[Federal Register Volume 72, Number 186 (Wednesday, September 26, 2007)]
[Proposed Rules]
[Pages 54621-54622]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-18919]


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DEPARTMENT OF THE TREASURY

Office of the Secretary

31 CFR Part 10

[REG-138637-07]
RIN 1545-BH01


Regulations Governing Practice Before the Internal Revenue 
Service

AGENCY: Office of the Secretary, Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed modifications of the 
regulations governing practice before the IRS (Circular 230). These 
proposed regulations affect individuals who practice before the IRS. 
The proposed amendments modify Sec.  10.34 of Circular 230 relating to 
standards with respect to tax returns.

DATES: Written or electronic comments and requests for a public hearing 
must be received by October 26, 2007.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-138637-07), room 
5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
138637-07), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS REG-138637-07).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Matthew S. Cooper at (202) 622-4940; concerning submissions of comments 
and request for a public hearing, Kelly Banks of the Publications and 
Regulation Branch at (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

    This document contains proposed amendments to Sec.  10.34 of 
Circular 230. Section 330 of title 31 of the United States Code 
authorizes the Secretary of the Treasury to regulate the practice of 
representatives before the Treasury Department. Pursuant to section 330 
of title 31, the Secretary has published the regulations in Circular 
230 (31 CFR part 10).
    On May 25, 2007, the President signed into law the Small Business 
and Work Opportunity Tax Act of 2007, Public Law 110-28 (121 Stat. 
190), which amended several provisions of the Internal Revenue Code to 
extend the application of the income tax return preparer penalties to 
all tax return preparers, alter the standards of conduct that must be 
met to avoid imposition of the penalties for preparing a return that 
reflects an understatement of liability, and increase applicable 
penalties. On June 11, 2007, the IRS released Notice 2007-54, 2007-27 
IRB 1 (see Sec.  601.601(d)(2)(ii)(b)), providing guidance and 
transitional relief for the return preparer provisions under section 
6694 of the Internal Revenue Code, as recently amended.
    Final regulations are, simultaneously to these proposed 
regulations, being promulgated on September 26, 2007 modifying the 
general standards of practice before the IRS under Circular 230. Those 
final regulations finalize the standards with respect to documents, 
affidavits and other papers as proposed, with modifications. Those 
final regulations, however, do not finalize the standards with respect 
to tax returns under Sec.  10.34(a) and the definitions under Sec.  
10.34(e) because of the amendments made by the Small Business and Work 
Opportunity Tax Act of 2007. Rather, the Treasury Department and the 
IRS are reserving Sec.  10.34(a) and (e) in those final regulations and 
are simultaneously issuing this notice of proposed rulemaking proposing 
to amend this part to reflect these recent amendments to the Code.
    The Treasury Department and the IRS have determined that the 
professional standards under Sec.  10.34 of Circular 230 should conform 
with the civil penalty standards for return preparers. Previously, for 
example, on June 20, 1994 (59 FR 31523), the regulations were modified 
to reflect more closely the rules under section 6694 and professional 
guidelines. The standards with respect to tax returns in Sec.  10.34(a) 
of these proposed regulations have been amended to reflect changes to 
section 6694(a) of the Internal Revenue Code made by the Small Business 
and Work Opportunity Tax Act of 2007.
    Under Sec.  10.34(a) of these proposed regulations, a practitioner 
may not sign a tax return as a preparer unless the practitioner has a 
reasonable belief that the tax treatment of each position on the return 
would more likely than not be sustained on its merits, or there is a 
reasonable basis for each position and each position is adequately 
disclosed to the Internal Revenue Service. A practitioner may not 
advise a client to take a position on a tax return, or prepare the 
portion of a tax return on which a position is taken, unless: (1) The 
practitioner has a reasonable belief that the position satisfies the 
more likely than not standard; or (2) the position has a reasonable 
basis and is adequately disclosed to the Internal Revenue Service. The 
definitions of ``more likely than not'' and ``reasonable basis'' under 
Sec.  10.34(e) also are proposed to be amended to reflect these changes 
in accordance with the well-established definitions of these terms 
under the section 6662 penalty regulations.
    On June 11, 2007, the IRS released Notice 2007-54, 2007-27 IRB 1 
(see Sec.  601.601(d)(2)(ii)(b)), providing guidance and transitional 
relief for the return preparer provisions under section 6694 of the 
Code, as recently amended. In order to apply Sec.  10.34 of these 
regulations consistently with the transitional relief under Notice 
2007-54, Sec.  10.34(a) and (e) are proposed to apply to returns filed 
or advice provided on or after the date that final regulations are 
published in the Federal Register, but no earlier than January 1, 2008.

Proposed Effective Date

    These regulations are proposed to apply to returns filed or advice 
provided on or after the date that final regulations are published in 
the Federal Register, but no earlier than January 1, 2008.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required.
    It is hereby certified, under the provisions of the Regulatory 
Flexibility Act (5 U.S.C. 601 et seq.), that these regulations will not 
have a significant economic impact on a substantial number of small 
entities. Persons authorized to practice have long been required to 
comply with certain standards of conduct when practicing before the 
Internal Revenue Service. The general requirements of these regulations 
are substantially the same as the recent Congressional amendments to 
section 6694 of the Code by the Small Business and Work Opportunity Act 
of 2007. Practitioners already enroll in educational seminars or 
training programs to keep up to date with the

[[Page 54622]]

latest changes to the Internal Revenue Code, the provisions of the Act, 
and Circular 230, and the proposed regulations will generally be 
covered as part of that training. These regulations will not impose, or 
otherwise cause, a significant increase in reporting, recordkeeping, or 
other compliance burdens on a substantial number of small entities. A 
regulatory flexibility analysis, therefore, is not required.
    Pursuant to section 7805(f) of the Internal Revenue Code, this 
regulation has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on the regulations' impact on 
small businesses.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the substance 
of the proposed regulations, as well as on the clarity of the proposed 
rules and how they can be made easier to understand. All comments will 
be available for public inspection and copying. A public hearing will 
be scheduled if requested in writing by any person that timely submits 
written comments. If a public hearing is scheduled, notice of the date, 
time, and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of these regulations is Matthew S. Cooper of 
the Office of the Associate Chief Counsel (Procedure and 
Administration).

List of Subjects in 31 CFR Part 10

    Accountants, Administrative practice and procedure, Lawyers, 
Reporting and recordkeeping requirements, Taxes.

Proposed Amendments to the Regulations

    Accordingly, 31 CFR part 10 is proposed to be amended to read as 
follows:

PART 10--PRACTICE BEFORE THE INTERNAL REVENUE SERVICE

    Paragraph 1. The authority citation for 31 CFR 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. 321; 31 U.S.C. 330; 
Reorg. Plan No. 26 of 1950, 15 FR 4935, 64 Stat. 1280, 3 CFR, 1949-
1953 Comp., p. 1017.

    Paragraph 2. Section 10.34(a) and (e), and paragraph (f) is revised 
to read as follows:


Sec.  10.34  Standards with respect to tax returns and documents, 
affidavits and other papers.

    (a) Tax returns. A practitioner may not sign a tax return as a 
preparer unless the practitioner has a reasonable belief that the tax 
treatment of each position on the return would more likely than not be 
sustained on its merits (the more likely than not standard), or there 
is a reasonable basis for each position and each position is adequately 
disclosed to the Internal Revenue Service. A practitioner may not 
advise a client to take a position on a tax return, or prepare the 
portion of a tax return on which a position is taken, unless--
    (1) The practitioner has a reasonable belief that the position 
satisfies the more likely than not standard; or
    (2) The position has a reasonable basis and is adequately disclosed 
to the Internal Revenue Service.
* * * * *
    (e) Definitions. For purposes of this section--
    (1) More likely than not. A practitioner is considered to have a 
reasonable belief that the tax treatment of a position is more likely 
than not the proper tax treatment if the practitioner analyzes the 
pertinent facts and authorities, and based on that analysis reasonably 
concludes, in good faith, that there is a greater than fifty-percent 
likelihood that the tax treatment will be upheld if the IRS challenges 
it. 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.
    (2) Reasonable basis. A position is considered to have a reasonable 
basis if it is reasonably based on one or more of the authorities 
described in 26 CFR 1.6662-4(d)(3)(iii), or any successor provision, of 
the substantial understatement penalty regulations. Reasonable basis is 
a relatively high standard of tax reporting, that is, significantly 
higher than not frivolous or not patently improper. The reasonable 
basis standard is not satisfied by a return position that is merely 
arguable or that is merely a colorable claim. The possibility that a 
tax return will not be audited, that an issue will not be raised on 
audit, or that an issue will be settled may not be taken into account.
    (3) Frivolous. A position is frivolous if it is patently improper.
    (f) Effective/applicability date. Section 10.34(a) and (e) is 
applicable for returns filed or advice provided on or after the date 
that final regulations are published in the Federal Register, but no 
earlier than January 1, 2008.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: September 19, 2007.
Robert Hoyt,
General Counsel, Office of the Secretary.
[FR Doc. E7-18919 Filed 9-25-07; 8:45 am]
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