Question

Instructions: For each scenario below, answer the question about whether the tax preparer should or should not do something for a (potential) client based only on the specific section(s) of the Treasury Circular 230 referenced in the problem. In addition, describe in your own words why you determined the action by the tax preparer was or was not appropriate based on your read of the Circular language referenced. Do not just quote the Circular. Instead, paraphrase what it says in your own words. PLEASE TYPE YOUR ANSWERS IN A SEPARATE DOCUMENT AND SUBMIT VIA BLACKBOARD. GRADING RUBRIC: Full credit for each scenario: If the appropriate final determination is made for the tax preparer and the reasoning for why you came to that conclusion is consistent with the Treasury Circular language I reference. Partial credit breakout for each problem:12.5 points related to ultimate conclusion Is or is not appropriate behavior? 12.5 points related to the discussion of why you came to the ultimate conclusion Did you paraphrase the Circular in a coherent way to support your answer rather than just quote the circular?

Jonah is the general partner of the partnership DTP. He is not an attorney, CPA, enrolled agent, enrolled actuary, enrolled retirement plan agent, or a registered tax return preparer. But, he does bookkeeping in general for the partnership and his own personal finances. Because Jonah does the bookkeeping for DTP, his business partners ask him to represent the company during a discussion with the IRS as part of a tax position the company claimed on its prior year return. Based on § 10.3 and § 10.7 in Treasury Circular 230, can Jonah represent DTP in the meeting (representing DTP in the meeting constitutes “Practice before the IRS” based on § 10.2(a)(4))?

Lila is a CPA who has prepared a joint Form 1040, U.S. Individual Income Tax Return, for Mr. and Mrs. Shuffleton for over a decade. This year, Lila receives a call from Mr. Shuffleton, saying that he and his wife have started divorce proceedings. Mr. Shuffleton wants to meet with Lila to discuss preparing a joint return for him and Mrs. Shuffleton, and to discuss whether any tax positions could help him gain an advantage over Mrs. Shuffleton in what he expects will be a bitter battle over their marital assets.[1] Based on § 10.29 in Treasury Circular 230, should Lila assist Mr. Shuffleton to take positions that will favor him over Mrs. Shuffleton in the divorce proceedings?

Sherry is a CPA and has performed general bookkeeping for Travis and his wife Amy for the past 7 years. However, this year, Travis and Amy failed to pay her fees for bookkeeping because they argued that Sherry’s increase in fees this year was unreasonably high. At the end of the year, Travis and Amy request their accounting information to be able to prepare their tax return for the year on their own. Sherry tells them that she will not give them the information necessary to prepare their returns until they pay her fees. Based on § 10.28(a) in Treasury Circular 230, is Sherry able to withhold the records of the client that are necessary for the clients to comply with Federal tax obligations if she fails to receive payment from them because of a dispute over fees?

Leah worked for the IRS for the past 5 years. Her primary expertise was examining tax returns from pharmaceutical companies. One of the companies she examined was DrugNBiz. Later that year, Leah decides to leave employment with the IRS and begin her own small tax practice. Two months after she leaves the IRS, DrugNBiz offers to hire Leah to represent them in discussions with the IRS for the same issue she had been working on with them in the prior year. They believe her past experience will better help them effectively communicate their positions to the IRS and better maintain previous tax positions claimed on their returns. Based on § 10.25 in Treasury Circular 230, should Leah take the work offered from DrugNBiz? [1] Based on Mathers, R. May 1, 2014. “Practical Approaches to Common Conflicts of Interest.” The Tax Adviser.

Answer 1

Circular 230 Case Processing and the Application of Monetary Penalties

The IRS Office of Professional Responsibility (OPR) investigates reports of possible violations of Circular 230. Circular 230 covers many areas, including due diligence in return preparation, solicitation of clients, and the maintenance of firm procedures to ensure compliance with Circular 230 by all members of a firm. Even if a person's actions violate Circular 230, OPR can levy sanctions against the person only if he or she falls under OPR's jurisdiction. OPR may take the position that Circular 230 applies even to unenrolled preparers. Regardless of the nature of the potential violation that gives rise to an investigation, OPR will also check to make sure the firm and practitioners being investigated are current in filing and paying their own taxes, which may lead to additional sanctions. OPR may impose a reprimand, censure, suspension, a deferred disciplinary agreement, disbarment, and/or monetary sanctions. Monetary penalties are potentially equal to all gross receipts derived from the sanctioned conduct.

One of the biggest issues practitioners have with the IRS Office of Professional Responsibility (OPR) is a lack of information on what constitutes a violation of Treasury Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), and how OPR applies sanctions for such violations. Case law does not provide much guidance on practitioner conduct, as most cases concern tax practitioners who failed to file or pay their taxes on time.

The following is intended to help clarify this subject by using examples from OPR issues and cases. While the facts are hypothetical, the analysis is drawn from actual cases.

Example 1: A medium-size tax firm with only CPAs and employees taking the CPA exam generates approximately $800,000 a year in gross receipts from tax preparation and has net income of about $10,000 a year. For the past 10 years, this firm's sole method of advertising has been hiring a local firm that runs the same local television ad each year. The advertisement states, "Our licensed attorneys and CPAs will guarantee the largest refund you can get." The ad is also posted on YouTube. However, the firm does not, in fact, employ any attorneys. The firm's owner reviews and approves the advertisement.