Final Regs on Practice Before the IRS

 [JUN 15, 94]

 ACTION: Final regulations.

 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 15, 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 section 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 section 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 section 10.34(b). Under this standard, only violations of section 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 section 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 section 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 section 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 section 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 section 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 non- practitioners who engage in limited practice before the IRS under section 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 section 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 section 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 section 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 section 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 section 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.

Treasury Decision 8545

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 subtitle A, 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.

Sections 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:

SECTION 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:

SECTION 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 section 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:

SECTION 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 section 10.5(c) or section 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.

* * * * *

SECTION 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.

SECTION 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 section 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 section 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 section 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:

SECTION 10.26 PRACTICE BY FORMER GOVERNMENT EMPLOYEES, THEIR PARTNERS AND THEIR ASSOCIATES.

(a) * * *

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

* * * * *

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

SECTION 10.28 FEES.

(a) A practitioner may not charge an unconscionable fee for representing a client in a matter before the Internal Revenue Service.

(b) GENERALLY. 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:

SECTION 10.33 TAX SHELTER OPINIONS.

* * * * *

(c) * * *

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

* * * * *

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

SECTION 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 section 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:

SECTION 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:

SECTION 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:

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

Par. 14. In section 10.65, paragraph (a) is revised to read as follows:

SECTION 10.65 HEARINGS.

(a) IN GENERAL. An Administrative Law Judge will preside at the hearing on a complaint furnished under section 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 section 10.76(g) will be conducted de novo.

* * * * *

Par. 15. Section 10.76 is redesignated as paragraph (d) of section 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 section 10.76 is added to read as follows:

SECTION 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 section 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 section 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 section 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 section 10.54.

(g) PROCEEDING INSTITUTED UNDER SECTION 10.54. If the Director suspends a practitioner under this section 10.76, the practitioner may ask the Director to issue a complaint under section 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.

SECTION 10.99 [REMOVED].

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