A CPA signs a return claiming a $180,000 deduction the client cannot substantiate, then charges a contingent fee tied to the refund. Two Circular 230 violations stack inside a single engagement, and the Office of Professional Responsibility opens both.
Circular 230 (Treasury Department Circular No. 230, 31 C.F.R. Part 10) is the rulebook for tax representation. The duties are statutory because tax practice involves both private money and public revenue, and a practitioner who plays loose costs the Treasury and erodes the system.
HIGH-FREQUENCY: "Practice before the IRS" includes preparing returns, corresponding with the IRS on a taxpayer's behalf, and representing the taxpayer at conferences and hearings. Simply preparing a return is practice under §10.2(d).
Four categories of full-rights practitioners under §10.3:
- CPAs: licensed and in good standing with any state board of accountancy
- Attorneys: admitted to any state bar and in good standing
- Enrolled agents (EAs): pass the Special Enrollment Examination or have 5 years of qualifying IRS experience
Common mistakes
- Treating censure as informal or private. Censure is the lightest Circular 230 sanction, but it is still formal and public. It appears on the practitioner's IRS record and is reportable to state boards. Trap answer: "the practitioner received a private censure with no public consequences."
- Allowing contingent fees on original returns. §10.27 flatly prohibits contingent fees for preparing original returns. Permitted only for amended returns / refund claims tied to an examination, refund claims for interest/penalties, and judicial proceedings. Trap answer: "permitted because the refund was legitimate": legitimacy of the refund is irrelevant; the rule is structural.
- Filing an amended return without client consent. §10.21 requires advising the client; the client decides. A CPA who unilaterally files Form 1040-X to "fix" a prior-year error violates Circular 230 and the AICPA SSTSs. Trap answer: "promptly file the amended return to correct the omission."
Bottom line
- Circular 230 governs who may practice before the IRS and how they must behave: CPAs, attorneys, enrolled agents, and enrolled actuaries.
- Subpart B sets duties: due diligence (§10.22), reasonable fees (§10.27), conflict-of-interest written consent (§10.29), competent advice (§10.34).
- §10.29 conflict-of-interest consent must be written and retained 36 months; verbal consent never suffices.
- §10.34 return-position thresholds: reasonable basis (about 20%) with disclosure, substantial authority (about 40%) without disclosure, more likely than not (over 50%) for tax shelters.
Exam shortcut
When a question asks about contingent fees, lock onto two facts: is the return original or amended, and (if amended) is it tied to an examination notice within 120 days? Original = always prohibited. Amended-plus-audit = always permitted. For sanctions questions, remember the CMSD ladder: Censure → Monetary → Suspension → Disbarment, all formal and all public.
The full lesson (about 2,490 words, 17 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- I.A1
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