The Potential Impact of Proposed Amendments to Circular 230

“The Potential Impact of Proposed Amendments to Circular 230,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is ACTEC Fellow Travis Hayes of Naples, Florida.

At the end of 2024, the Treasury Department and the Internal Revenue Service issued proposed regulations that would remove or update parts of Circular 230. Circular 230 governs the practice of tax professionals before the IRS. It establishes rules of conduct, ethical guidelines, and penalties for noncompliance for attorneys, certified public accountants, enrolled agents, and other tax practitioners.

So what is the impact on trust and estate attorneys and professionals? ACTEC Fellow Steve Gorin of St. Louis, Missouri, shares his thoughts on the proposal and potential changes we should be aware of.  Welcome, Steve.

Steve Gorin: Thank you, Travis. Delighted to be here. So now the IRS is giving us some updates on the professional standards of tax practice before the IRS. It actually had to propose regulations out about a decade ago, and then it had some losses in court relating to some of the regulations it was doing, and the IRS finally decided to re-propose the regulations. So, I’m not sure how long it’ll take for them to finalize these. Hopefully, it won’t be 10 years again.

What is Circular 230?

Circular 230 applies to practice before the IRS, which is all matters connected with a presentation of things to the IRS, including preparing documents, filing documents, corresponding and communicating with the IRS, rendering written advice with respect to any entity, transaction plan, or arrangement, or any plan or arrangement having a potential for tax avoidance or evasion. Any kind of tax planning could potentially be covered here. And also representing clients at conferences, hearings, and meetings, which could also include preparing related returns.  So,it’s a pretty wise swath here.

Proposed Regulations

The proposed regulations talk about whenever you have any error that you notice, the tax petitioner should be taking actions to explain to the client actions the client should take to correct a non-compliance error or omission. And they should consider whether the preparer or other professional can continue to meet their obligation to exercise diligence as to accuracy of returns at other documents.

Of course, lawyers are not really on the spot as much as income tax preparers are, because income tax preparers, every year that they’re preparing a return, you don’t know if a prior year might have an effect. You might have depreciation for an asset and so if there’s some kind of error on with the basis of the asset, then that error could have a multi-year effect.

The Circuit of 230 also has some requirements for written tax advice. It’s actually heavily regulated already. You need to base the written advice on (i) reasonable, factual, and legal assumptions; (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; (iv) not rely on any representations that are just obviously wrong. You ask whether reliance on those representations would be unreasonable. And, of course, you need to go ahead and do the normal things of relating the applicable law to the facts.

Audit Risk and Disclosure

In recommending a position, you can’t take into account audit risk in terms of saying, “well, it’s a bad position, but you’re not going to get audited, so forget about it.” No, you need to consider whether it’s a reasonable position or not. If you have substantial authority for that position, which is usually about a 40% chance of winning if there is a dispute, then you don’t have to do a special disclosure on the return. But if all you have is a reasonable basis, which is about 10% or 20% chance, or really anything between that and substantial authority, then you need to either have a special disclosure by Form 8275, or you need to comply with the annual revenue procedure that explains what disclosures on tax returns will take care of things. And one of the most more current revenue procedures for that is . Again, it’s either Form 8275 or 8275R or complying with form with Revenue Proc 2023-40 or the most recent revenue procedure.

That’s for avoiding penalties. You can certainly tell clients, you know, when they figure out whether they’re going to take a position or not, and you give them the appropriate advice as to whether they can take it and whether they need to do special disclosures, you can then, of course, tell them what their audit risk might appear to be. But you still have to go through whatever disclosure idea that you normally would need to do.

Best Practices for Tax Practitioners

They also have a lot of things where the IRS is telling us how we should run our tax practices. So, quite interesting about who’s telling who what to do when. They say tax practitioners should provide clients with the highest quality representation. I really wish the IRS would apply that standard to phone calls to the IRS and courtesy drops and stuff like that. But we’re supposed to be communicating with the client clearly about the terms of engagement, including fees, expenses, and payments. And so, we need to make sure that we have a really clear idea for the taxpayers about what we’re doing and what they can rely on, you know the scope limitations, things like that.

The IRS also has a requirement to have a written information security plan. When those of you who renewed your PTIN, your practitioner tax identification number, you had to check a box that says, I understand that I have to have a written information security plan. So, it actually says should, I think – but the IRS has a whole web page on getting a Written Information Security Plan, which is abbreviated WISP. And it has best practices. And it has publications that tell you recommendations for it.

Some of this is based on AICPA standards. And the AICPA standards in which the proposed regulations were relied were those that were in effect before 2024. The AICPA has since revised the proposed standards. I did make a submission to the IRS to suggest that if the preamble is relying on old standards, that they go contact the AICPA and get the new ones.

Finally, the idea, the rules say you can’t charge contingent fees or unconscionable fees – there are some restrictions on that that you can look through the proposed regulations for. So, I hope this new overview has been helpful and you can keep in touch with what the IRS is doing and watch for those final regulations to come out.

Thank you, Steve, for updating us on the proposed regulations relating to Circular 230 and the potential effect on trust and estate attorneys and professionals.

You may also be interested in:

• (IRS) Office of Professional Responsibility and Circular 230
• (IRS) Creating a Written Information Security Plan for your Tax & Accounting Practice
• ACTEC Commentaries on the Model Rules of Professional Conduct

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