[Federal Register Volume 59, Number 117 (Monday, June 20, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-14901]


[[Page Unknown]]

[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