Regulations Governing Practice Before the Internal Revenue Service, 6421-6437 [06-1106]

Agencies

• Office of the Secretary
• DEPARTMENT OF THE TREASURY
• Department of Treasury

[Federal Register Volume 71, Number 26 (Wednesday, February 8, 2006)]
[Proposed Rules]
[Pages 6421-6437]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-1106]


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DEPARTMENT OF THE TREASURY

Office of the Secretary

31 CFR Part 10

[REG-122380-02]
RIN 1545-AY05


Regulations Governing Practice Before the Internal Revenue 
Service

AGENCY: Office of the Secretary, Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document proposes modifications of the regulations 
governing practice before the IRS (Circular 230). These proposed 
regulations affect individuals who practice before the IRS. The 
proposed amendments modify the general standards of practice before the 
IRS. This document also provides notice of a public hearing on the 
proposed regulations.

DATES: Written or electronically generated comments must be received by 
April 10, 2006. Outlines of topics to be discussed at the public 
hearing scheduled for Wednesday, June 21, 2006 at 10 a.m., in the 
auditorium of the Internal Revenue Service building at 1111 
Constitution Avenue, NW., Washington, DC 20224, must be received by 
April 10, 2006.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-122380-02), room 
5203, Internal Revenue Service, PO Box

[[Page 6422]]

7604, Ben Franklin Station, Washington, DC 20044. Submissions may be 
hand delivered Monday through Friday between the hours of 8 a.m. and 4 
p.m. to: CC:PA:LPD:PR (REG-122380-02), Courier's Desk, Internal Revenue 
Service, 1111 Constitution Avenue, NW., Washington, DC. Alternatively, 
taxpayers may submit comments electronically via the IRS Internet site 
at https://www.irs.gov/regs or via the Federal eRulemaking Portal at 
https://www.regulations.gov (IRS and REG-122380-02). The public hearing 
will be held in the auditorium, Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning issues for comment, Brinton 
T. Warren at (202) 622-7800; concerning submissions of comments and the 
public hearing, Robin Jones at (202) 622-7180; (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 330 of title 31 of the United States Code authorizes the 
Secretary of the Treasury to regulate the practice of representatives 
before the Treasury Department. The Secretary is authorized, after 
notice and an opportunity for a proceeding, to censure, suspend or 
disbar from practice before the Treasury Department those 
representatives who are incompetent, disreputable, or who violate 
regulations prescribed under section 330 of title 31. The Secretary 
also is authorized to impose a monetary penalty against these 
individuals. Pursuant to section 330 of title 31, the Secretary has 
published the regulations in Circular 230 (31 CFR part 10). These 
regulations authorize the Director of the Office of Professional 
Responsibility to act upon applications for enrollment to practice 
before the IRS, to make inquiries with respect to matters under the 
Office of Professional Responsibility's jurisdiction, to institute 
proceedings to impose a monetary penalty or to censure, suspend or 
disbar a practitioner from practice before the IRS, to institute 
proceedings to disqualify appraisers, and to perform other duties 
necessary to carry out these functions.
    Circular 230 has been amended periodically. For example, on June 
20, 1994 (59 FR 31523), the regulations were amended to provide 
standards for tax return preparation by practitioners, to limit the use 
of contingent fees by practitioners in tax return or refund claim 
preparation and to provide expedited rules for suspension from practice 
before the IRS.
    On December 19, 2002 (67 FR 77724), the Treasury Department and the 
IRS issued an advance notice of proposed rulemaking (2002 ANPRM) 
requesting comments on amendments to the regulations relating to the 
Office of Professional Responsibility, unenrolled practice, eligibility 
for enrollment, sanctions and disciplinary proceedings, contingent fees 
and confidentiality agreements. This document proposes amendments 
reflecting the Treasury Department and the IRS consideration of the 
comments received in response to the 2002 ANPRM and reflecting 
amendments to section 330 of title 31 made by the American Jobs 
Creation Act of 2004, Public Law 108-357 (118 Stat. 1418) (the Jobs 
Act). The proposed regulations include conforming amendments to reflect 
the final regulations relating to best practices, covered opinions and 
other written advice published as TD 9165 on December 20, 2004 (69 FR 
75839) and as TD 9201 on May 19, 2005 (70 FR 28824), but do not 
otherwise address those final regulations.

Explanation of Provisions

    Over 60 written comments were received in response to the 2002 
ANPRM. All comments were considered and are available for public 
inspection upon request. A number of these comments are summarized 
below. Comments relating to matters about which the Treasury Department 
and the IRS declined to propose changes are not generally discussed. 
The scope of these regulations is limited to practice before the IRS. 
These regulations do not alter or supplant ethical standards that might 
otherwise be applicable to practitioners.

Director of the Office of Professional Responsibility

    In the 2002 ANPRM, the Treasury Department and the IRS solicited 
comments relating to the name of the office and appointment of the 
Director. In January of 2003, the Office of Professional Responsibility 
was established and replaced the office of the Director of Practice. 
This change, which was supported by many commentators, reflects the 
office's commitment to ensuring the integrity of the tax system and 
recognition of tax professionals as an integral part of effective tax 
administration. The proposed regulations change references to the 
Office of the Director of Practice to the Office of Professional 
Responsibility. The Director of the Office of Professional 
Responsibility is appointed by the Secretary, or his or her delegate. 
The text of the regulations also will be changed to eliminate 
references to the Office of the Secretary to reflect the prior transfer 
of the Office of Professional Responsibility to the IRS. See 47 FR 
29918 (July 9, 1982).

Definitions--Practice Before the Internal Revenue Service

    On October 22, 2004, the President signed the Jobs Act. Section 
822(b) of the Act amends section 330 of title 31 of the United States 
Code by adding a provision that recognizes the Secretary's authority to 
impose standards for written advice rendered with respect to any 
entity, transaction plan or arrangement, or other plan or arrangement 
having a potential for tax avoidance or evasion. Accordingly, Sec.  
10.2(d) of the proposed regulations is modified to clarify that the 
rendering of this written advice is practice before the IRS subject to 
Circular 230 when it is provided by a practitioner.

Who May Practice

    The Advisory Committee for Tax Exempt/Governmental Entities 
recently suggested that individuals who provide technical services to 
plan sponsors to maintain the tax qualified status of their retirement 
plans (retirement plan administrators) should be authorized to practice 
provided they demonstrate the competency to do so. The Treasury 
Department and the IRS are considering this proposal and invite public 
comments even though text is not proposed in this notice of proposed 
rulemaking. The Advisory Committee's proposal suggests limiting the 
practice by this group of individuals to representation relating to 
filing applications for determination letters, Forms 5500, employee 
plan audits, and negotiating with the IRS with respect to voluntary 
compliance matters.
    In addition, the Advisory Committee proposes procedures for 
enrollment similar to the current Enrolled Agent program (see 
Sec. Sec.  10.4-10.6), including an examination to determine 
competency, a renewal process and continuing professional education 
requirements. For more information relating to practice by retirement 
plan administrators, see Establishing the Enrolled Retirement Plan 
Agent Under Circular 230, Advisory Committee for Tax Exempt/
Governmental Entities (June 2005). The Treasury Department and the IRS 
also invite comments on proposals relating to limited practice by other 
individuals that the public believes competent to represent taxpayers 
before the IRS, and whether the Director of the Office of Professional 
Responsibility should have the authority to regulate these individuals 
through IRS notice procedures.

[[Page 6423]]

Enrollment Procedures

    Section 10.5 of the regulations sets forth the applicable 
procedures relating to the enrollment of an enrolled agent. The 
proposed regulations provide that applicants for enrollment must 
utilize forms and comply with procedures established and published by 
the Office of Professional Responsibility. The proposed regulations 
permit the Office of Professional Responsibility to change the 
``Application for Enrollment To Practice Before the IRS'' and other 
requirements pertaining to the procedures to apply for enrollment.
    Section 10.6 of the regulations sets forth the procedures for 
renewal of enrollment to practice before the IRS. Under the current 
regulations, the Director of the Office of Professional Responsibility 
must maintain a list of enrolled agents, including those who are 
active, inactive and sanctioned. This requirement is combined with the 
roster requirements of Sec.  10.90 in the proposed regulations to 
clarify that all rosters, including those related to enrolled agents, 
will be maintained and made available for public inspection in the time 
and manner prescribed by the Secretary.
    The proposed regulations clarify the requirements to maintain 
active enrollment to practice before the IRS. An enrolled agent must 
apply for renewal of enrollment between November 1 and January 31 of 
the relevant period described in Sec.  10.6(d). The effective date of 
renewal is the first day of the third month following the close of the 
period for renewal, i.e., April 1. An enrolled agent must complete 72 
hours of continuing professional education during each enrollment 
cycle, with a minimum of 16 hours (including two hours of ethics) 
during each enrollment year. The enrollment year is each calendar year, 
i.e., January 1 to December 31, in the enrollment cycle. The enrollment 
cycle is the three successive enrollment years preceding the April 1 
effective date of renewal. Thus, an enrolled agent whose social 
security number ends with 0 must renew enrollment between November 1, 
2006, and January 31, 2007. The enrolled agent must have completed 72 
hours of continuing professional education between January 1, 2004, and 
December 31, 2006, with at least 16 hours (including two hours of 
ethics) during each calendar year. Similarly, the proposed regulations 
require sponsors of continuing education courses to renew their status 
as qualified sponsors every three years.
    The proposed regulations require that a qualifying course enhance 
professional knowledge in Federal taxation or Federal tax related 
matters and be consistent with the Internal Revenue Code and effective 
tax administration.

Limited Practice Before the IRS

    In the 2002 ANPRM, the Treasury Department and IRS solicited 
comments relating to limited practice by unenrolled return preparers. 
Most commentators opposed expanding the authority of the Director of 
the Office of Professional Responsibility to include the authority to 
modify the scope of limited practice by unenrolled preparers without 
further amendment to Circular 230. Most commentators agreed that the 
Director of the Office of Professional Responsibility should not be 
given the authority to determine the eligibility for limited practice 
by unenrolled preparers.
    Section 10.7(c)(1)(viii) currently authorizes an individual, who is 
not otherwise a practitioner, to represent a taxpayer during an 
examination if that individual prepared the return for the taxable 
period under examination. The proposed regulations revoke this 
authorization because it is inconsistent with the requirement that all 
individuals permitted to practice before the IRS demonstrate their 
qualifications to advise and assist persons in presenting their cases 
to the IRS.
    Under the proposed regulations, an unenrolled return preparer may 
not represent a taxpayer unless otherwise authorized by Sec.  
10.7(c)(1)(i)-(vii). These individuals no longer may negotiate with the 
IRS on behalf of a taxpayer during an examination and no longer may 
bind a taxpayer to a position during an examination. For example, an 
unenrolled return preparer may not sign a Form 872, ``Consent To Extend 
Time To Assess Tax,'' with regard to the tax return prepared for that 
individual. In addition, an unenrolled return preparer may not agree to 
any adjustment to the taxpayer's reported tax liability.
    Individuals who are not eligible to practice and who prepare an 
original return may assist in the exchange of information with the IRS 
regarding a taxpayer's return if the taxpayer has specifically 
authorized the preparer to receive confidential tax information from 
the IRS. Revocation of the authority for limited practice will not 
preclude a return preparer from assisting a taxpayer in responding to 
questions regarding the taxpayer's return. The proposed regulations do 
not preclude an unenrolled return preparer from accompanying a taxpayer 
to an examination, provided the taxpayer authorizes the IRS to disclose 
confidential tax information to the unenrolled return preparer.

Practice by Former Government Employees, Their Partners and Their 
Associates

    Section 10.25 sets forth rules governing practice by former 
government employees, their business partners and their associates. 
These rules were first promulgated in 1976 to address discrepancies 
between the Government-wide post-employment statute, 18 U.S.C. 207, its 
implementing regulations and the codes of professional responsibility 
(e.g., ABA Model Rules of Professional Conduct, AICPA Code of 
Professional Conduct and individual state rules of professional 
conduct) applicable to practitioners who appear before the IRS.
    Section 10.25 of the proposed regulations has been conformed with 
the terminology used in 18 U.S.C. 207, and 5 CFR parts 2637 and 2641 
(or superseding regulations), by eliminating the definitions of 
official responsibility in Sec.  10.25(a)(5), participate or 
participation in Sec.  10.25(a)(6), and transaction in Sec.  
10.25(a)(8) and substituting the term particular matter involving 
specific parties in Sec.  10.25(a)(4) (formerly Sec.  10.25(a)(8)).
    The proposed regulations also eliminate the prohibition in Sec.  
10.25(b)(3) against assisting in the representation in matters in which 
the former employee had official responsibility during the former 
employee's last year of service. Existing statutes, regulations and 
codes of professional responsibility are adequate to protect against 
conflicts of interest and protect the integrity of the tax system, 
including the prohibition on representation in 18 U.S.C. 207.
    Section 10.25(b)(2) of the proposed regulations continues to 
prohibit former employees who personally and substantially participated 
in a matter while in Government service from representing or assisting 
in the representation in the same matter while in private practice. In 
these matters, the former employee's firm may represent the taxpayer in 
the matter if the former employee is isolated from the matter and 
isolation statements are filed with the Office of Professional 
Responsibility in accordance with Sec.  10.25(c).

Contingent Fees

    In the 2002 ANPRM, the Treasury Department and the IRS solicited 
comments relating to contingent fees. Most commentators opposed further 
limitations on contingent fees under Sec.  10.27. The Treasury 
Department and the IRS continue to believe that a rule

[[Page 6424]]

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. Additionally, a 
broader prohibition against contingent fee arrangements is appropriate 
in light of concerns regarding attorney and auditor independence. The 
recent shift toward even greater independence, including rules adopted 
by the Securities and Exchange Commission (SEC) and the Public Company 
Accounting Oversight Board, also support expanding the prohibition on 
contingent fees with respect to Federal tax matters.
    Under section 10.27 of the proposed regulations, a practitioner 
generally is precluded from charging a contingent fee for services 
rendered in connection with any matter before the Service, including 
the preparation or filing of a tax return, amended tax return or claim 
for refund or credit. A practitioner may, however, charge a contingent 
fee for services rendered in connection with the IRS's examination of, 
or challenge to, an original tax return. Practitioners also may charge 
a contingent fee for services rendered in connection with the IRS's 
examination of, or challenge to, an amended return or claim for refund 
or credit filed prior to the taxpayer receiving notice of the 
examination of, or challenge to the original tax return. A written 
notice of examination would include the written notice furnished to 
taxpayers subject to the Coordinated Industry Case procedures 
requesting a statement showing additional tax due (or an adequate 
disclosure with respect to an item or position) to avoid the imposition 
of certain accuracy--related penalties if no other written notice of 
examination is received. Contingent fees also may be charged for 
services rendered in connection with a judicial proceeding arising 
under the Federal tax laws.

Conflicting Interests

    Section 10.29 of the regulations prohibits a practitioner from 
representing conflicting interests before the IRS, except with the 
express consent of all directly interested parties after full 
disclosure. Section 10.29 is generally consistent with Rule 1.7 of the 
ABA Model Rules of Professional Conduct (Model Rules), which was 
amended just prior to the July 26, 2002 amendment to the regulations.
    Section 10.29 of the proposed regulations clarifies that a 
practitioner is required to obtain consents in writing from each 
affected client in order to represent the conflicting interests. The 
written consent may vary in form. The practitioner may prepare a letter 
to the client outlining the conflict, as well as the possible 
implications of the conflict, and submit the letter to the client for 
the client to countersign. Unlike the Model Rules, which permit 
affected clients to provide informed consent orally if the consent is 
contemporaneously documented by the practitioner in writing, an oral 
consent followed by a confirmation letter authored by the practitioner 
will not satisfy Sec.  10.29 unless the confirmation letter is 
countersigned by the client.

Standards With Respect to Tax Returns and Documents, Affidavits and 
Other Papers

    Section 10.34 sets forth standards applicable to advice with 
respect to tax return positions and applicable to preparing or signing 
returns. Section 10.34 of the proposed regulations sets forth standards 
applicable to practitioners who advise clients with respect to 
documents, affidavits and other papers submitted to the IRS. The 
proposed regulations also provide separate standards for papers that 
take a position with respect to Federal tax matters and standards for 
advising a client to file papers involving procedural or factual 
matters.
    Under the proposed regulations, a practitioner may not advise a 
client to take a position on a submission to the IRS unless the 
position is not frivolous. A practitioner also may not advise a client 
to submit a document to the IRS that is meant primarily for delay; is 
frivolous or groundless; or contains or omits information in a manner 
that demonstrates an intentional disregard of a rule or regulation. 
With regard to factual matters, a practitioner may rely upon 
information furnished by the taxpayer with respect to tax returns and 
documents, affidavits and other papers, unless the information appears 
to be incorrect, inconsistent with an important fact or another factual 
assumption, or incomplete. These standards would supplement the 
existing requirement in Sec.  10.22 that practitioners exercise due 
diligence in preparing, or assisting in the preparation of, tax returns 
and other documents relating to IRS matters.

Sanctions

    In accordance with section 822(a) of the Jobs Act, proposed Sec.  
10.50 authorizes the Secretary to impose a monetary penalty against a 
practitioner if the practitioner is shown to be incompetent or 
disreputable, fails to comply with any regulation in part 10, or with 
intent to defraud, willfully and knowingly misleads or threatens a 
client or prospective client.
    Under the proposed regulations, the monetary penalty may be imposed 
in addition to, or in lieu of, any other sanction. If a practitioner 
acts on behalf of the practitioner's employer, firm or other entity and 
the employer, firm or other entity knew or should have known of the 
practitioner's conduct, the Secretary may impose a monetary penalty on 
the employer, firm or other entity. The Treasury Department and the IRS 
will issue procedures relating to the imposition of the monetary 
penalty through separate published guidance.
    The proposed regulations also contain conforming amendments to 
other provisions relating to sanctions.

Incompetence and Disreputable Conduct

    In the 2002 ANPRM, the Treasury Department and the IRS solicited 
comments relating to whether the definition of disreputable conduct 
should include the willful failure of a preparer who is a practitioner 
to sign a return. Many commentators supported expanding the definition 
of disreputable conduct to specifically include the willful failure of 
a practitioner who is a tax return preparer to sign a return.
    Section 10.51 of the regulations defines disreputable conduct for 
which a practitioner may be sanctioned. Section 10.51 of the proposed 
regulations modifies the definition of disreputable conduct to include 
willful failure to sign a tax return prepared by the practitioner. The 
definition of disreputable conduct also includes the disclosure or use 
of returns or return information by practitioners in a manner not 
authorized by the Code, a court of competent jurisdiction, or an 
administrative law judge in a proceeding instituted under Sec.  10.60.

Supplemental Charges

    Section 10.65 provides that the Director of the Office of 
Professional Responsibility may file supplemental charges against a 
practitioner or appraiser. Section 10.65 of the proposed regulations 
provides that the Director may file supplemental charges against a 
practitioner by amending the complaint to reflect the additional 
charges if the practitioner is given notice and an opportunity to 
prepare a defense to the supplemental charges.

Hearings and Discovery

    In the 2002 ANPRM, the Treasury Department and the IRS solicited 
comments relating to expanding discovery and providing greater 
procedural protections in disciplinary

[[Page 6425]]

proceedings. Most commentators supported expanding the use of discovery 
in disciplinary proceedings. Most commentators also supported providing 
further procedural protections such as a guarantee of the right to 
cross-examine witnesses.
    These proposed regulations redesignate the provisions relating to 
hearings, evidence and depositions and discovery. Proposed Sec.  10.71 
addresses discovery, proposed Sec.  10.72 addresses hearings and 
proposed Sec.  10.73 addresses evidence.
1. Motions and Requests
    Section 10.68 of the regulations sets forth procedures for filing a 
motion or request with the Administrative Law Judge presiding over a 
disciplinary proceeding. The regulations provide that a party is not 
presumed to oppose a motion for decision by default for failure to file 
a timely answer or for failure to prosecute. The proposed regulations 
amend Sec.  10.68 to expressly allow a party to file a motion for 
summary adjudication if there is no genuine issue as to any material 
fact.
2. Discovery in Disciplinary Proceedings
    Section 10.71 of the proposed regulations clarifies the discovery 
methods available to the parties in preparation for a disciplinary 
hearing. The Administrative Law Judge may authorize discovery if the 
party seeking discovery establishes that it is necessary and relevant. 
Discovery methods include depositions upon oral examination and 
requests for admission. The Administrative Law Judge should weigh 
factors such as the ultimate relevancy and anticipated costs to 
determine the least burdensome method in ordering discovery.
    Discovery is not permitted if the information is privileged or the 
information relates to mental impressions, conclusions or legal 
theories of any attorney, party, or other representative of a party 
prepared in anticipation of a proceeding.
    To address practitioners' due process rights without creating a 
formal court proceeding, the proposed regulations require the Director 
of the Office of Professional Responsibility to turn over the 
documentation used in support of a complaint filed with the 
Administrative Law Judge. Under Sec.  10.63(d) of the proposed 
regulations, this information must be served on the practitioner or 
appraiser, or the representative, within 10 days of serving the 
complaint. This requirement, however, is only an initial disclosure of 
the evidence of record at the time of the complaint. Supplemental 
evidence developed during preparation for the hearing is not prohibited 
from being introduced.
    Under Sec.  10.62(c) of the proposed regulations, the Director of 
the Office of Professional Responsibility must notify the practitioner 
or appraiser of the time for answering the complaint, which cannot be 
less than 30 days. When determining the time for answering the 
complaint, the Director will take into account the amount of the 
evidence in support of the complaint and the complexity of the charges 
to allow the practitioner or appraiser time to prepare an adequate 
answer in defense to the complaint.
3. Hearings
    Section 10.72 of the regulations sets forth the procedures for an 
administrative hearing pursuant to Circular 230. The Administrative Law 
Judge should conduct the hearing within 180 days of the time for filing 
of the answer, absent circumstances requiring that, in the interest of 
justice, the hearing be held at a later date. The proposed regulations 
amend Sec.  10.72 to allow each party to a disciplinary proceeding, as 
may be required for a full and true disclosure of the facts, to 
question, in the presence of the Administrative Law Judge, a person 
whose statement is offered by the opposing party. The proposed 
regulations incorporate the requirements of the Administrative 
Procedure Act (5 U.S.C. 556(d)). The proposed regulations do not 
prohibit a party from presenting evidence contained in a deposition if 
all parties to the proceeding were given an opportunity for full 
examination and cross-examination of the witness under Sec.  10.71. The 
proposed regulations generally require pre-hearing memoranda. The 
Administrative Law Judge may determine that pre-hearing memoranda are 
not necessary or, by order, require other information with respect to 
the disciplinary proceeding.
4. Publicity of Disciplinary Proceedings
    Currently, disciplinary proceedings brought pursuant to Circular 
230 are closed to the public unless the Administrative Law Judge grants 
a practitioner's request that the proceedings be public. The proposed 
regulations amend Sec.  10.72(d) to provide that all hearings, reports, 
evidence and decisions in a disciplinary proceeding be available for 
public inspection. The proposed regulations mandate procedures to 
protect the identities of any third party taxpayers contained in 
returns and return information obtained pursuant to section 6103(l)(4) 
for use in an action or proceeding under subpart D. The procedures to 
protect the identities of third party taxpayers also must be observed 
with respect to discovery matters.
    The Administrative Law Judge must issue a protective order in the 
event that redactions of taxpayer identifiers render documents 
unintelligible or may still permit indirect identification of the 
taxpayer. The Administrative Law Judge may, for good cause, order 
proceedings closed to the public or may order nondisclosure of 
materials associated with the proceeding, such as in the case in which 
disclosure is prohibited by 18 U.S.C. 1905 or section 6103. The 
Administrative Law Judge also may order limited access to materials 
which are confidential or sensitive in some other way.
    The proposed regulations provide that, at the conclusion of a 
proceeding, the Secretary, or his or her delegate, shall ensure that 
all returns and return information, including the names, addresses or 
other identifying details of third party taxpayers, are redacted and 
replaced with the code assigned to the corresponding taxpayer in all 
documents prior to such documents being made available for further 
public inspection.

Decision of Administrative Law Judge

    Section 10.76 of the regulations sets forth the requirements for 
the decision of the Administrative Law Judge. The proposed regulations 
amend Sec.  10.76 to provide that the Administrative Law Judge should 
render a decision within 180 days after the conclusion of the hearing. 
If a party files a motion for summary adjudication, the Administrative 
Law Judge should rule on the motion within 60 days after a written 
response to the motion for summary adjudication or, if no written 
response is filed, 90 days after the motion for summary adjudication is 
filed.
    The proposed regulations provide that the decision of the 
Administrative Law Judge will become the final decision of the agency 
45 days after the date the decision is served on the parties. The 
Secretary may, however, either in response to a petition for review 
filed by a party or on the Secretary's own initiative, intervene and 
order review of the Administrative Law Judge's decision before the 
decision becomes final. The petition for review must be filed within 30 
days of the date the decision is served on the parties.
    If the Secretary grants a petition or otherwise orders review, the 
Secretary must notify the parties within 45 days from the date the 
Administrative Law Judge's decision is served on the parties.

[[Page 6426]]

The notice must state that (1) the decision is under review, (2) no 
final agency decision has been made, (3) any action of the 
Administrative Law Judge is inoperative, and (4) a final decision of 
the agency made by the Secretary is required before judicial review can 
be obtained. The Secretary will not review an interlocutory order or 
ruling, e.g., a discovery request ruling, of the Administrative Law 
Judge prior to the rendering of a decision by the Administrative Law 
Judge that would dispose of the proceeding.

Expedited Suspension

    Section 10.82 of the regulations authorizes the Director of the 
Office of Professional Responsibility to suspend immediately a 
practitioner who has engaged in certain conduct. The proposed 
regulations extend the expedited process to practitioners who are in 
egregious noncompliance with their tax obligations or have been 
adjudicated as having advanced arguments, relating to the 
practitioner's own tax obligations or the obligations of the client, 
primarily for delay.
    The Treasury Department and the IRS are aware of a number of 
practitioners who are not in compliance with their own Federal tax 
obligations, but continue to represent taxpayers, and of situations in 
which practitioners advance frivolous or obstructionist positions 
relating to their own tax obligations and the obligations of their 
clients. Under the proposed regulations, a practitioner who is not 
compliant with the practitioner's own Federal tax obligations may be 
subject to expedited disciplinary proceedings. In addition, a 
practitioner who has been found by a court of competent jurisdiction to 
have advanced frivolous arguments or advanced arguments primarily for 
delay, either relating to a taxpayer's tax liability or relating to the 
practitioner's own tax liability, will be subject to an expedited 
disciplinary proceeding.

Proposed Effective Date

    These regulations are proposed to apply on the date that final 
regulations are published in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It is hereby 
certified that these regulations will not have a significant economic 
impact on a substantial number of small entities. The general 
requirements of these regulations are substantially the same as the 
requirements of the regulations that these regulations replace. Persons 
authorized to practice have long been required to comply with certain 
standards of conduct when practicing before the Internal Revenue 
Service. These regulations do not alter the basic nature of the 
obligations and responsibilities of these practitioners. These 
regulations clarify those obligations in response to public comments, 
replace certain terminology to conform with the terminology used in 18 
U.S.C. 207, and 5 CFR parts 2637 and 2641 (or superseding regulations), 
make modifications to reflect amendments to section 330 of title 31 
made by the Jobs Act, and make other modifications to reflect concerns 
about greater independence, transparency and due process. Therefore, a 
regulatory flexibility analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Internal Revenue Code, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small businesses.

Comments and Public Hearing

    Before the regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) and electronic comments that are submitted timely 
to the IRS. The Treasury Department and IRS specifically request 
comments on the clarity of the proposed regulations and how they can be 
made easier to understand. All comments will be available for public 
inspection and copying.
    The public hearing is scheduled for June 21, 2006, at 10 a.m., and 
will be held in the auditorium of the Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. 
All visitors must present photo identification to enter the building. 
Because of access restrictions, visitors will not be admitted beyond 
the immediate entrance area more than 30 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend the hearing, see the FOR FURTHER INFORMATION 
CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments by April 10, 2006 and an outline of the topics to 
be discussed and the time to be devoted to each topic by April 10, 
2006. A period of 10 minutes will be allocated to each person for 
making comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal authors of these regulations are Brinton T. Warren 
and Heather L. Dostaler of the Office of Associate Chief Counsel 
(Procedure and Administration), Administrative Provisions and Judicial 
Practice Division.

List of Subjects in 31 CFR Part 10

    Accountants, Administrative practice and procedure, Lawyers, 
Reporting and recordkeeping requirements, Taxes.
    Accordingly, 31 CFR part 10 is proposed to be amended to read as 
follows:

Proposed Amendments to the Regulations

PART 10--PRACTICE BEFORE THE INTERNAL REVENUE SERVICE

    Paragraph 1. The authority citation for 31 CFR part 10 is revised 
to read as follows:

    Authority: 5 U.S.C. 301, 500, 551-559; 31 U.S.C. 321; 31 U.S.C. 
330, as amended by Pub. L. 108-357, Sec. 822.

Part 10 [Nomenclature change]

    Par. 2. In part 10, remove the language ``Director of Practice'' 
and add, in its place, the language ``Director of the Office of 
Professional Responsibility'' in each of the following sections and 
paragraphs:
    Sec.  10.4(a), (b) introductory text, (b)(1), (b)(2);
    Sec.  10.5(c), (d), (e);
    Sec.  10.6(b), (g)(2)(iii), (g)(2)(iv), (g)(4), (j)(1), (j)(2), 
(j)(4), (k)(1), (k)(2), (n);
    Sec.  10.7(c)(2)(iii), (d);
    Sec.  10.20(b), (c);
    Sec.  10.62(a), (b);
    Sec.  10.63(c);
    Sec.  10.64(a);
    Sec.  10.66;
    Sec.  10.69(a)(1), (b);
    Sec.  10.73(a);
    Sec.  10.81;
    Sec.  10.82(a), (c) introductory text, (c)(3), (d), (e), (f)(1), 
(g).
    Par. 3. Section 10.1 is revised to read as follows:


Sec.  10.1  Director of the Office of Professional Responsibility.

    (a) Establishment of office. The Office of Professional 
Responsibility is established in the Internal Revenue Service. The 
Director of the Office of

[[Page 6427]]

Professional Responsibility is appointed by the Secretary of the 
Treasury, or his or her delegate.
    (b) Duties. The Director of the Office of Professional 
Responsibility acts on applications for enrollment to practice before 
the Internal Revenue Service; makes inquiries with respect to matters 
under his or her jurisdiction; institutes and provides for the conduct 
of disciplinary proceedings relating to practitioners (and employers, 
firms or other entities, if applicable) and appraisers; and performs 
other duties as are necessary or appropriate to carry out his or her 
functions under this part or as are otherwise prescribed by the 
Secretary of the Treasury, or his or her delegate.
    (c) Acting Director of the Office of Professional Responsibility. 
The Secretary of the Treasury, or his or her delegate, will designate 
an officer or employee of the Treasury Department to act as Director of 
the Office of Professional Responsibility in the absence of the 
Director or a vacancy in that office.
    (d) Effective date. This section is applicable on the date that 
final regulations are published in the Federal Register.
    Par. 4. Section 10.2 is revised to read as follows:


Sec.  10.2  Definitions.

    (a) As used in this part, except where the text provides 
otherwise--
    (1) Attorney means any person who is a member in good standing of 
the bar of the highest court of any State, territory, or possession of 
the United States, including a Commonwealth, or the District of 
Columbia.
    (2) Certified public accountant means any person who is duly 
qualified to practice as a certified public accountant in any State, 
territory, or possession of the United States, including a 
Commonwealth, or the District of Columbia.
    (3) Commissioner refers to the Commissioner of Internal Revenue.
    (4) 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 taxpayer's rights, 
privileges, or liabilities under laws or regulations administered by 
the Internal Revenue Service. Such presentations include, but are not 
limited to, preparing and filing documents, corresponding and 
communicating with the Internal Revenue Service, rendering written 
advice with respect to any entity, transaction plan or arrangement, or 
other plan or arrangement having a potential for tax avoidance or 
evasion, and representing a client at conferences, hearings and 
meetings.
    (5) Practitioner means any individual described in paragraphs (a), 
(b), (c), or (d) of Sec.  10.3.
    (6) A tax return includes an amended tax return and a claim for 
refund.
    (7) Service means the Internal Revenue Service.
    (b) Effective date. This section is applicable on the date that 
final regulations are published in the Federal Register.
    Par. 5. Section 10.5 is amended by revising paragraphs (a) and (b) 
and adding paragraph (f) to read as follows:


Sec.  10.5  Application for enrollment.

    (a) Form; address. An applicant for enrollment must apply as 
required by forms or procedures established and published by the Office 
of Professional Responsibility, including proper execution of required 
forms under oath or affirmation. The address on the application will be 
the address under which a successful applicant is enrolled and is the 
address to which all correspondence concerning enrollment will be sent.
    (b) Fee. The applicant must pay the fee established and published 
by the Office of Professional Responsibility. This fee will be 
reflected on applicable forms and will be retained regardless of 
whether the applicant is granted enrollment.
* * * * *
    (f) Effective date. This section is applicable to enrollment 
applications received on or after the date that final regulations are 
published in the Federal Register.
    Par. 6. Section 10.6 is amended by:
    1. Removing paragraph (a).
    2. Redesignating paragraph (c) as paragraph (a).
    3. Adding a new paragraph (c).
    4. Revising paragraphs (d) introductory text, (d)(5), (d)(6), 
(d)(7), (e), (f)(1), (f)(2)(iv)(A), (g)(5), (k)(7) and (l).
    5. Adding a new paragraph (p).
    The revisions and additions read as follows:


Sec.  10.6  Enrollment.

* * * * *
    (c) Change of address. An enrolled agent must send notification of 
any change of address to the address specified by the Director of the 
Office of Professional Responsibility. This notification must include 
the enrolled agent's name, prior address, new address, social security 
number or tax identification number and the date.
    (d) Renewal of enrollment. To maintain active enrollment to 
practice before the Internal Revenue Service, each individual is 
required to have his or her enrollment renewed. Failure to receive 
notification from the Director of the Office of Professional 
Responsibility of the renewal requirement will not be justification for 
the individual's failure to satisfy this requirement.
* * * * *
    (5) The Director of the Office of Professional Responsibility will 
notify the individual of his or her renewal of enrollment and will 
issue the individual a card evidencing enrollment.
    (6) A reasonable nonrefundable fee may be charged for each 
application for renewal of enrollment filed with the Director of the 
Office of Professional Responsibility.
    (7) Forms required for renewal may be obtained by sending a written 
request to the Director of the Office of Professional Responsibility, 
Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, DC 
20224 or from such other source as the Director of the Office of 
Professional Responsibility will publish in the Internal Revenue 
Bulletin (see 26 CFR 601.601(d)(2)) and on the Internal Revenue Service 
Web page (https://www.irs.gov).
    (e) Condition for renewal: continuing professional education. In 
order to qualify for renewal of enrollment, an individual enrolled to 
practice before the Internal Revenue Service must certify, on the 
application for renewal form prescribed by the Director of the Office 
of Professional Responsibility, that he or she has satisfied the 
following continuing professional education requirements.
    (1) Definitions. For purposes of this section--
    (i) Enrollment year means January 1 to December 31 of each year of 
an enrollment cycle.
    (ii) Enrollment cycle means the three successive enrollment years 
preceding the effective date of renewal.
    (iii) The effective date of renewal is the first day of the third 
month following the close of the period for renewal described in 
paragraph (d) of this section.
    (2) For renewed enrollment effective after December 31, 2006--(i) 
Requirements for enrollment cycle. A minimum of 72 hours of continuing 
education credit must be completed during each enrollment cycle.
    (ii) Requirements for enrollment year. A minimum of 16 hours of 
continuing education credit, including 2 hours of ethics or 
professional conduct, must be completed during each enrollment year of 
an enrollment cycle.
    (iii) Enrollment during enrollment cycle--(A) In general. Subject 
to

[[Page 6428]]

paragraph (2)(iii)(B) of this section, an individual who receives 
initial enrollment during an enrollment cycle must complete 2 hours of 
qualifying continuing education credit for each month enrolled during 
the enrollment cycle. Enrollment for any part of a month is considered 
enrollment for the entire month.
    (B) Ethics. An individual who receives initial enrollment during an 
enrollment cycle must complete 2 hours of ethics or professional 
conduct for each enrollment year during the enrollment cycle. 
Enrollment for any part of an enrollment year is considered enrollment 
for the entire year.
    (f) Qualifying continuing education--(1) General. To qualify for 
continuing education credit, a course of learning must--
    (i) Be a qualifying program designed to enhance professional 
knowledge in Federal taxation or Federal tax related matters, i.e., 
programs comprised of current subject matter in Federal taxation or 
Federal tax related matters, including accounting, tax preparation 
software and taxation or ethics;
    (ii) Be a qualifying program consistent with the Internal Revenue 
Code and effective tax administration; and
    (iii) Be sponsored by a qualifying sponsor.
    (2) * * *
    (iv) Credit for published articles, books, etc. (A) Continuing 
education credit will be awarded for publications on Federal taxation 
or Federal tax related matters, including accounting, tax preparation 
software, and taxation or ethics, provided the content of such 
publications is current and designed for the enhancement of the 
professional knowledge of an individual enrolled to practice before the 
Internal Revenue Service. The publication must be consistent with the 
Internal Revenue Code and effective tax administration.
* * * * *
    (g) * * *
    (5) Sponsor renewal--(i) In general. A sponsor maintains its status 
as a qualified sponsor during the sponsor enrollment cycle.
    (ii) Renewal period. Each sponsor must file an application to renew 
its status as a qualified sponsor between May 1 and July 31, 2008. 
Thereafter, applications for renewal will be required between May 1 and 
July 31 of every subsequent third year.
    (iii) Effective date of renewal. The effective date of renewal is 
the first day of the third month following the close of the renewal 
period.
    (iv) Sponsor enrollment cycle. The sponsor enrollment cycle is the 
three successive calendar years preceding the effective date of 
renewal.
* * * * *
    (k) * * *
    (7) Inactive enrollment status is not available to an individual 
who is the subject of a disciplinary matter in the Office of 
Professional Responsibility.
    (l) Inactive retirement status. An individual who no longer 
practices before the Internal Revenue Service may request being placed 
in an inactive retirement status at any time and such individual will 
be placed in an inactive retirement status. The individual will be 
ineligible to practice before the Internal Revenue Service. Such 
individual must file a timely application for renewal of enrollment at 
each applicable renewal or enrollment period as provided in this 
section. An individual who is placed in an inactive retirement status 
may be reinstated to an active enrollment status by filing an 
application for renewal of enrollment and providing evidence of the 
completion of the required continuing professional education hours for 
the enrollment cycle. Inactive retirement status is not available to an 
individual who is the subject of a disciplinary matter in the Office of 
Professional Responsibility.
* * * * *
    (p) Effective date. This section is applicable to enrollment 
effective on or after the date that final regulations are published in 
the Federal Register.
    Par. 7. Section 10.7 is amended by:
    1. Removing paragraph (c)(1)(viii).
    2. Revising paragraph (c)(2)(ii).
    3. And adding paragraph (g).
    The revisions and additions read as follows:


Sec.  10.7  Representing oneself; participating in rulemaking; limited 
practice; special appearances; and return preparation.

* * * * *
    (c) * * *
    (2) * * *
    (ii) The Director, after notice and opportunity for a conference, 
may deny eligibility to engage in limited practice before the Internal 
Revenue Service under paragraph (c)(1) of this section to any 
individual who has engaged in conduct that would justify a sanction 
under Sec.  10.50.
* * * * *
    (g) Effective date. This section is applicable on the date that 
final regulations are published in the Federal Register.
    Par. 8. Section 10.22 is amended by revising paragraph (b) and 
adding paragraph (c) to read as follows:


Sec.  10.22  Diligence as to accuracy.

* * * * *
    (b) Reliance on others. Except as provided in Sec. Sec.  10.34 and 
10.35, a practitioner will be presumed to have exercised due diligence 
for purposes of this section if the practitioner relies on the work 
product of another person and the practitioner used reasonable care in 
engaging, supervising, training, and evaluating the person, taking 
proper account of the nature of the relationship between the 
practitioner and the person.
    (c) Effective date. This section is applicable on the date that 
final regulations are published in the Federal Register.
    Par. 9. Section 10.25 is revised to read as follows:


Sec.  10.25  Practice by former Government employees, their partners 
and their associates.

    (a) Definitions. For purposes of this section--
    (1) Assist means to act in such a way as to advise, furnish 
information to, or otherwise aid another person, directly, or 
indirectly.
    (2) Government employee is an officer or employee of the United 
States or any agency of the United States, including a special 
government employee as defined in 18 U.S.C. 202(a), or of the District 
of Columbia, or of any State, or a member of Congress or of any State 
legislature.
    (3) Member of a firm is a sole practitioner or an employee or 
associate thereof, or a partner, stockholder, associate, affiliate or 
employee of a partnership, joint venture, corporation, professional 
association or other affiliation of two or more practitioners who 
represent nongovernmental parties.
    (4) Particular matter involving specific parties is defined at 5 
CFR 2637.201(c), or superseding post-employment regulations issued by 
the U.S. Office of Government Ethics.
    (5) Practitioner includes any individual described in Sec.  
10.2(a)(5).
    (6) Rule includes Treasury regulations, whether issued or under 
preparation for issuance as notices of proposed rule making or as 
Treasury decisions; revenue rulings; and revenue procedures published 
in the Internal Revenue Bulletin (see 26 CFR Sec.  601.601(d)(2)).
    (b) General rules. (1) No former Government employee may, 
subsequent to his or her Government employment, represent anyone in any 
matter administered by the Internal Revenue Service if the 
representation would violate 18 U.S.C. 207 or any other laws of the 
United States.
    (2) No former Government employee who personally and substantially 
participated in a particular matter involving specific parties may,

[[Page 6429]]

subsequent to his or her Government employment, represent or knowingly 
assist, in that particular matter, any person who is or was a specific 
party to that particular matter.
    (3) A former Government employee who within a period of one year 
prior to the termination of Government employment had official 
responsibility for a particular matter involving specific parties may 
not, within two years after his or her Government employment is ended, 
represent in that particular matter any person who is or was a specific 
party to that particular matter.
    (4) No former Government employee may, within one year after his or 
her Government employment is ended, appear before any employee of the 
Treasury Department in connection with the publication, withdrawal, 
amendment, modification, or interpretation of a rule the development of 
which the former Government employee participated or for which, within 
a period of one year prior to the termination of his or her Government 
employment, the former government employee had official direct 
responsibility. This paragraph (b)(4) does not, however, preclude such 
former employee from appearing on his or her own behalf or from 
representing a taxpayer before the Internal Revenue Service in 
connection with a particular matter involving specific parties 
involving the application or interpretation of such a rule with respect 
to that particular matter, provided that such former employee does not 
utilize or disclose any confidential information acquired by the former 
employee in the development of the rule.
    (c) Firm representation. (1) No member of a firm of which a former 
Government employee is a member may represent or knowingly assist a 
person who was or is a specific party in any particular matter with 
respect to which the restrictions of paragraph (b)(2) of this section 
apply to the former Government employee, in that particular matter, 
unless the firm isolates the former Government employee in such a way 
to ensure that the former Government employee cannot assist in the 
representation.
    (2) When isolation of a former Government employee is required 
under paragraph (c)(1) of this section, a statement affirming the fact 
of such isolation must be executed under oath by the former Government 
employee and by another member of the firm acting on behalf of the 
firm. The statement must clearly identify the firm, the former 
Government employee, and the particular matter(s) requiring isolation. 
The statement must be retained by the firm and, upon request, provided 
to the Director of the Office of Professional Responsibility.
    (d) Pending representation. The provisions of this regulation will 
govern practice by former Government employees, their partners and 
associates with respect to representation in particular matters 
involving specific parties where actual representation commenced before 
the effective date of this regulation.
    (e) This section is applicable on the date that final regulations 
are published in the Federal Register.
    Par. 10. Section 10.27 is revised to read as follows:


Sec.  10.27  Fees.

    (a) In general. A practitioner may not charge an unconscionable fee 
in connection with any matter before the Internal Revenue Service.
    (b) Contingent fees. (1) Except as provided in paragraphs (b)(2) 
and (3) of this section, a practitioner may not charge a contingent fee 
for services rendered in connection with any matter before the Internal 
Revenue Service.
    (2) A practitioner may charge a contingent fee for services 
rendered in connection with the Service's examination of, or challenge 
to--
    (i) An original tax return; or
    (ii) An amended return or claim for refund or credit filed prior to 
the taxpayer receiving a written notice of the examination of, or a 
written challenge to the original tax return.
    (3) A practitioner may charge a contingent fee for services 
rendered in connection with any judicial proceeding arising under the 
Internal Revenue Code.
    (c) Definitions. For purposes of this section--
    (1) Contingent fee is any fee that is based, in whole or in part, 
on whether or not a position taken on a tax return or other filing 
avoids challenge by the Internal Revenue Service or is sustained either 
by the Internal Revenue Service or in litigation. A contingent fee 
includes a fee that is based on a percentage of the refund reported on 
a return, that is based on a percentage of the taxes saved, or that 
otherwise depends on the specific result attained. A contingent fee 
also includes any fee arrangement in which the practitioner will 
reimburse the client for all or a portion of the client's fee in the 
event that a position taken on a tax return or other filing is 
challenged by the Internal Revenue Service or is not sustained, whether 
pursuant to an indemnity agreement, a guarantee, rescission rights, or 
any other arrangement with a similar effect.
    (2) Matter before the Internal Revenue Service includes tax 
planning and advice, preparing or filing or assisting in preparing or 
filing returns or claims for refund or credit, and all matters 
connected with a presentation to the Internal Revenue Service or any of 
its officers or employees relating to a taxpayer's rights, privileges, 
or liabilities under laws or regulations administered by the Internal 
Revenue Service. Such presentations include, but are not limited to, 
preparing and filing documents, corresponding and communicating with 
the Internal Revenue Service, rendering written advice with respect to 
any entity, transaction, plan or arrangement, and representing a client 
at conferences, hearings, and meetings.
    (d) Effective date. This section is applicable on the date that 
final regulations are published in the Federal Register.
    Par. 11. Section 10.29 is revised to read as follows:


Sec.  10.29  Conflicting interests.

    (a) Except as provided by paragraph (b) of this section, a 
practitioner shall not represent a client in his or her practice before 
the Internal Revenue Service if the representation involves a conflict 
of interest. A conflict of interest exists if--
    (1) The representation of one client will be directly adverse to 
another client; or
    (2) There is a significant risk that the representation of one or 
more clients will be materially limited by the practitioner's 
responsibilities to another client, a former client or a third person 
or by a personal interest of the practitioner.
    (b) Notwithstanding the existence of a conflict of interest under 
paragraph (a) of this section, the practitioner may represent a client 
if--
    (1) The practitioner reasonably believes that the practitioner will 
be able to provide competent and diligent representation to each 
affected client;
    (2) The representation is not prohibited by law; and
    (3) Each affected client waives the conflict of interest and gives 
informed consent, confirmed in writing by the affected client, at the 
time the existence of the conflict of interest is known by the 
practitioner.
    (c) Copies of the written consents must be retained by the 
practitioner for at least 36 months from the date of the conclusion of 
the representation of the affected clients, and the written consents 
must be provided to any officer

[[Page 6430]]

or employee of the Internal Revenue Service on request.
    (d) This section is applicable on the date that final regulations 
are published in the Federal Register.
    Par. 12. Section 10.34 is revised to read as follows:


Sec.  10.34  Standards with respect to tax returns and documents, 
affidavits and other papers.

    (a) Tax returns. A practitioner may not sign a tax return as a 
preparer if the practitioner determines that the tax 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 Internal Revenue 
Service. A practitioner may not advise a client to take a position on a 
tax return, or prepare the portion of a tax return on which a position 
is taken, unless--
    (1) The practitioner determines that the position satisfies the 
realistic possibility standard; or
    (2) The position is not frivolous.
    (b) Documents, affidavits and other papers. (1) A practitioner may 
not advise a client to take a position on a document, affidavit or 
other paper submitted to the Internal Revenue Service unless the 
position is not frivolous.
    (2) A practitioner may not advise a client to submit a document, 
affidavit or other paper to the Internal Revenue Service--
    (i) The purpose of which is to delay or impede the administration 
of the Federal tax laws;
    (ii) That is frivolous or groundless; or
    (iii) That contains or omits information in a manner that 
demonstrates an intentional disregard of a rule or regulation.
    (c) Advising clients on potential penalties. (1) A practitioner 
must inform a client of any penalties that are reasonably likely to 
apply to the client with respect to--
    (i) A position taken on a tax return if--
    (A) The practitioner advised the client with respect to the 
position; or
    (B) The practitioner prepared or signed the tax return; and
    (ii) Any document, affidavit or other paper submitted to the 
Internal Revenue Service.
    (2) The practitioner also must inform the client of any opportunity 
to avoid any such penalties by disclosure, if relevant, and of the 
requirements for adequate disclosure.
    (3) This paragraph (c) applies even if the practitioner is not 
subject to a penalty under the Internal Revenue Code with respect to 
the position or with respect to the document, affidavit or other paper 
submitted.
    (d) Relying on information furnished by clients. A practitioner 
advising a client to take a position on a tax return, document, 
affidavit or other paper submitted to the Internal Revenue Service, or 
preparing or signing a tax return as a preparer, generally may rely in 
good faith without verification upon information furnished by the 
client. The practitioner may not, however, 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 with an important fact or another factual 
assumption, or incomplete.
    (e) Definitions. For purposes of this section--
    (1) Realistic possibility. A position is considered to have a 
realistic possibility of being sustained on its merits if a reasonable 
and well-informed analysis of the law and the facts 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 tax return will not 
be audited, that an issue will not be raised on audit, or that an issue 
will be settled may not be taken into account.
    (2) Frivolous. A position is frivolous if it is patently improper.
    (f) Effective date. This section is applicable to tax returns, 
documents, affidavits and other papers filed on or after the date that 
final regulations are published in the Federal Register.


Sec.  10.35  [Amended]

    Par. 13. In Sec.  10.35(b)(1) remove the language ``Sec.  10.2(e)'' 
and add the language ``Sec.  10.2(a)(5)'' in its place.
    Par. 14. Section 10.50 is amended by revising paragraph (a) and 
adding paragraphs (c) and (d) to read as follows:


Sec.  10.50  Sanctions.

    (a) Authority to censure, suspend, or disbar. The Secretary of the 
Treasury, or his or her delegate, after notice and an opportunity for a 
proceeding, may censure, suspend, or disbar any practitioner from 
practice before the Internal Revenue Service if the practitioner is 
shown to be incompetent or disreputable (within the meaning of Sec.  
10.51), fails to comply with any regulation in this part (under the 
prohibited conduct standards of Sec.  10.52), or with intent to 
defraud, willfully and knowingly misleads or threatens a client or 
prospective client. Censure is a public reprimand.
* * * * *
    (c) Authority to impose monetary penalty--(1) In g