regulating the conduct of lawyers
           may be considered by a trier of fact as an aid in understanding and
           applying” the lawyer’s duty of care.). But see Hizey v. Carpenter, 830
           P.2d 646 (Wash. 1992).



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§ 4:17                   THE CIRCULAR 230 DESKBOOK

this section now requires management to take affirmative steps to
ensure the firm’s compliance with section 10.34.441.1

§ 4:17        Section 10.36: Supervisory Responsibility
              Regarding Section 10.35
    Section 10.36 imposes supervisory duties on the Practitioner who
has principal authority for overseeing the department in the firm that is
in charge of providing federal tax advice. The Practitioner having such
authority must take reasonable steps to ensure that others in the firm
maintain compliance with the rules in section 10.35. Sanctions under
this provision can be based on one of two types of dereliction: failing to
create and maintain procedures designed to ensure compliance, and
failing to take action where there is knowledge or there should be
knowledge that one or more people associated with the firm has engaged
in a pattern of practice that is not consistent with section 10.35. It is
interesting to note that section 10.36 does not cross-reference section
10.34 or section 10.37. This would appear to suggest that supervisory
responsibility only applies in the context of section 10.35.442




441.1.   In terms of firm responsibility in the context of the earned income credit,
         see Treas. Reg. § 1.6695-2(c)(1) (indicating that a firm could be liable for
         the penalty under section 6695 if the manager had prior knowledge of an
         employee’s failure to comply with the due diligence requirements under
         section 6695).
442.     The preamble to the proposed regulations explains the expansion of
         section 10.36 as follows:
            Section 10.36 currently provides procedures to ensure that tax
            practitioners with responsibility for overseeing a firm’s practice before
            the IRS take reasonable steps to ensure that the firm has adequate
            procedures in effect for all members, associates, and employees for
            purposes of complying with § 10.35 regarding covered opinions. The
            procedures to ensure compliance have produced great successes in
            encouraging firms to self-regulate, while at the same time doing so in
            a flexible way that is not a rigid one-size-fits-all regulatory burden.
            Firm responsibility is a critical factor in ensuring high quality advice
            and representation for taxpayers. Accordingly, the IRS and the
            Treasury Department conclude that the procedures to ensure com-
            pliance should be expanded to include practice involving tax return
            preparation activities. Section 10.36 of the proposed regulations
            provides that firm management with principal authority and respon-
            sibility for overseeing a firm’s practice of preparing tax returns, claims
            for refunds and other documents filed with the IRS must take
            reasonable steps to ensure that the firm has adequate procedures in
            effect for purposes of complying with Circular 230.




                                       4–178
                                       Circular 230                              § 4:17.1

    § 4:17.1            Statutory and Constitutional Questions
                        As to the Validity of Section 10.35
   As suggested, in some respects, section 10.35 is not congruent with
the penalty rules contained in the Code. As a consequence, the
Circular raises serious First Amendment issues. In this section, after
rehearsing the lack-of-congruence analysis and the resulting First
Amendment implications, consideration is given to an additional,
related argument: that the Treasury Department, in creating that
incongruence, exceeded the authority it has been given by Congress. 443
   Under section 10.35, written advice concerning a principal-purpose
transaction constitutes a Covered Opinion. As such, the opinion must
reach a more-likely-than-not conclusion regarding any Significant
Federal Tax Issue or it must state that it cannot be relied on by the
taxpayer for penalty-protection purposes regarding that issue. 444 Thus,
for a principal-purpose transaction, a Practitioner may not give an
opinion that there is a reasonable basis for the desired treatment of a
Significant Federal Tax Issue without stating that the taxpayer may not
rely on it in defending against the imposition of a penalty.445 Under
the Code, in contrast, a taxpayer may be able to avoid penalties if the
position is taken in good faith and based on reasonable cause. 446 A
taxpayer may be able to satisfy this standard, and thereby defeat the
penalty, if the position is taken after professional opinion is secured
stating that there is a reasonable basis for the taxpayer ’s position.447




443.       See 31 U.S.C. § 330 (creating the authority to issue regulations concerning
           written advice provided by Practitioners that has the potential for tax
           avoidance or evasion).
444.       See Circular 230 § 10.35(b)(2)(ii)(B).
445.       See id.
446.       See I.R.C. § 6664.
447.       Treas. Reg. § 1.6662-3(b) indicates that, if there is a reasonable basis for the
           position, the taxpayer is not negligent. It then references Treas. Reg.
           § 1.6664-4, which provides that the negligence penalty can be defeated if
           the taxpayer had reasonable cause and was in good faith. Thus, if the
           taxpayer receives a reasonable-basis opinion, that should provide a defense
           against the negligence penalty. See Melnik v. Comm’r, T.C. Memo 2006-25;
           but see Kaplan v. Comm’r, T.C. Memo 2006-16 (rejecting the taxpayer ’s
           penalty defense because the Practitioner advised that there was “substantial
           risk” the Service would prevail). Note, however, that Treas. Reg. § 1.6664-4(c)
           provides that a professional opinion will not defeat a penalty if the taxpayer
           did not reasonably rely on it in good faith. See Santa Monica Pictures LLC v.
           Comm’r, T.C. Memo 2005-104 (imposing the substantial understatement
           penalty in a tax shelter context after rejecting the taxpayer ’s substantial
           authority argument because none of the opinions reached a more-likely-
           than-not conclusion and then rejecting the taxpayer ’s § 6664 argument on
           the different ground that the taxpayer could not have reasonably relied in



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§ 4:17.1                   THE CIRCULAR 230 DESKBOOK

Thus, while a taxpayer may rely on professional advice that there is a
reasonable basis for the claimed position to avoid a penalty, the
Circular prevents the Practitioner from issuing such an opinion unless
it contains an advisory that reliance is not permitted.
    This lack of congruence that the Circular produces cannot be
squared with the First Amendment. While the government can
certainly require attorneys or other Practitioners to make certain
disclosures to their clients, it can do so only when there is an
appropriate justification. In Zauderer v. Office of Disciplinary Counsel
of Supreme Court,448 the state bar required lawyers who advertised
contingency-fee services to include in the advertisement a disclosure to
the effect that the client would remain responsible for certain costs if
the lawsuit were to fail. In upholding the disclosure requirement over a
First Amendment challenge, the Court explained that mandatory
disclosure rules can be justified by the government’s interest in
preventing consumer deception.449
    If, for example, the Code permitted taxpayers to escape a penalty
only if they first secured a more-likely-than-not opinion, the Circular
could certainly require a Practitioner to disclose the fact that reliance
on a reasonable-basis opinion is not a valid defense against the
imposition of a penalty. The justification for requiring the Practitioner
to make such a disclosure would be the government’s concern about
preventing taxpayers from being misled. Thus, when the Circular and
the Code are congruent in that both require a more-likely-than-not
opinion, no First Amendment challenge could be asserted.450 For some
income-tax shelters the Circular permissibly can require, as it does, a
more-likely-than-not opinion given that the Code similarly requires
the taxpayer subjectively to believe that to be the case to defeat the
penalty.451 However, where a reasonable-basis opinion can suffice for

           good faith on the legal opinions that had been secured). See also United
           States v. Boyle, 469 U.S. 241, 251 (1985) (indicating that, when the Code is
           unclear, a taxpayer may avoid a penalty by showing reasonable cause through
           reliance on professional opinion).
448.       Zauderer v. Office of Disciplinary Counsel of Supreme Court, 471 U.S.
           626 (1985). See also Milavetz, Gallop & Milavetz, P.A. v. United States,
           ___ U.S. ___, 2010 WL 757616 (2010) (explaining Zauderer).
449.       See id. at 651–53.
450.       When government seeks to regulate speech when it could effectively address
           its concerns through alternative means—for example, by amending the
           penalty provisions in the Code—the constraint of the First Amendment
           becomes particularly critical. See Thompson v. W. States Med. Ctr., 535 U.S.
           357, 373 (2002) (“If the First Amendment means anything, it means that
           regulating speech must be a last—not first—resort. Yet here it seems to have
           been the first strategy the Government thought to try.”).
451.       See I.R.C. § 6664(d)(2)(C) (requiring the taxpayer, in the case of Listed and
           Reportable Transactions, reasonably to believe the position was more likely
           than not the correct one to defeat the penalty).



                                        4–180
                                       Circular 230                           § 4:17.1

penalty-protection purposes,452 the government cannot defend the
disclaimer that the Circular mandates by pointing to a taxpayer-
deception concern. In short, free discourse between Practitioners and
clients is unjustifiably undermined if the Code permits taxpayers to
assert a reasonable-basis opinion as a defense while the Circular, at the
same time, precludes Practitioners from giving such advice in writing
without including a disclaimer that renders the advice worthless. 453
   In any challenge to the validity of the Circular, however, it is unlikely
that the courts would find it necessary to resolve the First Amendment
question. The courts seek to avoid a constitutional question whenever a
case can be resolved on statutory grounds instead.454 Indeed, when an
agency adopts a regulation that raises constitutional questions, the
courts will refuse to find that the agency had the authority to promulgate
it absent a clear indication in the statute.455 Thus, if the Circular is
challenged on the ground that it fails to maintain congruence with the
Code, the specter of constitutional invalidity would likely lead the court


452.       See Melnik, T.C. Memo 2006-25 (permitting a reasonable-basis opinion to
           defeat the penalty); but see Kaplan v. Comm’r, T.C. Memo 2006-16
           (rejecting the taxpayer ’s penalty defense because the Practitioner advised
           that there was “substantial risk” the Service would prevail).
453.       See also J. Blattmachr, M. Gans & T. Bentley, The Application of Circular
           230 in Estate Planning, 107 TAX NOTES 61 (Apr. 4, 2005); J. Blattmachr,
           M. Gans, T. Bentley & D. Zeydel, Circular 230 Redux: Questions of
           Validity and Compliance Strategies, 107 TAX NOTES 1533 (June 20,
           2005). In Milavetz, Gallop & Milavetz, P.A. v. United States, __ U.S. __,
           2010 WL 757616 (2010), the Court analyzed a statute that, under the
           Court's construction, prevented an attorney from advising a client to
           engage in conduct that would abuse the bankruptcy process. The Court
           upheld the statute (although the First Amendment issue was not squarely
           raised). The Court emphasized the potential for abuse, strongly intimating
           that the First Amendment does not render invalid a restriction designed to
           prevent an attorney from advising a client to engage in abusive conduct.
               Given the Supreme Court’s analysis, it would seem that the Circular
           cannot constitutionally prohibit a Practitioner from giving a reasonable
           basis opinion where the taxpayer is permitted to defeat a penalty on the
           basis of such an opinion. There is no potential for taxpayer abuse in this
           context. There would, however, be a potential for abuse if the Code was
           amended to provide that the taxpayer could not rely on a reasonable-basis
           opinion: a Practitioner who provided a reasonable-basis opinion to a
           taxpayer not permitted to rely on such an opinion would be guilty of
           helping the taxpayer abuse the process—thus making it constitutionally
           permissible under the Milavetz analysis to prevent the Practitioner from
           providing the opinion.
454.       See, e.g., INS v. St. Cyr, 533 U.S. 289 (2001) (resolving statutory ambiguity
           to avoid confronting the constitutional question).
455.       See Solid Waste Agency of N. Cook Cnty. v. U.S. Army Corps of Eng’rs,
           531 U.S. 159, 172 (2001) (“Where an administrative interpretation of a
           statute invokes the outer limits of Congress’ power, we expect a clear
           indication that Congress intended that result.”).



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–181
§ 4:17.1                  THE CIRCULAR 230 DESKBOOK

to conclude that the Treasury did not have the statutory authority to
promulgate it. As will be discussed next, Congress did not indicate any
intent—let alone a clear intent—to authorize the Treasury to use the
Circular as a vehicle to override the Code.
   In the American Jobs Creation Act of 2004,456 Congress amended
section 6664, somewhat altering the elements of the defense that
taxpayers must establish to avoid some penalties (that is, the penalties
imposed under Code sections 6662, 6662A, and 6663). The section, as
amended, continues in essence a two-tier framework. For some tax
shelters (now defined as Listed and Reportable Transactions, which are
the subject of a penalty under new Code section 6662A), the taxpayer
must establish a reasonable belief that the position was more likely
than not the correct one. In all other cases, a more-likely-than-not
standard is not imposed. Instead, the taxpayer must merely establish
reasonable cause and good faith—which, as suggested, can be accom-
plished by reliance on a professional’s reasonable-basis opinion. In
creating that framework, Congress could not have expressed itself
more clearly. Indeed, as indicated, it continued the pattern under the
pre-amendment version of Code section 6664, which similarly re-
quired a more-likely-than-not standard for certain tax shelters and a
less rigorous standard in other cases.
   The question thus becomes whether Treasury had the authority to
require in the Circular that all written advice concerning a principal-
purpose transaction designed to provide penalty protection be accom-
panied by a more-likely-than-not conclusion when Congress provided
so unambiguously just a few months earlier that this standard would
apply only in the limited category of certain tax shelters. While under
the Supreme Court’s Chevron doctrine,457 the authority of an agency
to issue regulations under a statute it administers is quite expan-
sive,458 it is not without limits.
   In Food and Drug Admin. v. Brown & Williamson Tobacco Corp.,459
the Food and Drug Administration sought to regulate tobacco products.
Under the FDA’s governing statute, any exercise of jurisdiction would
have necessarily resulted in a complete ban, given the health risks
involved and the statutory requirement that the FDA remove from the
marketplace unsafe products that fail to offer a therapeutic benefit.
Despite the broad deference that agencies’ regulations enjoy under
Chevron, the Supreme Court held that the FDA lacked statutory
authority to ban tobacco and therefore that the regulation was invalid.


456.       Pub. L. No. 108-357.
457.       Chevron U.S.A. Inc. v. Natural Res. Def. Council Inc., 467 U.S. 837 (1984).
458.       See Mitchell M. Gans, Deference and the End of Tax Practice, 36 REAL
           PROP. PROB. & TR. J. 731 (2002).
459.       FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120 (2000).



                                       4–182
                                       Circular 230                            § 4:17.1

The Court first examined various pieces of legislation in which Congress
had imposed regulations on tobacco (for example, regulations on labeling
and advertising). From that, the Court inferred that Congress intended
that tobacco would remain a legitimate product. Thus, the Court held,
Congress made sufficiently clear in its tobacco-regulating legislation its
intent to permit the product to remain viable, thereby leaving the FDA
without the regulatory authority that would have inexorably led to a
ban.460 In the jargon of Chevron, when Congress unambiguously
resolves an issue, the agency may not adopt a contrary approach.
   Similarly, here, by repeatedly adopting a two-tier framework for
penalties under which the rigorous more-likely-than-not standard
applies only in a limited category of cases, Congress made clear
that in other cases taxpayers should be able to secure and rely on
reasonable-basis opinions supplied by professionals. 461 Yet the Circu-
lar ignores that framework and precludes Practitioners from supplying
this kind of written opinion on a Significant Federal Tax Issue in all
principal-purpose transactions. It would seem that the Treasury
sought to do indirectly (through the Circular) what it was unable to
achieve directly (in Congress). However broad an agency ’s authority
under Chevron, the Supreme Court’s decision in Brown & Williamson
makes clear that it does not extend that far.462
   The Circular stands on even weaker ground than the regulation in
Brown & Williamson. Unlike the FDA’s regulation, the Circular raises
constitutional questions. And, as suggested, in such a case, the courts
are less willing to defer under Chevron, requiring the agency to
demonstrate instead that Congress had a clear intent to confer the
authority the agency claims. Given the penalty provisions Congress
has embedded in the Code, the Treasury’s burden will be considerable
should the Circular be challenged.

460.       For a further discussion of Brown & Williamson, see Gans, supra note 458.
461.       In Brown & Williamson, the Court emphasized that the FDA had
           conceded, before adopting the regulation at issue, that it did not have
           jurisdiction to regulate tobacco. The Court alluded to this concession to
           support its conclusion that Congress had intended to ratify the FDA’s
           understanding and to continue the regulation of tobacco without giving
           the FDA authority to regulate (ban) it. See 529 U.S. at 157. Here, as well,
           the Treasury made clear to Congress its view of the law, adopting the two-
           tier framework in Treas. Reg. § 1.6664-4. And, as in Brown & Williamson,
           Congress, in turn, in amending I.R.C. § 6664, sought to continue that
           framework.
462.       In the statute authorizing the Treasury to regulate Practitioners, 31 U.S.C.
           § 330, the Treasury is authorized to create standards applicable to the
           rendering of written advice concerning an entity or transaction having the
           potential for tax avoidance or tax evasion. See 31 U.S.C. § 330(d). While
           that statute certainly gives the Treasury the authority to issue the Circular,
           it does not give it the authority to render meaningless the two-tier
           framework that Congress recently decided to retain.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–183
§ 4:18                   THE CIRCULAR 230 DESKBOOK

   The argument that the Circular is invalid could be asserted in one
of two ways. It could be raised as a defense by a Practitioner charged
with violating the Circular. Or a professional organization could bring
suit before any disciplinary violation is alleged, claiming that it is
invalid on its face (as opposed to an argument that it is invalid as
applied to a particular Practitioner). While facial challenges can be
problematic and perhaps difficult to sustain, the courts are particularly
receptive when First Amendment issues are implicated. 463 Indeed,
challenges designed to obtain judicial intervention before engaging in
conduct that might be sanctionable are not unusual. 464

§ 4:18        Sanctions and Penalties for Failure to Comply with
              the Circular
   Pursuant to section 10.50, after notice of an opportunity for a
proceeding, a Practitioner may be censured, suspended or disbarred
from practice before the IRS by the Treasury Department for failure to
comply with the requirements of the Circular and certain other
actions. Although final regulations have not yet been issued, the
American Jobs Creation Act of 2004 also permits the Treasury to
impose money penalties for violations.465
   Censure, suspension or disbarment may occur if the Practitioner is
shown to be incompetent or disreputable, fails to comply with the
Circular, or with intent to defraud, willfully and knowingly misleads or
threatens a client or prospective client.
   It will be noted that certain actions that may result in such sanctions
are expressly not prohibited by the Circular and, therefore, are not
technically Circular violations, although they may be violations of the
law. An example is engaging in incompetent and disreputable conduct.
There are three areas of conduct that may result in sanctions:
   (1)   incompetent and disreputable conduct;
   (2)   violating provisions of the Circular (for example, not comply-
         ing with the requirements of whichever of section 10.35 or
         10.37 applies for written advice about federal tax issues); and

463.     See, e.g., United States v. Salerno, 481 U.S. 739 (1987) (discussing the
         rigorous standards employed by the courts when a facial challenge is brought
         if the First Amendment is not implicated). It should be noted that the
         Supreme Court just recently decided to review the continuing viability of
         Salerno. See Ayotte v. Planned Parenthood of N. New England, 546 U.S. 320
         (2006) (discussing appropriate remedy when, on a facial challenge, statute is
         found to be partially invalid). For a further discussion on the ripeness
         question, see City of Auburn v. Qwest Corp., 260 F.3d 1160 (9th Cir. 2001).
464.     See, e.g., N.Y. State Bar Ass’n v. FTC, 276 F. Supp. 2d 110 (D.D.C. 2003)
         (challenging the application of the privacy law by the FTC to lawyers).
465.     Proposed regulations have been issued and are reproduced at Appendix P.



                                      4–184
                                       Circular 230                           § 4:18.1

    (3)   willfully and knowingly misleading or threatening a client or
          prospective client with an intent to defraud.
As will be discussed later, the requisite intent for violation (for
example, willful or reckless action) varies from category to category.

    § 4:18.1            Meaning of “Incompetence and Disreputable
                        Conduct”
   Section 10.50(a) provides that engaging in incompetent or disrepu-
table conduct may be sanctioned.466 Section 10.51 provides a non-
exclusive list of certain types of action defined as incompetence
or disreputable conduct that may be sanctioned—in other words,
section 10.51 defines what is regarded as incompetent or disreputable
conduct and section 10.50 provides that such conduct may be
sanctioned.466.1 However, certain conduct will result in censure or
suspension or disbarment from practice before the IRS only as a result
of gross incompetence (or recklessness or, in some cases,
willfulness).467
   Section 10.50(a) provides for the imposition of sanction “if the
[P]ractitioner [(1)] is shown to be incompetent or disreputable, [(2)] fails
to comply with any regulation in this part, or [(3)] willfully and
knowingly misleads or threatens a client or prospective client.” It
will be noted that there are three different violations. (The “(1),” “(2)”
and “(3)” do not appear in the section and have been added for
clarification.) It will be noted that the only one that requires any
willful act is the third. As has been discussed above, section 10.51 sets
forth a non-exclusive list of conduct that is “incompetence and
disreputable” conduct “for which a [P]ractitioner may be censured,
suspended or disbarred from practice before the” IRS. A contrast,

466.       Prop. Treas. Reg. § 10.51 of the Circular would expand incompetent and
           disreputable conduct to include a Practitioner ’s failure to sign a return
           prepared by the Practitioner and a Practitioner ’s disclosure or use of
           returns or return information in a manner not authorized by the Code,
           a court of competent jurisdiction, or an administrative law judge in a
           disciplinary proceeding instituted under Circular 230 § 10.60.
466.1.     In 2011, section 10.50 was amended to provide that the IRS has the
           authority to accept a Practitioner ’s offer to be sanctioned in lieu of
           pursuing a proceeding against the Practitioner.
467.       See, e.g., Circular 230 § 10.52(a)(2) (providing that a Practitioner may be
           censured, suspended or disbarred from practice before the IRS for reck-
           lessly or through gross incompetence violating § 10.34 (relating to stan-
           dards for advising with respect to tax return positions and for preparing
           or signing tax returns)); § 10.35 (relating to giving certain writing advice
           about a federal tax matter); § 10.36 (relating to procedures for the
           Practitioner who has principal authority for overseeing a firm’s tax
           practice); or § 10.37 (relating to requirements for written advice that
           does not constitute a Covered Opinion under § 10.35).



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–185
§ 4:18.1              THE CIRCULAR 230 DESKBOOK

whether intentional or not, will be noted between sections 10.50(a)
and 10.51. Section 10.50(a) refers to “incompetent or disreputable”
while section 10.51 defines conduct that is “incompetence and
disreputable.” (Emphasis added.) It seems logical, especially because
section 10.51 says the Practitioner may be censured, suspended or
disbarred for the conduct, that the authority granted to the Secretary of
the Treasury or his or her delegate in section 10.50(a) to censure,
suspend or disbar a Practitioner who is shown to be incompetent
or disreputable overlaps with the sanctionable incompetence and
disreputable conduct section 10.51 describes.
    As just mentioned, only the third action described in section 10.50(a)
need be shown to be willful to be sanctioned. There is no prerequisite
that an incompetent or disreputable act or a failure to comply with any
“regulation in this part” need be willful, reckless or fail to meet any
particular standard. Of course, “incompetent” suggests that it must be
shown to have been the result of incompetence (perhaps, including
negligent action). But the authority to sanction under section 10.50(a)
for failure to comply with any regulation contained in the Circular does
not require any standard of behavior, such as negligence, incompetence,
recklessness or willfulness.
    It seems interesting to note that the breakdown of sanctionable action
under section 10.50(a) does seem to distinguish clearly between
(1) incompetent or disreputable action, and (2) failure “to comply with
any regulation in this part.” (“Part” seems to mean all of Circular 230.
The Circular is part 10 of 31 C.F.R. and is titled “Part 10—Practice Before
The Internal Revenue Service.”) That seems to suggest that engaging in
incompetent or disreputable action is not to be considered a failure to
comply with any regulation of the Circular. It seems each section of the
Circular is a regulation (whether contained in subpart B or subpart C),
including those actions listed in section 10.51 as incompetence and
disreputable conduct. But if sense is to be made from the distinction set
forth in 10.50 between incompetent or disreputable conduct, on the one
hand, and failure to comply with any regulation in the Circular, then it
seems the incompetence and disreputable conduct is not necessarily a
violation of a regulation under the Circular.
    In some ways, that distinction may make some sense. For instance,
incompetence and disreputable conduct includes, under section 10.51
(a), the conviction of any criminal offense under the revenue laws of
the United States. The Circular does not prohibit a Practitioner from
being so convicted but simply provides for sanctions if he or she is.
And certain of the conduct labeled under section 10.51 as incompetence
and disreputable sets a standard. For example, under section 10.51(j),
the aiding and abetting of another in practice before the IRS while
such other is under suspension or disbarment requires that the aiding
and abetting be “knowing.” Similarly, under section 10.51(l), the



                                 4–186
                                       Circular 230              § 4:18.1

giving of a false opinion must be done “knowingly, recklessly or
through gross incompetence” to constitute incompetence and disrep-
utable conduct.
   But not all subsections of section 10.51 require any particular
standard of behavior. For instance, failure properly and promptly to
remit funds received from a client for the purpose of payment of
taxes constitutes incompetence and disreputable conduct under
section 10.51(g). There is no knowing, intentional, reckless or other
standard. That, however, would prove too much. For example, a solo
Practitioner is given funds by a client to remit to the IRS for a tax
payment. The Practitioner goes to her office intending to place the
check in an envelope and mail it immediately to the IRS. But she
suffers a stroke that places her in a coma, and the funds are not
promptly and properly remitted. It seems beyond any question that the
Practitioner could not be charged as having committed conduct that is
incompetent and disreputable. On the other extreme is a Practitioner
who intentionally fails to remit the funds. He or she certainly would
have engaged in the type of incompetent and disreputable conduct
described in section 10.51(g). Other cases, such as where the Practi-
tioner was simply negligent in failing to remit the funds as described in
the section, are less certain. On the one hand, one could maintain that
because the funds were not promptly and properly remitted the Practi-
tioner has engaged in the incompetent and disreputable conduct de-
scribed in the section, particularly because interest and possibly
penalties would likely be assessed against the taxpayer. On the other
hand, there must be an exception from strict liability, such as where
a circumstance beyond the Practitioner’s control (for example, a stroke)
results in the failure to remit the funds in a prompt and proper manner.
   It might be that section 10.52 provides an answer as to the standard
of behavior that must be proved for the Practitioner to be sanctioned.
Section 10.52(a) states that, other than with respect to violations of
sections 10.34 (dealing with advice relating to tax returns); 10.35
(dealing with Covered Opinions); 10.36 (dealing with the person in
charge of a tax department having to take action to ensure compliance
with sections 10.35 and 10.37); and 10.37 (dealing with written tax
advice that does not constitute a Covered Opinion), a Practitioner may
be sanctioned only if the violation of any regulation in the Circular is
willful. Section 10.52(b) states that the Practitioner may be sanctioned
for a violation of any of sections 10.34, 10.35, 10.36 or 10.37 that is
reckless or the result of gross incompetence. Hence, viewed by itself,
section 10.52 could be viewed as suggesting a Practitioner could be
sanctioned for engaging in incompetent and disreputable conduct only if
the conduct was willful. In other words, unlike section 10.50(a), section
10.52 does not have a separate category for incompetent or disreputable
conduct. However, it may well be that section 10.52 deals only with the



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–187
§ 4:18.1                   THE CIRCULAR 230 DESKBOOK

duties set forth in subpart B of the Circular and not the incompetent and
disreputable conduct described in subpart C of the Circular, and where
the wording in section 10.52 speaks of “willfully violating any of the
regulations . . . contained in this part,” it means only the regulations
contained in subpart B. On the other hand, the heading of subpart C,
which deals with the incompetent and disreputable conduct, itself is
“Sanctions for Violations of the Regulations.” (Emphasis added.)
   But the interpretation that a Practitioner may be sanctioned for
engaging in incompetent and disreputable conduct only if it is willful
(as, perhaps, section 10.52 may imply) is troublesome in two ways.
First, in some cases, the incompetent and disreputable conduct is
described in terms of gross incompetence or recklessness. For example,
a Practitioner ’s conduct is incompetent and disreputable, under
section 10.51(l), if the Practitioner gives a false opinion recklessly or
through gross incompetence. Requiring, as section 10.52(a) may
suggest, that the conduct must be willful seems contrary to
section 10.51(l). Even if one could suggest that the action, which
resulted in giving a false opinion recklessly or through gross incompe-
tence, must be willful (for example, the Practitioner willfully gave the
opinion) to support a sanction, that construction seems contradicted
by section 10.51(l) because the Practitioner ’s conduct is incompetent
and disreputable if the false opinion is given recklessly, through gross
incompetence or knowingly. There seems little, if any, difference
between knowingly and willfully.
   As a result, it is uncertain what standard of conduct is subject to
sanction if the Practitioner ’s conduct is described in any part of
section 10.51 as incompetent and disreputable. It may be a matter
of strict liability, as would seem to be the case with the conviction of
any criminal offense under the revenue law of the United States. Or,
perhaps, it would require some “wrongdoing,” such as negligence, or
where there is a misappropriation of funds given by the client to the
Practitioner for remittance to the IRS for taxes.
   As explained above, when a complaint for a violation of the Circular
issued against a Tax Practitioner by the Director of the Office of
Professional Responsibility is not otherwise resolved, the matter is
tried before an Administrative Law Judge. Complaint No. 2006-1 467.1
of the Director against John M. Sykes, III, an attorney, was tried before
Administrative Law Judge Richard A. Scully, who entered his decision
on January 29, 2009. Mr. Sykes was apparently the partner at Shear-
man & Sterling involved in the tax shelter at issue in Long Term
Capital.467.2 That case is instructive about substantive and procedural
issues relating to alleged violations of the Circular.


467.1.     This complaint is reproduced as Appendix EE.
467.2.     For a discussion of this case, see section 4:14.2.



                                       4–188
                                       Circular 230               § 4:18.1

   The Director sought to have Mr. Sykes suspended from practice
before the IRS for one year for an alleged failure to exercise due
diligence in connection with certain written opinions he issued to
an investment firm and for allegedly engaging in willful or disreputable
conduct within the meaning of the Circular, based in part upon
the fact that he issued “short form” opinions in 2000, which recited
the facts and conclusions of law but contained no analysis of the law.
On the basis of Mr. Sykes’s opinions and those of another firm, the
client took a deduction for an alleged loss it sustained on the sale of
certain stock. The IRS disallowed the loss and the client challenged
the IRS determination. The district court held that the transaction
“lacked economic substance” and that the overall transaction “con-
stituted a single sham transaction not having a reasonable expectation
of profit and lacking in any business purpose other than tax avoid-
ance.” The district court held the client subject to penalties, apparently
under section 6662 for substantial underpayment of income tax. After
the district court decision, the Department of Justice referred the
matter to the Office of Professional Responsibility (OPR), which issued
a complaint against Mr. Sykes.
   According to the Administrative Law Judge, Mr. Sykes, although
acknowledging that he had been involved in “limited practice” before
the IRS, did not concede that the matters involved in the complaint
constituted practice before the IRS (a critical predicate for application
of the Circular). The judge, however, stated that Mr. Sykes did not
pursue that contention in his post-trial brief. Nevertheless, the judge
found that, because the “ultimate purpose of the . . . opinions . . . was
to convince the IRS that the basis of the stock . . . for tax purposes
was what the opinion said it was and to shield the taxpayer from
penalties . . . if the IRS disagreed with the basis being claimed,”
Mr. Sykes was subject to the Circular. It is, perhaps, instructive that
the Administrative Law Judge did not find Mr. Sykes subject to the
Circular on account of his limited practice before the IRS, but because
he had issued a written opinion on federal tax issues that was intended
to convince the IRS of the stock’s income tax basis and to insulate the
client from tax penalties. Hence, it may well be that, even if an
attorney or CPA has never been a taxpayer ’s representative before the
IRS (for example, has never been appointed the attorney-in-fact for a
taxpayer for tax purposes), just advising about a federal tax matter may
be sufficient to cause him or her to be subject to the Circular. As
discussed in section 4:6, the Circular only applies to lawyers and CPAs
who “practice” before the IRS, which certainly covers those who file a
“written declaration” of taxpayer representation, such as being named
as the attorney-in-fact for the IRS with respect to a matter before it. In
addition, however, under the American Jobs Creation Act of 2004
(“2004 Act”), the writing of an opinion concerning a transaction with



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–189
§ 4:18.1                 THE CIRCULAR 230 DESKBOOK

the potential for tax avoidance or evasion is sufficient to trigger
application of the Circular. This amendment to the authorizing
statute is now embodied in section 10.2(a)(4). In any case, the complaint
against Mr. Sykes involved activity apparently well before the 2004 Act
was enacted, suggesting a broad meaning for the term “Practitioner” for
purposes of the Circular even prior to the 2004 Act.
   The complaint against Mr. Sykes alleged he failed to exercise the
due diligence required of a Practitioner under section 10.22(a) and (c).
A Practitioner is required to exercise due diligence in preparing or
assisting in the preparation of, approving, and filing U.S. tax returns,
documents, affidavits, and other papers relating to IRS matters, in
determining the correctness of oral or written representations made by
the Practitioner to the Department of the Treasury, and in determining
the correctness of oral or written representations made by the Practi-
tioner to clients with reference to any matter administered by the
IRS.467.3 Section 10.22(a)(3) requires that due diligence be exercised in
determining the correctness of oral or written representations to
clients with reference of any matter administered by the IRS.
   Specifically, the complaint alleged that due diligence required by
section 10.22 was not met because:
   (1)     the opinions rendered by Mr. Sykes failed to discuss IRS
           Notice 95-93 (which dealt with similar transactions among
           other things);
   (2)     the opinions did not discuss the substance over form or
           similar judicial tax doctrine;
   (3)     the opinions failed to analyze the economic substance of the
           transactions; and
   (4)     Mr. Sykes did not make sufficient inquiries to determine
           whether:
           (a)   the assumptions contained in the opinions (for example,
                 appraised values) were valid,
           (b)   the transactions had a valid and reasonable expectation
                 of a pre-tax profit, and
           (c)   the parties to the transactions had complied with the
                 contractual terms of the transactions.
   It seems apparent that the Administrative Law Judge concluded
that the attorney’s issuance of the opinion letter was an act of
preparing or assisting in the preparation of, or was an approval of,


467.3.     Circular 230 § 10.22. See also Circular 230 § 10.34 dealing with advice
           with respect to return preparation, discussed at § 3.



                                     4–190
                                       Circular 230               § 4:18.1

the returns the client filed. It may also be that the Administrative Law
Judge viewed the opinions as constituting a representation to his client
with reference to a matter administered by the IRS.
   The Director of OPR presented no witnesses. Several individuals
testified on behalf of Mr. Sykes, including a Mr. Langdon, a former
Commissioner of the Large and Midsized Business Division of the
IRS, which deals with corporate tax shelter activity, as an expert
witness.
   Based in part on the fact that the rules relating to “covered
opinions” under section 10.35 were not issued until 2004, the judge
found that “OPR has failed to establish that [Mr. Sykes’s] use of short
form opinions was inappropriate or is evidence of a lack of due
diligence.” (Footnote omitted.) Section 10.35, as discussed in detail
at section 4:15, requires, among other things, that where written
advice with respect to a Listed Transaction is involved, where the
principal purpose for entering into the transaction is tax avoidance, or
where tax avoidance is a significant purpose and other elements are
present, such written advice, in general, must relate the law to the
facts and must discuss applicable judicial tax doctrines (such as
substance over form). Almost certainly, as indicated by the Adminis-
trative Law Judge’s decision, the opinions rendered by Mr. Sykes,
which were the subject to the OPR Complaint against him, would
be Covered Opinions under section 10.35 and Mr. Sykes’s opinions
would not have complied with that section. But merely complying
with the form of a Covered Opinion as now required by section 10.35
may not be a defense to a charge of lack of due diligence under section
10.22. Moreover, section 10.37, which set forth requirements for
written tax advice that does not constitute a Covered Opinion, does
not require that the Practitioner relate the law to the facts or discuss
potentially applicable judicial tax doctrines.
   The judge found that the client was aware of the specific matters
(for example, IRS Notice 96-53467.4) the OPR contended should have
been mentioned in the opinions. But the judge goes on to add “More
importantly (sic), the evidence shows that [Mr. Sykes] was aware of
Notice 95-53 and had analyzed the statutes and legal doctrines
referenced therein before he issued the . . . opinions*** and in the
course of . . . research and analysis . . . recognized the possible
applicability and considered each of the . . . statutes and common law
doctrines . . . delineated in notice 95-53.” Although far from certain, it
may be that this statement suggests that a Practitioner who fails to
become aware of and to analyze what may be relevant law, including any
potential judicial doctrine, may be guilty of a Circular violation even if
the advice rendered to a taxpayer is not a Covered Opinion or is oral. It

467.4.     1996-2 C.B. 219.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–191
§ 4:18.1                 THE CIRCULAR 230 DESKBOOK

also suggests that Practitioners likely should keep a record of research
conducted or at least of the analysis he or she has made.

              [A] Conviction of Criminal Violation of Revenue or
                  Certain Other Laws
   A Practitioner may be sanctioned pursuant to section 10.50 if the
Practitioner is convicted of any criminal offense under the revenue
laws of the United States. For example, if the Practitioner is convicted
of criminal tax fraud, the Practitioner may be sanctioned under
section 10.50.

              [B]   Conviction of Crime Involving Dishonesty or
                    Breach of Trust
   A Practitioner may be sanctioned pursuant to section 10.50 if the
Practitioner is convicted of any criminal offense involving dishonesty
or breach of trust.468 Dishonesty probably encompasses any type of
fraud, such as larceny, embezzlement, etc. It almost certainly would
include mail fraud and, perhaps, obstruction of justice. It does not
seem to cover crimes of violence, such as murder, although subsequent
behavior such as lying to the police would constitute criminal dis-
honesty, though the criminal may not be charged a separate crime for
that. Breach of trust is not defined. It certainly would cover embezzle-
ment by a lawyer of client funds. But that also would be a crime of
dishonesty. Hence, there may be overlap between the two categories of
crimes. One crime involving a breach of trust which may not be one
involving dishonesty is corrupting the morals of a minor with respect
to whom the Practitioner is a guardian. Crimes generally consist of
both misdemeanors and felonies. This rule does not distinguish
between those two categories and, therefore, probably covers either if
involving dishonesty or a breach of trust.

              [C]   Conviction of a Felony Rendering the
                    Practitioner Unfit to Practice Before the IRS
   Incompetence and disreputable conduct includes the conviction of
any felony under federal or state law for which the conduct involved
renders the Practitioner unfit to practice before the IRS. This broad
statement is not explained. Perhaps it may be viewed as similar to the
offense that a military officer may commit of “conduct unbecoming an
officer.” Generally, a criminal statute cannot be too vague or it is not


468.       Rules governing suspension of practice by lawyers and CPAs may be even
           more severe in some cases. Cf. American Institute of Certified Public
           Accountants Bylaws BL section 730 (suspension or termination of AICPA
           membership without a hearing upon conviction of a crime punishable by
           imprisonment for more than one year). See Appendix J.



                                     4–192
                                       Circular 230                § 4:18.1

enforceable. Because the sanctions under the Circular are not criminal
sanctions, that rule does not apply. In fact, it may well be that this rule
is less stringent than it could be. In other words, rather than providing
that conviction of a felony constitutes incompetence and disreputable
conduct, the rule quite apparently means that not all felony convic-
tions are subject to sanction under section 10.50.
    However, there is nothing to suggest that the Office of Professional
Responsibility of the IRS may unilaterally decide which felonies would
render the Practitioner unfit to practice before the IRS. As a general
rule, the burden of proof is on the government to prove that the
Practitioner should be sanctioned, at least with respect to the facts that
must be established to show the Practitioner engaged in a certain
action. Whether the conviction of the felony renders the Practitioner
unfit to practice before the IRS may be a question of law as opposed to
one of fact, where the burden of proof almost certainly is on the
government. It may be that the specific facts involved in the felony will
determine if the conviction renders the Practitioner unfit. In other
words, a crime of violence may be a “serious” felony (labeled a “class A
felony”) in some states but it may not necessarily mean that the
Practitioner is unfit for practice before the IRS.

               [D] Providing False or Misleading Information to the
                   Treasury or Tribunal
   A Practitioner may be sanctioned under section 10.50 if he or she
gives false or misleading information, or participates in any way in
giving false or misleading information, to the Department of the
Treasury or to any tribunal authorized to pass upon federal tax
matters, in connection with any matter pending or likely to be pending
before the Treasury or the tribunal, knowing such information to be
false or misleading.
   For this purpose, information includes facts or other matters
contained in testimony, federal tax returns, financial statements,
applications for enrollment, affidavits, declarations, or any other
document or written or oral statement. “Other matters” may be legal
arguments that the Practitioner knows are false or misleading. It
should not include expressions of opinion or boasting such as stating
to an IRS official, “I think the courts will rule in favor of my client”
even if the Practitioner does not believe it.
   It will be noted that, in any event, the Practitioner must know the
information to be false or misleading. An example would be where the
Practitioner provides an IRS agent with “losing” horse racetrack tickets
to attempt to offset gambling winnings where the Practitioner knows
the tickets were not purchased by the taxpayer but merely picked up
from the floor. The act of supplying them to the agent probably
would be regarded as misleading even if the Practitioner does not



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–193
§ 4:18.1                  THE CIRCULAR 230 DESKBOOK

affirmatively state that his or her client purchased them; the mere act
of supplying them likely would be misleading and the Practitioner
could be charged with knowing they are misleading.
    Providing false information may also include calling a witness
whose testimony the Practitioner knows is false.
    The term “tribunal” is not defined. It probably includes any court and
any proceeding before an Administrative Law Judge in a hearing con-
ducted against a Practitioner pursuant to the Circular. An appearance
before the Appeals office of the IRS almost certainly is included,
whether treated as a presentation to the Treasury (the IRS being a
bureau of the Treasury, and, therefore, the IRS Appeals office being part
of the Treasury) or a tribunal.
    Supplementing a filing with the IRS almost certainly is covered by
this rule as well, even if it is not technically a federal tax return and
even if any matter relating to it is not under audit or other review by
the IRS.

              [E]   Soliciting Employment in Violation of the
                    Circular
    Soliciting employment as a Practitioner in a manner prohibited in
section 10.30469 or the use of false of misleading representations with
intent to deceive a client or prospective client in order to procure
employment, or intimating that the Practitioner is able improperly to
obtain special consideration or action from the IRS constitutes in-
competence and disreputable conduct under section 10.51 that may be
sanctioned under section 10.50.
    An illustration of conduct covered by this rule may include a
knowing overstatement of the Practitioner ’s experience or success
such as overstating the number of audits the Practitioner has con-
ducted or “concessions” he or she has received from the IRS if the
purpose is to procure employment as a Practitioner. If the Practitioner
is a former IRS employee, exaggerating the length of employment with
the Service or the level of employment reached also would be covered if
the purpose for the misstatement is to procure employment as a
Practitioner.
    Similarly, overstating one’s education or the number or types of
licenses held may be covered, again if the purpose is to procure such
employment. For example, telling a prospective client about how well
the Practitioner did in law school in moot court competition or in tax
courses may be misleading if the Practitioner did not graduate
from law school or become a member of the bar. It may be difficult
to discern whether such a statement would serve as grounds for


469.       See section 4:11, supra.



                                      4–194
                                       Circular 230                             § 4:18.1

discipline: The government would have to establish that, under the
circumstances, the statement, even if not “technically” false (the
Practitioner never stated whether he or she graduated from law school
or became a member of the bar), was misleading, and also have to
establish it was for the purpose of procuring employment. The latter
may be easier to establish than the former but, in any event, it seems
that the burden of proof would be on the government with respect to
both matters. Additional statements, of course, may provide the proof.
For instance, if the Practitioner stated something like, “Of course now,
because I limit my practice solely to matters before the IRS, I don’t
engage in practice of other types of what you would call law,” then his
or her statements about law school may be found to have been
knowingly misleading even though the Practitioner never explicitly
stated that he or she graduated from law school or became a member
of the bar.

               [F] Willful Failure to File Return, Pay Tax and
                   Related Offenses
   Incompetence and disreputable conduct, subject to sanctions under
section 10.50, includes

         [W]illfully failing to make a Federal tax return in violation of the
         revenue laws of the United States, willfully evading, attempting to
         evade, or participating in any way in evading or attempting to
         evade any assessment or payment of any federal tax, or knowingly
         counseling or suggesting to a client or prospective client an illegal
         plan to evade Federal taxes or payment thereof.

   The scope of this “prohibited” action is somewhat uncertain.469.1
Willfully failing to make a federal tax return in violation of the revenue
laws seems to cover at least a return the Practitioner is required to file
for himself or herself, such as the Practitioner ’s own income or gift tax
return. It may also include any return for which the Practitioner has
an obligation to file, such as where the Practitioner is the officer of a
corporation who is responsible for filing the return for the corporation
and willfully fails to do so.
   The word “make” rather than the word “file” may suggest it
includes a circumstance where the Practitioner has been engaged to
prepare a return for a client and fails to do so. Similarly, it probably
includes a situation where the client has signed and delivered to the


469.1.      In a decision announced by OPR, the Appellate Authority sustained a
            disbarment of an attorney for failing to file returns on a timely basis over a
            period of years. OPR had also alleged that a sanction was appropriate based
            on a willful failure to pay. The Appellate Authority sustained the sanction
            without addressing the failure-to-pay issue. See IR-2011-52.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–195
§ 4:18.1                   THE CIRCULAR 230 DESKBOOK

Practitioner a tax return that the Practitioner has represented that he
or she will file for the client but willfully fails to do so.
   It is unclear if the rule encompasses a “knowing” failure to file a
return that the Practitioner knows is due but intends to file later, but
does not file before being charged with a violation. The failure to file
on time, even if willful, may not constitute willfully failing to make a
return though existing authority suggests that a failure to timely file is
sanctionable.469.2
   It seems that the adverb “willfully” modifies each of “evading,
attempting to evade, or participating in any way in evading or
attempting to evade any assessment or payment of any Federal tax”
and not just “evading,” although literally the grammatical structure
may suggest it applies only to “evading.” Nonetheless, the context
suggests it applies to all of the actions just quoted. “Willful” means
“the voluntary, intentional violation of a known legal duty.”470 The
term “willful” is contrasted, it seems, with the term “reckless” and
with “incompetence” in some sections of the Circular.471 “Willful”
may be contrasted in section 10.51(f) itself with the word “knowingly,”
which modifies “counseling or suggesting to a client or prospective
client an illegal plan to evade Federal taxes or payment thereof.”
“Knowingly” may or may not mean something different from
“willfully.”
   It is uncertain what the phrase “in any way” means. Because
“willfully evading” and “attempting to evade” are expressly covered,
adding “or participating in any way in evading or attempting to evade”
suggests even participation, if willful, is covered even if the Practi-
tioner is not the “instigator” and even if his or her participation is
secondary and not substantial. “Participating in any way” suggests it
is intended to at least cover providing assistance to another who is
attempting to evade tax. If so, it raises the issue of how “willfully”
contrasts with “knowingly.” For example, a Practitioner willfully
assists someone who is attempting to evade a federal tax but the
Practitioner does not know that the taxpayer is attempting to evade
the tax. It seems that such action by the Practitioner should not fall
within the scope of the conduct described in section 10.51(f). On the
other hand, the due diligence requirement of section 10.22(a)(1) likely


469.2.     See U.S. Dep’t of the Treasury, Office of Prof ’l Responsibility v. Kilduff,
           Complaint No. 2008-12 (“Accordingly, willfully failing to timely file a
           return is disreputable conduct within the express language of section
           10.51(f).”).
470.       Cheek v. United States, 498 U.S. 192, 201 (1991). See Office of Prof ’l
           Responsibility v. Chandler, Complaint No. 2006-23 (applying Cheek in
           finding that the CPA had violated the Circular by reason of a failure to file
           his personal tax return).
471.       See, e.g., Circular 230 § 10.52(a).



                                        4–196
                                       Circular 230                        § 4:18.1

means that by assisting in the preparation of a return, the Practitioner
has some obligation to attempt to determine its accuracy and could
not ignore blatant indications of improper reporting.
   Thus, if the Practitioner should have known that the purpose of tax
evasion was present but failed to discern it by reason of acting
incompetently or grossly incompetently, the Practitioner ’s conduct
would fall within the scope of section 10.51(f).
   Section 10.51(f) includes evading or attempting to evade not just
the payment of tax but its assessment as well. As a general rule, federal
tax must or may be paid only if it is assessed. Filing a fraudulent return
constitutes evasion of tax and is intended, in all likelihood, to avoid
both the assessment and payment of tax. However, because both
“assessment” and “payment” are mentioned and separated by the
disjunctive “or,” the Circular seems to suggest that a taxpayer could
evade or attempt to evade assessment without avoiding payment, or
evade payment without avoiding assessment.
   A circumstance where a taxpayer might attempt to avoid payment
but not assessment is to claim that a tax that has been assessed has
been paid even though it has not been paid. Another situation might
be where the taxpayer hides his or her assets or transfers them to
another in an attempt to avoid paying tax that has been or will be
assessed. It is, however, difficult to imagine a taxpayer only trying to
avoid the assessment but not the payment of tax.
   As mentioned above, the last part of section 10.51(f) involves
knowingly counseling or suggesting to a client or prospective client
an illegal plan to evade federal taxes or the payment of such tax.
The word “knowingly,” as suggested above, seems to mean that the
Practitioner knows the plan is “illegal” and knows it will evade federal
tax or its payment. No definition of “illegal” is offered in the section or
the Circular. The word, in some ways, seems unnecessary, as evasion
of a federal tax is a crime and, therefore, illegal. Perhaps it was added to
modify “payment of tax” because, in general, planning to avoid paying
tax is not a crime, but it seems that “evade” modifies both the evasion
of tax and the evasion of paying the tax, both of which, no doubt,
would be viewed as crimes and, therefore, be illegal, in the usual sense
of the word “illegal.” It might arise in a circumstance where the plan is
“legal” but is being employed to evade federal tax or its payment. For
example, engaging in a transaction (such as a particular investment)
might be “legal,” and even if it is intended to result in the evasion of
the tax or its payment, it does not seem to fall within the scope of that
part of section 10.51(f) because the plan is not illegal.472




472.       Cf. Schulman v. United States, 817 F.2d 1355 (9th Cir. 1987).



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–197
§ 4:18.1                 THE CIRCULAR 230 DESKBOOK

              [G]   Misappropriation of Client’s Tax Funds
   The misappropriation of, or failure properly and promptly to remit,
funds received from a client for the purpose of payment of taxes or
other obligations due the United States constitutes incompetence and
disreputable conduct under section 10.51(g).473
   This provision appears to cover situations where a client has
entrusted funds with a Practitioner to pay taxes or other obligations
due the federal government. Although the broad language of “other
obligations due the United States” would seem to cover any pecuniary
obligation due the government including taxes, the presence of “taxes”
suggests that it is limited to revenue law matters such as interest, user
fees due the Treasury Department or penalties. The misappropriation
of other funds due the United States (such as a payment for equipment
sold by the government) would not seem to be encompassed by the
section.
   Nevertheless, the section seems to cover not just a failure to remit
the funds but the failure to do so “properly and promptly.” “Properly”
may cover a situation where the funds are remitted to the government
but have been credited to the incorrect taxpayer or incorrect return.
Making a tax payment on behalf of the client at the last moment it is
due under the Code, but not earlier, would seem to have been made
promptly. Also, making a tax payment within a reasonable time after
the funds have been transferred by the client to the Practitioner
should be regarded as having been made promptly, even if the client
should have transmitted the funds to the government earlier. For
example, estate tax is being paid on the installment basis under
section 6166 of the Code (relating to the deferral of payment of estate
tax attributable to the value of certain “closely held” companies). The
client fails to deliver the funds to pay the installment currently due in
a manner that allows the Practitioner to make the payment when it is
due under the extension to pay provisions of section 6166. Even
though the payment is late, the Practitioner should be treated as
making the payment promptly if he or she remits it within a reason-
able time after the client transmits the funds to the Practitioner to
effect the payment.

              [H]   Bribes to and Threats Against IRS Employee
   A Practitioner may be sanctioned pursuant to section 10.50 if the
Practitioner, directly or indirectly, attempts to influence or offers or
agrees to attempt to influence the official action of any officer or
employee of the IRS by use of threats, false accusations, duress

473.       Comparison may be made to Circular 230 § 10.31, which prohibits a
           Practitioner who prepares tax returns from negotiating or endorsing a
           government check payable to the client.



                                     4–198
                                       Circular 230              § 4:18.1

or coercion, by the offer of any special inducement or promise of
advantage, or by bestowing any gift, favor or thing of value.
   There seem to be several key elements to a finding of this action.
First, it applies whether it is direct or indirect. For example, a
Practitioner who induces another, apparently whether or not for
compensation, to attempt to influence an IRS employee by having
such other person make threats or make gifts would be guilty of
incompetence and disreputable conduct. The mere attempt to influ-
ence the official action of an IRS officer or employee is not subject to
sanction under section 10.50. Indeed, Practitioners do attempt to
influence official action of the IRS by presenting legal arguments
and/or presenting facts. The attempt to influence (or agreement to
attempt to influence) is subject to sanction only if it is a result of at
least one of five actions:
    (1)   threats;
    (2)   false accusations;
    (3)   duress or coercion;
    (4)   offer of special inducement or promise of advantage; or
    (5)   bestowing any gift, favor or thing of value.
    Whether a statement constitutes a “threat” may depend upon its
context. A Practitioner who “threatens” to take the IRS matter to court
(for example, for claim for refund) if the IRS employee does not resolve
or settle the matter almost certainly has not made the type of “threat”
that constitutes incompetence or disreputable conduct. On the other
hand, a statement to an IRS employee that the Practitioner will seek to
have the IRS employee fired if the employee does not resolve the
matter in favor of the Practitioner ’s client may constitute such
conduct. On the other hand, if the Practitioner believes the IRS
employee has engaged in improper conduct (perhaps by intentionally
destroying evidence that would be beneficial to the Practitioner ’s
client) or has acted incompetently, the Practitioner certainly should
be able, indeed the Practitioner should be encouraged, to report that
action to the IRS employee’s superior. But the Practitioner should be
careful not to suggest that the report will be made if the IRS employee
fails to take the official action the Practitioner desires.
    Making a false accusation is subject to sanction only if its purpose
is to influence the official action of the IRS employee. It probably must
be knowingly false to constitute incompetence and disreputable con-
duct. It is uncertain whether the accusation must be addressed to a
superior of the IRS employee or could apply even if made to the IRS
employee himself or herself. Indeed, if the false accusation is made
directly to the employee, it might be viewed as a “veiled” threat. For



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–199
§ 4:18.1               THE CIRCULAR 230 DESKBOOK

example, stating to an IRS employee that she has intentionally lied
while knowing that is not true, might under the circumstances
constitute a threat because of the high likelihood that the action
(intentionally lying) would be brought to the attention of a superior
and, under the circumstances, that the employee could anticipate that
the risk of this occurring is reduced if the matter is resolved with the
Practitioner and the employee.
    Practitioners should, but are not required to, report improper conduct
of IRS personnel. But, in some cases, it may be preferable to say nothing
to the employee or officer and separately raise it with a superior in the
IRS, perhaps, after dealings with the IRS employee or officer have ceased.
    It seems important to emphasize that the false-accusation rule
applies only if the accusation is knowingly false. For example, a
Practitioner states that he is going to complain to superiors that the
IRS employee has treated his or her client in a different manner than
the employee has treated similarly situated taxpayers. If that charge is
false (the “other” taxpayers were not treated differently or they are not
similarly situated to the Practitioner ’s client) but the Practitioner
believes the accusation to be true, the accusation should not be treated
as constituting incompetence and disreputable conduct.
    Duress and coercion are terms that are difficult to define and either
or both may be present in some cases and not in others, depending
upon the circumstances and the people involved. It is possible that
constant unreasonable demands by a Practitioner could constitute
duress. Calling an IRS employee, for example, many times during the
same week asking for the same information, already having been told
by the employee that it will not be available until the following week,
likely would constitute duress, especially if the Practitioner is belittling
the employee. For instance, in each such message the Practitioner says
something like, “I know you are putting your entire personal life ahead
of your work which I, as a taxpayer, pay for. So keep ignoring my
matter—I know it’s not important to you.” Those are the kinds of
statements that when made repeatedly may well result in a charge of
incompetence and disreputable conduct. Indeed, a hallmark of duress
may be the frequency with which such statements are made.
    An offer of special inducement could take a variety of forms. An offer
of employment, for example, if the IRS employee settles the matter in a
certain way might well be regarded by the Office of Professional
Responsibility of the IRS as subject to sanction. The line between a
completely legitimate comment and one that is improper may be a
fine one in some cases. For example, making a sincere statement
that the Practitioner intends to discuss possible employment with the
IRS employee when the matter is completed should not constitute
incompetence or disreputable conduct, but should be delayed until
the matter is resolved to avoid the appearance of impropriety.



                                  4–200
                                       Circular 230                      § 4:18.1

   Bestowing a gift, favor or thing of value in order to try to influence
the official action of an IRS employee or officer seems relatively clear
in scope. As with other areas, any dispute is likely to turn, not on
whether the gift, favor or thing of value was bestowed, but the motive
in doing so. Some actions, such as providing an IRS employee with a
cup of coffee or giving the employee a pen or writing pad almost
certainly would not be viewed as even suggesting in the slightest
manner that the item was granted for an improper motive. In some
communities, the IRS employees deal with Practitioners in social
contexts. While working on a matter together, it will be prudent for
the Practitioner not to bestow anything significant of value unless,
perhaps, it follows a well-established prior course of conduct. For
example, both the Practitioner and the IRS employee are in a social
group where a birthday party is held for each person in the group and
each person brings a meaningful present for the individual whose
birthday is being celebrated. That type of circumstance probably
forecloses any suggestion at all that the birthday present was given
as an attempt to influence official action by the IRS employee.
               [I]   Disbarment or Suspension from Practice As an
                     Attorney or CPA
   The disbarment or suspension from practice as an attorney, CPA,
public accountant or actuary by any duly constituted authority of any
state, territory, possession of the United States, including a Common-
wealth, or the District of Columbia, any federal court of record or any
federal agency, body or board constitutes incompetence and disrepu-
table conduct under section 10.51.
   It is not just disbarment or suspension by a state, for example, but a
duly constituted authority of the United States, a state or one of the
other government entities mentioned immediately above. Hence, a
Practitioner who is disbarred or suspended from practice before
another federal agency will be treated as having engaged in incompe-
tence and disreputable conduct for purposes of section 10.51.
               [J]   Knowingly Aiding and Abetting a Suspended or
                     Disbarred Person
   A Practitioner who knowingly aids and abets another person to
practice before the IRS during a period of suspension, disbarment or
ineligibility of such other person has engaged in activity that consti-
tutes incompetence and disreputable conduct under section 10.51. 474



474.       Comparison may be made to Circular 230 § 10.24, which prohibits a
           Practitioner from accepting assistance from a Practitioner who has been
           disbarred or suspended from practice before the IRS.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–201
§ 4:18.1               THE CIRCULAR 230 DESKBOOK

   The term “knowingly” seems to determine the real scope of this
rule. The knowing requirement seems to apply not just to the fact that
the Practitioner knowingly is aiding and abetting someone in practice
before the IRS, but also that the Practitioner knows the person to be
under suspension or disbarment from practice before the IRS or is
ineligible to practice before it.
   It will be appropriate for a Practitioner, if he or she has any doubt
about whether the person whom the Practitioner will “aid and abet”
may practice before the IRS, to check into the matter. A roster of
suspended and disbarred Practitioners is available from the Director of
Practice. Although an attorney or CPA may be or become a Practi-
tioner (by filing, for example, a power of attorney authorizing him or
her to represent a taxpayer before the IRS), that attorney may not
become a Practitioner if he or she, for example, has been suspended
from practice in his or her state. That suspension may not be known
but can be checked. And it is good practice for a Practitioner, before
assisting another with respect to such other ’s practice before the IRS,
to ask or independently check if there is any doubt about another ’s
ability to practice before the Service.

             [K]   Engaging in Contemptuous Conduct While
                   Practicing Before the IRS
   A Practitioner, under section 10.51(k), will be treated as having
engaged in conduct that is incompetent and disreputable if he or she
acts in a contemptuous manner in connection with practice before the
IRS, including the use of abusive language, making false accusations
and statements, knowing them to be false, or circulating or publishing
any malicious or libelous matter.
   The word “including” in section 10.51(f) suggests the list of what
may be regarded as “contemptuous” is not exclusive. It might, for
example, cover conduct that would constitute intentional infliction of
emotional distress.475
   Although it may seem logical that the contemptuous conduct is
limited to actions addressed at or against an IRS employee, it seems
likely that it is somewhat broader. It might, for example, include
publishing libelous material about a family member of an IRS em-
ployee. Another example of what may be included is directing abusive
language at an IRS expert or possibly even at the Practitioner ’s client
or someone acting on the client’s behalf.
   The issue of what constitutes “abusive language” may be a “reason-
able person” standard, such as that used to determine negligence, or
possibly something that would be offensive in the community


475.       See RESTATEMENT   OF   TORTS § 46.



                                       4–202
                                       Circular 230                       § 4:18.1

(a community standard).476 It may include harsh swear words or
profanity. The determination of whether statements constitute abusive
language may depend on the context and other matters, such as the prior
relationships of those involved. A Practitioner probably runs a greater
risk of being charged as having engaged in contemptuous behavior by
frequently using profanity. In some circles, use of such language may be
the “norm” but discretion, no doubt, is wiser conduct.
   The prohibition contained in section 10.51(k) requiring a “know-
ing” condition applies to making false accusations and statements. If
the Practitioner does not know them to be false, he or she should not
be subject to sanction under section 10.50 for making them. No
condition of “knowing” seems to apply to using abusive language or
circulating or publishing malicious or libelous matter. As mentioned
above, whether language is abusive may turn on a reasonable-person
or similar standard. Perhaps, the reason no “knowing” condition is
required for a Practitioner to have “violated” the Circular for circulat-
ing or publishing libelous matter is because no such condition is
required for a claim for libel (a writing that makes a false statement
about another).477 Actually, under tort law, a person is guilty of libel if
he or she circulates (retransmits and does not initially publish) some-
thing written by another.478 Perhaps that is why “circulating” is a
ground for possible sanction as well as publication. In any event,
circulating probably includes oral transmission of information as a
means to pass it from one person to another. “Publication” almost
certainly includes something in writing or other permanent medium
(such as a visual or oral recording). It also likely includes an oral
statement that originated with the Practitioner (as opposed to repeat-
ing something someone else originated, which might fall under
“circulating”).
   As mentioned, it appears that a Practitioner may be subject to
sanction under section 10.50 if he or she circulates or publishes any
malicious matter in connection with practice before the IRS. No
definition of “malicious” is offered in the Circular. The Supreme
Court has defined “actual malice” as knowledge that a statement is
false or made with reckless disregard of whether it is false or not. 479
Note that the rule does not require knowing the statement is false,


476.       Compare Miller v. California, 413 U.S. 15 (1973) (community standard for
           determining if something is pornographic).
477.       However, some “fault” may be required as a matter of compliance with the
           First Amendment. See RESTATEMENT OF TORTS § 580B (based on Gertz v.
           Robert Welch, Inc., 418 U.S. 323 (1974)).
478.       However, a “republisher” may be liable for libel only if the republisher
           knows or has reason to know of the statement’s defamatory (false)
           character. See RESTATEMENT OF TORTS § 581.
479.       N.Y. Times Co. v. Sullivan, 376 U.S. 254 (1964).



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–203
§ 4:18.1              THE CIRCULAR 230 DESKBOOK

only that it is false and was maliciously made. It is also unclear what
it means for the conduct to be “in connection with” practice before
the IRS. Conduct during the course of actual practice would
naturally be covered. But suppose the contemptuous conduct
occurs in the course of gathering information to respond to an IRS
request, and is directed at third parties, and not at IRS employees.
It seems that conduct might also be subject to sanction under
section 10.51(k).

           [L] Knowingly, Recklessly, or Through Gross
               Incompetence Giving a False Opinion
    A Practitioner may be sanctioned under section 10.50 for giving a
false opinion, knowingly, recklessly, or through gross incompetence.
Under section 10.51(l), that includes giving an opinion that is inten-
tionally or recklessly misleading. A Practitioner similarly may be
sanctioned for engaging in a pattern of providing incompetent opin-
ions on questions arising under federal tax law.
    Although the sentence structure under section 10.51(l) may suggest
that giving a false opinion knowingly may be sanctioned under
section 10.50 even if the opinion has nothing to do with a federal
tax matter, it seems likely that section 10.51(l) is aimed only at
opinions that are about or may affect a federal tax matter.
    In any case, giving an opinion knowing it is false, giving an opinion
that is false by reason of recklessness or giving one that is false by
reason of gross incompetence all seem to be covered.
    Reckless conduct is defined in section 10.51(l) as a highly unrea-
sonable omission or misrepresentation involving an extreme departure
from the standards of ordinary care that a Practitioner should observe
under the circumstances. Such reckless conduct may be contrasted
with the definition the section provides of gross incompetence, which
is stated to include conduct that reflects gross indifference, preparation
which is grossly inadequate under the circumstances, and a consistent
failure to perform obligations to the client. It will be noted that the
definition of reckless conduct seems inclusive or complete but the
description of gross incompetence is not closed as it only “includes”
the conduct just described.
    Presumably, the reckless conduct and gross incompetence must
have resulted in a false opinion. Unlike sections 10.35 and 10.37, but
in line with section 10.34 (relating to advice on tax return preparation
matters), the false opinions “prohibited” by section 10.51(l) appear to
cover both verbal and written ones because the section’s definition of
false opinions includes those resulting from “an assertion of a position
known to be unwarranted” and “from counseling . . . conduct known
to be illegal.” Also, it seems that the recklessness or gross incompe-
tence may relate to either or both of the law or the facts. For example,



                                 4–204
                                       Circular 230               § 4:18.1

if a Practitioner correctly analyzes the law but has used facts, as a
result of his or her gross indifference, that are incorrect, rendering the
opinion false, he or she probably has given a false opinion of the type
described in section 10.51(l).
    In fact, section 10.51(l) clarifies that a false opinion includes one
that reflects or results from a knowing misstatement of fact or law,
from an assertion of a position known to be unwarranted under
existing law, from counseling or assisting in conduct known to be
illegal or fraudulent, from concealing matters required by law to be
revealed, or from consciously disregarding information indicating that
material facts expressed in the tax opinion or offering material are false
or misleading.
    Section 10.51(l) provides that a pattern of conduct is a factor that
will be taken into account in determining whether a Practitioner acted
knowingly, recklessly, or through gross incompetence. It appears that
the pattern of conduct is one of proof—that is, following a pattern may
establish that the Practitioner ’s repeated conduct in rendering false
opinions is the result of gross incompetence. This may be true even if
the incorrect advice does not result in a significant understatement
of tax by any particular taxpayer, for example, so that the magnitude of
the error taking each case separately, would not justify a finding of
“gross incompetence.” On the other hand, it may be that the Practi-
tioner ’s consistent practice could show at least a belief that the
opinions were correct where he or she advises all clients with an
interpretation of the law that is incorrect. For instance, the Practi-
tioner is unaware that a provision of the Code, with which the
Practitioner had reasonable knowledge, had been modified and is
open and frank in rendering the advice based upon prior law without
being challenged or corrected. Perhaps that consistent pattern of
behavior helps to demonstrate that the Practitioner did not know
the opinion was false, even if his or her failure to know that the law
had changed was a result of gross incompetence. For example, the
Practitioner tells all clients that they may deduct their contributions to
individual retirement accounts (IRAs) regardless of their levels of
income. At one time that was true, but is no longer the case.

               [M]     2011 Amendment to Section 10.51
    In 2011, section 10.51 was amended in four respects.
    First, the section now provides that a tax return preparer ’s willful
failure to electronically file returns where such filing is mandatory is
subject to discipline.479.1 The preamble to the regulations adopting
this amendment states:


479.1.     See Circular 230 § 10.51(a)(16).



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–205
§ 4:18.2                   THE CIRCULAR 230 DESKBOOK

         The Treasury Department and the IRS, however, conclude that it
         is appropriate to include as disreputable conduct a tax return
         preparer’s willful failure to electronically file tax returns subject
         to the mandatory electronic filing requirement. The IRS cannot
         permit tax return preparers to intentionally disregard the internal
         revenue laws and continue to practice before the IRS. Section
         6011(e)(3) only applies to certain tax return preparers who file a
         specified number of returns per year and these tax return pre-
         parers need to be aware of the new electronic filing requirement.
         The Treasury Department and the IRS have issued final regula-
         tions (TD 9518) published in the Federal Register (76 FR 17521)
         on March 30, 2011, that provide exclusions from the electronic
         filing requirement. The exclusions in the final regulations include
         undue hardship waivers and administrative exemptions. See Rev.
         Proc. 2011-25 for additional information on hardship waivers
         and Notice 2011-16 for additional information on administrative
         exemptions. Moreover, tax return preparers are only subject to
         sanction under § 10.51(a)(16) of the final regulations for not
         electronically filing if such a failure is willful. Accordingly,
         § 10.51(a)(16) is sufficiently narrowly tailored to only apply to
         these tax return preparers who willfully fail to comply with the
                                        479.2
         electronic filing requirement.

   Second, disreputable conduct now includes preparing a return or
refund claim where the practitioner does not have a valid identifica-
tion number (a valid PTIN).479.3
   Third, disreputable also includes representing a taxpayer before the
IRS if the practitioner is not authorized to do so under the
Circular.479.4
   Fourth, disreputable conduct also includes improperly disclosing or
using a tax return or return information.479.5

   § 4:18.2            Violations of the Regulations for Which a
                       Practitioner May Be Censured, Suspended or
                       Disbarred from Practice Before the IRS
               [A] In General
   Section 10.52 of the Circular provides the penalties or sanctions
which a Practitioner may face for violating the requirements of the
Circular. These violations are to be distinguished from incompetent or



479.2.      See T.D. 9527.
479.3.      See Circular 230 § 10.51(a)(17).
479.4.      See Circular 230 § 10.51(a)(18). For provisions concerning permissible
            appearances before the IRS, see sections 10.3 and 10.7.
479.5.      See Circular 230 § 10.51(a)(15).



                                       4–206
                                       Circular 230                          § 4:18.2

disreputable conduct which, even if not a violation of the Circular,
may be sanctioned under section 10.50. These penalties or sanctions
consist of censure, or suspension or disbarment from practice before
the IRS, or monetary penalties, depending upon the nature of the
violation and the reason for the violation.
   In particular, a Practitioner may be censured, or suspended or
disbarred from practice before the IRS for willfully violating any part
of the Circular (other than section 10.33). A Practitioner may be so
censured, suspended or disbarred for recklessly or through gross
incompetence violating section 10.34 (relating to standards for advice
with respect to federal tax return positions and for preparing and
signing federal tax returns); section 10.35 (relating to Covered Opin-
ions); section 10.36 (relating to Practitioners who have principal
authority and responsibility for overseeing a firm’s federal tax prac-
tice); or section 10.37 (relating to written advice about a federal tax
issue which does not constitute a Covered Opinion).

               [B] American Jobs Creation Act of 2004 Provisions
   The American Jobs Creation Act made certain changes to 31 U.S.C.
§ 330, which is the basic law authorizing the Secretary of the Treasury
to regulate practice before the Treasury, including the IRS. Among other
things,480 the Secretary is authorized, after notice and opportunity for
a proceeding, to censure, suspend or disbar, or impose monetary
penalties against a taxpayer representative481 who is incompetent or
disreputable, who violates the Circular or other regulations promul-
gated under 31 U.S.C. § 330, or who, with intent to defraud, willfully
and knowingly misleads or threatens the taxpayer being represented or
a prospective person to be represented.
   The provisions permit the monetary penalty to be imposed on any
employer, firm or entity on whose behalf the representative was acting
when engaging in the conduct for which the monetary penalty may be




480.       For example, the Secretary is expressly authorized to regulate the practice
           of representatives of persons before the Treasury. The Secretary is autho-
           rized, prior to admitting a representative to practice, to require that the
           representative demonstrate good character and reputation, the necessary
           qualifications to enable the representative to provide service, and
           competency to advise and assist taxpayers in representing their cases.
           This is an important underpinning to section 10.51, for example, which
           permits sanction for acts not violating the express provisions of the
           Circular that demonstrate bad character or reputation.
481.       As mentioned elsewhere, a taxpayer, in some cases, may be represented by
           someone who is not a Practitioner. For instance, one family member may
           represent another under Circular 230 § 10.7(c)(1). This is discussed at
           section 4:6.2[E][2].



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–207
§ 4:18.2                    THE CIRCULAR 230 DESKBOOK

imposed if the employer, firm or entity knew or reasonably should
have known of the conduct.482
   The monetary penalty may not exceed the gross income derived (or
to be derived) from the conduct giving rise to the penalty and may be in
addition to, or in lieu of, any censure, suspension or disbarment of the
representative.
   Regulations have not yet been promulgated under the changes made
to 31 U.S.C. § 330 by the American Jobs Creation Act.
              [C]     Provisions with Respect to Appraisers
   After notice and an opportunity for hearing, the Secretary of the
Treasury may rule that the appraiser is barred from presenting
evidence or testimony in any administrative proceeding before the
Treasury or the IRS and that any appraisal made by that appraiser after
the effective date of disqualification will not have any probative effect
in any administrative proceeding before the Treasury or the IRS.483
   Before the enactment of the Pension Protection Act of 2006, the
Treasury could blacklist only if the penalty under section 6701 of
the Code had been imposed on the appraiser. That section permits
the penalty to be imposed only if, among other conditions, the
appraiser knew the appraisal would result in an underpayment of
tax. The Pension Protection Act of 2006 eliminates the requirement
of the imposition of any section 6701 penalty. It seems that being
subjected to the new appraiser penalty under new section 6695A
might serve as a basis for “blacklisting” under section 10.50(b) of the
Circular.483.1




482.       The following conduct can also be the predicate for sanction if done willfully:
           failing to sign a return prepared by the Practitioner (see section 10.51(a)(14));
           improper use or disclosure of return information (see section 10.51(a)(15));
           failing to use electronic filing when required to do so (see section 10.51(a)(16));
           preparing a return or refund claim (or substantially all of a return or
           refund claim) when the preparer does not have a valid PTIN (see section
           10.51(a)(17)); and representing a taxpayer before the IRS when not authorized
           to do so (see section 10.51(a)(18)).
483.       Circular 230 § 10.50(b).
483.1.     See SBSE Memorandum 04-0809-015 (Aug. 18, 2009), where the Service
           discusses the responsibility of an examiner to pursue the I.R.C. § 6695A
           penalty where valuation issues arise. The Service states: “If the claimed
           value of the property on the return or claim for refund, which is based on
           an appraisal results in a substantial valuation misstatement, substantial
           estate or gift tax valuation understatement, or gross valuation misstate-
           ment with respect to such property, the examiner should open an IRC
           section 6695A penalty case to determine if sanctions against the appraiser
           are warranted.” According to the Service, it will send a Form 4477 to the
           appraiser where it is considering imposing the penalty. At that time,



                                          4–208
                                       Circular 230                           § 4:18.2

               [D] Meaning of “Censure”
   Censure is a public reprimand or a public “scolding,” so to speak.484
Such censure seems to be similar to what is used by the bar authorities
in some states.
               [E]    Meaning of “Suspension”
   Suspension means that the Practitioner is prohibited for the time
specified from practicing before the IRS.485 The suspension com-
mences on the date that written notice of the suspension is issued
and remains in effect until the earlier of (1) the Director of Practice of
the Office of Professional Responsibility of Practice removes or lifts the
suspension, or (2) an Administrative Law Judge or the Secretary of the
Treasury lifts it, which may occur in certain cases.486

               [F] Meaning of “Disbarment”
   Disbarment means the permanent prohibition of the Practitioner
from practicing before the IRS unless and until authorized to do so by
the Director of Practice pursuant to section 10.81.487

               [G] Meaning and Importance of “Willful”
    As mentioned above, willfully violating any part of the Circular
(other than section 10.33, dealing with aspirational or non-mandatory
practices) is subject to sanction. Violations of section 10.34, 10.35,
10.36 or 10.37 only by reason of reckless or grossly incompetent
behavior may be sanctioned.
    Certain of the incompetent and disreputable conduct described in
section 10.51 also requires a “willful” element. Other conduct “pro-
hibited” by that section requires a “knowing” element which, perhaps,
is the same as willful. But still other conduct seems to require neither.
For instance, misappropriation of funds received from a client for the
purpose of payment of taxes constitutes incompetence and disrepu-
table conduct under section 10.51(g), but seems not to require a
“willful” or “knowing” condition.
    Willful probably means knowing or intentional. Nevertheless, the
scope of what is willful is not certain. On the one hand, it may simply




           the appraiser will have an opportunity to show that it is entitled to assert
           the more-likely-than-not defense contained in I.R.C. § 6695A. See also Lisi
           Estate Planning Newsletter #1580 (Jan. 20, 2010) (discussing this
           memorandum).
484.       Circular 230 § 10.50(a).
485.       Circular 230 § 10.79(b).
486.       See Circular 230 § 10.82.
487.       Circular 230 § 10.79(a).



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–209
§ 4:18.2                  THE CIRCULAR 230 DESKBOOK

mean that the Practitioner knew he or she was engaging in the conduct
and that the conduct is “prohibited.” On the other hand, the contrast
between violations that require such a willful violation and those that
require only recklessness or are a result of gross incompetence may mean
the Practitioner must have known not only that he or she was commit-
ting an act but also that the act was proscribed by the Circular.487.1
   For example, under section 10.30(a) of the Circular, an enrolled
agent may not use the term “certified.” Suppose an enrolled agent
knowingly uses that term but does not know it is a violation to do so.
Arguably, the agent may not be sanctioned under section 10.52
because he or she is not willfully violating section 10.30(a). As a
further illustration, consider a Practitioner who charges an uncon-
scionable fee, which is prohibited by section 10.27(a). The Practitioner
certainly is willfully charging the fee but, if he or she does not know it
is unconscionable, it does not seem he or she could be sanctioned,
even if charging such a fee was reckless or the result of gross
incompetence.

              [H]   Meaning of “Reckless”
   Reckless conduct, in giving a false opinion under section 10.51(l) of
the Circular, means conduct that constitutes a highly unreasonable
omission or misrepresentation involving an extreme departure from
the standards of ordinary care that a Practitioner should observe under
the circumstances. It appears that the same meaning of reckless is to
be applied for purposes of section 10.52. The latter section provides, in
part, “Recklessly or through gross incompetence (within the meaning
of § 10.51(l)).” Based upon the sentence structure, it is not certain that
“within the meaning of § 10.51(l)” necessarily modifies “recklessly” or
only “gross incompetence,” although it seems likely that it does.

              [I]   Meaning of “Gross Incompetence”
   As stated above, the meaning of gross incompetence for purposes of
section 10.52 is the same as its meaning for purposes of section 10.51(l),


487.1.     See Dir., Office of Prof ’l Responsibility v. Sykes, Complaint 2006-1
           (Jan. 2009, Administrative Law Judge Richard A. Scully) (reproduced in
           the Appendix EE). In this decision, the ALJ discussed the meaning of
           willfulness for purposes of the Circular as follows:
             While the term “willful” is not defined in the regulations, its use in
             the Treasury laws has consistently been held to mean, in both civil
             and criminal contexts, the “voluntary, intentional violation of a
             known legal duty.” E.g., United States v. Pomponio, 429 U.S. 10, 12
             (1976); Thibodeau v. United States, 828 F.2d 1499, 1505 (11th Cir.
             1987). Consequently, OPR does not have to show that Respondent
             acted with malicious intent or bad purpose, only that he purpose-
             fully disregarded or was indifferent to his obligations.



                                      4–210
                                       Circular 230             § 4:18.4

which is conduct that includes conduct that reflects gross indiffer-
ence, preparation which is grossly inadequate under the circum-
stances, and a consistent failure to perform obligations to the
client. The definition is not, by its terms, complete, since it merely
“includes” the conduct described. Hence, conduct other than gross
indifference, preparation that is grossly inadequate under the circum-
stances, or a consistent failure to perform obligations to the client
may be covered.
   It may be of interest to note that the Secretary of the Treasury,
under amendments made to 31 U.S.C. § 330, may censure, suspend or
disbar from practice before the IRS, or impose monetary penalties not
just for gross incompetence but just incompetence. However, the
Circular has not been amended to provide for sanctions only for
engaging in incompetent conduct.

    § 4:18.3            Violations Requiring Only a Reckless or Gross
                        Incompetence Element
   As mentioned above, a Practitioner may be sanctioned under
section 10.52 if he or she recklessly or through gross incompetence
violates section 10.34 (relating to standards for advice with respect to
federal tax return positions and for preparing and signing federal tax
returns); section 10.35 (relating to Covered Opinions); section 10.36
(relating to Practitioners who have principal authority and responsi-
bility for overseeing a firm’s federal tax practice); or section 10.37
(relating to written advice about a federal tax issue which does not
constitute a Covered Opinion).
   Hence, a Practitioner who violates the Covered Opinion rules of
section 10.35, not as a result of willfulness, but by reason of gross
incompetence, may be sanctioned under section 10.52. For instance,
a Practitioner who fails to familiarize himself or herself with
section 10.35 and renders a written opinion that correctly recites the
law and facts and reaches a reasonable conclusion but fails to follow
the strict rules of section 10.35 presumably may be sanctioned.

    § 4:18.4            Providing Information About Practitioner
                        Violations
   Section 10.53 of the Circular sets forth certain rules that require
IRS employees and others to provide information about a Practi-
tioner ’s violation of the Circular.

               [A] Information to Be Provided by IRS Personnel
   Under section 10.53 of the Circular, an IRS officer or employee who
has reason to believe that a Practitioner has violated any provision of
the Circular must promptly make a written report to the Director of



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–211
§ 4:19                   THE CIRCULAR 230 DESKBOOK

Practice of the suspected violation. The report is to include an
explanation of the facts and reasons for the belief by the officer or
employee that a violation may have occurred.
   It may be of interest to note that, unlike the rest of the Circular,
section 10.53(a) is aimed at IRS personnel, not Practitioners. Although
presumably an IRS officer or employee who fails promptly to make
such a report to the Director of Practice could not be sanctioned under
the Circular, the IRS person might be disciplined under other provi-
sions applicable to IRS personnel.

            [B]    Information by Others
   Section 10.53(b) permits persons (other than an officer or employee
of the IRS) having information of a violation of the Circular to make
an oral or written report of the alleged violation to the Director of
Practice or any officer or employee of the IRS. If made to any IRS
employee or officer, that employee or officer must make a written
report to the Director of Practice. This express authorization may
protect against any potential civil liability for doing so, even if the
purpose of the report was to gain leverage or concessions from
the Practitioner who is the subject of the report.

§ 4:19        Subpart D of Circular 230 Provides Rules
              Applicable to Disciplinary Proceedings Against
              Practitioners and Appraisers
   § 4:19.1          Overview
   A Practitioner charged with violating the Circular and who may be
disciplined under it is entitled to a proceeding before an Adminis-
trative Law Judge. The Circular provides specific procedures to insti-
tute such a proceeding and to conduct the proceeding.

   § 4:19.2          Institution of a Proceeding Against a
                     Practitioner
   Section 10.60(a) deals with proceedings against a Practitioner by the
Director of Practice. It provides that a Practitioner may be repri-
manded by the Director of Practice whenever the Director determines
that a Practitioner has violated any provisions or laws contained in the
Circular.488 The Director may, in the alternative, institute a proceed-
ing for censure, suspension, or disbarment of the Practitioner in


488.     Circular 230 § 10.1(a) states that a Director of Practice is appointed by the
         Secretary of the Treasury or his or her designate. Section 10.1(b) states that
         the Director of Practice acts on applications for enrollment to practice
         before the IRS; makes inquiries with respect to matters under his or her



                                      4–212
                                       Circular 230                           § 4:19.3

accordance with section 10.62 (as discussed below). This proceeding
for censure, suspension, or disbarment of a Practitioner is instituted by
the filing of a complaint, whose contents are described in section 10.62
of the Circular.
   Note that a censure is defined as the expression of an official
disapproval by a party for one of its members. A suspension is defined
as a temporary disbarment. A disbarment is defined as the taking away
the license to practice law, usually for life. According to federal law,
disbarment or suspension proceedings must entitle an attorney to
procedural due process.489 The attorney must have an opportunity to
be heard in disbarment or suspension proceedings and the burden lies
on the moving party.490
   These entitlements of an attorney to due process and burden of
proof requirements apply to all Practitioners in disciplinary action
under the Circular. Indeed, section 10.60 appears to provide even
greater protection. Section 10.60(c) provides that, except as provided
in section 10.82, a proceeding will not be instituted under sec-
tion 10.60 unless the proposed respondent has been advised in writing
of the law, fact and conduct warranting such action, and has been
accorded an opportunity to dispute facts, assert additional facts, and
make arguments (including an explanation or description of mitigat-
ing circumstances). Thus, even before an actual proceeding has
commenced, the Practitioner must have an opportunity to know
what violation is being asserted and, presumably informally, dispute
the finding.

    § 4:19.3            Institution of a Proceeding Against an
                        Appraiser
   Section 10.60(b) of the Circular deals with proceedings against
appraisers and states that when the Director of Practice is advised or
becomes aware that a penalty has been assessed against an appraiser
under section 6701(a) of the Code, the Director may reprimand the
appraiser.491 The Director, as an alternative to reprimanding the
appraiser, may institute proceedings for disqualification of the apprais-
er in accordance with section 10.62. A proceeding for disqualification
of an appraiser is instituted by the filing of a complaint, the contents of
which are more fully described in section 10.62.


           jurisdiction; and provides for conduct of disciplinary proceedings related to
           attorneys, CPAs, enrolled agents, enrolled actuaries and appraisers. Note
           that “reprimand” is defined as a severe, formal, or official rebuke or
           censure.
489.       In re Ruffalo, 390 U.S. 544, 550 (1968).
490.       In re Medrano, 956 F.2d 101 (5th Cir. 1992).
491.       I.R.C. § 6701(a) is further discussed below.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–213
§ 4:19.4                 THE CIRCULAR 230 DESKBOOK

   § 4:19.4           Internal Revenue Code Provisions with Respect
                      to Appraisers
   Section 6701 of the Code was created under the Tax Equity and
Fiscal Responsibility Act of 1982 as a penalty for the abuse of tax
shelters.492 Code section 6701 imposes a penalty on those who aid and
assist in the preparation of false and fraudulent tax documents that
result in the understatement of a tax liability. 493 Specifically,
section 6701(a) imposes a penalty on any person who:
   (1)     aids, assists in, procures, or advises with respect to the
           preparation, presentation of any portion of a return, affidavit,
           claim, or other document;
   (2)     knows or has reason to believe that such document will be
           used in connection with any material matter arising under the
           Internal Revenue laws; and
   (3)     knows that such portion (if so used) will result in an under-
           statement of the liability for tax of another person.
   Accordingly, section 6701(a) requires that, for a violation to take
place, there must be a person who aids or assists in some way to
prepare or create the document, the person must know or have reason
to know that the document will be used in a material matter arising
under the Internal Revenue laws, and also knows the document would
result in an understatement of tax liability of another person.494 It
seems appropriate to note that a violation of Code section 6701(a) may
occur if the person has reason to know (as opposed to actually knows)
the document will be used in connection with any material matter
arising under the Internal Revenue laws of the United States, but
actual knowledge that it will result in an underpayment of tax liability
is also necessary.
   This latter “knowing” requirement may be difficult to prove. For
example, unless it is certain to result in an underpayment of tax even if
the person has reason to know it almost certainly will (for example,
because the preparation or presentation is frivolous), there may be no
violation of Code section 6701(a).




492.       Michael Seto, David Jones & Gerry Sack, Application of IRC 6700 and
           6701 to Charitable Contribution Deductions, from Exempt Organizations
           Professional Education program 1999, available at www.irs.gov/pub/
           irs-tege/eotopicm99.pdf#search=‘irc%206701%28a%29’.
493.       Id.
494.       BLACK’S LAW DICTIONARY (7th ed.) defines “material” as anything that is
           relevant and significant.



                                     4–214
                                       Circular 230                             § 4:19.6

    § 4:19.5            Required Opportunity to Dispute an Alleged
                        Violation
   Except as provided in section 10.82 of the Circular (relating to
expedited suspension upon criminal conviction or loss of license for
cause), a proceeding will not take place under section 10.60 unless the
Practitioner has been advised previously in writing of the law, facts and
conduct warranting such action and has been accorded the opportunity
to dispute facts, assert additional facts, and make arguments (including
an explanation or description of mitigating circumstances). 495 The
Practitioner must be given an opportunity to refute the allegations and
provide evidence that a Circular violation has not occurred before the
proceeding under section 10.60 has been commenced.
   If any of the foregoing requirements (for example, previous written
advice to the Practitioner) are not met, the proceeding is unlawful and
any result of it probably is void or voidable. Nevertheless, it seems that
the failure to meet those requirements can be corrected and the
proceeding thereafter commenced.

    § 4:19.6            Conferences Relating to Alleged Misconduct
   Section 10.61 provides guidelines for a conference that allows a
Practitioner or an appraiser to present his or her “side of the story.”
This is not the same as the opportunity that must be afforded a
Practitioner under section 10.60(c) to dispute facts or assert additional
facts, which opportunity must be granted before the any proceeding
against the Practitioner under section 10.60 is commenced.
Section 10.61(a) states that the Director of Practice may confer with
a Practitioner or an appraiser concerning allegations of misconduct
regardless of whether a proceeding for censure, suspension, disbar-
ment, or disqualification has been instituted against the Practitioner
or appraiser. If the conference results in a stipulation in connection
with an ongoing proceeding in which the Practitioner or appraiser is
the respondent, the stipulation may be entered in the record by either
party (that is, the Director or the Practitioner) to the proceeding. 496
   A Practitioner (or whomever is representing him or her at the
conference) needs to be wary of the latter rule. It could result in
the waiver of privilege or work product that otherwise could not be



495.       Circular 230 § 10.82 deals with expedited hearings. If a Practitioner has
           been convicted of a crime or has lost his or her license to practice for cause,
           as outlined in § 10.82, the Practitioner may be subject to an expedited
           hearing.
496.       BLACK’S LAW DICTIONARY (7th ed.) defines “stipulation” as a material
           condition or requirement in an agreement or a voluntary agreement
           between opposing parties concerning some relevant points.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–215
§ 4:19.7                   THE CIRCULAR 230 DESKBOOK

introduced by the Director in the proceeding. Often, information that
may seem helpful at one stage of a matter becomes detrimental at a
later stage.
   At the conclusion of the conference, the Director may take one of
three actions. The Director may accept the Practitioner ’s or apprais-
er’s explanation and close the case; agree to settle the matter with the
Practitioner or the appraiser; or issue a complaint against the Practi-
tioner or the appraiser.

   § 4:19.7            Resignation or Voluntary Censure, Suspension
                       or Disbarment
   Instead of the proceeding being instituted under section 10.60(a)
(Institution of Proceeding against a Practitioner by the Director of
Practice), section 10.61(b) permits a Practitioner to offer his or her
consent to the issuance of a censure, suspension or disbarment. If the
Practitioner is an enrolled agent, he or she may offer to resign. A
Practitioner (defined under section 10.3), who is not an enrolled agent
(that is, an attorney, a CPA or an enrolled actuary), may not offer his or
her resignation. The Director of Practice has discretion to accept or
decline an offer for censure, suspension, disbarment, or, with respect
to an enrolled agent, a resignation.
   According to section 10.61(b), if the offer for censorship, suspen-
sion, or disbarment, or if the Practitioner is an enrolled agent, offer of
resignation, is declined by the Director of Practice, the Director of
Practice may state that he or she would accept such offer if it contained
different terms.497 The Practitioner may then revise the offer and
present it to the Director of Practice. The Director of Practice has
discretion to accept the revised offer from the Practitioner, or may
counteroffer and act upon any counteroffer.

   § 4:19.8            Voluntary Disqualification by an Appraiser
   Section 10.61(c) permits an appraiser to offer his or her consent to
disqualification instead of being subject to proceedings discussed
under section 10.60(b). The Director of Practice has discretion to
accept or decline the offer of disqualification from the appraiser. If
the Director of Practice declines the offer of disqualification from the
appraiser, he or she may inform the appraiser that the offer may be
accepted if the offer contains different terms. The appraiser may then


497.       “Different terms” probably means that the Director would accept the offer
           by the Practitioner of “voluntary” censure or suspension if it had different
           provisions. For example, a Practitioner offers to be suspended for one
           month. The Director rejects that but indicates that the Director would
           accept the offer if the suspension were for a longer time.



                                       4–216
                                       Circular 230                           § 4:19.9

revise the offer and present it to the Director of Practice. The Director
of Practice has discretion to accept or reject the revised offer of censure,
suspension or disbarment. The Director of Practice may also counter-
offer and act upon any counteroffer that is accepted by the parties.

    § 4:19.9            Requirements of the Complaint Against the
                        Practitioner
   Section 10.62 of the Circular gives an overview of the contents of a
complaint against a Practitioner or appraiser, referred to in the section
as a “respondent.”

               [A] Clear and Concise Description That Fairly
                   Informs the Practitioner of the Charges
   Section 10.62(a) provides that the complaint must name the
respondent and give a clear and concise description of the facts and
law that constitute the basis for the proceeding. The complaint must
be signed by the Director of Practice or a person representing the
Director of Practice. Section 10.69(a)(1) states that the Director of
Practice may be represented in a proceeding by an attorney or other
employee of the Internal Revenue Service. Section 10.69(a)(1)
authorizes this representative of the Director of Practice to sign the
complaint on behalf of the Director of Practice.
   The complaint is sufficient if it fairly informs the respondent of the
charges brought so that the respondent can prepare a defense. If the
complaint filed is against an appraiser, the complaint is sufficient if it
refers to a penalty imposed previously on the respondent under
section 6701(a) of the Code, as discussed above. 498

               [B] Specification of Sanction Sought by the IRS
   Section 10.62(b) requires the complaint to specify the sanction that
is being sought by the Director of Practice against the Practitioner or
appraiser. If the Director of Practice seeks a suspension as a sanction,
the duration of the suspension sought must be specified. 499

               [C] Demand for Answer
   Section 10.62(c) requires the Director of Practice to notify the
Practitioner or appraiser, upon whom the complaint is being served,


498.       Prop. Treas. Reg. § 10.62(c) of the Circular would require that the Director
           of the Office of Professional Responsibility notify the Practitioner or
           appraiser against whom the proceeding has been instituted under the
           Circular of the time for answering the complaint, which cannot be less
           than thirty days.
499.       BLACK’S LAW DICTIONARY (7th ed.) defines “suspension” as the temporary
           deprivation of a person’s powers or privileges.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–217
§ 4:19.9                   THE CIRCULAR 230 DESKBOOK

of the time he or she has for answering the complaint. The time given
by the Director of Practice may not be less than fifteen days from
the date of service of the complaint. The section also requires the
complaint to contain the name and address of the Administrative Law
Judge with whom the answer must be filed.500 The complaint must
also contain the name and address of the person who is representing
the Director of Practice. Section 10.69(a)(1) states that the Director of
Practice may be represented by an attorney or any employee of the
Internal Revenue Service. A copy of the answer must be served to the
person representing the Director of Practice. The complaint must also
include a disclaimer that a decision by default may be rendered against
the respondent in the event the respondent fails to file an answer as
required.
   The information described above may be within the complaint
itself or attached to the complaint on a separate paper.

              [D]    Service of the Complaint and Filing of Papers
   Section 10.63 provides for manners to serve a complaint, or any
papers other than complaints, on the respondent or on the Director of
Practice. It also provides for rules in filing papers with an Adminis-
trative Law Judge.501
   Sections 10.63(a)(2) and (a)(3) provide for the manner in which a
complaint or a copy of the complaint must be served on the respondent.
   Service of the complaint may be made on the respondent by mailing
the complaint by certified mail to the last known address of the
respondent.502 Section 6212 of the Code (Interpretive Notes and
Decisions) provides for determining the “last known ad-
dress.”503 Where service is by certified mail, the return post office
receipt signed by the respondent constitutes proof of the service.


500.       The powers and responsibilities of an Administrative Law Judge (ALJ) are
           defined in the Administrative Procedure Act. According to the Manual of
           Administrative Law Judge, an Administrative Law Judge is responsible for
           developing an accurate and complete record and then providing a fair and
           equitable decision in a formal administrative proceeding. See www.oalj.
           dol.gov/LIBRULES.htm.
501.       Prop. Treas. Reg. § 10.63(d) of the Circular would require that the Director
           of the Office of Professional Responsibility turn over the documentation
           used in support of a complaint filed against a Practitioner with the
           Administrative Law Judge.
502.       U.S. Postal Service describes “Certified Mail” as one that provides the
           sender with a proof of mailing from the U.S. Postal Service and allows the
           sender to verify delivery. Certified mail can only be used with first-class
           and priority mail.
503.       See Kennedy v. United States, 403 F. Supp. 619 (W.D. Mich. 1975)
           (Commissioner of Internal Revenue could not have reasonably believed
           that taxpayer wished to be reached at address where in the past taxpayer



                                       4–218
                                       Circular 230                           § 4:19.9

    Section 10.63(a)(2)(ii) states that if certified mail is not claimed or
accepted by the respondent, or is returned to the sender, service may
still be made on the respondent by sending respondent the complaint
by first-class mail to the respondent’s last known address. Serving the
complaint by this first-class mail method is deemed complete once the
complaint has been mailed. There is no requirement to show that
respondent received the complaint in order for service to be deemed to
have occurred. The address used must be of the respondent’s “last
known address.”504
    Section 10.63(a)(3)(i) provides that service of complaint may also be
made by a private delivery service pursuant to section 7502(f) of the
Code to the respondent’s last known address (as discussed above with
respect to section 6212 of the Code). Section 7502(f) of the Code
provides that a “designated delivery service” means a delivery service
provided by a trade or business designated as such by the Secretary
for purposes of section 7502 of the Code. 505 A service may be
designated a delivery service by the Secretary only if it:
    (1)   is available to the general public;
    (2)   is at least as timely and reliable on a regular basis as the U.S.
          mail;
    (3)   records the date in which items were given to it for date of
          delivery; and
    (4)   meets other criteria as the Secretary of the Treasury may
          prescribe.506
Service by this method is considered complete as long as the complaint
was addressed to the respondent’s last known address.507
   Section 10.63(a)(3)(ii) provides that the service of complaint may
be made in person on the respondent. Service of complaint may also
be made by leaving the complaint at the office or place of business of

           had never been successfully contacted). See also Butler v. Comm’r, 409
           F. Supp. 853 (S.D. Tex. 1975) (where last known address was held to be the
           address that the Commissioner reasonably believed taxpayer wanted
           notice sent to and Commissioner acted reasonably and diligently in
           sending notice to return address used by taxpayer on taxpayer ’s tax return
           even though Commissioner knew it was inaccurate). See also Bagwell v.
           Comm’r, T.C. Memo 1984-9 (last known address for purposes of I.R.C.
           § 6212 was taxpayer ’s old address where taxpayer notified IRS indirectly of
           his move by filing 1980 tax return, but return was processed at regional
           service center and district office did not receive new address until after
           deficiency).
504.       Id.
505.       I.R.C. § 7502(f).
506.       Id.
507.       Id.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–219
§ 4:19.9                 THE CIRCULAR 230 DESKBOOK

the respondent. Service by this method is considered complete once
delivered. Proof of the service is a written statement, sworn or affirmed
by the person who served the complaint.508 The written statement
must identify the manner of service, identify the recipient and the
relationship of recipient to respondent, as well as the place, date, and
time of service. Section 10.63(a)(3)(iii) provides that service of the
complaint may be made by any other method agreed upon by the
respondent as long as the proof of service is a written statement that is
sworn and affirmed by the person serving the complaint and the
written statement contains information regarding the manner of
service, including the recipient, relationship of the recipient to the
respondent, place, date, and time of service.
   Section 10.63(a)(4)(a) defines respondent to mean a Practitioner or
appraiser named in the complaint or any other person having the
authority to accept mail on behalf of the Practitioner or appraiser.
   Section 10.63(b) provides for service of papers other than com-
plaints. It provides that such papers may be served on the respondent
or respondent’s authorized representative as stipulated in
section 10.69(a)(2) by:
   (1)     mailing the paper by first-class mail to the last known address
           of the respondent or respondent’s authorized representative;
   (2)     delivery by a private delivery service (as discussed above and in
           section 7502(f) of the Code) to the last known address of the
           respondent or the respondent’s authorized representative;
   (3)     delivery in person pursuant to section 10.63(a)(3)(ii) (dealing
           with personal service) or by any other means agreed to by the
           respondent pursuant to section 10.63(a)(3)(iii).
   Section 10.63(c) provides procedures for service of papers on the
Director of Practice and provides that when papers are required or
permitted to be served on the Director, the papers are to be served on
the Director’s authorized representative under section 10.69(a)(1). The
papers must be served at the address designated in the complaint or at an
address provided in a notice of appearance. If an address is not provided
in the complaint or notice of appearance, service is to be made on:
   Internal Revenue Service, Director of Practice
   111 Constitution Avenue, NW
   Washington, D.C. 20224




508.       A sworn statement is a statement made under oath. B LACK’S LAW
           DICTIONARY (7th ed.). An affirmed statement is a solemn declaration
           rather than a sworn statement under oath. Id.



                                    4–220
                                       Circular 230                          § 4:19.9

   Section 10.63(d) provides that when filing of a paper is required or
permitted in connection with a proceeding under the Circular, the
original paper, plus one additional copy, must be filed with the
Administrative Law Judge at the address specified in the complaint
or at an address otherwise specified by the Administrative Law Judge.
All papers that are filed under the Circular must also be served on the
other party, unless the Administrative Law Judge directs otherwise. A
certificate evidencing such service must be attached to the original
paper that is filed with the Administrative Law Judge.

               [E]    Answer and Potential of Default
   Once the Practitioner or appraiser receives the complaint, he or she
must file an answer to the complaint. Failure to do so may result in a
default judgment against him or her. Section 10.64 provides the
relevant rules.
   Section 10.64 provides that the respondent’s answer must be filed
with the Administrative Law Judge and served on the Director of Practice.
This must be accomplished within the time specified in the complaint.
There are exceptions to this general rule. For example, if the respondent
has made a request or application to the Administrative Law Judge to
extend the time to respond and the Administrative Law Judge has
granted such an extension, the time to respond is accordingly extended.
   Section 10.64 provides that the answer must be in writing and
contain a statement of facts that will constitute the respondent’s
grounds of defense. General denials are not permitted. Rather, the
respondent must specifically admit or deny each allegation set forth in
the complaint. If the respondent does not have sufficient information to
specifically admit or deny an allegation, then the respondent may state
that he or she is without sufficient information to admit or deny a
claim.509 If the respondent possesses the required information, the
respondent may not deny a material allegation in the complaint that
the respondent knows to be true or state that he or she does not have
sufficient information to form a belief. If the respondent relies on any
special matters of defense, he or she must affirmatively state such
matters.510
   Section 10.64(c) provides that a failure to deny or answer an
allegation in the complaint results in the admittance of such allegation
and will be deemed proven. Once this occurs, no further evidence is



509.       BLACK’S LAW DICTIONARY (7th ed.) defines “sufficient” as being adequate or
           of such quality or value as is necessary for a given purpose.
510.       A special matter of defense probably includes procedural matters, such as a
           failure to have given the Practitioner the required opportunity under
           Circular 230 § 10.60(c) to contest the alleged violation.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–221
§ 4:19.9                  THE CIRCULAR 230 DESKBOOK

required with respect to such allegation, and it need not be addressed
at a hearing. Section 10.64(d) provides that a failure to file an answer
within the time given (or time extended by an Administrative Law
Judge) is treated as an admission of the allegations of the complaint
and a waiver of a hearing. This will allow an Administrative Law Judge
to make a decision by default without either a hearing or any further
procedure. Any decision by default constitutes a decision under
section 10.76 of the Circular. Section 10.76 states that if the Admin-
istrative Law Judge has determined that a violation of the Circular has
occurred, then a judgment is ordered and a sanction is imposed. 511
   Section 10.64(e) requires the respondent or the respondent’s
authorized representative (as discussed under section 10.69(a)(2) of
the Circular) to sign the answer. The answer must also include a
statement above the signature acknowledging that the statements
made in the answer are true and correct and that knowing and willful
false statements may be punishable under 18 U.S.C. § 1001. A
violation of 18 U.S.C. § 1001 occurs when
   (1)     a statement is made;
   (2)     the statement is false;
   (3)     the person making the statement knew it was false;
   (4)     the statement was material; and
   (5)     the statement concerned any matter within the jurisdiction
           of the executive, legislative, or judicial branch of the U.S.
           Government. Different Federal Courts of Appeals have
           reached different conclusions of what constitutes a “knowing
           and willful false statement.”
Most appellate courts require the government to prove intent by
the person making the statement to deceive or induce a false
statement.512 Others have held that honest inadvertence or duress
does not amount to a “knowing” false statement.513 For there to be a
violation under 18 U.S.C. § 1001, a statement must be materially
false. A statement is “material” if the contents of the statement have
a tendency to influence the government’s determination. 514 Conceal-
ing a material fact by some scheme requires the government to prove
affirmative acts of such scheme.515 According to 18 U.S.C. § 1001,
leaving blanks on required federal forms is a violation.516

511.       Circular 230 § 10.76.
512.       See, e.g., United States v. Godwin, 566 F.2d 975 (5th Cir. 1978).
513.       See, e.g., United States v. Tamargo, 637 F.2d 346 (5th Cir. 1981).
514.       United States v. McIntosh, 655 F.2d 80 (5th Cir. 1981).
515.       United States v. Irwin, 654 F.2d 671 (10th Cir. 1981).
516.       United States v. Mattox, 689 F.2d 531 (5th Cir. 1982).



                                      4–222
                                       Circular 230                       § 4:19.9

               [F] Supplemental Charges
   Section 10.65 authorizes the Director of Practice to file supple-
mental charges for various reasons. If the respondent, in his or her
answer, falsely and in bad faith denies a material allegation of fact in
the complaint, the Director of Practice may file supplemental charges
against such respondent for having done so. Similarly, if the respon-
dent falsely claims that he or she has insufficient knowledge to form a
belief, or if it appears that the respondent has knowingly introduced
false testimony during the proceeding for his or her censure, suspen-
sion, disbarment, or disqualification, the Director of Practice may file
supplemental charges against the respondent on those grounds. These
supplemental charges may be heard with other charges in the case as
long as the respondent is given due notice of such charges and is
afforded an opportunity to prepare a defense to such charges.

               [G] Reply to Answer
   Section 10.66 provides that unless ordered by the Administrative
Law Judge, the Director of Practice is not required to file a reply to the
respondent’s answer, but may still do so. If a reply is not filed, any new
matter in the answer is deemed denied.
   “New matter” refers to any matter that was raised by the respon-
dent that was not part of the original complaint.

               [H] Proof and Related Matters
   Section 10.67 of the Circular provides that in a case of a variance 517
between the allegations in pleadings and the evidence adduced in
support of the pleadings, the Administrative Law Judge, before any
decision, may order or authorize amendment of the pleadings to
conform to the evidence. The party who would be prejudiced by the
amendment must be given a reasonable opportunity to address the
allegations of the pleadings as amended and the Administrative Law
Judge must make findings on any issue presented by the pleadings as
amended.
   A variance in the Circular refers to the difference between the
allegations in the pleading and the evidence that is introduced in
support of the pleadings. In a federal civil procedure, “pleadings” refer
to the plaintiff ’s complaint and the defendant’s answer.
   Neither the Circular nor any federal opinion has defined “reason-
able opportunity” as it relates to the context of this section.



517.       BLACK’S LAW DICTIONARY (7th ed.) defines “variance” as a difference or
           disparity between two statements or documents that ought to agree, such
           as a difference between the allegations in a charging instrument and the
           proof that is introduced.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–223
§ 4:19.10                THE CIRCULAR 230 DESKBOOK

            [I]   Motions
   Any party, at any time after filing of the complaint, may file a
motion with the Administrative Law Judge. All motions must be in
writing and must be served on the opposing party, unless otherwise
ordered by the Administrative Law Judge.518 Serving of motions must
be pursuant to section 10.63(b) of the Circular, discussed above.
Section 10.68(a) provides that a motion must concisely specify its
grounds. The motion must also concisely specify the relief sought.
Where appropriate, the motion must contain a memorandum of facts
and law in support. Before filing a motion, the party filing must make
a good-faith effort to resolve with the other party any dispute that gives
rise to, or is a concern of, the motion. The party making the motion
must certify that a good-faith attempt was made with the opposing
party to resolve any dispute that gave rise to, or was a concern of, the
motion. The party making the motion must also state, if it is known,
whether the opposing party opposes the motion.

            [J]   Response
    Section 10.68(b) provides that a nonmoving party is not required to
file a response to a motion unless ordered to do so by the Adminis-
trative Law Judge. It is automatically assumed that the nonmoving
party is opposed to the motion if the Administrative Law Judge does
not order the nonmoving party to file a response.

            [K]    Oral Motions and Argument
   The Administrative Law Judge, under section 10.68(c), may, for
good cause and with notice to the parties, permit oral motions and oral
opposition to motions. The Administrative Law Judge has discretion
to permit oral arguments on any motion.

   § 4:19.10           Representation of the Director and the
                       Respondent
   Under section 10.69(a) of the Circular, the Director of Practice in a
disciplinary proceeding under the Circular may be represented by an
attorney or other employee of the IRS. The language used suggests that
the attorney must be employed by the IRS and not be hired from private
practice, but the Circular does not specifically discuss that matter. In any


518.     Prop. Treas. Reg. § 10.68 of the Circular would permit a party to a
         disciplinary proceeding under the Circular to move for summary adjudica-
         tion if there is no genuine issue of material fact. Prop. Treas. Reg. § 10.76
         would provide that the Administrative Law Judge should rule on a motion
         for summary adjudication within sixty days after a written response to the
         motion or, if no written response is filed, within ninety days after the
         motion for summary adjudication is filed.



                                      4–224
                                       Circular 230                        § 4:19.11

event, the attorney or employee of the IRS may sign the complaint or
any document required to be filed by the Director in the proceeding.
   A respondent may appear in the proceeding on his or her own
behalf, be represented by a Practitioner or by an attorney who is not a
Practitioner (because he or she has not filed a declaration under
section 10.3 that he or she is authorized to represent a particular
taxpayer before the IRS). As with the person who is representing the
Director, the representative of the respondent may sign the answer or
any document required to be filed on behalf of the respondent.

               [A] Ex Parte Communications
   Section 10.69(b) of the Circular prohibits the Director of Practice, the
respondent or any representative of either of them from attempting to
initiate or participating in ex parte discussions519 concerning a proceed-
ing or potential proceeding with the Administrative Law Judge (or
anyone likely to advise the judge on a ruling or decision), whether before
or during the proceeding. Any memorandum, letter or other commu-
nication concerning the merits of the proceeding, addressed to the judge
by or on behalf of any party must be served upon the other party.

    § 4:19.11             Administrative Law Judge
   Section 10.70(a) of the Circular requires that any proceeding on
complaints for censure, suspension or disbarment520 of a Practitioner
or disqualification of an appraiser must be conducted before an
Administrative Law Judge.521
   Section 10.70(b) provides that this judge has, among other powers,
the authority with respect to a proceeding under section 10.60
assigned to him or her to:
   •    administer oaths and affirmations;
   •    make rulings on motions and requests (which rulings may not
        be appealed prior to the close of a hearing except in extraordi-
        nary circumstances and at the discretion of the judge);

519.       An ex parte communication is an oral or written communication not on
           the public record with respect to which reasonable prior notice to all
           parties is not given, but does not include requests for status reports on
           certain matters or proceedings. 5 U.S.C. § 551(14).
520.       The American Jobs Creation Act of 2004, by making amendments to
           31 U.S.C. § 330, also permits the Secretary of the Treasury to impose
           monetary penalties, as well as to censure or to suspend or disbar from
           practice before the IRS a Practitioner who violates the Circular. Presum-
           ably, once the Circular is amended to reflect the imposition of monetary
           penalties, proceedings similar or the same as those for censure or suspen-
           sion or disbarment will be required.
521.       The Administrative Law Judge will be appointed pursuant to the authority
           granted by 5 U.S.C. § 3105.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–225
§ 4:19.12              THE CIRCULAR 230 DESKBOOK

   •   determine the time and place of the hearing;
   •   regulate its course and conduct;
   •   adopt and amend rules of procedure as needed for orderly
       disposition of proceedings;
   •   rule on offers of proof;
   •   receive relevant evidence;
   •   examine witnesses;
   •   take and authorize the taking of depositions;
   •   receive and consider oral and written arguments as to fact and
       law;
   •   hold or provide for the holding of conferences for settlement or
       simplification of the issues with the consent of the parties;
   •   perform and take such other acts as necessary or appropriate to
       the efficient conduct of the proceeding; and
   •   make decisions.


   § 4:19.12         Hearings
   The Administrative Law Judge assigned under section 10.70 pre-
sides over the hearing on a complaint filed under section 10.60(c) for
the censure, suspension, or disbarment of a Practitioner or the
disqualification of an appraiser.
   The hearing must be stenographically recorded and transcribed.
Testimony of witnesses must be taken under oath (or affirmation).
   It appears the Administrative Law Judge must permit the parties to
submit proposed findings and conclusions before rendering a
decision.522

            [A] Hearings Must Be Conducted in Accordance
                with the Federal Administrative Procedure Act
   Any hearing under section 10.70 of the Circular must be conducted
pursuant to provisions of the Federal Administrative Procedure Act
(5 U.S.C. § 556). That law should be carefully considered in any
proceeding conducted under section 10.70, as it sets forth required
procedures relating to matters such as powers and duties of
the presiding authority (which under section 10.70 is an Administrative




522.    See Circular 230 § 10.76(a).



                                   4–226
                                       Circular 230                          § 4:19.12

Law Judge), burden of proof, evidence and record as basis of any decision
made.523
   Section 556 of the Federal Administrative Procedure Act requires
that the presiding authority must act in an impartial manner but may
at any time disqualify him or herself. Similar to the authority granted
to the Administrative Law Judge under section 10.70(b), that section
of the Federal Administrative Procedure Act grants the presiding
authority the powers to:
    (1)   administer oaths and affirmations;
    (2)   issue subpoenas authorized by law;
    (3)   rule on offers of proof and receive relevant evidence;
    (4)   take depositions or have depositions taken;
    (5)   regulate the hearing;
    (6)   hold conferences to settle or simplify the issue by consent of
          the parties or by using alternative dispute resolution;
    (7)   inform the parties that one or more means of alternative
          dispute resolution is available and encourage use of such
          methods;
    (8)   require that at least one representative of each party who has
          authority to negotiate the issue be present at the conference;
    (9)   dispose of procedural requests;
    (10) make or recommend decisions; and
    (11) take other action authorized by agency rule with this
         subchapter.524
   Also, under section 556 of the Federal Administrative Procedure
Act, the proponent of a rule or order has the burden of proof, except as
otherwise provided by statute. Any oral or documentary evidence may
be received, but must exclude irrelevant, immaterial, or unduly
repetitious evidence. Unless the whole record (or partial, if supported
by reliable, probative and substantial evidence) is considered, a sanc-
tion may not be imposed and a rule or order may not be issued.




523.       Prop. Treas. Reg. § 10.72(d) of the Circular would provide that all hearings,
           reports, evidence and decisions in a disciplinary proceeding be available for
           public inspection, but would contain procedures to protect identities of
           third-party taxpayers.
524.       Cf. TAX CT. R. 182.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–227
§ 4:19.12               THE CIRCULAR 230 DESKBOOK

   Section 556 of the Federal Administrative Procedure Act also
provides that a party is entitled to present his case by oral or
documentary evidence, to submit rebuttal evidence, and to conduct
such cross-examination as may be required for a full disclosure of
facts. A transcript of testimony and exhibits together with other papers
and requests filed in the proceeding constitute the exclusive record for
decision. That “exclusive record for decision” must be made available
to the parties for a lawfully prescribed cost. When a decision rests on
official notice of a material fact not appearing in evidence in the
record, a party is entitled to an opportunity to show the contrary if a
timely request is made by such party.

            [B]    Other Hearing Requirements
   An evidentiary hearing must be held prior to the issuance of a
decision by the Administrative Law Judge unless:
   (1)   the Director withdraws the complaint;
   (2)   the Practitioner consents, pursuant to section 10.61(b), to
         sanctions;
   (3)   a decision is issued in default pursuant to section 10.64(d);
   (4)   a decision is issued under section 10.82(e) which permits the
         Director of Practice, under certain circumstances, expedi-
         tiously to suspend a Practitioner after a conference requested
         by the Practitioner in a timely answer;525
   (5)   the respondent requests a decision on the record without a
         hearing; or
   (6)   the Administrative Law Judge issues a decision on a motion
         that disposes of the case prior to a hearing.
The last might include, for example, a motion to quash the complaint
issued by the Director for lack of jurisdiction.




525.     It may be that a Practitioner who has had a conference under section
         10.82(e), who is then suspended, and thereafter demands the issuance of a
         complaint under section 10.82(g), will not be entitled to an evidentiary
         hearing under section 10.71. Section 10.71 provides that an evidentiary
         hearing must be held in all proceedings, but contains certain exceptions to
         the evidentiary hearing requirement, one of which is “when a decision is
         issued under section 10.82(e).” It is unclear whether this reference to
         section 10.82(e) is intended to validate the summary suspension of the
         Practitioner under section 10.82 following a conference, but not a hearing,
         or whether it could be construed to mean that the conference is a
         substitute for a hearing on the complaint.



                                     4–228
                                       Circular 230             § 4:19.12

               [C] Making Proceedings Public
   The Administrative Law Judge may make the hearing public and
make the record in the disciplinary proceeding available for inspection
by “interested persons” upon the request of the Practitioner or
appraiser who was the subject of the disciplinary proceeding where
the parties stipulate in advance to protect from disclosure confidential
tax information in accordance with all applicable statutes and
regulations.

               [D] Location of Hearing
   The parties by agreement may determine the location of the hearing,
but only with the approval of the Administrative Judge. Absent such an
agreement, the hearing must be held in Washington, D.C.

               [E]    Default Judgment for Failure to Appear at
                      Hearing
   If either the Director or the respondent fails to appear at the
hearing, after notice of the proceeding has been sent to him or her,
that party will be deemed to have waived the right to a hearing and the
judge may make a decision against that party by default.

               [F] Special Procedure Hearing Called Under
                   Section 10.82(g)
   Under section 10.82, the Director of Practice may suspend certain
Practitioners whom the Director finds have had their licenses to
practice as an attorney, CPA or actuary suspended or revoked for
cause, have been convicted of certain crimes, have failed to follow
certain special procedures imposed on them after suspension or
censure, or have failed to file an answer to a complaint issued under
section 10.82(c). Under section 10.82(g), upon request of the Practi-
tioners, a complaint, not under section 10.82(c) but under
section 10.60, must be issued by the Director within thirty days after
such a Practitioner has been expeditedly suspended pursuant to
section 10.82.
   If a complaint is issued under section 10.82(g) of the Circular
(relating to a request by a Practitioner to issue a complaint pursuant to
section 10.60) and the Director of Practice has suspended the Practi-
tioner pursuant to section 10.82 without a conference, the Practitioner
will be entitled to a hearing under section 10.71.
   In fact, section 10.71 contains special procedures for such a hear-
ing. It must be conducted de novo, presumably meaning that any
finding by the Director that led to the expedited suspension under
section 10.82 will not be considered in evidence.




(Circ. 230 Deskbook, Rel. #12, 3/12)     4–229
§ 4:19.13               THE CIRCULAR 230 DESKBOOK

   § 4:19.13          Evidence
    Under section 10.72 of the Circular, in a hearing or proceeding
conducted under the Circular, the rules of evidence prevailing in courts
of law and equity are not controlling.526 The Administrative Law Judge
may exclude evidence that is irrelevant, immaterial or unduly
repetitious.
    Any deposition taken under section 10.73 (discussed below) may be
admitted into evidence in any proceeding instituted under
section 10.60.
    Official documents, records and papers of the IRS and the Office of
Director of Practice are admissible into evidence under section 10.72(c)
without the production of an officer or employee to authenticate them.
Also, any such document may be evidenced by a copy attested to or
identified by an officer or employee of the IRS or the Treasury Depart-
ment. In other words, the original document (which need not be
authenticated by anyone) need not be produced; rather, a copy may be
used if it is attested to or identified by an officer or employee of the IRS or
the Treasury Department.
    Once any document, record or other paper is introduced into
evidence as an exhibit, the Administrative Law Judge may authorize
its withdrawal subject to any conditions the judge deems proper.
Presumably, such conditions might be limited to the ability to attempt
to introduce it into evidence at another stage of the proceeding. 527
    Any objection to evidence is to be short, although the ground for
making it is to be expressed. Unless the Administrative Law Judge
orders otherwise, arguments on objections are not recorded or tran-
scribed. Rulings as to objections are required to be part of the record of
the proceeding but no exception to a ruling is necessary to preserve the
rights of the parties. In other words, a party need not state that he or
she is reserving the right to object to the ruling to admit or exclude
evidence on appeal.

   § 4:19.14          Depositions
   Depositions may be taken, under section 10.73 of the Circular, with
the written approval of the Administrative Law Judge, by the Director of
Practice, the respondent or either party’s representative. Hence, it seems
that depositions may not be taken as a matter of right. In any case, any
deposition is to be taken before any officer duly authorized to administer
an oath for general purposes (such as are generally available from court

526.     See generally the Federal Rules of Evidence.
527.     Prop. Treas. Reg. § 10.72 of the Circular would generally require pre-
         hearing memoranda, although the Administrative Law Judge may deter-
         mine them as not necessary or, by order, require other information with
         respect to the disciplinary proceeding commenced under the Circular.



                                   4–230
                                       Circular 230                       § 4:19.15

stenographic recording firms) or before an officer or employee of the IRS
who is authorized to administer an oath in an Internal Revenue matter.
Depositions may be taken of persons who are not parties.528
   The party that will take the deposition must provide the deponent
and the other party with at least ten days’ notice of the deposition
unless the deponent and the parties agree otherwise. The notice must
include the name of the deponent, the time and place where the
deposition will be held, and whether the deposition will be conducted
using oral or written questions.
   As indicated, written interrogatories may be used. When they are
used, any cross-examination also must be by written interrogatories.
The written interrogatories must be served on the other party with the
notice of deposition at least ten days before the deposition will be
taken unless the parties agree otherwise. Written cross-interrogatories
must be mailed or delivered to the opposing party at least five days
before the date that the deposition will be taken, unless the parties
agree otherwise. The section seems to distinguish between written
(direct) interrogatories, which must be “served,” and written cross-
interrogatories that must be “mailed or delivered.” “Served” suggests
some formal service of process; “mailed or delivered” suggests a much
less formal system of getting the interrogatories to the other party. It is
unclear if any such distinction is intended.
   A party on whose behalf a deposition is taken (which seems to
mean the party who has requested the deposition) must file the
responses to the written interrogatories or a transcript of the oral
deposition with the Administrative Law Judge and service a copy on
the opposing party and on the deponent. Expenses in the reporting of
depositions are to be borne by the party who requests the deposition.

    § 4:19.15             Transcript of the Proceeding
   Under section 10.74, where the hearing is stenographically reported
by a government contract reporter, a copy of the transcript may be
obtained from that reporter at rates not to exceed the maximum rates
fixed by contract between the government and the reporter.
   Where the hearing is stenographically reported by a regular em-
ployee of the IRS, a copy will be supplied to the respondent either
without charge or upon the payment of a reasonable fee. Although not
expressly stated in section 10.74 of the Circular, it seems that the copy
must be requested by the respondent.


528.       Prop. Treas. Reg. § 10.72 of the Circular would allow each party to a
           disciplinary proceeding under the Circular, as may be required for a full
           and true disclosure of the facts, to question, in the presence of the
           Administrative Law Judge, a person whose statement is offered by the
           opposing party.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–231
§ 4:19.16              THE CIRCULAR 230 DESKBOOK

   Copies of exhibits (for example, a written document admitted into
evidence) introduced at the hearing or at a deposition will be supplied
to the parties upon the payment of a “reasonable fee.”529
   The Circular does not specify the time within which the transcript
or an exhibit must be delivered to the party requesting it.

   § 4:19.16         Proposed Findings and Conclusions
   Except in cases where the respondent has failed to answer the
complaint or where a party has failed to appear at the hearing, the
parties must be afforded a reasonable opportunity to submit proposed
findings and conclusions, and their supporting reasons, to the Admin-
istrative Law Judge under section 10.75 of the Circular. Accordingly, it
seems that even if no evidence is presented, a respondent must be
given an opportunity to state why he or she believes no sanctions
should apply.

   § 4:19.17         Decision of the Administrative Law Judge
   Under section 10.76(a) of the Circular, the Administrative Law
Judge is to enter a decision in the case as soon as practicable after
the parties have submitted any proposed findings of fact and con-
clusions of law after the hearing has been concluded. 530 The decision
must include a statement of findings and conclusions as well as the
reasons or basis for making those findings and conclusions. It must also
contain an order of censure, suspension, disbarment, disqualification
or dismissal of the complaint.531 The Administrative Law Judge must
give the original copy of the decision to the Director of Practice and a
copy to the respondent or his or her authorized representative.

            [A] Different Burden to Establish Facts for Different
                Sanctions
   Section 10.76(a) requires an alleged fact to be proved by a different
standard depending upon the sanction the Administrative Law Judge
imposes. If the sanction is censure or suspension from practice before


529.    See Pub. L. No. 82-137 § 501, 65 Stat. 290, 31 U.S.C. § 483.
530.    For an example of a decision by an Administrative Law Judge ordering the
        disbarment of a Practitioner from practice before the IRS, see www.irs.gov/
        newsroom/article/0,,id=119380,00.html. Prop. Treas. Reg. § 10.76 of the
        Circular would provide that the Administrative Law Judge should render a
        decision within 180 days after the conclusion of the hearing.
531.    Presumably, once regulations have been issued with respect to the mone-
        tary penalties that may be imposed for violation of Circular 230, as
        permitted by changes to 31 U.S.C. § 330 made by the American Jobs
        Creation Act of 2004, the Administrative Law Judge could impose a
        monetary penalty.



                                    4–232
                                       Circular 230                         § 4:19.17

the IRS for less than six months, the Administrative Law Judge may
consider an allegation of fact to be proven if established by the party
alleging it by a preponderance of the evidence in the record. 532 If the
sanction imposed is disbarment or suspension for six months or
longer, it must be proved by clear and convincing evidence in the
record, a higher standard of proof.533 An allegation of fact necessary for
a finding of disqualification of an appraiser must be proven by clear
and convincing evidence in the record.
   In other words, even if the respondent has been accused in a
complaint of action that would justify suspension for six months or
disbarment, the decision cannot order that sanction unless the
facts necessary to justify it are proved by the Director of Practice by
clear and convincing evidence. It seems obvious that even if the
Director proves all facts alleged in the complaint against the respon-
dent by clear and convincing evidence, the Administrative Law Judge
need not suspend the Practitioner for more than six months or disbar
him or her, but could impose a less onerous sanction.

               [B] Finality of Decision
   The decision of the Administrative Law Judge becomes the
decision of the agency (that is, the Treasury Department) unless
within thirty days of that decision either the respondent or the
Director of Practice appeals the decision to the Secretary of the
Treasury or the decision is reviewed on motion of the Secretary or
his or her designee.534




532.       The Federal Rules of Evidence contain no definition of “preponderance of
           evidence.” BLACK’S LAW DICTIONARY (7th ed.) defines it as evidence which
           is of greater weight or more convincing than the evidence which is offered
           in opposition to it; that is, evidence which as a whole shows that the fact
           sought to be proved is more probable than not. In civil actions it means
           greater weight of evidence, or evidence which is more credible and
           convincing to the mind; that which best accords with reason and prob-
           ability. See also Grogan v. Garner, 498 U.S. 279, 283–91 (1991).
533.       The Federal Rules of Evidence contain no definition of “clear and convinc-
           ing evidence.” BLACK’S LAW DICTIONARY (7th ed.) defines it as evidence
           indicating that the thing to be proved is highly probable or reasonably
           certain. This is a greater burden than preponderance of evidence, the
           standard applied in most civil trials, but less than evidence beyond a
           reasonable doubt, the norm in criminal trials. See generally Cruzan v. Dir.,
           Mo. Dep’t of Health, 497 U.S. 261, 286 (1990).
534.       It will be noted that Circular 230 § 10.77 refers to the Secretary ’s
           “delegate” rather than “designee.” It seems no difference is intended by
           the use of these two different terms.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–233
§ 4:19.18                THE CIRCULAR 230 DESKBOOK

   § 4:19.18           Appeal of the Decision
   Either the respondent or the Director of Practice may appeal the
decision of the Administrative Law Judge to the Secretary of the
Treasury (or his or her delegate),535 but only within thirty days of
the date of the decision.
   It is implied that any appeal must be in writing. Section 10.77
provides that the Director must provide the respondent with a copy of
any appeal the Director makes. No method by which the respondent
must be provided such a copy (for example, by first-class mail) or the
time within which the copy must be provided is set forth in the
Circular. In any event, the respondent may, within thirty days after
receipt of a copy of the Director ’s appeal, file a reply brief. The
respondent must file with the Director any appeal or any reply brief
to an appeal by the Director; it must be filed in duplicate. Any appeal
by the respondent must set forth the exceptions to the decision and
the reasons supporting the exceptions. The Director may file a reply
brief to the respondent’s appeal and must provide of copy of it to the
respondent (although, again, no method by which the copy must be
provided or the time within which it must be provided is specified in
the Circular).
   Whether the appeal is by the respondent or the Director, the
Director must provide the entire record of the proceeding to the
Secretary of the Treasury, or his or her delegate, after the appeal and
any reply brief has been filed.

   § 4:19.19           Decision on Appeal by the Secretary of the
                       Treasury
   The decision of the Administrative Law Judge will not be reversed
by the Secretary of the Treasury (or his or her delegate) unless the
appealing party establishes that the decision is “clearly erroneous” in
light of the evidence in the record and applicable law. 536 Issues that
are exclusively matters of law will be reviewed de novo.536.1




535.     Id.
536.     Circular 230 § 10.78. On what constitutes a finding that is clearly
         erroneous, see United States v. U.S. Gypsum Co., 333 U.S. 364, 394–95
         (“A finding is ‘clearly erroneous’ when although there is evidence to
         support it, the reviewing court on the entire evidence is left with a definite
         and firm conviction that a mistake has been committed.”). See also FED. R.
         CIV. P. 52(a).
536.1.   See Office of Prof ’l Responsibility v. Chandler, Complaint No. 2006-23
         (applying the “clearly erroneous” standard with respect to questions of fact
         and mixed questions of law and fact, the de novo standard with respect to
         questions of law and, surprisingly, the appropriateness of the sanction).



                                      4–234
                                       Circular 230                          § 4:19.20

   In the event the Secretary (or his or her delegate) determines that
there are unresolved issues raised by the record, the Secretary or
delegate may remand the case to the Administrative Law Judge to
elicit additional testimony or evidence. The Secretary of the Treasury,
or his or her delegate, makes the agency decision on any decision that
is appealed.
   In any event, the Secretary or delegate must provide a copy of the
agency decision made by the Secretary or delegate to the Director of
Practice and to the respondent (or the respondent’s authorized repre-
sentative contemporaneously).

    § 4:19.20             Effect of Disbarment, Suspension or Censure
                          and Possible Reinstatement to Practice
   Section 10.79 of the Circular sets forth the consequences to a
Practitioner who is censured, suspended or disbarred from
practice.536.2




           Compare U.S. Dep’t of the Treasury, Office of Prof ’l Responsibility v.
           Kilduff, Complaint No. 2008-12 (indicating that the Director of OPR is
           entitled to some deference on the question of the appropriateness of the
           sanction).
536.2.     In August 2011, the Office of Professional Responsibility indicated the
           nature of activity that is prohibited in the case of a suspended or disbarred
           Practitioner:
              A SUSPENDED OR DISBARRED INDIVIDUAL MAY NOT—
              1. Prepare or file documents (including tax returns) or other
              correspondence with the IRS.
              The restriction applies regardless of whether the individual signs
              the document or correspondence and regardless of whether the
              individual personally files, or directs another person to file, docu-
              ments or correspondence with the IRS. Also, as a result of a
              suspension or disbarment, the individual will have any preparer
              tax identification number (PTIN) revoked.
              2. Render written advice with respect to any entity, transaction,
              plan or arrangement, or other plan or arrangement having a
              potential for tax avoidance or evasion.
              The prohibition applies regardless of whether the written advice is a
              part of a larger document or a component of a set of documents and
              regardless of whether the individual signs the written advice.
              3. Represent a client at conferences, hearings, and meetings.
              The prohibition applies to all forms of conferences, hearings, and
              meetings, including those conducted person-to-person or by tele-
              phone or by teleconferencing facilities. The prohibition bars the
              individual from representing the taxpayer, that is, from advocating,
              disputing, arguing, or otherwise negotiating on the taxpayer ’s


(Circ. 230 Deskbook, Rel. #12, 3/12)     4–235
§ 4:19.20                THE CIRCULAR 230 DESKBOOK



            behalf with respect to the taxpayer ’s rights, privileges, or liabilities
            under laws or regulations administered by the Internal Revenue
            Service, including provisions outside Title 26 which have been
            delegated to the Commissioner by the Treasury Secretary or Congress
            (e.g., foreign bank account reporting; health care insurance premium
            provisions).
            The prohibition applies regardless of whether the taxpayer is a
            paying client and also applies to all of the limited forms of practice
            defined in section 10.7(c). The prohibition does not affect a tax-
            payer’s right to the services of the individual as a witness or any
            right of the taxpayer to be accompanied by the individual to
            conferences, hearings, or meetings. However, OPR will consider
            any instances of the individual’s advocating or negotiating on the
            taxpayer ’s behalf at conferences, hearings, or meetings, to be
            attempted practice in violation of the individual’s suspended or
            disbarred status.
            4. Execute waivers, consents, or closing agreements; receive a
            taxpayer’s refund check; or sign a tax return on behalf of a taxpayer.
            Because these acts require the filing of a power of attorney autho-
            rizing the representative to perform these acts, they are considered
            to be practice before the IRS.
            See section 601.504(a) of the IRS Conference and Practice Require-
            ments, which are set out at 26 C.F.R. sections 601.501 through
            601.509 and are reprinted in pamphlet form as Publication 216.
            5. File powers of attorney with the IRS.
            OPR will consider the filing of a power of attorney appointing an
            individual as a representative who is under suspension or disbar-
            ment to be an attempt to practice in violation of the individual’s
            suspended or disbarred status. An individual who seeks to practice
            before the IRS must declare (usually on Form 2848, Power of
            Attorney and Declaration of Representative) that he or she is not
            under suspension or disbarment from practice before the IRS. OPR
            will refer false declarations to the Treasury Inspector General for
            Tax Administration.
            6. Accept assistance from another person (or request assistance)
            or assist another person (or offer assistance) if the assistance
            relates to a matter constituting practice before the IRS, or enlist
            another person for the purpose of aiding and abetting practice
            before the IRS.
            Sections 10.24(a) and 10.51(a)(11) prohibit individuals who are
            eligible to practice before the IRS from accepting assistance from,
            or assisting, or aiding or abetting a suspended or disbarred individ-
            ual in matters constituting practice. OPR will consider both a
            suspended or disbarred individual and any other individual’s/firm’s
            participation in such relationships to be in violation of sections
            10.24(a) and 10.51(a)(11) and evidence of disreputable conduct
            under section 10.51(a).
            7. State or imply that he or she is eligible to practice before the IRS.
            OPR will consider such express or implied statements to be false,
            misleading, or deceptive, and to constitute a violation of section



                                       4–236
                                       Circular 230                         § 4:19.20

   A respondent, upon disbarment, may no longer practice before the
IRS unless or until he or she is reinstated to practice pursuant to
section 10.81. That section allows a former Practitioner (or an
appraiser who has been disqualified from having his or her appraisal
having any probative value for Internal Revenue law purposes) to apply
to the Director of Practice for reinstatement after five years following
the disbarment or disqualification. In other words, five years from the
disbarment or disqualification must expire before a petition for
reinstatement may be considered. The Director may grant the petition
only if the Director is satisfied that the petitioner is no longer likely to
engage in conduct contrary to the Circular and only if it would not be
contrary to the public interest. Public interest is not discussed in the
Circular. Perhaps one factor the Director would consider is whether
allowing reinstatement would encourage others to engage in conduct
contrary to the Circular that was the grounds for complaint against the
Practitioner or appraiser.

              10.30. In addition, under section 10.6(j)(4), individuals may not use
              the terms enrolled agent, enrolled retirement plan agent, or regis-
              tered tax return preparer, the designation “EA” or “ERPA,” or other
              form of reference to eligibility to practice before the IRS while
              disbarred, suspended, or in inactive status. These prohibitions
              apply to business cards, business stationery, and web sites.
              A SUSPENDED OR DISBARRED INDIVIDUAL MAY NEVER-
              THELESS—
              1. Represent himself or herself with respect to any matter.
              Authorized under section 10.7(a).
              2. Appear before the IRS as a trustee, receiver, guardian, admin-
              istrator, executor, or other fiduciary if duly qualified/authorized
              under the law of the relevant jurisdiction.
              Authorized under section 10.7(e). Fiduciaries should file Form 56,
              Notice Concerning Fiduciary Relationship.
              3. Appear as a witness for the taxpayer.
              Authorized under section 10.8(b) and Revenue Procedure 68-29,
              reprinted in pamphlet form as Publication 499. A witness is limited
              to providing factual information, and he or she may not advocate
              particular positions on issues or controversies arising during a tax
              examination.
              4. Furnish information at the request of the IRS or any of its
              officers or employees.
              Authorized under section 10.8(b).
              5. Receive information concerning a taxpayer from the IRS
              pursuant to a valid tax information authorization.
              A suspended or disbarred individual’s appointment on Form 8821,
              Tax Information Authorization, entitles him or her to receive
              taxpayer information but does not entitle him or her to practice
              before the IRS on behalf of that taxpayer.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–237
§ 4:19.21               THE CIRCULAR 230 DESKBOOK

    If the Practitioner is suspended from practice before the IRS, the
respondent cannot practice before the IRS during the suspension
period. Even after the suspension expires, the Director is permitted,
under section 10.78(d), to impose conditions on the respondent’s
practice. Similarly, even if the Practitioner has only been censured
(and not disbarred or suspended from practice), the Director may
impose conditions on the Practitioner ’s practice. The section provides,
by way of example, that the Director may require, for an appropriate
period of time, that the Practitioner provide the Director or another
IRS official with a copy of all consents of clients by which they consent
to a representation notwithstanding potential conflict of interest as
permitted under section 10.29(b), where the Practitioner was censured
for failing to advise a client about a potential conflict of interest or
failed to obtain, as required by section 10.29(b), written consents to
representation notwithstanding the conflict. It is probably merely a
case of oversight, but the Director is not authorized to impose such
conditions with respect to a disbarred Practitioner upon his or her
reinstatement under section 10.81, although, perhaps, the Director
would make that a condition of reinstatement by agreement with the
reinstated Practitioner.

   § 4:19.21          Notice of Disbarment, Suspension, Censure or
                      Disqualification
   The Director of Practice is permitted to give notice to appropriate
officers and employees of the IRS and to other departments and
agencies of the federal government of a censure, suspension, or
disbarment of a Practitioner or disqualification of an appraiser, after
the final order has been issued.536.3
   Section 10.80 also indicates that the Director may be required to
give notice to authorities of the state in which the censured, suspended
or disbarred Practitioner was licensed to practice. This section, by its
terms, only provides the Director with the discretion as to the manner
of giving that notice to the state and not whether to give it or not. In
any event, no time for giving that notice is set forth in the Circular.




536.3.   In CCA 201001019, the Service addresses the authority of an IRS collec-
         tion employee to ascertain whether the taxpayer ’s representative named in
         a power of attorney has satisfied his or her personal filing and payment
         obligations to the IRS. The CCA concludes that it would be impermissible
         for the collection employee to access internal IRS documents about the
         representative. Nonetheless, the CCA concludes that it is permissible for
         the IRS employee to check the state bar website to determine if the
         representative is eligible to practice and to also check the OPR website.



                                    4–238
                                       Circular 230                              § 4:19.22

    § 4:19.22             Expedited Suspension in Some Cases
   Section 10.82 of the Circular sets forth provisions to effect a prompt
determination of conduct justifying suspension of a Practitioner in
some cases. These procedures do not apply to a censure or disbarment
or the disqualification of an appraiser.

               [A] Practitioners Against Whom the Expedited
                   Suspension Procedures May Be Applied
    The procedures set forth in section 10.82 may apply to any
Practitioner who, within the past five years, has had his or her license
to practice as an attorney, CPA or actuary suspended or revoked for
cause by any authority or court, agency, body, or board of any state,
territory, possession of the United States, including a Commonwealth,
or the District of Columbia, or any federal court of record or any
federal agency, body or board.
    Similarly, the procedures may be applied against a Practitioner who
has been convicted of any crime under title 26 of the U.S. Code (the
Internal Revenue Code), any crime involving dishonesty or breach of
trust, or any felony for which the conduct involved renders the Practi-
tioner unfit to practice before the IRS. Although described in somewhat
different terms, these convictions appear to be those constituting
incompetence and disreputable conduct under section 10.51(a),
(b) and (c) that may be sanctioned under section 10.50. The procedures
under section 10.82 for suspension may commence even if an appeal is
pending with respect to the conviction.
    The procedures under section 10.82 may also be instituted against
a Practitioner who has violated the conditions the Director has
imposed on his or her continuing practice after censure or suspension
pursuant to section 10.79(d).537

               [B] Commencement of the Proceeding
   A proceeding for expedited suspension under section 10.82 is
commenced by the issuance of a complaint by the Director or someone
representing the Director. It must be filed in the office of the Director
and served on the Practitioner in accordance with section 10.63(a).
The complaint must set forth a plain and concise description of the
allegations that constitute the basis for the proceeding under
section 10.82. It also must give notice to the respondent of the place


537.       Prop. Treas. Reg. § 10.82 of the Circular would permit a Practitioner who
           is not compliant with his or her own federal tax obligations or one who has
           been found by a court of competent jurisdiction to have advanced frivolous
           arguments or arguments primarily for delay, either relating to a taxpayer ’s
           tax liability or relating to the Practitioner ’s own tax liability, to be subject
           to an expedited disciplinary proceeding.



(Circ. 230 Deskbook, Rel. #12, 3/12)     4–239
§ 4:19.22              THE CIRCULAR 230 DESKBOOK

and time for filing an answer, that a decision by default may be
rendered if the respondent fails to file an answer, that the respondent
may request a conference with the director to address the merits of the
complaint and that any such request for a conference must be con-
tained in the answer, and that the respondent may be suspended either
immediately following the time in which an answer must be filed or, if
a conference is requested, immediately following the conference.

            [C]   Answer Required to Be Filed
    The answer must be filed no later than thirty calendar days after the
complaint is served, unless the Director extends the time. It must be
filed in accordance with the rules set forth in section 10.64, 538 except
to the extent inconsistent with section 10.82.

            [D]   Director’s Authority to Effect Expedited
                  Suspension If No Answer Is Made
   The Director is expressly authorized to suspend the Practitioner
following the date the answer was due if no conference with the
Director is contained in the answer, if the answer if not timely filed,
or if the Practitioner or his or her authorized representative fails to
appear at the conference.

            [E]   Time and Place of Conference
   The Director selects the time and place of the conference, over
which the Director or his or her designee will preside. The conference
cannot be scheduled less than fourteen calendar days after the date on
which the answer is to be filed, unless the respondent agrees to an
earlier date.

            [F]   Suspension Immediately After Conference
   If it is determined in the conference that the license of the Practi-
tioner to practice has been suspended or revoked, that the Practitioner
has been convicted of the crimes described in section 10.82(b)(2), or
that the Practitioner has been in violation of the conditions of
continued practice imposed by the Director under section 10.79(d),
the Director may immediately suspend the Practitioner.
   None of the “safeguards” required in a hearing under section 10.71
before the Administrative Law Judge or the requirements of proof (such
as clear and convincing evidence in some cases) is required under the
expedited procedures of section 10.82.




538.    Circular 230 § 10.64 is discussed in section 4:19.9[E], supra.



                                    4–240
                                       Circular 230              § 4:20

               [G] Period of Expedited Suspension
   A suspension effected under section 10.82 begins upon the date the
written notice of suspension is issued. The Circular contains no
requirement that it be served upon the respondent. The expedited
suspension remains in effect until it is lifted by the Director upon a
determination that the respondent did not engage in the conduct (for
example, conviction of a certain crime) that served as the basis of the
expedited suspension or for any other reason. For example, a reversal
on appeal of a conviction probably would serve as grounds for the
Director to lift the suspension. It may also be lifted by an Adminis-
trative Law Judge or by the Secretary of the Treasury in a proceeding
commenced pursuant to a special procedure set forth in section 10.82,
discussed below.

               [H] Proceeding After Expedited Suspension
   If the Director suspends a Practitioner under the expedited pro-
cedure of section 10.82, the respondent may demand that the Director
issue a complaint so that a proceeding may be commenced pursuant to
section 10.60 before an Administrative Law Judge. It is not clear
whether a hearing is required under section 10.71 where the Practi-
tioner has had the opportunity for a conference under section 10.82(c).
A hearing, if required, would be conducted de novo and will provide
the suspended Practitioner the safeguards such a proceeding offers,
although the Practitioner presumably will not be permitted to practice
until those proceedings end, unless the Director decides to lift the
suspension.

§ 4:20           Record of Enrollments, Sanctioned Practitioners,
                 Etc.
   Under section 10.90 of the Circular, the Director of Practice must
make available for public inspection the roster of all persons enrolled
to practice before the IRS, of all Practitioners who have been censured
or been suspended or disbarred from practice before the IRS, and of all
disqualified appraisers.




(Circ. 230 Deskbook, Rel. #12, 3/12)     4–241

				
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