The IRS issued final rules under Circular 230 governing practice before the IRS on September 26 (T.D. 9359). See this CCH description of the changes in the final rules.
The final regulations adopt the proposed change to the definition of practice before the Internal Revenue Service, so that it covers all matters connected with a presentation to the IRS or any of its officers or employees relating to a taxpayer's rights, privileges or liabilities under the tax laws administered by the IRS. Even though some commentators had stated that the provision of tax advice could not, in and of itself, constitute practice before the IRS, the Treasury and IRS have concluded that providing written advice is practice before the IRS subject to Circular 230 when it is provided by a practitioner, and attorneys or CPAs who provide written advice covered under sections 10.35 or 10.37 of Circular 230 are not required to file a Form 2848 to the IRS before rendering covered advice.
The regulations change the proposed rules regarding contingent fees set forth in section 10.27. The Preamble states that tax administrators "continue to believe that a rule restricting contingent fees for preparing tax returns supports voluntary compliance with the Federal tax laws by discouraging return positions that exploit the audit selection process. The rules permit contingent fees for services in connection with the IRS examination of (i) an original tax return or an amended return or claim for refund or credit, where the amended return or claim was filed within 120 days of receipt of a written notice of exam or of a written challenge to the original tax return or (ii) interest and penalty reviews, or (iii) services rendered in connection with a judicial proceeding arising under the Code.
The final regulations also adopt the proposed amendments on conflict of interest with some modifications. A practitioner has to obtain consent in writing from each client to represent conflicting interests. Unlike the ABA model rule 1.7, a verbal consent followed by a confirmatory letter from the practitioner is insufficient--the client must countersign the confirmatory letter within 30 days of the verbal agreement.
The final regulations do not conform the Circular 230 standards to the new Code standards for advice applicable to return positions under section 10.34. The "Small Business and Work Opportunity Tax Act of 2007" applied the tax return preparer penalties to all tax return preparers, increased the penalty and altered the standard to avoid imposition of penalties to a more likely than not (MLTN) standard. The IRS issued transitional relief under Notice 2007-54 for the section 6694 standards. Therefore these regulations reserve section 10.34 (a) and (e) and a notice of proposed rulemaking is concurrently issued to amend this part to reflect the tax law changes. The regulations clarify that "a practitioner may not advise a client to submit a document to the IRS that contains or omits information in a manner that demonstrates an intentional disregard of a rule or regulation unless the practitioner also advises the client to submit a document showing a good faith challenge to the rule or regulation."
The Notice of Proposed Rulemaking (REG-138637-07; RIN 1545-BH01) states that Treasury and IRS have concluded that section 10.34 of Circular 230 should conform to the civil penalty provisions in the Code, including the 2007 changes made to section 6694(a). Therefor, a practitioner may not sign a tax return without a reasonable belief that the treatment of each position "would more likely than not be sustained on its merits, or there is a reasonable basis for each position and each position is adequately disclosed." A similar standard applies to advice to a client to take a position on a return. The NPRM also modifies the definitions of "more likely than not" and "reasonable basis" to reflect the understanding of these termms under the section 6662 penalty regulations. Conforming wiht Notice 2007-54, these rules are proposed to apply when the regulations are finalized, but no earlier than January 1, 2008.