Scope of Circular 230
By its terms, the proposed amendment to Circular 230 applies to “attorneys, certified public accountants, enrolled agents, enrolled retirement plan agents, enrolled actuaries and other persons representing clients before the Internal Revenue Service” [Proposed 31 CFR Part 10 (prop. Circ. 230), section 10.0(a), https://tinyurl.com/5n7y7bdf]. This represents a departure from the previous version of Circular 230, last updated in 2014, in that it deletes the reference to “registered tax return preparers” (Circular 230, https://tinyurl.com/34z2dz64). This change was mandated by the Loving v. IRS case, in which the D.C. District Court, and later the D.C. Court of Appeals, held that the mere preparation of tax returns could not be regulated by the IRS because it does not constitute “practicing” before the IRS [917 F.Supp.2d 67 (D.D.C. 2013), aff’d 742 F.3d 1013 (D.C. Cir. 2014)]. The elimination of return preparation from the scope of the proposed revisions to Circular 230 was not complete, however, as the definition of “practice” before the IRS was expanded to include “preparation and submission of tax returns” when done in connection with representing a client before the IRS [Prop. Circ. 230, section 10.2(a)(4)].
In addition, the proposed regulations also expand the reach of Circular 230 to include “standards for appraisers who submit appraisals or present evidence or testimony to the Department of the Treasury or the [IRS],” [Prop. Circ. 230, section 10.0(a)] an addition widely acknowledged to be a response to the significant number of cases involving conservation easement valuations that are currently under examination and before the U.S. Tax Court. An entirely new Subpart D has been proposed to establish the standards of conduct and disqualification procedures for appraisers (section 10.60–62). While a detailed review of these standards is beyond the scope of this article, it is worth noting that the International Society of Business Appraisers, National Association of Certified Valuators and Analysts, AICPA, and American Bar Association Tax Section, among many others, raised significant concerns regarding both the necessity and substance of Subpart D. Over 150 comments were submitted in response to the proposed regulations (https://tinyurl.com/8rxx4jcd), with 13 commenters testifying at the March 6, 2025, public hearing (https://tinyurl.com/ywnd6msy).
Prohibition on Contingent Fees
Aside from the question of Circular 230’s scope, perhaps the most hotly contested and litigated issue addressed in the proposed regulations is Circular 230’s general prohibition on contingent fees. The current version of Circular 230 provides that practitioners may not charge contingent fees for “services rendered in connection with any matter before the [IRS],” with the exception of services related to (i) the examination of an original return or certain amended returns and claims for refund, (ii) credit or refund claims related solely to interest and penalties, and/or (iii) court proceedings arising under the Internal Revenue Code [Prop Circ. 230, section 10.27(b)]. Following on the heels of the Loving decision, the D.C. District Court, in Ridgely v. Lew held that this blanket prohibition could not be applied to the preparation or filing of “ordinary refund claims”—that is, those that did not involve any type of audit defense or other representation of the taxpayer—because they, like the preparation of original tax returns, do not involve “practice” before the IRS [55 F.Supp.3d 89 (D.D.C. 2014)].
In response to Ridgely, the proposed regulations delete the current section on fees entirely and add a section that addresses contingent fees in a newly created Subpart C that classifies certain activities as per se disreputable conduct (section 10.51). The importance of the placement of the contingent fee provision in the new Subpart C is easy to overlook, but critically important. Currently, the prohibition on contingent fees lives in Subpart B–Duties and Restrictions Relating to Practice Before the IRS, meaning it only applies to fees charged for services considered “practice” before the IRS. The new Subpart C, however, governs the conduct of all practitioners subject to Circular 230, whether that conduct takes place in connection with practice before the IRS or not. Thus, at least by the Treasury Department’s interpretation, the proposed rules would extend to prohibit contingent fees even when the services at issue do not relate to representation (i.e., practice) before the IRS [89 Fed. Reg. 104918 (Dec. 26, 2024)]. It remains to be seen whether this workaround would be deemed permissible under Loving, Ridgely, and their progeny.
While the reach of the proposed regulations’ prohibition on contingent fees has been extended to “non-practice” situations, the definition of the types of services subject to the prohibition has narrowed. Recall that the current Circular 230 prohibition on contingent fees applies an “all prohibited, some excepted” approach. The proposed revision, however, only applies the contingent fee ban to fees charged “in connection with the preparation of an original or amended tax return or claim for refund or credit prepared prior to the examination of the tax return” [Prop. Circ. 230, section 10.51(b) (1)]. While this may seem innocuous at first, practitioners have taken issue with this new rule for two primary reasons. First, as discussed at length in the comments submitted by the New York State Bar Association’s Tax Section, the proposed regulations do not take into account the societal benefits of contingent fee arrangements–namely that in many cases, a taxpayer does not have the financial means to pay for the preparation of an amended return, notwithstanding that their grounds for requesting a refund may be valid [NYSBA Tax Section Report 1507–Report on Proposed Amendments to Circular 230 (Feb. 24, 2025)]. Without the availability of a contingent fee option, such a taxpayer would have no other option.
Second, the preamble to the proposed regulations claims that charging a contingent fee for any kind of return preparation “encourage[s] evasion or abuse of Federal tax laws by incentivizing practitioners to take unduly aggressive tax positions … resulting in personal gain for the practitioner” [Prop. Circ. 230, section 10.51(b)(1)]. The notion that practitioners—including CPAs and attorneys who have sworn an oath to uphold the law—are so easily persuaded to file false returns on behalf of contingent fee clients is, in this author’s opinion, outrageous. While there are no doubt unscrupulous preparers who might abuse contingent fee arrangements, Circular 230 is not the proper avenue to address the issue, particularly when such individuals are unlikely to be subject to Circular 230 in the first place.
Errors and Omissions
The proposed revisions to Circular 230 also significantly expand the section that addresses practitioners’ obligations with respect to a client’s errors or omissions. Currently, Circular 230 provides that a practitioner who becomes aware of a client’s noncompliance, error, or omission must promptly advise them of the issue and of the consequences of the noncompliance, error, or omission under the IRC and Treasury Regulations (Circ. 230, section 10.21). The expansion of this rule under the proposed regulations can best be illustrated through the below redline:
Section 10.21 Knowledge of error or omission
(a) In general. A practitioner who, having been retained bywhile representing a client with respect toin a matter administered bybefore the Internal Revenue Service, knows that either the client, the practitioner, or a prior practitioner has not complied with the revenue laws of the United States and regulations, or has made an error in or omission from any return, document, affidavit, or other paper whichthat the client submitted or executed under the revenue laws of the United States and regulations, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences of the noncompliance, error, or omission, as provided under the Codeinternal revenue laws of the United States and regulations, of such noncompliance, error, or omission and recommend corrective actions, such as disclosure, to be taken [Comparison of Prop. Circ. 230, section 10.21(a) to Circ. 230, section 10.21].
While previously practitioners would only need to inform clients of the issue and the consequences of not correcting it, the proposed revisions would place an affirmative duty on practitioners to recommend corrective action, including disclosure to the government. The proposed regulations then go another step further and add section 10.21(b) instructing practitioners that they “should request the client’s agreement to disclose the noncompliance, error, or omission to the [IRS].” If the client does not agree, “the practitioner should consider whether [they] can continue to represent the client” [Prop. Circ. 230, section 10.21(b)]. As several commenters have noted, these requirements are plainly contrary to established law [See, e.g., American Bar Association Tax Section Comments on Proposed Amendments to Circular 230 (Feb. 24, 2025), https://tinyurl.com/msjutmrz].
First, the Supreme Court has unambiguously held that a taxpayer has no obligation to file an amended return [Badaracco v. Commissioner, 464 U.S. 386 (1984)]. This plainly contradicts the proposed regulations’ unequivocal requirement that practitioners recommend that clients take such action, and consider terminating their representation if they do not. Second, the proposed regulations seemingly give short shrift to the duty of confidentiality held by CPAs and attorneys, not to mention a lawyer’s duty of zealous advocacy, and a client’s right against self-incrimination.
Penalty Assessment as Proof of Per Se Disreputable Conduct
Finally, the proposed revisions to Circular 230 would make it per se disreputable conduct any time a practitioner is assessed penalties under one of the following IRC provisions: Section 6694(b) (willful attempt to understate tax liabilities), Section 6701 (aiding or abetting in the understatement of tax liabilities), Section 6662(b)(1) (careless, reckless, or intentional disregard of rules or regulations), or Section 6700 (promotion of abusive tax shelters) [Prop. Circ. 230, section 10.50(b)].
Commenters on the proposed regulations have universally condemned this proposed addition on the grounds that a mere penalty assessment does not prove that a practitioner engaged in disreputable conduct. This is particularly true in light of the fact that a violation of Circular 230 can result in censure, suspension, or disbarment from practice before the IRS [Circ. 230, section10.70(a); monetary penalties may also apply, section 10.70(c)].
Furthermore, three of the four enumerated penalties are immediately assessable, meaning that they cannot be challenged prior to their assessment. In most cases, the best option a practitioner has for challenging the penalty is paying it and seeking a refund, a process that can be difficult, time-consuming, and expensive, particularly if it requires the hiring of legal counsel. Considering the minimal amount of the penalties (some as low as $1,000), a practitioner who has done nothing wrong could reasonably conclude that paying the penalty is far easier (and cheaper) than contesting it. A practitioner who makes that choice would be deemed to have engaged in disreputable conduct and potentially stripped of their ability to practice before the IRS.
Mixed Results
For over a decade, practitioners have been calling on the IRS and Treasury Department to revise Circular 230 to bring it into compliance with caselaw and the norms of modern tax practice. Though some of the changes proposed in the revisions to Circular 230 are welcome, like the removal of references to registered tax return preparers, many others—including those discussed in this article—remain subject to significant debate. Given the change of administration, it is unclear whether the final regulations revising Circular 230 will ever see the light of day. For now, practitioners may prefer to keep their well-worn copies of the 2014 revision of Circular 230, annotated for those provisions that have been mooted by the courts.
