IRS Regulations

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Intro to tax practice


Tax avoidance ———————————————————–tax evasion


Tax avoidance- paying minimum amount of tax legally owed by arranging transactions in a certain way


Tax evasion- intentional underpayment of a tax that is owed

–          Criminal and subject to fines/jail

–          Punished by regulatory bodies

  • Board of accountancy
  • Courts

–          Evidence can be used for malpractice cases


Source of rules and ethics for tax practitioners

EX.      ABA Model Code of professional responsibility

Issued by ABA

Binding upon Attorneys


Internal Revenue Code

US Congress

Tax preparers


IRS Regulations

Circular 230 – collection of IRS regulations

Issued by Internal Revenue Service

Binding upon those that practice before the IRS


Industry Organizations do not have law enforcing abilities and are just standards

–          Punishment is removal from organization

–          Evidence can be used for malpractice lawsuits


Enrolled IRS agent can represent tax payers

CPA can represent taxpayer through audit a trial

–          Tax preparers in general cannot

–          They are not authorized to practice before the IRS


Tax preparers as of Jan 1, 2011 are now registered

-fired revenue agents are no longer eligible

-all preparers must use ID number given by IRS






Tax return preparer- any person who prepares for compensation or employs one or more persons to prepare for compensation, any return of tax imposed by this title or any claim for refund of tax imposed by this title…

S7701 CA3(36)

Also includes those that contributed to substantial portion of a return

-Does not have to sign


Internal Revenue Code Section

IRS Rulings



-Authoritative Source

-How we found answer

Pg 196

Check third box


Practice before the IRS- representation of clients during audit procedures such as a meeting with a revenue agent on behalf of a client to establish the correctness of a taxpayer’s return

-best if taxpayer is not with you when representing you to revenue agent


Who can practice before service:

  1. Enrolled agents
  2. Enrolled actuaries
  3. Attorneys
  4. CPA’s


Form 2848 must be filed for taxpayer to authorize representation


Proposed requirements for tax return preparers

  1. Require all preparers to register with IRS and get an ID
    1. Now enacted
    2. Competency test
    3. Continuing education
      1. 15 hours
      2. Compliance check
      3. Extending circular 230 ethics standards to all preparers


Rules of Conduct when practicing before IRS

1. Tax practitioner must furnish information to any agent of the IRS

2. Provide director of practice of the IRS information regarding any violation

Pg. 10


Due Diligence- Circular 230 S 10.22



Sec. 6694 Understatement of Liability by Tax Return Preparer

Understatement due to Unreasonable positions

  1. General

If tax preparer

  1. Prepares any return or claim of refund with any respect to any part of where understatement exists or knew/should have  known of the position

The preparer pays greater of $1,000 or 50% of the income derived from preparing the statement

  1. Unless there was a substantial authority for the position
  2. Authority not needed if questionable position is disclosed
    1. Must fill out Disclosure form

Substantial Authority


Class 2


Registered Tax Preparers Limitations


Actions to be taken on                   Registered Tax Preparer                    Practitioner

behalf of the client                                                                                 (cpa/lawyer/ea)


Prepare a tax return                        yes                                                          yes

Represent in audit                            yes                                                         yes

Represent in appeals                       no                                                            yes

Provide tax advice                         no                                                            yes

Section 7525 protection                 no                                                            yes


—————————————— —————————————————————–


Tax preparer can represent a client before the service in an audit, provided the registered tax preparer signed the tax return. Tax advice can be given only relating to matters contained on that tax return they prepared.


Section 7525 – extends privileges of confidentiality between tax payer and lawyer to tax payer and practitioner



Tax Return Positions


6694 imposes penalties upon tax preparers and established substantial authority standard

  • Preparer gets penalized unless position has substantial authority
    • Circular 230. S 10.34
    • If it does not have substantial authority you can be suspended as a registered tax preparer
    • Loss of license at state level as practitioner



Covered opinions    Circular 230 S 10.35

–          Covered opinions meant to protect “shelters”

–          disclaimer states that unless stated otherwise, any tax advice is not intended to suggest tax avoidance

  • protects from S 10.35


Statement 5: Department from position previously concluded

–          binding upon members of the AICPA

–          A treatment of a similar item on a tax return should be treated in its own way each year, and is not bound by previous  year’s recommendations, unless bound by the IRS by a Closing Agreement


Statement 6: Knowledge of error: return preparation and administrative proceedings


The member must advise the taxpayer in a prompt manner of error, regardless of whether the member prepared or signed the return





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