Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries Before the Internal Revenue Service

DEPARTMENT OF THE TREASURY

31 CFR Part 10

[TD 8545]

RIN 1545-AQ57

Regulations Governing the Practice of Attorneys, Certified Public

Accountants, Enrolled Agents, and Enrolled Actuaries Before the

Internal Revenue Service

AGENCY: Office of the Secretary, Department of the Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under 31 CFR part 10

governing the practice of individuals before the IRS. These regulations

affect individuals who are eligible to practice before the IRS. These

regulations establish tax return preparation standards and prescribe

the circumstances under which a practitioner may be disciplined for

violating those standards, limit the use of contingent fees for

preparing tax returns, clarify that certain of the existing

restrictions governing limited practice before the IRS apply to all

individuals who are eligible to engage in limited practice before the

IRS, establish expedited proceedings to suspend individuals from

practice before the IRS in cases in which certain determinations have

been made by independent bodies, and permit attorneys and certified

public accountants in good standing to obtain or retain enrolled agent

status.

EFFECTIVE DATE: These regulations are effective June 20, 1994.

FOR FURTHER INFORMATION CONTACT: David L. Meyer, Office of the

Assistant Chief Counsel (Income Tax and Accounting), IRS, 1111

Constitution Avenue, NW., Washington, DC 20224 (Attention:

CC:DOM:CORP:T:R), or by telephone at 202-622-6232 (not a toll-free

number).

SUPPLEMENTARY INFORMATION:

Background

On October 8, 1992, the Department of the Treasury published in the

Federal Register proposed amendments to the regulations governing

practice before the IRS (57 FR 46356). The regulations are in subtitle

A, part 10, of title 31 of the Code of Federal Regulations and have

been reprinted as Treasury Department Circular No. 230 (Circular 230).

A public hearing was held on December 16, 1992. A number of comments

were received in response to the proposed amendments. After careful

consideration of the comments received, the regulations are adopted as

revised by this Treasury decision.

Explanation of Changes

I. Return Preparation Standards and Related Disciplinary Standard

A. Standards of Conduct

The proposed regulations included new return preparation standards

for attorneys, certified public accountants, enrolled agents and

enrolled actuaries (practitioners). These standards would modify

Circular 230 to reflect more closely the standards for return preparers

under section 6694 of the Internal Revenue Code of 1986 (Code) and

professional guidelines.

Under the proposed regulations, a practitioner may not sign a

return as a preparer if the practitioner determines that the return

contains a position that does not have a realistic possibility of being

sustained on its merits (the realistic possibility standard), unless

the position is not frivolous and is adequately disclosed to the IRS.

In addition, a practitioner may not advise a client to take a position

on a return, or prepare the portion of a return on which a position is

taken, unless the practitioner determines that the position satisfies

the realistic possibility standard or the position is not frivolous and

the practitioner advises the client to adequately disclose the

position.

One commentator suggested deleting the language in the first

sentence of Sec. 10.34(a)(1) of the proposed regulations, which

prohibited a practitioner from signing a return without disclosure if

the practitioner determined that the return contained a position that

did not satisfy the realistic possibility standard. The commentator

asserted that the practitioner should not be subject to discipline

under Circular 230 if the return position resulted from reasonable

reliance on another preparer.

Treasury does not believe it is appropriate to alter the standard

of conduct in Sec. 10.34(a), which generally conforms to the rules of

section 6694. In addition, the commentator's concern is addressed by

the standard of discipline of Sec. 10.34(b). Under this standard, only

violations of Sec. 10.34 that are willful, reckless, or grossly

incompetent will be subject to discipline. See Standard of Discipline,

below.

Another commentator stated that a signing preparer should only be

required to advise disclosure of (rather than actually disclose) a

return position that did not satisfy the realistic possibility

standard. This commentator added that Circular 230 should not

distinguish between the not frivolous and realistic possibility

standards because, in the commentator's view, they are identical.

To promote consistency in disclosure standards, the Circular 230

disclosure rules are patterned after the section 6694 rules and,

therefore, a signing preparer must actually disclose (rather than

merely advise disclosure of) nonfrivolous return positions that do not

satisfy the realistic possibility standard. Because Treasury believes

the realistic possibility standard is distinct from the not frivolous

standard, these amendments to Circular 230 also distinguish between

these two standards.

The Omnibus Budget Reconciliation Act of 1993 (the OBRA '93) made

certain changes to the accuracy-related penalty in section 6662 of the

Code. The OBRA '93 raised the disclosure standard for purposes of the

penalties for disregarding rules or regulations or a substantial

understatement of income tax from ``not frivolous'' to ``reasonable

basis''. Also, the OBRA '93 eliminated the disclosure exception for the

negligence penalty. The IRS published temporary regulations

Sec. 1.6662-7T in the Federal Register to implement these changes. See

59 FR 12547 (March 17, 1994) and 59 FR 14749 (March 30, 1994). These

changes narrow the opportunities to avoid an accuracy-related penalty

by disclosing a return position. In view of these changes, these final

regulations require non-signing practitioners to advise their clients

of any opportunity to avoid such a penalty by disclosing a position

(rather than to disclose the position).

Under Sec. 10.34(a)(2) of the proposed regulations, a practitioner

who advises a client on a position to be taken on a return, or who

signs or prepares a return, must inform the client of the penalties

reasonably likely to apply to the client with respect to the position.

One commentator contended that the requirement that a practitioner

apprise its client of penalties reasonably likely to apply intrudes on

the practitioner-client relationship and should be deleted. Another

commentator stated that the requirement was too lenient and should be

strengthened by requiring practitioners to give their clients written

notice of penalties reasonably likely to apply.

Treasury believes that informing clients of penalties reasonably

likely to apply with respect to return positions is an important

component of a practitioner's duty to his or her client. Accordingly,

these final regulations retain this requirement. The final regulations,

however, do not require practitioners to give the penalty advice in

writing. Treasury believes that preserving flexibility as to the form

in which practitioners advise their clients promotes client

understanding of the advice and discourages the use of possibly

confusing boilerplate language.

Under the proposed regulations, a position satisfies the realistic

possibility standard if a reasonable and well-informed analysis by a

person 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. Several

commentators stated that the one-in-three formulation of the realistic

possibility standard should not be used for purposes of Circular 230. A

common criticism was that the test is inherently difficult to

administer.

The one-in-three test has been adopted for preparers under section

6694. Adopting a different formulation of the realistic possibility

standard in Circular 230 would lead to unnecessary confusion. In

addition, quantification of the realistic possibility standard helps to

prevent its erosion. For these reasons, the suggestion of some

commentators to eliminate the one-in-three test was not adopted.

For purposes of determining whether the realistic possibility

standard is satisfied, the proposed regulations provide that the

authorities that may be taken into account under 26 CFR 1.6662-

4(d)(3)(iii) for purposes of the substantial understatement penalty

also may be taken into account for purposes of Circular 230. Some

commentators suggested expanding the permissible authorities to include

well-reasoned treatises, articles in recognized professional tax

publications, and other reference tools commonly used by practitioners.

Treasury believes that the determination of whether the realistic

possibility standard is satisfied for purposes of Circular 230 (as well

as section 6694) should be grounded in laws enacted by politically

authorized decisionmakers, not in interpretations of those laws in

secondary source materials. Thus, the suggestion was not adopted. Even

though secondary sources are not authorities for Circular 230 purposes,

practitioners may rely in preparing returns on applicable authorities

underlying the conclusions in those sources.

B. Standard of Discipline

Under the proposed standard of discipline, only violations of

Sec. 10.34 that are willful, reckless, or a result of gross

incompetence will subject a practitioner to suspension or disbarment

from practice before the IRS. The proposed regulations further provide

that a pattern of conduct is a factor that will be taken into account

in determining whether a practitioner acted recklessly or with gross

incompetence.

A commentator suggested that the standard of discipline for

Sec. 10.34 be amended to provide that only a pattern of conduct will

subject a practitioner to discipline. This suggestion would permit

practitioners to violate the new return preparation standard of

Circular 230 at least once without being subject to discipline by the

Director of Practice. Treasury does not believe it is appropriate for

Circular 230 to countenance improper conduct, or to establish a more

lenient standard of discipline in the return preparation context than

in other Circular 230 contexts not requiring a pattern of conduct to

impose discipline. Accordingly, this suggestion was not adopted.

One commentator recommended that a general reasonable cause and

good faith exception be expressly incorporated into the standard of

discipline for Sec. 10.34 of Circular 230. Some commentators also asked

for a more limited reasonable cause and good faith exception for

reasonable reliance on the advice of another practitioner. The existing

standard of discipline eliminates the need for an express reasonable

cause and good faith exception in that willful, reckless, or grossly

incompetent violations of Circular 230 are inconsistent with reasonable

cause and good faith. Therefore, these suggestions were not adopted.

II. Contingent Fees

The proposed regulations ban contingent fees for preparing a return

except in the case of certain claims for refund. Under the proposed

regulations, a practitioner may charge a contingent fee for preparing a

claim for refund if the practitioner reasonably anticipates, at the

time the claim is filed, that the claim will be denied by the IRS and

subsequently litigated by the client.

A number of comments were received concerning the proposed rule on

contingent fees. Some commentators expressed concerns about the

administrability of the portion of the rule involving claims for

refund. These commentators noted that it may be difficult to anticipate

whether the IRS will deny a claim and whether a client will choose to

litigate the claim if it is denied. They also asserted that a claim's

prospects for being denied should be evaluated at the time of the fee

arrangement, rather than at the time the claim is filed.

Other commentators questioned the need for additional rules in

Circular 230 regulating fees at all. These commentators suggested that

the preparer and accuracy-related penalties provide adequate safeguards

against overly-aggressive positions, that the proposed rule is broader

than necessary to counter any use of contingent fee arrangements to

exploit the ``audit lottery,'' and that the proposed rule could

interfere with reasonable commercial relationships.

Treasury continues to believe that a rule restricting contingent

fees for preparing tax returns supports voluntary compliance with the

tax laws by discouraging return positions that exploit the audit

selection process. In response to comments received, the proposed

contingent fee rule has been modified in the final regulations to

permit contingent fees for claims for refund (other than claims for

refund made on original returns) or for amended returns if the

practitioner reasonably anticipates, at the time the fee arrangement is

entered into, that the return will receive substantive review by the

IRS. This determination will be made on a case-by-case basis. Like the

proposed rule, the final rule bans contingent fees for preparing

original returns.

III. Restrictions on Individuals Engaging in Limited Practice

The proposed regulations generally required that all

nonpractitioners who engage in limited practice before the IRS under

Sec. 10.7 uphold the same standards as practitioners and simplified the

structure of that section. In response to a comment, the final

regulations clarify ambiguous wording in Sec. 10.7(c)(1)(vii) of the

proposed regulations, which relates to representation outside of the

United States. The change makes clear that a nonpractitioner may

represent a taxpayer before personnel of the IRS who are located

outside of the United States, regardless of where the taxpayer is

located.

Another commentator asked that Sec. 10.7(c)(1)(viii), which relates

to representation before the Examination Division by a preparer, be

clarified by substituting ``as the preparer'' for ``on behalf of the

taxpayer''. This change, which is not substantive in nature, is adopted

by the final regulations.

IV. Expedited Suspensions From Practice Before the Service in Certain

Cases

The proposed regulations added a new section permitting the

Director of Practice to commence an expedited proceeding leading to a

practitioner's suspension from practice before the Service in those

instances in which an independent authority already has determined that

the practitioner has engaged in serious misconduct. Some commentators

recommended against adopting the expedited suspension provision. These

commentators argued that an expedited suspension violates an

individual's due process rights and constitutes an abuse of the

Director of Practice's authority. Alternatively, it was suggested that:

(1) An expedited suspension be deferred if the individual requests a

hearing before an Administrative Law Judge; (2) the Director be

required to take additional steps to ensure that the complaint in an

expedited suspension proceeding is properly served; and (3) the

respondent in such a proceeding be given additional time to respond to

the Director's complaint and not be deemed to have waived his or her

right to a conference if the respondent's answer is not timely filed.

The acts giving rise to an expedited suspension, such as loss of

professional license for misconduct or conviction of certain felonies,

constitute disreputable conduct under Circular 230. Title 31, section

330(b) of the United States Code requires only that a representative

who engages in disreputable conduct be given notice and an opportunity

for a proceeding prior to being suspended from practice before the IRS.

The expedited suspension procedures comply with these and general due

process requirements by providing a practitioner with reasonable notice

of the grounds for any proposed suspension and an opportunity to be

heard by the Director of Practice before the suspension takes effect.

The expedited suspension provision has been carefully drafted to

apply only in limited circumstances, minimize any opportunities for

abuse, and provide individuals with adequate procedural safeguards. For

these reasons and considering Treasury's interest in expeditiously

handling these cases, the commentators' recommendations on this section

of Circular 230 generally were not adopted. However, in response to the

comments, the time for responding to a complaint has been increased to

30 days. In addition, the scheduling requirements for a conference with

the Director of Practice are relaxed and clarified. Under the final

regulations, the conference with the Director of Practice may be held

no sooner than 14 calendar days after the answer is required to be

filed, rather than 30 calendar days after the complaint is served,

unless the respondent agrees to an earlier date. The final regulations

also provide that a practitioner's loss of his or her professional

license solely due to a failure to pay a professional licensing fee

will not constitute grounds for an expedited suspension. The section

has been renumbered and conforming changes made to comply with the

requirements of the Federal Register.

V. Other Matters

A. ``Return''

One commentator asked that the definition of ``return'' of tax in

Sec. 10.2(g) be revised to explicitly state that a return includes an

amended return. To eliminate any confusion on this point, the final

regulations incorporate this recommendation.

B. ``Reckless Conduct''

One commentator requested assurances that changes to the definition

of ``reckless conduct'' in Sec. 10.51(j) were not intended to

substantively change that provision. Other commentators asked that the

words ``highly unreasonable omission'' be eliminated or replaced with

other words.

The proposed changes to the definition of ``reckless conduct'' were

intended to streamline that definition without changing its substance.

Accordingly, there is no substantive significance to eliminating the

words ``merely simple or inexcusable negligence'' or to substituting

``should observe under the circumstances'' for ``is either known or is

so obvious that the competent practitioner must or should have been

aware of it.'' Because no substantive change is intended, substantive

wording changes suggested by commentators to the proposed definition

were not adopted.

C. Comments Outside the Scope of the Project

Additional comments were not adopted because they were beyond the

scope of the regulations project. These included: (1) Altering the

definition of ``practice before the Internal Revenue Service'' in

Sec. 10.2(e); (2) extending the practice standards to commercial return

preparers; (3) requiring a return preparer who is representing a

taxpayer on audit to withdraw from the representation if a conflict of

interest arises; (4) prescribing burdens of proof in disciplinary

proceedings (which generally are governed by the Administrative

Procedure Act, 5 U.S.C. section 551 et. seq.); and (5) permitting a

temporary or part-time employee who is not a practitioner to represent

an employer, partnership, corporation, or trust under the limited

practice rules.

Special Analyses

It has been determined that this Treasury decision is not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It has also been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to

these regulations and, therefore, a final Regulatory Flexibility

Analysis is not required. Pursuant to section 7805(f) of the Internal

Revenue Code, the notice of proposed rulemaking for the regulations was

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is David L. Meyer, Office

of Assistant Chief Counsel, Income Tax and Accounting, Internal Revenue

Service. However, other personnel from the IRS and Treasury Department

participated in their development.

List of Subjects 31 CFR Part 10

Administrative Rules and Procedures, Lawyers, Accountants, Enrolled

Agents, Enrolled Actuaries, Appraisers.

Amendments to the Regulations

Accordingly, 31 CFR part 10 is amended as follows:

PART 10--PRACTICE BEFORE THE INTERNAL REVENUE SERVICE

Paragraph 1. The authority citation for part 10 continues to read

as follows:

Authority: Sec. 3, 23 Stat. 258, secs. 2-12, 60 Stat. 237 et.

seq.; 5 U.S.C. 301, 500, 551-559, 31 U.S.C. 1026; Reorg. Plan No. 26

of 1950, 15 FR 4935, 64 Stat. 1280, 3 CFR, 1949-1953 Comp., p. 1017.

Secs. 10.7 and 10.33(d) also issued under 31 U.S.C. 321 and 330.

Par. 2. Section 10.0 is revised to read as follows:

Sec. 10.0 Scope of part.

This part contains rules governing the recognition of attorneys,

certified public accountants, enrolled agents, and other persons

representing clients before the Internal Revenue Service. Subpart A of

this part sets forth rules relating to authority to practice before the

Internal Revenue Service; subpart B of this part prescribes the duties

and restrictions relating to such practice; subpart C of this part

contains rules relating to disciplinary proceedings; subpart D of this

part contains rules applicable to disqualification of appraisers; and

Subpart E of this part contains general provisions, including

provisions relating to the availability of official records.

Par. 3. Section 10.2 is revised to read as follows:

Sec. 10.2 Definitions.

As used in this part, except where the context clearly indicates

otherwise:

(a) Attorney means any person who is a member in good standing of

the bar of the highest court of any State, possession, territory,

Commonwealth, or the District of Columbia.

(b) Certified Public Accountant means any person who is duly

qualified to practice as a certified public accountant in any State,

possession, territory, Commonwealth, or the District of Columbia.

(c) Commissioner refers to the Commissioner of Internal Revenue.

(d) Director refers to the Director of Practice.

(e) Practice before the Internal Revenue Service comprehends all

matters connected with a presentation to the Internal Revenue Service

or any of its officers or employees relating to a client's rights,

privileges, or liabilities under laws or regulations administered by

the Internal Revenue Service. Such presentations include preparing and

filing necessary documents, corresponding and communicating with the

Internal Revenue Service, and representing a client at conferences,

hearings, and meetings.

(f) Practitioner means any individual described in Sec. 10.3 (a),

(b), (c), or (d) of this part.

(g) A return includes an amended return and a claim for refund.

(h) Service means the Internal Revenue Service.

Par. 4. Section 10.3 is amended by revising paragraphs (a), (b),

(e), and (f) to read as follows:

Sec. 10.3 Who may practice.

(a) Attorneys. Any attorney who is not currently under suspension

or disbarment from practice before the Internal Revenue Service may

practice before the Service upon filing with the Service a written

declaration that he or she is currently qualified as an attorney and is

authorized to represent the particular party on whose behalf he or she

acts.

(b) Certified public accountants. Any certified public accountant

who is not currently under suspension or disbarment from practice

before the Internal Revenue Service may practice before the Service

upon filing with the Service a written declaration that he or she is

currently qualified as a certified public accountant and is authorized

to represent the particular party on whose behalf he or she acts.

* * * * *

(e) Others. Any individual qualifying under Sec. 10.5(c) or

Sec. 10.7 is eligible to practice before the Internal Revenue Service

to the extent provided in those sections.

(f) Government officers and employees, and others. An individual,

including an officer or employee of the executive, legislative, or

judicial branch of the United States Government; officer or employee of

the District of Columbia; Member of Congress; or Resident Commissioner,

may not practice before the Service if such practice would violate 18

U.S.C. 203 or 205.

* * * * *

Sec. 10.4 [Amended]

Par. 5. Section 10.4 is amended by removing paragraph (d).

Par. 6. Section 10.7 is amended by:

1. Revising the heading and text as set forth below.

2. Removing the authority that appears at the end of the section.

Sec. 10.7 Representing oneself; participating in rulemaking; limited

practice; special appearances; and return preparation.

(a) Representing oneself. Individuals may appear on their own

behalf before the Internal Revenue Service provided they present

satisfactory identification.

(b) Participating in rulemaking. Individuals may participate in

rulemaking as provided by the Administrative Procedure Act. See 5

U.S.C. 553.

(c) Limited practice--(1) In general. Subject to the limitations in

paragraph (c)(2) of this section, an individual who is not a

practitioner may represent a taxpayer before the Internal Revenue

Service in the circumstances described in this paragraph (c)(1), even

if the taxpayer is not present, provided the individual presents

satisfactory identification and proof of his or her authority to

represent the taxpayer. The circumstances described in this paragraph

(c)(1) are as follows:

(i) An individual may represent a member of his or her immediate

family.

(ii) A regular full-time employee of an individual employer may

represent the employer.

(iii) A general partner or a regular full-time employee of a

partnership may represent the partnership.

(iv) A bona fide officer or a regular full-time employee of a

corporation (including a parent, subsidiary, or other affiliated

corporation), association, or organized group may represent the

corporation, association, or organized group.

(v) A trustee, receiver, guardian, personal representative,

administrator, executor, or regular full-time employee of a trust,

receivership, guardianship, or estate may represent the trust,

receivership, guardianship, or estate.

(vi) An officer or a regular employee of a governmental unit,

agency, or authority may represent the governmental unit, agency, or

authority in the course of his or her official duties.

(vii) An individual may represent any individual or entity before

personnel of the Internal Revenue Service who are outside of the United

States.

(viii) An individual who prepares and signs a taxpayer's return as

the preparer, or who prepares a return but is not required (by the

instructions to the return or regulations) to sign the return, may

represent the taxpayer before officers and employees of the Examination

Division of the Internal Revenue Service with respect to the tax

liability of the taxpayer for the taxable year or period covered by

that return.

(2) Limitations.

(i) An individual who is under suspension or disbarment from

practice before the Internal Revenue Service may not engage in limited

practice before the Service under Sec. 10.7(c)(1).

(ii) The Director, after notice and opportunity for a conference,

may deny eligibility to engage in limited practice before the Internal

Revenue Service under Sec. 10.7(c)(1) to any individual who has engaged

in conduct that would justify suspending or disbarring a practitioner

from practice before the Service.

(iii) An individual who represents a taxpayer under the authority

of Sec. 10.7(c)(1)(viii) is subject to such rules of general

applicability regarding standards of conduct, the extent of his or her

authority, and other matters as the Director prescribes.

(d) Special appearances. The Director, subject to such conditions

as he or she deems appropriate, may authorize an individual who is not

otherwise eligible to practice before the Service to represent another

person in a particular matter.

(e) Preparing tax returns and furnishing information. An individual

may prepare a tax return, appear as a witness for the taxpayer before

the Internal Revenue Service, or furnish information at the request of

the Service or any of its officers or employees.

Par. 7. Section 10.26, paragraph (a)(4) is revised to read as

follows:

Sec. 10.26 Practice by former Government employees, their partners and

their associates.

(a) * * *

(4) Practitioner includes any individual described in Sec. 10.3(e).

* * * * *

Par. 8. Section 10.28 is revised to read as follows:

Sec. 10.28 Fees.

(a) Generally. A practitioner may not charge an unconscionable fee

for representing a client in a matter before the Internal Revenue

Service.

(b) Contingent fees for return preparation. A practitioner may not

charge a contingent fee for preparing an original return. A

practitioner may charge a contingent fee for preparing an amended

return or a claim for refund (other than a claim for refund made on an

original return) if the practitioner reasonably anticipates at the time

the fee arrangement is entered into that the amended return or claim

will receive substantive review by the Service. A contingent fee

includes a fee that is based on a percentage of the refund shown on a

return or a percentage of the taxes saved, or that otherwise depends on

the specific result attained.

Par. 9. Section 10.33, paragraph (c)(1) is revised to read as

follows:

Sec. 10.33 Tax shelter opinions.

* * * * *

(c) * * *

(1) Practitioner includes any individual described in Sec. 10.3(e).

* * * * *

Par. 10. Section 10.34 is added to read as follows:

Sec. 10.34 Standards for advising with respect to tax return positions

and for preparing or signing returns.

(a) Standards of conduct--(1) Realistic possibility standard. A

practitioner may not sign a return as a preparer if the practitioner

determines that the return contains a position that does not have a

realistic possibility of being sustained on its merits (the realistic

possibility standard) unless the position is not frivolous and is

adequately disclosed to the Service. A practitioner may not advise a

client to take a position on a return, or prepare the portion of a

return on which a position is taken, unless--

(i) The practitioner determines that the position satisfies the

realistic possibility standard; or

(ii) The position is not frivolous and the practitioner advises the

client of any opportunity to avoid the accuracy-related penalty in

section 6662 of the Internal Revenue Code of 1986 by adequately

disclosing the position and of the requirements for adequate

disclosure.

(2) Advising clients on potential penalties. A practitioner

advising a client to take a position on a return, or preparing or

signing a return as a preparer, must inform the client of the penalties

reasonably likely to apply to the client with respect to the position

advised, prepared, or reported. The practitioner also must inform the

client of any opportunity to avoid any such penalty by disclosure, if

relevant, and of the requirements for adequate disclosure. This

paragraph (a)(2) applies even if the practitioner is not subject to a

penalty with respect to the position.

(3) Relying on information furnished by clients. A practitioner

advising a client to take a position on a return, or preparing or

signing a return as a preparer, generally may rely in good faith

without verification upon information furnished by the client. However,

the practitioner may not ignore the implications of information

furnished to, or actually known by, the practitioner, and must make

reasonable inquiries if the information as furnished appears to be

incorrect, inconsistent, or incomplete.

(4) Definitions. For purposes of this section:

(i) Realistic possibility. A position is considered to have a

realistic possibility of being sustained on its merits if a reasonable

and well-informed analysis by a person 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. The authorities described in 26 CFR 1.6662-4(d)(3)(iii),

or any successor provision, of the substantial understatement penalty

regulations may be taken into account for purposes of this analysis.

The possibility that a position will not be challenged by the Service

(e.g., because the taxpayer's return may not be audited or because the

issue may not be raised on audit) may not be taken into account.

(ii) Frivolous. A position is frivolous if it is patently improper.

(b) Standard of discipline. As provided in Sec. 10.52, only

violations of this section that are willful, reckless, or a result of

gross incompetence will subject a practitioner to suspension or

disbarment from practice before the Service.

Par. 11. Section 10.50 is revised to read as follows:

Sec. 10.50 Authority to disbar or suspend.

Pursuant to 31 U.S.C. 330(b), the Secretary of the Treasury after

notice and an opportunity for a proceeding, may suspend or disbar any

practitioner from practice before the Internal Revenue Service. The

Secretary may take such action against any practitioner who is shown to

be incompetent or disreputable, who refuses to comply with any

regulation in this part, or who, with intent to defraud, willfully and

knowingly misleads or threatens a client or prospective client.

Par. 12. Section 10.51, paragraph (j) is amended by removing the

third sentence and adding two sentences in its place to read as

follows:

Sec. 10.51 Disreputable conduct.

* * * * *

(j) * * * For purposes of this paragraph, reckless conduct is a

highly unreasonable omission or misrepresentation involving an extreme

departure from the standards of ordinary care that a practitioner

should observe under the circumstances. A pattern of conduct is a

factor that will be taken into account in determining whether a

practitioner acted knowingly, recklessly, or through gross

incompetence. * * *

Par. 13. Section 10.52 is revised to read as follows:

Sec. 10.52 Violation of regulations.

A practitioner may be disbarred or suspended from practice before

the Internal Revenue Service for any of the following:

(a) Willfully violating any of the regulations contained in this

part.

(b) Recklessly or through gross incompetence (within the meaning of

Sec. 10.51(j)) violating Sec. 10.33 or Sec. 10.34 of this part.

Par. 14. Section 10.65, paragraph (a), is revised to read as

follows:

Sec. 10.65 Hearings.

(a) In general. An Administrative Law Judge will preside at the

hearing on a complaint furnished under Sec. 10.54 for the disbarment or

suspension of a practitioner. Hearings will be stenographically

recorded and transcribed and the testimony of witnesses will be taken

under oath or affirmation. Hearings will be conducted pursuant to 5

U.S.C. 556. A hearing in a proceeding requested under Sec. 10.76(g)

will be conducted de novo.

* * * * *

Sec. 10.76 [Redesignated]

Par. 15. Section 10.76 is redesignated as paragraph (d) of

Sec. 10.33 and amended by:

1. Removing the authority that appears at the end of the

redesignated text.

2. Removing the language ``of this part'' in both sentences where

it appears.

Par. 16. A new Sec. 10.76 is added to read as follows:

Sec. 10.76 Expedited suspension upon criminal conviction or loss of

license for cause.

(a) When applicable. Whenever the Director has reason to believe

that a practitioner is described in paragraph (b) of this section, the

Director may institute a proceeding under this section to suspend the

practitioner from practice before the Service.

(b) To whom applicable. This section applies to any practitioner

who, within 5 years of the date a complaint instituting a proceeding

under this section is served--

(1) Has had his or her license to practice as an attorney,

certified public accountant, or actuary suspended or revoked for cause

(not including a failure to pay a professional licensing fee) by any

authority or court, agency, body, or board described in Sec. 10.51(g);

or

(2) Has been convicted of any crime under title 26 of the United

States Code, or a felony under title 18 of the United States Code

involving dishonesty or breach of trust.

(c) Instituting a proceeding. A proceeding under this section will

be instituted by a complaint that names the respondent, is signed by

the Director, is filed in the Director's office, and is served

according to the rules set forth in Sec. 10.57(a). The complaint must

give a plain and concise description of the allegations that constitute

the basis for the proceeding. The complaint, or a separate paper

attached to the complaint, must notify the respondent--

(1) Of the place and due date for filing an answer;

(2) That a decision by default may be rendered if the respondent

fails to file an answer as required;

(3) That the respondent may request a conference with the Director

to address the merits of the complaint and that any such request must

be made in the answer; and

(4) That the respondent may be suspended either immediately

following the expiration of the period by which an answer must be filed

or, if a conference is requested, immediately following the conference.

(d) Answer. The answer to a complaint described in this section

must be filed no later than 30 calendar days following the date the

complaint is served, unless the Director extends the time for filing.

The answer must be filed in accordance with the rules set forth in

Sec. 10.58, except as otherwise provided in this section. A respondent

is entitled to a conference with the Director only if the conference is

requested in a timely filed answer. If a request for a conference is

not made in the answer or the answer is not timely filed, the

respondent will be deemed to have waived his or her right to a

conference and the Director may suspend such respondent at any time

following the date on which the answer was due.

(e) Conference. The Director or his or her designee will preside at

a conference described in this section. The conference will be held at

a place and time selected by the Director, but no sooner than 14

calendar days after the date by which the answer must be filed with the

Director, unless the respondent agrees to an earlier date. An

authorized representative may represent the respondent at the

conference. Following the conference, upon a finding that the

respondent is described in paragraph (b) of this section, or upon the

respondent's failure to appear at the conference either personally or

through an authorized representative, the Director may immediately

suspend the respondent from practice before the Service.

(f) Duration of suspension. A suspension under this section will

commence on the date that written notice of the suspension is issued. A

practitioner's suspension will remain effective until the earlier of

the following--

(1) The Director lifts the suspension after determining that the

practitioner is no longer described in paragraph (b) of this section or

for any other reason; or

(2) The suspension is lifted by an Administrative Law Judge or the

Secretary of the Treasury in a proceeding referred to in paragraph (g)

of this section and instituted under Sec. 10.54.

(g) Proceeding instituted under Sec. 10.54. If the Director

suspends a practitioner under this Sec. 10.76, the practitioner may ask

the Director to issue a complaint under Sec. 10.54. The request must be

made in writing within 2 years from the date on which the

practitioner's suspension commences. The Director must issue a

complaint requested under this paragraph within 30 calendar days of

receiving the request.

Sec. 10.99 [Removed]

Par. 17. Subpart E of part 10 is amended by removing Sec. 10.99.

Jean E. Hanson,

General Counsel.

[FR Doc. 94-14901 Filed 6-15-94; 12:53 pm]

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