[Federal Register Volume 59, Number 117 (Monday, June 20, 1994)]
[Unknown Section]
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From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14901]
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[Federal Register: June 20, 1994]
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DEPARTMENT OF THE TREASURY
31 CFR Part 10
[TD 8545]
RIN 1545-AQ57
Regulations Governing the Practice of Attorneys, Certified Public
Accountants, Enrolled Agents, and Enrolled Actuaries Before the
Internal Revenue Service
AGENCY: Office of the Secretary, Department of the Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations under 31 CFR part 10
governing the practice of individuals before the IRS. These regulations
affect individuals who are eligible to practice before the IRS. These
regulations establish tax return preparation standards and prescribe
the circumstances under which a practitioner may be disciplined for
violating those standards, limit the use of contingent fees for
preparing tax returns, clarify that certain of the existing
restrictions governing limited practice before the IRS apply to all
individuals who are eligible to engage in limited practice before the
IRS, establish expedited proceedings to suspend individuals from
practice before the IRS in cases in which certain determinations have
been made by independent bodies, and permit attorneys and certified
public accountants in good standing to obtain or retain enrolled agent
status.
EFFECTIVE DATE: These regulations are effective June 20, 1994.
FOR FURTHER INFORMATION CONTACT: David L. Meyer, Office of the
Assistant Chief Counsel (Income Tax and Accounting), IRS, 1111
Constitution Avenue, NW., Washington, DC 20224 (Attention:
CC:DOM:CORP:T:R), or by telephone at 202-622-6232 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Background
On October 8, 1992, the Department of the Treasury published in the
Federal Register proposed amendments to the regulations governing
practice before the IRS (57 FR 46356). The regulations are in subtitle
A, part 10, of title 31 of the Code of Federal Regulations and have
been reprinted as Treasury Department Circular No. 230 (Circular 230).
A public hearing was held on December 16, 1992. A number of comments
were received in response to the proposed amendments. After careful
consideration of the comments received, the regulations are adopted as
revised by this Treasury decision.
Explanation of Changes
I. Return Preparation Standards and Related Disciplinary Standard
A. Standards of Conduct
The proposed regulations included new return preparation standards
for attorneys, certified public accountants, enrolled agents and
enrolled actuaries (practitioners). These standards would modify
Circular 230 to reflect more closely the standards for return preparers
under section 6694 of the Internal Revenue Code of 1986 (Code) and
professional guidelines.
Under the proposed regulations, a practitioner may not sign a
return as a preparer if the practitioner determines that the return
contains a position that does not have a realistic possibility of being
sustained on its merits (the realistic possibility standard), unless
the position is not frivolous and is adequately disclosed to the IRS.
In addition, a practitioner may not advise a client to take a position
on a return, or prepare the portion of a return on which a position is
taken, unless the practitioner determines that the position satisfies
the realistic possibility standard or the position is not frivolous and
the practitioner advises the client to adequately disclose the
position.
One commentator suggested deleting the language in the first
sentence of Sec. 10.34(a)(1) of the proposed regulations, which
prohibited a practitioner from signing a return without disclosure if
the practitioner determined that the return contained a position that
did not satisfy the realistic possibility standard. The commentator
asserted that the practitioner should not be subject to discipline
under Circular 230 if the return position resulted from reasonable
reliance on another preparer.
Treasury does not believe it is appropriate to alter the standard
of conduct in Sec. 10.34(a), which generally conforms to the rules of
section 6694. In addition, the commentator's concern is addressed by
the standard of discipline of Sec. 10.34(b). Under this standard, only
violations of Sec. 10.34 that are willful, reckless, or grossly
incompetent will be subject to discipline. See Standard of Discipline,
below.
Another commentator stated that a signing preparer should only be
required to advise disclosure of (rather than actually disclose) a
return position that did not satisfy the realistic possibility
standard. This commentator added that Circular 230 should not
distinguish between the not frivolous and realistic possibility
standards because, in the commentator's view, they are identical.
To promote consistency in disclosure standards, the Circular 230
disclosure rules are patterned after the section 6694 rules and,
therefore, a signing preparer must actually disclose (rather than
merely advise disclosure of) nonfrivolous return positions that do not
satisfy the realistic possibility standard. Because Treasury believes
the realistic possibility standard is distinct from the not frivolous
standard, these amendments to Circular 230 also distinguish between
these two standards.
The Omnibus Budget Reconciliation Act of 1993 (the OBRA '93) made
certain changes to the accuracy-related penalty in section 6662 of the
Code. The OBRA '93 raised the disclosure standard for purposes of the
penalties for disregarding rules or regulations or a substantial
understatement of income tax from ``not frivolous'' to ``reasonable
basis''. Also, the OBRA '93 eliminated the disclosure exception for the
negligence penalty. The IRS published temporary regulations
Sec. 1.6662-7T in the Federal Register to implement these changes. See
59 FR 12547 (March 17, 1994) and 59 FR 14749 (March 30, 1994). These
changes narrow the opportunities to avoid an accuracy-related penalty
by disclosing a return position. In view of these changes, these final
regulations require non-signing practitioners to advise their clients
of any opportunity to avoid such a penalty by disclosing a position
(rather than to disclose the position).
Under Sec. 10.34(a)(2) of the proposed regulations, a practitioner
who advises a client on a position to be taken on a return, or who
signs or prepares a return, must inform the client of the penalties
reasonably likely to apply to the client with respect to the position.
One commentator contended that the requirement that a practitioner
apprise its client of penalties reasonably likely to apply intrudes on
the practitioner-client relationship and should be deleted. Another
commentator stated that the requirement was too lenient and should be
strengthened by requiring practitioners to give their clients written
notice of penalties reasonably likely to apply.
Treasury believes that informing clients of penalties reasonably
likely to apply with respect to return positions is an important
component of a practitioner's duty to his or her client. Accordingly,
these final regulations retain this requirement. The final regulations,
however, do not require practitioners to give the penalty advice in
writing. Treasury believes that preserving flexibility as to the form
in which practitioners advise their clients promotes client
understanding of the advice and discourages the use of possibly
confusing boilerplate language.
Under the proposed regulations, a position satisfies the realistic
possibility standard 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. Several
commentators stated that the one-in-three formulation of the realistic
possibility standard should not be used for purposes of Circular 230. A
common criticism was that the test is inherently difficult to
administer.
The one-in-three test has been adopted for preparers under section
6694. Adopting a different formulation of the realistic possibility
standard in Circular 230 would lead to unnecessary confusion. In
addition, quantification of the realistic possibility standard helps to
prevent its erosion. For these reasons, the suggestion of some
commentators to eliminate the one-in-three test was not adopted.
For purposes of determining whether the realistic possibility
standard is satisfied, the proposed regulations provide that the
authorities that may be taken into account under 26 CFR 1.6662-
4(d)(3)(iii) for purposes of the substantial understatement penalty
also may be taken into account for purposes of Circular 230. Some
commentators suggested expanding the permissible authorities to include
well-reasoned treatises, articles in recognized professional tax
publications, and other reference tools commonly used by practitioners.
Treasury believes that the determination of whether the realistic
possibility standard is satisfied for purposes of Circular 230 (as well
as section 6694) should be grounded in laws enacted by politically
authorized decisionmakers, not in interpretations of those laws in
secondary source materials. Thus, the suggestion was not adopted. Even
though secondary sources are not authorities for Circular 230 purposes,
practitioners may rely in preparing returns on applicable authorities
underlying the conclusions in those sources.
B. Standard of Discipline
Under the proposed standard of discipline, only violations of
Sec. 10.34 that are willful, reckless, or a result of gross
incompetence will subject a practitioner to suspension or disbarment
from practice before the IRS. The proposed regulations further provide
that a pattern of conduct is a factor that will be taken into account
in determining whether a practitioner acted recklessly or with gross
incompetence.
A commentator suggested that the standard of discipline for
Sec. 10.34 be amended to provide that only a pattern of conduct will
subject a practitioner to discipline. This suggestion would permit
practitioners to violate the new return preparation standard of
Circular 230 at least once without being subject to discipline by the
Director of Practice. Treasury does not believe it is appropriate for
Circular 230 to countenance improper conduct, or to establish a more
lenient standard of discipline in the return preparation context than
in other Circular 230 contexts not requiring a pattern of conduct to
impose discipline. Accordingly, this suggestion was not adopted.
One commentator recommended that a general reasonable cause and
good faith exception be expressly incorporated into the standard of
discipline for Sec. 10.34 of Circular 230. Some commentators also asked
for a more limited reasonable cause and good faith exception for
reasonable reliance on the advice of another practitioner. The existing
standard of discipline eliminates the need for an express reasonable
cause and good faith exception in that willful, reckless, or grossly
incompetent violations of Circular 230 are inconsistent with reasonable
cause and good faith. Therefore, these suggestions were not adopted.
II. Contingent Fees
The proposed regulations ban contingent fees for preparing a return
except in the case of certain claims for refund. Under the proposed
regulations, a practitioner may charge a contingent fee for preparing a
claim for refund if the practitioner reasonably anticipates, at the
time the claim is filed, that the claim will be denied by the IRS and
subsequently litigated by the client.
A number of comments were received concerning the proposed rule on
contingent fees. Some commentators expressed concerns about the
administrability of the portion of the rule involving claims for
refund. These commentators noted that it may be difficult to anticipate
whether the IRS will deny a claim and whether a client will choose to
litigate the claim if it is denied. They also asserted that a claim's
prospects for being denied should be evaluated at the time of the fee
arrangement, rather than at the time the claim is filed.
Other commentators questioned the need for additional rules in
Circular 230 regulating fees at all. These commentators suggested that
the preparer and accuracy-related penalties provide adequate safeguards
against overly-aggressive positions, that the proposed rule is broader
than necessary to counter any use of contingent fee arrangements to
exploit the ``audit lottery,'' and that the proposed rule could
interfere with reasonable commercial relationships.
Treasury continues to believe that a rule restricting contingent
fees for preparing tax returns supports voluntary compliance with the
tax laws by discouraging return positions that exploit the audit
selection process. In response to comments received, the proposed
contingent fee rule has been modified in the final regulations to
permit contingent fees for claims for refund (other than claims for
refund made on original returns) or for amended returns if the
practitioner reasonably anticipates, at the time the fee arrangement is
entered into, that the return will receive substantive review by the
IRS. This determination will be made on a case-by-case basis. Like the
proposed rule, the final rule bans contingent fees for preparing
original returns.
III. Restrictions on Individuals Engaging in Limited Practice
The proposed regulations generally required that all
nonpractitioners who engage in limited practice before the IRS under
Sec. 10.7 uphold the same standards as practitioners and simplified the
structure of that section. In response to a comment, the final
regulations clarify ambiguous wording in Sec. 10.7(c)(1)(vii) of the
proposed regulations, which relates to representation outside of the
United States. The change makes clear that a nonpractitioner may
represent a taxpayer before personnel of the IRS who are located
outside of the United States, regardless of where the taxpayer is
located.
Another commentator asked that Sec. 10.7(c)(1)(viii), which relates
to representation before the Examination Division by a preparer, be
clarified by substituting ``as the preparer'' for ``on behalf of the
taxpayer''. This change, which is not substantive in nature, is adopted
by the final regulations.
IV. Expedited Suspensions From Practice Before the Service in Certain
Cases
The proposed regulations added a new section permitting the
Director of Practice to commence an expedited proceeding leading to a
practitioner's suspension from practice before the Service in those
instances in which an independent authority already has determined that
the practitioner has engaged in serious misconduct. Some commentators
recommended against adopting the expedited suspension provision. These
commentators argued that an expedited suspension violates an
individual's due process rights and constitutes an abuse of the
Director of Practice's authority. Alternatively, it was suggested that:
(1) An expedited suspension be deferred if the individual requests a
hearing before an Administrative Law Judge; (2) the Director be
required to take additional steps to ensure that the complaint in an
expedited suspension proceeding is properly served; and (3) the
respondent in such a proceeding be given additional time to respond to
the Director's complaint and not be deemed to have waived his or her
right to a conference if the respondent's answer is not timely filed.
The acts giving rise to an expedited suspension, such as loss of
professional license for misconduct or conviction of certain felonies,
constitute disreputable conduct under Circular 230. Title 31, section
330(b) of the United States Code requires only that a representative
who engages in disreputable conduct be given notice and an opportunity
for a proceeding prior to being suspended from practice before the IRS.
The expedited suspension procedures comply with these and general due
process requirements by providing a practitioner with reasonable notice
of the grounds for any proposed suspension and an opportunity to be
heard by the Director of Practice before the suspension takes effect.
The expedited suspension provision has been carefully drafted to
apply only in limited circumstances, minimize any opportunities for
abuse, and provide individuals with adequate procedural safeguards. For
these reasons and considering Treasury's interest in expeditiously
handling these cases, the commentators' recommendations on this section
of Circular 230 generally were not adopted. However, in response to the
comments, the time for responding to a complaint has been increased to
30 days. In addition, the scheduling requirements for a conference with
the Director of Practice are relaxed and clarified. Under the final
regulations, the conference with the Director of Practice may be held
no sooner than 14 calendar days after the answer is required to be
filed, rather than 30 calendar days after the complaint is served,
unless the respondent agrees to an earlier date. The final regulations
also provide that a practitioner's loss of his or her professional
license solely due to a failure to pay a professional licensing fee
will not constitute grounds for an expedited suspension. The section
has been renumbered and conforming changes made to comply with the
requirements of the Federal Register.
V. Other Matters
A. ``Return''
One commentator asked that the definition of ``return'' of tax in
Sec. 10.2(g) be revised to explicitly state that a return includes an
amended return. To eliminate any confusion on this point, the final
regulations incorporate this recommendation.
B. ``Reckless Conduct''
One commentator requested assurances that changes to the definition
of ``reckless conduct'' in Sec. 10.51(j) were not intended to
substantively change that provision. Other commentators asked that the
words ``highly unreasonable omission'' be eliminated or replaced with
other words.
The proposed changes to the definition of ``reckless conduct'' were
intended to streamline that definition without changing its substance.
Accordingly, there is no substantive significance to eliminating the
words ``merely simple or inexcusable negligence'' or to substituting
``should observe under the circumstances'' for ``is either known or is
so obvious that the competent practitioner must or should have been
aware of it.'' Because no substantive change is intended, substantive
wording changes suggested by commentators to the proposed definition
were not adopted.
C. Comments Outside the Scope of the Project
Additional comments were not adopted because they were beyond the
scope of the regulations project. These included: (1) Altering the
definition of ``practice before the Internal Revenue Service'' in
Sec. 10.2(e); (2) extending the practice standards to commercial return
preparers; (3) requiring a return preparer who is representing a
taxpayer on audit to withdraw from the representation if a conflict of
interest arises; (4) prescribing burdens of proof in disciplinary
proceedings (which generally are governed by the Administrative
Procedure Act, 5 U.S.C. section 551 et. seq.); and (5) permitting a
temporary or part-time employee who is not a practitioner to represent
an employer, partnership, corporation, or trust under the limited
practice rules.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 12866. Therefore, a
regulatory assessment is not required. It has also been determined that
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations and, therefore, a final Regulatory Flexibility
Analysis is not required. Pursuant to section 7805(f) of the Internal
Revenue Code, the notice of proposed rulemaking for the regulations was
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Drafting Information
The principal author of these regulations is David L. Meyer, Office
of Assistant Chief Counsel, Income Tax and Accounting, Internal Revenue
Service. However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects 31 CFR Part 10
Administrative Rules and Procedures, Lawyers, Accountants, Enrolled
Agents, Enrolled Actuaries, Appraisers.
Amendments to the Regulations
Accordingly, 31 CFR part 10 is amended as follows:
PART 10--PRACTICE BEFORE THE INTERNAL REVENUE SERVICE
Paragraph 1. The authority citation for part 10 continues to read
as follows:
Authority: Sec. 3, 23 Stat. 258, secs. 2-12, 60 Stat. 237 et.
seq.; 5 U.S.C. 301, 500, 551-559, 31 U.S.C. 1026; Reorg. Plan No. 26
of 1950, 15 FR 4935, 64 Stat. 1280, 3 CFR, 1949-1953 Comp., p. 1017.
Secs. 10.7 and 10.33(d) also issued under 31 U.S.C. 321 and 330.
Par. 2. Section 10.0 is revised to read as follows:
Sec. 10.0 Scope of part.
This part contains rules governing the recognition of attorneys,
certified public accountants, enrolled agents, and other persons
representing clients before the Internal Revenue Service. Subpart A of
this part sets forth rules relating to authority to practice before the
Internal Revenue Service; subpart B of this part prescribes the duties
and restrictions relating to such practice; subpart C of this part
contains rules relating to disciplinary proceedings; subpart D of this
part contains rules applicable to disqualification of appraisers; and
Subpart E of this part contains general provisions, including
provisions relating to the availability of official records.
Par. 3. Section 10.2 is revised to read as follows:
Sec. 10.2 Definitions.
As used in this part, except where the context clearly indicates
otherwise:
(a) Attorney means any person who is a member in good standing of
the bar of the highest court of any State, possession, territory,
Commonwealth, or the District of Columbia.
(b) Certified Public Accountant means any person who is duly
qualified to practice as a certified public accountant in any State,
possession, territory, Commonwealth, or the District of Columbia.
(c) Commissioner refers to the Commissioner of Internal Revenue.
(d) Director refers to the Director of Practice.
(e) Practice before the Internal Revenue Service comprehends all
matters connected with a presentation to the Internal Revenue Service
or any of its officers or employees relating to a client's rights,
privileges, or liabilities under laws or regulations administered by
the Internal Revenue Service. Such presentations include preparing and
filing necessary documents, corresponding and communicating with the
Internal Revenue Service, and representing a client at conferences,
hearings, and meetings.
(f) Practitioner means any individual described in Sec. 10.3 (a),
(b), (c), or (d) of this part.
(g) A return includes an amended return and a claim for refund.
(h) Service means the Internal Revenue Service.
Par. 4. Section 10.3 is amended by revising paragraphs (a), (b),
(e), and (f) to read as follows:
Sec. 10.3 Who may practice.
(a) Attorneys. Any attorney who is not currently under suspension
or disbarment from practice before the Internal Revenue Service may
practice before the Service upon filing with the Service a written
declaration that he or she is currently qualified as an attorney and is
authorized to represent the particular party on whose behalf he or she
acts.
(b) Certified public accountants. Any certified public accountant
who is not currently under suspension or disbarment from practice
before the Internal Revenue Service may practice before the Service
upon filing with the Service a written declaration that he or she is
currently qualified as a certified public accountant and is authorized
to represent the particular party on whose behalf he or she acts.
* * * * *
(e) Others. Any individual qualifying under Sec. 10.5(c) or
Sec. 10.7 is eligible to practice before the Internal Revenue Service
to the extent provided in those sections.
(f) Government officers and employees, and others. An individual,
including an officer or employee of the executive, legislative, or
judicial branch of the United States Government; officer or employee of
the District of Columbia; Member of Congress; or Resident Commissioner,
may not practice before the Service if such practice would violate 18
U.S.C. 203 or 205.
* * * * *
Sec. 10.4 [Amended]
Par. 5. Section 10.4 is amended by removing paragraph (d).
Par. 6. Section 10.7 is amended by:
1. Revising the heading and text as set forth below.
2. Removing the authority that appears at the end of the section.
Sec. 10.7 Representing oneself; participating in rulemaking; limited
practice; special appearances; and return preparation.
(a) Representing oneself. Individuals may appear on their own
behalf before the Internal Revenue Service provided they present
satisfactory identification.
(b) Participating in rulemaking. Individuals may participate in
rulemaking as provided by the Administrative Procedure Act. See 5
U.S.C. 553.
(c) Limited practice--(1) In general. Subject to the limitations in
paragraph (c)(2) of this section, an individual who is not a
practitioner may represent a taxpayer before the Internal Revenue
Service in the circumstances described in this paragraph (c)(1), even
if the taxpayer is not present, provided the individual presents
satisfactory identification and proof of his or her authority to
represent the taxpayer. The circumstances described in this paragraph
(c)(1) are as follows:
(i) An individual may represent a member of his or her immediate
family.
(ii) A regular full-time employee of an individual employer may
represent the employer.
(iii) A general partner or a regular full-time employee of a
partnership may represent the partnership.
(iv) A bona fide officer or a regular full-time employee of a
corporation (including a parent, subsidiary, or other affiliated
corporation), association, or organized group may represent the
corporation, association, or organized group.
(v) A trustee, receiver, guardian, personal representative,
administrator, executor, or regular full-time employee of a trust,
receivership, guardianship, or estate may represent the trust,
receivership, guardianship, or estate.
(vi) An officer or a regular employee of a governmental unit,
agency, or authority may represent the governmental unit, agency, or
authority in the course of his or her official duties.
(vii) An individual may represent any individual or entity before
personnel of the Internal Revenue Service who are outside of the United
States.
(viii) An individual who prepares and signs a taxpayer's return as
the preparer, or who prepares a return but is not required (by the
instructions to the return or regulations) to sign the return, may
represent the taxpayer before officers and employees of the Examination
Division of the Internal Revenue Service with respect to the tax
liability of the taxpayer for the taxable year or period covered by
that return.
(2) Limitations.
(i) An individual who is under suspension or disbarment from
practice before the Internal Revenue Service may not engage in limited
practice before the Service under Sec. 10.7(c)(1).
(ii) The Director, after notice and opportunity for a conference,
may deny eligibility to engage in limited practice before the Internal
Revenue Service under Sec. 10.7(c)(1) to any individual who has engaged
in conduct that would justify suspending or disbarring a practitioner
from practice before the Service.
(iii) An individual who represents a taxpayer under the authority
of Sec. 10.7(c)(1)(viii) is subject to such rules of general
applicability regarding standards of conduct, the extent of his or her
authority, and other matters as the Director prescribes.
(d) Special appearances. The Director, subject to such conditions
as he or she deems appropriate, may authorize an individual who is not
otherwise eligible to practice before the Service to represent another
person in a particular matter.
(e) Preparing tax returns and furnishing information. An individual
may prepare a tax return, appear as a witness for the taxpayer before
the Internal Revenue Service, or furnish information at the request of
the Service or any of its officers or employees.
Par. 7. Section 10.26, paragraph (a)(4) is revised to read as
follows:
Sec. 10.26 Practice by former Government employees, their partners and
their associates.
(a) * * *
(4) Practitioner includes any individual described in Sec. 10.3(e).
* * * * *
Par. 8. Section 10.28 is revised to read as follows:
Sec. 10.28 Fees.
(a) Generally. A practitioner may not charge an unconscionable fee
for representing a client in a matter before the Internal Revenue
Service.
(b) Contingent fees for return preparation. A practitioner may not
charge a contingent fee for preparing an original return. A
practitioner may charge a contingent fee for preparing an amended
return or a claim for refund (other than a claim for refund made on an
original return) if the practitioner reasonably anticipates at the time
the fee arrangement is entered into that the amended return or claim
will receive substantive review by the Service. A contingent fee
includes a fee that is based on a percentage of the refund shown on a
return or a percentage of the taxes saved, or that otherwise depends on
the specific result attained.
Par. 9. Section 10.33, paragraph (c)(1) is revised to read as
follows:
Sec. 10.33 Tax shelter opinions.
* * * * *
(c) * * *
(1) Practitioner includes any individual described in Sec. 10.3(e).
* * * * *
Par. 10. Section 10.34 is added to read as follows:
Sec. 10.34 Standards for advising with respect to tax return positions
and for preparing or signing returns.
(a) Standards of conduct--(1) Realistic possibility standard. A
practitioner may not sign a return as a preparer if the practitioner
determines that the return contains a position that does not have a
realistic possibility of being sustained on its merits (the realistic
possibility standard) unless the position is not frivolous and is
adequately disclosed to the Service. A practitioner may not advise a
client to take a position on a return, or prepare the portion of a
return on which a position is taken, unless--
(i) The practitioner determines that the position satisfies the
realistic possibility standard; or
(ii) The position is not frivolous and the practitioner advises the
client of any opportunity to avoid the accuracy-related penalty in
section 6662 of the Internal Revenue Code of 1986 by adequately
disclosing the position and of the requirements for adequate
disclosure.
(2) Advising clients on potential penalties. A practitioner
advising a client to take a position on a return, or preparing or
signing a return as a preparer, must inform the client of the penalties
reasonably likely to apply to the client with respect to the position
advised, prepared, or reported. The practitioner also must inform the
client of any opportunity to avoid any such penalty by disclosure, if
relevant, and of the requirements for adequate disclosure. This
paragraph (a)(2) applies even if the practitioner is not subject to a
penalty with respect to the position.
(3) Relying on information furnished by clients. A practitioner
advising a client to take a position on a return, or preparing or
signing a return as a preparer, generally may rely in good faith
without verification upon information furnished by the client. However,
the practitioner may not ignore the implications of information
furnished to, or actually known by, the practitioner, and must make
reasonable inquiries if the information as furnished appears to be
incorrect, inconsistent, or incomplete.
(4) Definitions. For purposes of this section:
(i) Realistic possibility. 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. The authorities described in 26 CFR 1.6662-4(d)(3)(iii),
or any successor provision, of the substantial understatement penalty
regulations may be taken into account for purposes of this analysis.
The possibility that a position will not be challenged by the Service
(e.g., because the taxpayer's return may not be audited or because the
issue may not be raised on audit) may not be taken into account.
(ii) Frivolous. A position is frivolous if it is patently improper.
(b) Standard of discipline. As provided in Sec. 10.52, only
violations of this section that are willful, reckless, or a result of
gross incompetence will subject a practitioner to suspension or
disbarment from practice before the Service.
Par. 11. Section 10.50 is revised to read as follows:
Sec. 10.50 Authority to disbar or suspend.
Pursuant to 31 U.S.C. 330(b), the Secretary of the Treasury after
notice and an opportunity for a proceeding, may suspend or disbar any
practitioner from practice before the Internal Revenue Service. The
Secretary may take such action against any practitioner who is shown to
be incompetent or disreputable, who refuses to comply with any
regulation in this part, or who, with intent to defraud, willfully and
knowingly misleads or threatens a client or prospective client.
Par. 12. Section 10.51, paragraph (j) is amended by removing the
third sentence and adding two sentences in its place to read as
follows:
Sec. 10.51 Disreputable conduct.
* * * * *
(j) * * * For purposes of this paragraph, reckless conduct is a
highly unreasonable omission or misrepresentation involving an extreme
departure from the standards of ordinary care that a practitioner
should observe under the circumstances. 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. * * *
Par. 13. Section 10.52 is revised to read as follows:
Sec. 10.52 Violation of regulations.
A practitioner may be disbarred or suspended from practice before
the Internal Revenue Service for any of the following:
(a) Willfully violating any of the regulations contained in this
part.
(b) Recklessly or through gross incompetence (within the meaning of
Sec. 10.51(j)) violating Sec. 10.33 or Sec. 10.34 of this part.
Par. 14. Section 10.65, paragraph (a), is revised to read as
follows:
Sec. 10.65 Hearings.
(a) In general. An Administrative Law Judge will preside at the
hearing on a complaint furnished under Sec. 10.54 for the disbarment or
suspension of a practitioner. Hearings will be stenographically
recorded and transcribed and the testimony of witnesses will be taken
under oath or affirmation. Hearings will be conducted pursuant to 5
U.S.C. 556. A hearing in a proceeding requested under Sec. 10.76(g)
will be conducted de novo.
* * * * *
Sec. 10.76 [Redesignated]
Par. 15. Section 10.76 is redesignated as paragraph (d) of
Sec. 10.33 and amended by:
1. Removing the authority that appears at the end of the
redesignated text.
2. Removing the language ``of this part'' in both sentences where
it appears.
Par. 16. A new Sec. 10.76 is added to read as follows:
Sec. 10.76 Expedited suspension upon criminal conviction or loss of
license for cause.
(a) When applicable. Whenever the Director has reason to believe
that a practitioner is described in paragraph (b) of this section, the
Director may institute a proceeding under this section to suspend the
practitioner from practice before the Service.
(b) To whom applicable. This section applies to any practitioner
who, within 5 years of the date a complaint instituting a proceeding
under this section is served--
(1) Has had his or her license to practice as an attorney,
certified public accountant, or actuary suspended or revoked for cause
(not including a failure to pay a professional licensing fee) by any
authority or court, agency, body, or board described in Sec. 10.51(g);
or
(2) Has been convicted of any crime under title 26 of the United
States Code, or a felony under title 18 of the United States Code
involving dishonesty or breach of trust.
(c) Instituting a proceeding. A proceeding under this section will
be instituted by a complaint that names the respondent, is signed by
the Director, is filed in the Director's office, and is served
according to the rules set forth in Sec. 10.57(a). The complaint must
give a plain and concise description of the allegations that constitute
the basis for the proceeding. The complaint, or a separate paper
attached to the complaint, must notify the respondent--
(1) Of the place and due date for filing an answer;
(2) That a decision by default may be rendered if the respondent
fails to file an answer as required;
(3) That the respondent may request a conference with the Director
to address the merits of the complaint and that any such request must
be made in the answer; and
(4) That the respondent may be suspended either immediately
following the expiration of the period by which an answer must be filed
or, if a conference is requested, immediately following the conference.
(d) Answer. The answer to a complaint described in this section
must be filed no later than 30 calendar days following the date the
complaint is served, unless the Director extends the time for filing.
The answer must be filed in accordance with the rules set forth in
Sec. 10.58, except as otherwise provided in this section. A respondent
is entitled to a conference with the Director only if the conference is
requested in a timely filed answer. If a request for a conference is
not made in the answer or the answer is not timely filed, the
respondent will be deemed to have waived his or her right to a
conference and the Director may suspend such respondent at any time
following the date on which the answer was due.
(e) Conference. The Director or his or her designee will preside at
a conference described in this section. The conference will be held at
a place and time selected by the Director, but no sooner than 14
calendar days after the date by which the answer must be filed with the
Director, unless the respondent agrees to an earlier date. An
authorized representative may represent the respondent at the
conference. Following the conference, upon a finding that the
respondent is described in paragraph (b) of this section, or upon the
respondent's failure to appear at the conference either personally or
through an authorized representative, the Director may immediately
suspend the respondent from practice before the Service.
(f) Duration of suspension. A suspension under this section will
commence on the date that written notice of the suspension is issued. A
practitioner's suspension will remain effective until the earlier of
the following--
(1) The Director lifts the suspension after determining that the
practitioner is no longer described in paragraph (b) of this section or
for any other reason; or
(2) The suspension is lifted by an Administrative Law Judge or the
Secretary of the Treasury in a proceeding referred to in paragraph (g)
of this section and instituted under Sec. 10.54.
(g) Proceeding instituted under Sec. 10.54. If the Director
suspends a practitioner under this Sec. 10.76, the practitioner may ask
the Director to issue a complaint under Sec. 10.54. The request must be
made in writing within 2 years from the date on which the
practitioner's suspension commences. The Director must issue a
complaint requested under this paragraph within 30 calendar days of
receiving the request.
Sec. 10.99 [Removed]
Par. 17. Subpart E of part 10 is amended by removing Sec. 10.99.
Jean E. Hanson,
General Counsel.
[FR Doc. 94-14901 Filed 6-15-94; 12:53 pm]
BILLING CODE 4830-01-U