Employee benefits practitioners advised to review Circular 230 closely

Tax practitioners who violate the federal regulations governing practice before the IRS (Circular 230) can face disciplinary action from the Office of Professional Responsibility (OPR), civil penalties under the tax code, and even criminal prosecution, warned Karen Hawkins, director, OPR, during a February 13, 2013 IRS phone forum. This applies to all practitioners representing clients before the IRS, including those providing advice relating to employee benefit plans, Gabriel Minc, senior tax law specialist, IRS Employee Plans, said. Hawkins and Minc told practitioners that it was essential that they become knowledgeable about their duties and obligations under Circular 230.

“Practitioners are deemed to have knowledge of the regulations in that document,” Hawkins said. Intent or “malice aforethought” is not an element that OPR must prove in order to sanction a practitioner for a violation. Rather, sanctions are appropriate when OPR can prove to the administrative law judge by clear and convincing evidence that the practitioner knew he or she was supposed to do something and he or she did not do it.

Knowledge of error

Minc and Hawkins posed several hypothetical situations involving practitioner violations of Circular 230 in the employee benefits plan context. For example, a practitioner would be in violation of several provisions of Circular 230 if he or she recommended including undocumented workers in a plan’s census, knowing the employer does not intend to provide a benefit to such individuals, and nevertheless provided a written opinion regarding nondiscriminatory coverage testing under Code Sec. 410(b) based on the plan census.

This would be a violation of Circular 230 section 10.21, “Knowledge of client’s omission,” and section 10.22, “Diligence as to accuracy,” according to Hawkins. Where a practitioner has knowledge of his or her client’s noncompliance, error or omission in any submission, under section 10.21, he or she must promptly advise the client of that noncompliance and the consequences.

A practitioner cannot turn a blind eye to certain aspects of the law, Minc stated. He or she must exercise due diligence in preparing all documents relating to IRS matters. Moreover, Hawkins added, there might be another violation under section 10.34(b), “Standards with respect to tax returns and documents, affidavits and other papers.”

“A lot of the more recent OPR cases boil down…most often to the due diligence provisions of sections 10.22, 10.34, 10.37, and 10.61, all of which are variations on expectations of due diligence vis-à-vis the practitioner and its clients or the practitioner and the IRS,” Hawkins said.

Sanctions and injunctions

When OPR institutes disciplinary action against a practitioner, it can come in several forms. These include a private reprimand, public censure, suspension or permanent disbarment or a monetary sanction.

The IRS can also take action, by imposing injunctions or assessing heavy civil penalties. For example, there is a penalty under Code Sec. 6694 on tax return preparers whose conduct results in understatements of tax liability. This penalty could be assessed if a practitioner relied unreasonably on an undisclosed position for which there is no substantial authority, or disclosed a position for which there is no reasonable basis.

The district courts also have jurisdiction in many cases under Code Sec. 7402 to impose civil injunctions on preparers or certain transactions. “The number of injunctions that the Department of Justice is bringing with respect to all sorts of abuses has jumped exponentially,” Hawkins said.

Practitioners may even find themselves subject to criminal prosecution if, for example, they knowingly prepare a written opinion in support of criminal conduct. Minc stated that, generally, no one asks a practitioner how to commit a crime, but practitioners often fall into a scheme inadvertently. An innocent and well-structured transaction can sometimes embroil a practitioner in criminal conduct if they are not diligent and careful, he said.

Source: IRS phone forum, February 13, 2013.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

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