After the Civil War in 1884, Congress enacted a law known as the “Horse Act,” which allowed citizens to make claims against the Treasury Department for the value of horses confiscated for use by the troops. The Treasury soon discovered that people were making claims for more horses than could have existed at the time.
As a result, Congress amended the “Horse Act” to give the Treasury Department the authority to regulate representatives of the claimants. The Treasury Department required that representatives have good character, a good reputation, the necessary qualifications and competence.
In 1884, the Internal Revenue was not in existence. The regulations allowing the Treasury Department to regulate representatives is under Title 31 of the U.S. Code, rather than Title 26, the Internal Revenue Code.
Congress did not enact an income tax and the IRS until 1921. At that time, representatives were familiar with tax law, but ethical duties were not included in the tax code to outline how practitioners could comply with the rules of professional conduct when representing taxpayers. Treasury Circular 230 was issued as a nearly verbatim copy of the regulations under Title 31.
Treasury Circular 230 governs the recognition and conduct of persons representing taxpayers before the Internal Revenue Service. Circular 230 also sets rules relating to the authority to practice before the IRS, as well as, duties and restrictions with regard to such practice, sanctions for violations, and disciplinary proceedings. Every tax professional should read Subpart A, Rules Governing Authority to Practice, and Subpart B, Duties and Restrictions Relating to Practice Before the Internal Revenue Service and should hope to never have to read Subpart C, Sanctions for Violations of the Regulations, and D, Rules Applicable to Disciplinary Proceedings.
Due Diligence and Competence
In 2016 and 2017, the due diligence requirements expanded to include the Earned Income Credit, the Child Tax Credit and the Additional Child Tax Credit, as well as the American Opportunity Tax Credit. The IRS uses Form 886-H-EIC and Form 886-H-AOC to request documents. You might want to consider using them in your practice.
As of 2018, the due diligence requirements now include the Head of Household filing status.
The due diligence penalties have increased to $520 per credit.
A tax practitioner is required to exercise due diligence when submitting documents to the Internal Revenue Service. However, the practitioner can rely on third-party documents, unless there is reason to believe that those are not accurate.exercise due diligence when submitting documents to the Internal Revenue Service
The tax professional, however, cannot ignore facts and is required to make reasonable inquiries if the information presented appears to be incorrect, incomplete or inconsistent.
For example, when a client claims that he paid $100,000 in alimony to the ex-wife, the practitioner can rely on the dollar amount, but not on the client’s knowledge of tax law. He needs to make additional inquiries to determine if all $100,000 was actually court ordered alimony, or if part of the amount was child support or a settlement. If there is a clause in the decree that states that the $100,000 will be reduced to perhaps $80,000 once child number one turns age 21, then $20,000 is not alimony, but child support.
If the practitioner is aware that the client has not complied with revenue laws or has made an error on any return that has already been submitted to the IRS, then he has to promptly advise the client of the noncompliance, error or omission.
In addition, the practitioner must advise the client of the consequences of the error. Even though section 10.21 of Circular 230 does not require the practitioner to amend an inaccurate return, the practitioner must make sure that any error is not continued on the returns he or she is preparing. For example, if the taxpayer incorrectly calculated a capital loss and has a carryover, the carryover amount needs to be recalculated to the correct carryover amount before the preparer can sign the return.
Competence requires an appropriate level of knowledge for the particular tax engagement. A practitioner may become competent through various methods, such as taking classes, consulting with experts on the subject matter and hiring a consultant versed in the particular situation.
Incompetence can result in severe fines and even jail time. Don’t let the software be the tax return preparer! Know when to ask for help and when the situation is outside of your scope of expertise.
Stay tuned for part two of my “Ethics in the Modern World” series, where I’ll discuss conflict of interest, return of client records and disclosures.
For More Information
- Circular 230, Regulations Governing Practice Before the Internal Revenue Service
- Publication 947, Practice Before the IRS
- Publication 4687, Refundable Credits Due Diligence
Editor’s note: For more information, read the series on ethics from Mike D’Avolio, CPA, JD.