How to Stay Compliant with Treasury Circular 230 for Ethical Tax Practices

If you ever feel overwhelmed trying to navigate tax regulations, know you’re not alone. As a tax professional, you are expected not only to crunch numbers but also to uphold a standard of ethics and diligence. It has an immediate effect on your clients and their finances.

Enter Treasury Circular 230: your new rulebook for ethical tax preparation. Complying with it just isn’t a matter of avoiding penalties, it’s a matter of protecting your reputation and building trust in the industry. Be it a newcomer or an experienced player, you need to be compliant.

So, let’s explore what Treasury Circular 230 is and how you can become proficient in its rules for ethical tax practices.

Which Bodies Regulate & Who Can Practice?

Circular 230 is administered and enforced by the Office of Professional Responsibility (OPR), U.S. Department of the Treasury. It details who may represent taxpayers before the IRS and the circumstances under which they may do so.

So, who can practice? Eligibility is limited to attorneys, certified public accountants (CPAs), enrolled agents (EAs), and certain other individuals who meet specific criteria. But it’s not a free-for-all. Within each category are particular qualifications and duties.

Related: Is Your Tax Firm WISP Compliant? Get Your WISP Document Today & Avoid Penalties.

The Core Requirements of Treasury Circular 230

Diligence as to Accuracy

Diligence is not just a buzzword here; it is a pillar of ethical tax practice. You are expected to be diligent when preparing tax returns or advising clients. This entails double-checking the information that your clients give before tax submission. Even minor mistakes can have major ramifications. Treat diligence as your safety net against those grave errors.

Duty to Provide Information

When the IRS asks for documentation, you’re required to give it to them quickly. A refusal or a delay is a violation of Circular 230. If your client doesn’t possess the requisite documentation, it is upon you to advise them of compliance. Transparency is important, even when things aren’t going your client’s way.

Competence

Competence is not about knowing all, it’s about knowing enough to ensure you do the job well, or seeking help when needed. Circular 230 requires that you have the knowledge, skills, and training necessary to conduct your tax practice. Don’t wing it on an issue that isn’t your area of expertise. Bringing in a specialist will help you avoid the pitfalls and better serve your client.

Standards with Respect to Tax Returns and Documents, Affidavits and Other Papers

Standards for Tax Returns

You must ensure that you do not sign a tax return or advise a tax position, either willing or by mistake, that lacks reason. In short, you’re the line of defense against tax tactics with no legal basis.

Standards for Documents and Other Papers

When submitting documents and affidavits, it is the responsibility of the tax professional to advise the client against taking any frivolous positions. Also, if there is a chance that the submitted document will delay any federal proceeding, the tax professional should advise against it.

Advising Clients on Potential Penalties

As a tax professional, you should always maintain clear communication with the client. Circular 230 instructs practitioners to convey any potential penalties that may befall the client. This is in the case you have advised the client to take that tax position or submit the return yourself. The circular also instructs you to advise the client on how to prevent any penalties by full disclosure.

Best Practices for Tax Advisors

Competence is not just a requirement; it is a continual commitment. The motive of the U.S. Department of the Treasury, including best practices in the circular, is to ensure that your clients get the best representation. Here are some best practices to focus on:

• Clear communications of the terms of engagement.
• Giving sane advice to the client regarding aspects like avoiding penalties.
• Showcasing integrity and fairness in front of the IRS.

How to Avoid Conflicts of Interest in Tax Practice (10.29)

Conflicts of interest can be a big part of the tax process. Maybe you’re preparing returns for two clients whose interests violate those of another. You must identify and disclose these situations in advance so you comply with Circular 230.

According to Circular 230, it identifies as a conflict of interest when –

• You can’t fulfill your responsibilities equally for two clients.
• If you represent a client and it has a negative impact on the other client.

However, you can represent both clients if one of them waives the conflict of interest in writing within 30 days of the conflict.

Procedures to Ensure Compliance

Under Circular 230, Individuals who have primary authority over a firm’s tax practice must ensure adequate procedures are in place for compliance with Federal tax laws, including tax advice, return preparation, and document submissions. If no such person is identified, the IRS can appoint an individual responsible for tax compliance oversight.

If the primary authority is not able to enforce the compliance procedure, he or she can be subject to disciplinary action. Discipline can occur if:

• The firm has no adequate compliance procedures. As a result, the firm has a history of noncompliance.
• The firm continues to be non-compliant due to the failure to properly implement procedures.
• The designated person does not address identified patterns of non-compliance in a timely manner.

Errors and Omissions in Tax Returns

Mistakes are common; we’re only human. What counts is what you do with them. Under Circular 230, you are required to promptly advise your client of any errors or omissions in the filing, affidavit, etc. It is recommended that you also discuss with them the consequences of their actions.

Advertising and Solicitation: Guidelines

There’s nothing wrong with pitching your services — but there are rules. Circular 230 does not allow false or misleading claims. Be honest about your qualifications, experience, and the results you can provide. Your marketing needs to qualify you, not show off your willingness to work for clients.

As a practitioner, you are forbidden to portray in their description that you are working for the IRS. Instead, you can use acceptable descriptions like “enrolled to represent taxpayers before the Internal Revenue Service”.

Sanctions for Violation of the Treasury Circular 230 (Subpart C)

If, as a practitioner, you fail to comply with Circular 230, you could find yourself subject to heavy penalties and legal troubles. As per the Circular, giving any false information like testimony and financial statements to the IRS is subject to sanctions. Other activities of misconduct include federal law violations, intentional delay in filing, and helping a client in evading taxes, among others.

In such a scenario, The Secretary of Treasury has the power to disbar or suspend any practitioner. You can also be subject to a monetary penalty.

Wrapping Up!

Treasury Circular 230 compliance is more than a check box; it’s putting the fundamental principles of ethical tax practice into action. Understanding its directives will help you avoid penalties and build a reputation as a trustworthy, reliable professional.