Key Takeaways
- Circular 230 governs "Ethics" (Administrative). Sanctions: Censure, Suspension, Disbarment, Monetary Penalty.
- IRC governs "Law" (Civil/Criminal). Penalties: Fines ($), Prison.
- OPR (Office of Professional Responsibility) enforces Circular 230.
- DOJ (Department of Justice) prosecutes tax crimes under the IRC.
- Willful failure to file is a CRIME (IRC). Negotiating a taxpayer refund check is a Circular 230 VIOLATION.
- Monetary penalty under Circular 230: Up to gross income derived from the misconduct.
Ethics vs. Law: Understanding the Dual System
Why This Matters for the Exam
Part 3 tests your ability to distinguish between administrative sanctions (imposed under Circular 230) and civil/criminal penalties (imposed under the Internal Revenue Code). These are two separate systems with different enforcers, different punishments, and different standards.
Expect at least 4-6 questions that test whether you can identify:
- Which authority governs a particular violation (Circular 230 or IRC).
- Who enforces the rule (OPR or IRS/DOJ).
- What punishments apply (sanctions or penalties).
The Two Enforcement Systems
| Factor | Circular 230 (Ethics) | Internal Revenue Code (Law) |
|---|---|---|
| Governs | Practitioner conduct | Tax obligations and crimes |
| Enforcer | OPR (Office of Professional Responsibility) | IRS (civil) / DOJ (criminal) |
| Standard | Preponderance of evidence | Beyond reasonable doubt (criminal) |
| Punishments | Censure, Suspension, Disbarment, Monetary | Fines, Prison, Preparer Penalties |
| Appeals | Administrative appeal to Treasury | Federal court system |
Administrative Sanctions (Circular 230)
Circular 230 is the IRS's code of ethics for practitioners. It sets standards for competence, diligence, conflicts of interest, fees, and client confidentiality. Violations are handled administratively by the Office of Professional Responsibility (OPR).
Types of Sanctions
| Sanction | Description | Duration/Amount |
|---|---|---|
| Censure | Public reprimand; practitioner remains in good standing | Permanent mark on record |
| Suspension | Temporary loss of practice rights | Typically 1-5 years |
| Disbarment | Permanent loss of practice rights | Minimum 5 years before petition to restore |
| Monetary Penalty | Financial penalty on practitioner or firm | Up to gross income derived from misconduct |
Key Point: Administrative sanctions do NOT include prison time. Only the DOJ can prosecute criminal cases.
Examples of Circular 230 Violations
- Conflict of Interest: Representing both spouses in a divorce audit without disclosure and consent.
- Negotiating a Refund Check: Endorsing or cashing a client's IRS refund check.
- Frivolous Tax Arguments: Advising a client that wages are not taxable.
- Contingent Fees for Original Returns: Charging a fee based on the refund amount for a standard 1040.
- Incompetence: Signing returns without understanding the underlying facts.
Civil and Criminal Penalties (IRC)
The Internal Revenue Code imposes civil penalties (fines) and criminal penalties (fines and prison) for various tax offenses. These are enforced by the IRS (civil) or the Department of Justice (criminal).
Key Civil Penalties (Preparer Focused)
| Violation | IRC Section | Penalty |
|---|---|---|
| Failure to Sign Return | §6695(b) | $60 per failure (max $30,000) |
| Failure to Furnish Copy | §6695(a) | $60 per failure (max $30,000) |
| Negotiating Refund Check | §6695(f) | $635 per check (no max) |
| Understatement (Unreasonable Position) | §6694(a) | Greater of $1,000 or 50% of fee |
| Understatement (Willful/Reckless) | §6694(b) | Greater of $5,000 or 75% of fee |
Key Criminal Penalties
| Violation | IRC Section | Penalty |
|---|---|---|
| Willful Failure to File | §7203 | Misdemeanor: Up to 1 year and $25,000 |
| Tax Evasion | §7201 | Felony: Up to 5 years and $250,000 |
| Filing False Return | §7206(1) | Felony: Up to 3 years and $250,000 |
| Aiding/Assisting False Return | §7206(2) | Felony: Up to 3 years and $250,000 |
| Fraud and False Statements | §7207 | Misdemeanor: Up to 1 year and $10,000 |
Critical Distinction: Civil penalties are fines. Criminal penalties can include prison time.
Overlap: When Both Systems Apply
Some violations trigger both administrative and legal consequences. For example:
Scenario: A preparer knowingly prepares a false return to obtain a larger refund.
- Circular 230: OPR can impose disbarment (practitioner loses license).
- IRC §7206(2): DOJ can prosecute for a felony (up to 3 years and $250,000).
- IRC §6694(b): IRS can impose the willful/reckless preparer penalty ($5,000+).
The practitioner faces sanctions from OPR AND penalties from IRS/DOJ simultaneously.
The OPR: Who They Are and What They Do
Office of Professional Responsibility (OPR): The IRS office responsible for enforcing Circular 230. OPR investigates complaints, conducts disciplinary proceedings, and imposes sanctions.
How to Report a Violation: Form 14157 (Complaint Against a Tax Return Preparer) or Form 14157-A (Tax Return Preparer Fraud or Misconduct Affidavit).
OPR Proceedings:
- Investigation: OPR investigates the complaint.
- Complaint: If warranted, OPR files a formal complaint.
- Hearing: The practitioner can contest the charges before an Administrative Law Judge (ALJ).
- Decision: ALJ issues a decision (censure, suspension, disbarment, or dismissal).
- Appeal: Either party can appeal to the Treasury Secretary or federal court.
Real-World Scenario
Scenario: EA John prepares a return for a client, claiming false business deductions. John knows the deductions are fake but includes them because the client promised a bonus.
- Circular 230 Violation: Yes (lack of due diligence, willful misconduct). OPR can disbar John.
- IRC §6694(b) Violation: Yes (willful understatement). IRS can impose a $5,000+ preparer penalty.
- IRC §7206(2) Violation: Yes (aiding false return). DOJ can prosecute for a felony.
John faces disbarment, fines, AND potential prison time.
On the Exam
Expect 4-6 questions on sanctions vs. penalties, typically:
- Identification Questions: "Which of the following is an administrative sanction under Circular 230?"
- Enforcer Questions: "Who enforces Circular 230?"
- Scenario Questions: "A preparer negotiates a client's refund check. What are the consequences?"
The key is to distinguish: OPR = Circular 230 = Sanctions (no prison). DOJ = IRC = Criminal Penalties (prison possible).
Which of the following is an administrative sanction imposed by the OPR under Circular 230?
Can the OPR impose a monetary penalty on a practitioner?
Which IRC section covers the criminal offense of tax evasion?