On December 26, 2024, the IRS published proposed regulations on Circular 230, which governs the conduct of practitioners who practice before the IRS. The New York State Bar Association Tax Section (NYSBA) has submitted extensive comments on these proposed regulations.

Knowledge of Error or Omission

The proposed regulations would require that a practitioner who represents a client in a matter before the IRS must promptly advise the client of the consequences of any noncompliance with, error in, or omission from any return, document, affidavit or other paper that a client submits or executes under the US tax laws, and should request the client’s agreement before disclosing such noncompliance, error or omission to the IRS. The NYSBA agrees that the new obligations are good practice, but notes that practitioners should also advise clients of the potential consequences of making such disclosure to the IRS and their rights and privileges related to such disclosure. The NYSBA warns that the proposed regulations may force practitioners to advise clients to disclose to the IRS even when clients may not otherwise be legally required to file an amended return to correct a prior error. The NYSBA also states that advising clients to disclose an error without further discussing their interests, rights and privileges could violate the practitioners’ duty of competence to their clients and may cause clients to inadvertently waive their Fifth Amendment rights or other evidentiary privileges. Further, the NYSBA recommends that the IRS define “error” in order to ensure that the proposed regulations are clearer and easier to administer.

Assessment of Certain Penalties

The proposed regulations would also treat the assessment of certain penalties against practitioner as per se incompetence or disreputable conduct that carries sanctions, including censuring, suspending or disbarring the practitioner from practicing before the IRS, without any review. These penalties include, but are not limited to, penalties for an understatement of tax due to negligence or disregard of rules, for aiding or assisting in preparation of any return that will result in an understatement of tax liability, and for promoting abusive tax shelters. These penalties may be unduly harsh, as they do not require a pre-assessment judicial review and only require a low burden of proof. Accordingly, the NYSBA argues that the imposition of these penalties should not automatically result in the determination that the practitioner has engaged in incompetent or disreputable conduct, and suggests that the Office of Professional Responsibility at the Department of Justice should instead review these penalty assessments based on the particular facts and circumstances.

Contingent Fees

Lastly, the proposed regulations would categorize contingent fee arrangements for preparation of a tax return or claim for refund as per se disreputable conduct. The NYSBA cautions that the outright prohibition is overly broad with respect to both practitioners and taxpayers and points out that contingent fee arrangements can benefit low-income taxpayers who are unable to make out-of-pocket payments. Moreover, according to the NYSBA, other provisions of the current Circular 230 rules already prohibit taxpayers from taking unreasonable positions on returns and practitioners from considering the likelihood of audit when advising on federal tax matters. Thus, NYSBA proposes that the IRS should instead require taxpayers to disclose any contingent fee arrangements on returns or claims for refund, allowing the IRS to identify and further scrutinize such arrangements.

We endorse the NYSBA’s well-reasoned recommendations to limit some of the proposed regulations’ blanket requirements and outright prohibitions.