Tax Service Ethics: Codes, Circular 230, and Standards

Introduction

The tax service profession is both extremely important and susceptible to violations by service providers and clients alike. A number of codes, standards, and circular documents are available to minimize the possibility of such violations.

Code Sections 6694 and 6695: Preparer Violations and Penalties

Code Sections 6694 and 6695 identify possible violations and their accompanying penalties for tax service officials. These codes impose penalties for knowingly unethical conduct. According to Code Section 6694, a tax return preparer may not, for example, understate a taxpayer's liability. The code does, however, provide for reasonableness — if the understatement has a reasonable cause, the preparer is not considered in violation. On the other hand, if such an understatement results from wilful or reckless conduct, all penalties are upheld.

Wilful or reckless conduct is defined as the wilful understatement of liability, or the reckless or intentional disregard for regulations.

Code Section 6695 addresses more general transgressions by the tax preparer. A tax service provider could, for example, fail to provide the taxpayer with a copy of all relevant documents. If there is reasonable cause for such neglect and the preparer can demonstrate the absence of wilful neglect, he or she is not held liable. In many cases, the tax return preparer must sign the return as required by regulations. Failure to do so may result in the official being found in violation of that regulation. The preparer must also provide an identifying number for any claim for refund. Other obligations include retaining a copy or list of returns or claims for refunds, filing correct information, negotiating checks for returns, and diligently determining eligibility for earned income credit.

Should the tax preparer fail in any of the above obligations, he or she is held liable, except in cases where reasonable cause and the absence of wilful neglect can be proven.

Circular 230: Practice Before the IRS

Circular 230 consists of five subparts under the designation Part 10.0. It addresses various aspects of practicing officials affiliated with the Internal Revenue Service who represent taxpayers in that capacity. As such, the document concerns the rules, terms, and conditions under which an official may practice, as well as the disciplinary and prohibitive conditions that might prevent a practitioner from acting on behalf of the IRS. Subpart A addresses the rules under which a person may have or acquire the authority to practice before the IRS. Subpart B sets out the duties and restrictions connected to such practice. Subpart C concerns the sanctions connected to violations of these duties, while Subpart D explains the rules of disciplinary action for such violations. Finally, Subpart E highlights the general provisions of practice.

Specifically, IRS officials must ensure they are not in violation of any rules and regulations under United States tax law. If there are no restrictions arising from disbarment or disciplinary action against an official, the rules state that he or she may act before the IRS. This applies to relevant professions such as attorneys, accountants, actuaries, and qualified government employees. If conflicts of interest arise between IRS duties and the professional duties of the practitioner, the practitioner does not qualify to act on behalf of the IRS.

When acting on behalf of the IRS, the official is obliged to conduct his or her work as accurately and honestly as possible. Concomitantly, the practitioner must also maintain a sense of duty and honesty toward the client with respect to both service quality and fees. The client must not be misled regarding tax return accuracy, nor billed excessively for the official's services.

Conclusion

The rules and regulations implemented for tax service providers and other officials working with taxpayer clients are established to ensure the stability and ethical integrity of the profession. Taxpayers are vitally important, as they uphold the economic and financial health of their communities and their country. It is therefore the obligation of the tax service official to respect both the system and the client by maintaining a high level of ethics.