Sections of Circular 230: Practice Rules before the IRS

31 U.S.C. §330. Practice before the Department (a) Subject to section 500 of title 5, the Secretary of the Treasury may — (1) regulate the practice of representatives of persons before the Department of the Treasury; and (2) before admitting a representative to practice, require that the representative demonstrate — (A) good character; (B) good reputation; (C) necessary qualifications to enable the representative to provide to persons valuable service; and (D) competency to advise and assist persons in presenting their cases. (b) After notice and opportunity for a proceeding, the Secretary may suspend or disbar from practice before the Department, or censure, a representative who — (1) is incompetent; (2) is disreputable; (3) violates regulations prescribed under this section; or (4) with intent to defraud, willfully and knowingly misleads or threatens the person being represented or a prospective person to be represented. The Secretary may impose a monetary penalty on any representative described in the preceding sentence

§ 10.1 Offices. (a) Establishment of office(s). The Commissioner shall establish the Office of Professional Responsibility and any other office(s) within the Internal Revenue Service necessary to administer and enforce this part. The Commissioner shall appoint the Director of the Office of Professional Responsibility and any other Internal Revenue official(s) to manage and direct any office(s) established to administer or enforce this part. Offices established under this part include, but are not limited to: (1) The Office of Professional Responsibility, which shall generally have responsibility for matters related to practitioner conduct and shall have exclusive responsibility for discipline, including disciplinary proceedings and sanctions;

(4) 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 taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing documents; filing documents; corresponding and communicating with the Internal Revenue Service; rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and representing a client at conferences, hearings, and meetings.

Subpart B — Duties and Restrictions Relating to Practice Before the Internal Revenue Service § 10.20 Information to be furnished. (a) To the Internal Revenue Service. (1) A practitioner must, on a proper and lawful request by a duly authorized officer or employee of the Internal Revenue Service, promptly submit records or information in any matter before the Internal Revenue Service unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.

§ 10.21 Knowledge of client’s omission. A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.

§ 10.23 Prompt disposition of pending matters. A practitioner may not unreasonably delay the prompt disposition of any matter before the Internal Revenue Service.

§ 10.27 Fees. (a) In general. A practitioner may not charge an unconscionable fee in connection with any matter before the Internal Revenue Service. (b) Contingent fees — (1) Except as provided in paragraphs (b)(2), (3), and (4) of this section, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service. (2) A practitioner may charge a contingent fee for services rendered in connection with the Service’s examination of, or challenge to — (i) An original tax return; or (ii) An amended return or claim for refund or credit where the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return. (3) A practitioner may charge a contingent fee for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service. (4) A practitioner may charge a contingent fee for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.

§ 10.29 Conflicting interests. (a) Except as provided by paragraph (b) of this section, a practitioner shall not represent a client before the Internal Revenue Service if the representation involves a conflict of interest. A conflict of interest exists if — (1) The representation of one client will be directly adverse to another client; or (2) There is a significant risk that the representation of one or more clients will be materially limited by the practitioner’s responsibilities to another client, a former client or a third person, or by a personal interest of the practitioner. (b) Notwithstanding the existence of a conflict of interest under paragraph (a) of this section, the practitioner may represent a client if — (1) The practitioner reasonably believes that the practitioner will be able to provide competent and diligent representation to each affected client; (2) The representation is not prohibited by law; and (3) Each affected client waives the conflict

§ 10.31 Negotiation of taxpayer checks. (a) A practitioner may not endorse or otherwise negotiate any check (including directing or accepting payment by any means, electronic or otherwise, into an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated) issued to a client by the government in respect of a Federal tax liability.

§ 10.35 Competence. (a) A practitioner must possess the necessary competence to engage in practice before the Internal Revenue Service. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged. A practitioner may become competent for the matter for which the practitioner has been engaged through various methods, such as consulting an expert or study.

The practitioner must— (i) Base the written advice on reasonable factual and legal assumptions (including assumptions as to future events); (ii) Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know; (iii) Use reasonable efforts to identify and ascertain the facts relevant to written advice on each Federal tax matter; (iv) Not rely upon representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) of the taxpayer or any other person if reliance on them would be unreasonable;

§ 10.51 Incompetence and disreputable conduct. (a) Incompetence and disreputable conduct. Incompetence and disreputable conduct for which a practitioner may be sanctioned under §10.50 includes, but is not limited to —

(1) Conviction of any criminal offense under the Federal tax laws. (2) Conviction of any criminal offense involving dishonesty or breach of trust. (3) Conviction of any felony under Federal or State law for which the conduct involved renders the practitioner unfit to practice before the Internal Revenue Service. (4) Giving false or misleading information, or participating in any way in the giving of false or misleading information to the Department of the Treasury or any officer or employee thereof, or to any tribunal authorized to pass upon Federal tax matters, in connection with any matter pending or likely to be pending before them, knowing the information to be false or misleading. Facts or other matters contained in testimony, Federal tax returns, financial statements, applications for enrollment, affidavits, declarations, and any other document or statement, written or oral, are included in the term “information.” (5) Solicitation of employment as prohibited under §10.30, the use of false or misleading representations with intent to deceive a client or prospective client in order to procure employment, or intimating that the practitioner is able improperly to obtain special consideration or action from the Internal Revenue Service or any officer or employee thereof. (6) Willfully failing to make a Federal tax return in violation of the Federal tax laws, or willfully evading, attempting to evade, or participating in any way in evading or attempting to evade any assessment or payment of any Federal tax. (7) Willfully assisting, counseling, encouraging a client or prospective client in violating, or suggesting to a client or prospective client to violate, any Federal tax law, or knowingly counseling or suggesting to a client or prospective client an illegal plan to evade Federal taxes or payment thereof. (8) Misappropriation of, or failure properly or promptly to remit, funds received from a client for the purpose of payment of taxes or other obligations due the United States. (9) Directly or indirectly attempting to influence, or offering or agreeing to attempt to influence, the official action of any officer or employee of the Internal Revenue Service by the use of threats, false accusations, duress or coercion, by the offer of any special inducement or promise of an advantage or by the bestowing of any gift, favor or thing of value. (10) Disbarment or suspension from practice as an attorney, certified public accountant, public accountant, or actuary by any duly constituted authority of any State, territory, or possession of the United States, including a Commonwealth, or the District of Columbia, any Federal court of record or any Federal agency, body or board. (11) Knowingly aiding and abetting another person to practice before the Internal Revenue Service during a period of suspension, disbarment or ineligibility of such other person. (12) Contemptuous conduct in connection with practice before the Internal Revenue Service, including the use of abusive language, making false accusations or statements, knowing them to be false, or circulating or publishing malicious or libelous matter. (13) Giving a false opinion, knowingly, recklessly, or through gross incompetence, including an opinion which is intentionally or recklessly misleading, or engaging in a pattern of providing incompetent opinions on questions arising under the Federal tax laws. False opinions described in this paragraph (a)(l3) include those which reflect or result from a knowing misstatement of fact or law, from an assertion of a position known to be unwarranted under existing law, from counseling or assisting in conduct known to be illegal or fraudulent, from concealing matters required by law to be revealed, or from consciously disregarding information indicating that material facts expressed in the opinion or offering material are false or misleading. For purposes of this paragraph (a)(13), 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. Gross incompetence includes conduct that reflects gross indifference, preparation which is grossly inadequate under the circumstances, and a consistent failure to perform obligations to the client. (14) Willfully failing to sign a tax return prepared by the practitioner when the practitioner’s signature is required by Federal tax laws unless the failure is due to reasonable cause and not due to willful neglect. (15) Willfully disclosing or otherwise using a tax return or tax return information in a manner not authorized by the Internal Revenue Code, contrary to the order of a court of competent jurisdiction, or contrary to the order of an administrative law judge in a proceeding instituted under §10.60. (16) Willfully failing to file on magnetic or other electronic media a tax return prepared by the practitioner when the practitioner is required to do so by the Federal tax laws unless the failure is due to reasonable cause and not due to willful neglect. (17) Willfully preparing all or substantially all of, or signing, a tax return or claim for refund when the practitioner does not possess a current or otherwise valid preparer tax identification number or other prescribed identifying number. (18) Willfully representing a taxpayer before an officer or employee of the Internal Revenue Service unless the practitioner is authorized to do so pursuant to this part.

Time Limits for Filing a Claim for Refund with IRS

              The federal tax code provides numerous statutes of limitations. These include how long the IRS can question the taxpayer about a filed tax return. This could be three years, six years or forever depending upon the circumstances. There is also a collection statute that limits IRS ability to collect taxes to generally 10 years with appropriate extensions depending upon the tax filing activity of any particular taxpayer. Practitioners and taxpayers alike realize too late that there is also a statute of limitations to claim a refund of taxes erroneously paid. Generally that statute provides that such a refund claim must be filed within two years of payment or three years from the time a tax return was filed whichever expires later. Claims filed after those dates will result in the IRS rejecting any refund claim. When taxpayers or practitioners find themselves in that situation it should be remembered that over the years case law has developed a theory of the “informal” claim. What that amounts to is has the taxpayer properly noticed the IRS of his request for a return of taxes he has paid. While not taking the form of a formal claim like Form 843 or 1040X this may be no more than a letter to the IRS requesting such a refund. Lawyers should never rely on this fuzzy type of refund claim on which to base their case unless there is no other alternative. In a recent IRS Chief Counsel Advice 201540012, the IRS determined that a corporation which merely expressed its intent to file a formal claim in the future did not amount to sufficient notice to the IRS of a refund claim. Therefore the claim was denied and any tax unable to be refunded. A hard lesson to learn.

The Not So Innocent Spouse

              Matrimonial lawyers often are required to deal with tax problems. Certainly the New Jersey case of Sheridan  has made a minefield of litigation in this area. When confronted with difficult tax revelations on filed joint tax returns the concept of the innocent spouse is often bandied about. While the law has existed for many years current code section is section 6015. This section provides three specific areas where relief may be sought. In subsection (b) known as the “traditional” innocent spouse section what the requesting spouse knew or should have known as well as benefit derived become difficult issues. In subsection (c) and election exists to in essence provide an opportunity for the electing spouse who is divorced or separated to get out of joint and several liability from a filed joint tax return. This section permits income deductions credits and losses to be credited to the electing spouse separately. Actual knowledge of problems with the joint tax return if demonstrated by IRS can deny relief here. An amended tax return can be attached with the election form requesting (c) treatment. Lastly, subsection (f) provides for equitable relief based on all the facts and circumstances. Taxpayers seeking to take advantage of the innocent spouse rules have two years to file Form 8857 after collection action has begun against them. That form is seven pages and must be cautiously approached both as to content and likely consequences to the electing spouse. The form also warns that the non-electing spouse will be contacted. The easiest way to avoid the problem is to NOT file a joint tax return if the relationship is headed to the rocks. No joint tax return; no joint tax liability.

IRS Hacked

             It won’t be long before hacking is accepted as an Olympic sport. The IRS has had its own website hacked and financial information of taxpayers stolen by who knows who. IRS says this information is used by hackers to file bogus tax returns requesting refunds. The unsophisticated IRS programs simply punch out the refunds to these crooks. Well the agency now has another concern. At least two individuals have begun lawsuits against the IRS filing a class action claiming their personal tax information was stolen by hackers when the IRS’ “Get Transcript” web application was hacked. In making out their case, it seems the individuals are alleging that the IRS knew that its security system was not up to the task of preventing easy access to this confidential information. The failure to implement adequate security measures amounted to negligence by the agency. The agency is certainly feeling the heat. Recently IRS issued temporary regulations that ends the availability of automatic extensions for filing forms W-2. It has also proposed regulations that would end the availability of automatic extensions for other information returns as well. This is being done to combat fraud and to limit the ability of hackers to file fraudulent tax returns requesting refunds. When hackers file these false returns they do so early in the filing season. If IRS has not as yet received W-2 forms from employers it is not possible for the agency to check the accuracy of items listed on the return. The longer these forms are unavailable to the service the more likely that hackers will be successful in their quest for these refunds. It is certainly not a very sophisticated approach to stopping tax hackers but for an agency plagued by lack of funding it may be the best it can do right now. Sort of bringing the wagons into a circle as they did in the old western movies. But these bad guys are better at being bad than those back then.

Is the IRS Going Out of Business?

         I got on the elevator at my office this morning with a little white dog. It was pouring rain and it had a tiny blue raincoat on. I tried to decide whether it was a service dog but it didn’t look like it was doing anything except shaking off the rain. The owner was a young guy who was trying to shed the rain off his coat as well. I couldn’t resist asking him what the dog was doing here. “It’s for morale” he said. “Oh, well that’s important” I said. I was dripping wet also. I had come in with the intention of dictating this bar bulletin. That tiny dog gave me my intro. In the last few months the Commissioner of Internal Revenue has been telling Congress that the agency is basically going broke. Audit examinations are declining quickly. Last year’s overall exam rate was a tiny .86% which means one out of every 116 tax returns. The IRS performed less than 160,000 fewer audits in 2014 than they did in 2013. And it gets worse. The IRS audit staff has been reduced by more than 600 revenue agents. That’s where the little dog came in. What is it like these days to be working for an agency that doesn’t seem to have the support of the U.S. Congress? When staff is reduced the remaining agents are expected to pick up the slack. Of course human nature drives down morale when this happens. By the way the drop in examination coverage applies to all income classes. For tax filers with income under $200,000 it’s a drop of 12%. With no statistics it’s clear that the audit rate for business returns has also declined. It’s hard to imagine that audit rates have been significantly lower in prior years. Back in 2000 only .49% of all individual tax returns were examined that’s less than one in 200. When IRS does the calculation of its audit rates however it only counts in person exams and correspondence audits by service centers. Many more taxpayers get notices from IRS about mismatches in their 1099s and W-2 information. But the reality is the morale at the service must be terrible. Should you have occasion to discuss a client’s tax case with an agent, you’ll see for yourself. What it means is agents will most likely not have as much heart in their job and that smaller cases will probably not be pursued. The agency is requesting an additional $2 billion for fiscal year 2016 but given the Republican controlled House and Senate it doesn’t look like the IRS will be getting much of an increase. I wonder if that little dog would mind commuting to Washington DC. You know morale is important.

What to Consider if You are Hiding from the IRS: Voluntary Disclosure

Revised IRS Voluntary Disclosure Practice

 

TAX CRIMES - GENERAL IRM 9.5.11.9 Voluntary Disclosure Practice (1)  It is currently the practice of the IRS that a voluntary disclosure will be considered along with all other factors in the investigation in determining whether criminal prosecution will be recommended.  This voluntary disclosure practice creates no substantive or procedural rights for taxpayers, but rather is a matter of internal IRS practice, provided solely for guidance to IRS personnel.  Taxpayers cannot rely on the fact that other similarly situated taxpayers may not have been recommended for criminal prosecution. (2)  A voluntary disclosure will not automatically guarantee immunity from  prosecution; however, a voluntary disclosure may result in prosecution not being recommended.  This practice does not apply to taxpayers with illegal source income. (3)  A voluntary disclosure occurs when the communication is truthful, timely, complete, and when: a.  the taxpayer shows a willingness to cooperate (and  does in fact cooperate) with the IRS in determining his or her correct tax liability; and b.   the taxpayer makes good faith arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable. (4) A disclosure is timely if it is received before: a.  the IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation; b.  the IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer’s noncompliance; c.  the IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer; or d.  the IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena). (5)  Any taxpayer who contacts the IRS in person or through a representative regarding voluntary disclosure will be directed to Criminal Investigation for evaluation of the disclosure.  Special agents are encouraged to consult Area Counsel, Criminal Tax on voluntary disclosure issues. (6)  Examples of voluntary disclosures include: a.  a letter from an attorney which encloses amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns), which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full and which meets the timeliness standard set forth above.  This is a voluntary disclosure because all elements of (3), above are met. b.  a disclosure made by a taxpayer of omitted income facilitated through a barter exchange after the IRS has announced that it has begun a civil compliance project targeting barter exchanges; however the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intention to do so.  In addition, the taxpayer files complete and accurate amended returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.  This is a voluntary disclosure because the civil compliance project involving barter exchanges does not yet directly relate to the specific liability of the taxpayer and  because all other elements of (3), above are met c.  a disclosure made by a taxpayer of omitted income facilitated through a widely promoted scheme regarding which the IRS has begun a civil compliance project and already obtained information which might lead to an examination of the taxpayer; however, the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so.  In addition, the  taxpayer files complete and accurate returns and makes arrangements with the IRS to pay in full, the tax, interest, and any penalties determined by the IRS to be applicable.  This is a voluntary disclosure because the civil compliance project involving the scheme does not yet directly relate to the specific liability of the taxpayer and because all other elements of (3), above are met. d.  A disclosure made by an individual who has not filed tax returns after the individual has received a notice stating that the IRS has no record of receiving a return for a particular year and inquiring into whether the taxpayer filed a return for that year.  The individual files complete and accurate returns and makes arrangements with the IRS to pay the tax, interest, and any penalties determined by the IRS to be applicable in full.  This is a voluntary disclosure because the IRS has not yet commenced an examination or investigation of the taxpayer or notified the taxpayer of its intent to do so and because all other elements of (3), above, are met. (7) Examples of what are not voluntary disclosures include: a.  a letter from an attorney stating his or her client, who wishes to remain anonymous, wants to resolve his or her tax liability. This is not a voluntary disclosure until the identity of the taxpayer is disclosed and all other elements of (3) above have been met. b.  a disclosure made by a taxpayer who is under grand jury investigation.  This is not a voluntary disclosure because the taxpayer is already under criminal investigation.  The conclusion would be the same whether or not the taxpayer knew of the grand jury investigation. c.  a disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted gross receipts from a partnership, but whose partner is already under investigation for omitted income skimmed from the partnership.  This is not a voluntary disclosure because the IRS has already initiated an investigation which is directly related to the specific liability of this taxpayer.  The conclusion would be the same whether or not the taxpayer knew of the ongoing investigation. d.  a disclosure made by a taxpayer, who is not currently under examination or investigation, of omitted constructive dividends received from a corporation which is currently  under examination.  This is not a voluntary disclosure because the IRS has already initiated an examination which is directly related to the specific liability of this taxpayer.  The conclusion would be the same whether or not the taxpayer knew of the ongoing examination. e.  a disclosure made by a taxpayer after an employee has contacted the IRS regarding the taxpayer's double set of books.  This is not a voluntary disclosure even if no examination or investigation has yet commenced because the IRS has already been informed by the third party of the specific taxpayer's noncompliance.  The conclusion would be the same whether or

The Plight of the Tax Non-Filer

                                                     The Tax Non-Filer

Tax filing season which these days runs from January 1 through October 15 is a time of real suffering for some people. All the advertisements about getting tax refunds and using the found money for lots of things that one enjoys only makes things worse. For these people it is more sleepless nights, sweaty palms and upset stomachs that can be triggered by the most off hand remark. A coworker or friend mentions having gotten their juicy tax refund early. Dizziness, depression, anxiety follow. These are the hallmarks. This is the plight of the tax return non-filer.

Like most of our human problems the non-filer has put himself in a box he can't seem to break out of. His dreams are about being detected and spending hard time in a federal prison in an orange jumpsuit breaking big rocks into small rocks and small rocks into sand. The real shame of all this is that barring a business life which generates illegal income the dream is not even remotely related to the reality.

In fact, in the vast majority of cases IRS and our system of tax administration is more anxious to have the non-filer join the system then to spend their lives in a restless tax purgatory. Most of the fears that a non-filer harbors are baseless. Of primary concern may be criminal prosecution which is reserved  for the most part to illegal behavior or for those cases IRS had to use its less than abundant resources to detect. Coming forth voluntarily is the best advice to avoid this part of the nightmare.

Secondly, is the actual cost of coming forward. It is true that the IRS code provides for interest and penalties, but no one goes to jail, loses reputation and is held to community scorn for simply owing the IRS money. Do a Google search of celebrities that have found themselves owing tax bundles. What should come as relief to these non-filers is that the code provides methods for paying back tax liabilities. These methods allow ordinary life to continue as usual while still satisfying IRS tax law compliance. Foremost among these is the installment agreement which simply gives time, in some cases up to 10 years to pay off tax liabilities. The taxpayer must fully disclose his available resources to IRS and a payment plan can most often be worked out. Where payments are not possible, the code also allows an Offer in Compromise to be made. This procedure allows taxpayers to offer to pay an amount in exchange for being released from any unpaid balance which can include tax, penalty and 

interest. In dire cases, if certain other conditions are met, bankruptcy may also discharge income taxes and allow a taxpayer a fresh start.

The point of all this is that tax filing season need not be torture for the non-filer. Many of their worst nightmares will not materialize. The time to act is before IRS makes contact.  

Voluntary compliance and full disclosure with cooperation with IRS will put most non-filers back on track and perhaps even getting refunds, just like the adverts say or at least getting a decent night’s sleep.

Theodore M. David, Esq. is the chairman of the Bergen County Bar Association’s tax committee. He is a former IRS agent and IRS lawyer who practices exclusively in the IRS tax dispute area in Hackensack New Jersey. He is the author of the ALI-ABA tax text “Dealing With The IRS: Law, Forms and Practice”.