IRS Circular 230: A Case Study

As mentioned above, one of the primary sources for tax standards comes from the AICPA’s Standards for Tax Services (SSTSs). Originating from the Statements on Responsibilities in Tax Practice (SRTPs), a body of advisory opinions on good tax practice, the SSTSs have been the go-to authority for any CPA practicing tax since 2000. As the guidelines originally set forth in the SRTPs became more and more important to the profession and others, organizations recognized the need for an official declaration of what was considered professional conduct in tax practice. The AICPA’s Tax Executive Committee then concluded it was appropriate to issue tax practice standards that would become a part of the AICPA’s Professional Standards by which all CPA’s
IRS’ Circular 230 In complementary fashion to the AICPA’s SSTSs, the IRS’ Circular 230 also sets forth standards for signing returns, advising a client to take a position on a return, and preparing the portion of a return on which a position is taken, albeit in less detail. One area in which Circular 230 provides more detail is REPOS standard. A tax return position is considered to have a realistic possibility of being sustained on its merits if a reasonable and well-informed analysis of the law and the facts by a person who is knowledgeable in the tax law would lead such a person to conclude that the position has approximately a one-in-three, or greater, likelihood of being sustained on its merits. Circular 230 places two requirements on the practitioner with respect to advising clients on potential penalties. First, a
Some penalties apply to the return and some apply to the actor (both tax preparer and taxpayer). The provision practitioners most often are concerned with is the penalty for understatement of income tax liability by the income tax preparer. This provision is very broad, and it affects tax planning, the giving of tax advice and the preparation of income tax returns. Code Sec. 6694(a) provides a penalty of the greater of (1) $1,000 or (2) 50 percent of the income derived by the tax preparer on a return if there is an understatement of tax and there was not a realistic possibility of the position’s being sustained based on the merits for the position taken. In addition, there are additional penalties for promoting abusive tax shelters, aiding and abetting in the understatement of a tax liability, and taking a number of other improper actions (or failing to act when required) under the Code. With regard to promoters of abusive tax shelters, any person who organizes a tax shelter or sells (directly or indirectly) an interest in the shelter and makes a statement (or causes another person to make a statement) with respect to the allowance of a deduction or credit or the exclusion of income, knowing (or having reason to know) that the statement is false as to any material matter, is subject to a penalty. Tax preparers who disclose any information provided to them in connection