Key Takeaways
- Circular 230 establishes rules of conduct for practitioners before the IRS.
- Key duties: competence, diligence, prompt return of client records.
- Must advise clients of errors/omissions discovered on prior returns.
- Contingent fees are generally prohibited for original/amended returns.
- Due diligence includes technological competency.
- Covered in detail in Chapter 25.
Circular 230 Overview
Why This Matters for the Exam
Circular 230 is the rulebook for practitioner conduct. This section provides an overview—Chapter 25 covers these topics in detail. The exam heavily tests Circular 230 requirements.
Expect at least 3-4 questions on Circular 230 basics.
What Is Circular 230?
Treasury Department Circular 230 (31 CFR Part 10) is the federal regulation governing practice before the IRS.
| Circular 230 Component | Description |
|---|---|
| Subpart A | Rules for practice |
| Subpart B | Duties and restrictions |
| Subpart C | Sanctions |
| Subpart D | OPR proceedings |
| Subpart E | General provisions |
Key Duties Under Circular 230
| Duty | Description |
|---|---|
| Competence | Must have knowledge and skill for the matter |
| Due diligence | Exercise reasonable care in all matters |
| Prompt return of records | Return client records upon request |
| Advise of errors | Inform client of errors on prior returns |
| Avoid conflicts | Manage conflicts of interest properly |
Key Prohibitions Under Circular 230
| Prohibition | Description |
|---|---|
| Contingent fees for returns | Cannot charge based on refund amount |
| Negotiating client refund checks | Cannot cash client's refund |
| False/misleading statements | Cannot lie to IRS or clients |
| Frivolous positions | Cannot take positions with no legal basis |
| Willful tax noncompliance | Must file and pay own taxes |
Contingent Fees: The Key Rule
| Contingent Fees | Allowed? |
|---|---|
| Original returns | ❌ No |
| Amended returns | ❌ No |
| Refund claims | ❌ No (with limited exceptions) |
| Audit representation | ✅ Yes |
| Appeals representation | ✅ Yes |
| Court proceedings | ✅ Yes |
Due Diligence Components
| Component | Requirement |
|---|---|
| Accuracy | Take reasonable steps to ensure correctness |
| Inquiry | Ask questions when things seem wrong |
| Reliance | Can rely on client info in good faith |
| Technology | Maintain competency with technology |
Client Error Discovery
When you discover an error on a client's prior return:
| Required Action | Not Required |
|---|---|
| Advise client of the error | Notify the IRS |
| Explain the consequences | File amended return without consent |
| Explain how to correct | Terminate engagement immediately |
Covered in Detail: Chapter 25
This overview introduces Circular 230. Chapter 25 covers:
- Due diligence requirements (Section 10.22)
- Knowledge of client's omission (Section 10.21)
- Conflict of interest rules (Section 10.29)
- Fee requirements (Section 10.27)
- Advertising and solicitation (Section 10.30)
- Tax return position standards (Section 10.34)
- Written advice standards (Section 10.37)
- Sanctions and penalties (Sections 10.50-10.53)
Real-World Scenario
Scenario: A client asks you to prepare their return for "$100 plus 10% of any refund over $1,000."
- Allowed? No—this is a contingent fee for an original return, which is prohibited.
- Alternative: Charge a flat fee or hourly rate.
- If you charge contingent fee: Disreputable conduct under Circular 230.
On the Exam
Expect 3-4 questions on Circular 230 basics, typically:
- Prohibition Questions: "Which fee arrangement is prohibited?"
- Duty Questions: "What must a practitioner do upon discovering an error?"
- Scope Questions: "What does Circular 230 govern?"
The key is to remember: Circular 230 = practitioner rules. No contingent fees for returns. Advise client of errors. Due diligence required.
Which of the following is prohibited under Circular 230?
What must a practitioner do upon discovering an error on a client's prior return?
For which activity ARE contingent fees allowed?