On Dec. 20, 2024, the Treasury Department and the IRS released proposed regulations (REG-116610-20) to update Circular 230, which governs practice before the IRS. These amendments, if finalized, would have a substantial impact on attorneys, CPAs, enrolled agents, and other tax professionals who practice before the IRS. Understanding these proposed amendments is essential for tax practitioners to prepare for potential changes ahead. 

This article identifies the reasoning for the proposed amendments, highlights key amendments and their implications, and underscores the importance of proactively preparing for these potential changes.

Background and Rationale

Since the last update to Circular 230 in June 2014, three significant court cases have had a profound impact on the IRS’s oversight authority and necessitated amendments to Circular 230:

1. Loving v. IRS (742 F.3d 1013, D.C. Cir. 2014): The court determined that the IRS lacks statutory authority under 31 USC section 330 to regulate tax return preparation. It concluded that tax return preparers do not represent taxpayers before the IRS and that merely preparing returns does not constitute practice before the IRS. This decision invalidated the IRS’s 2011 Registered Tax Return Preparer Program.


2. Ridgely v. Lew (55 F. Supp. 3d 89, D.D.C. 2014): The court ruled that the IRS lacks authority to regulate contingent fees for “ordinary refund claims,” concluding that preparing such claims before examination does not constitute practice before the IRS.


3. Sexton v. Hawkins (119 A.F.T.R.2d 2017-1187, D. Nev. 2017): The court found that the Office of Professional Responsibility (OPR) lacked jurisdiction over suspended practitioners under Circular 230. This finding limited OPR’s ability to enforce compliance during the suspension period.

In addition to the impact of these court decisions, the proposed amendments also address changes in the tax practice environment. To assess the need and scope of amendments to Circular 230, the OPR reached out to tax professional organizations for feedback. The OPR also collaborated with the Taxpayer Advocate Service (TAS), the IRS Advisory Council, and OPR and Chief Counsel attorneys who manage OPR matters and litigation. Feedback from the outreach focused on the evolution of tax practices, technological advancements, and the desire to align with professional standards established by the American Institute of Certified Public Accountants (AICPA) and the American Bar Association (ABA).  

Key Proposed Amendments

1. Tax Return Preparation Standards: In response to Loving, the proposed amendments remove provisions about registered tax return preparers from several Circular 230 sections, including 10.0, 10.2, 10.3-10.6, 10.30, 10.38, and 10.90. The definition of “practice before the IRS” has been updated to clarify that practice includes tax return preparation in connection with representing a client in a matter before the IRS. As such, standards for tax return preparation are revised to apply only when returns are prepared or approved in connection with representing a client or submitted during representation. This includes updates to due diligence responsibilities (section 10.22) and standards for tax returns (section 10.34).

By eliminating provisions related to registered tax return preparers and clarifying that practice standards apply only when returns are prepared in connection with representing clients, the proposed amendments reflect the court’s ruling that tax return preparation alone does not constitute practice before the IRS. This distinction is necessary to ensure the IRS is regulating within its statutory authority.

2. Contingent Fees: Addressing Ridgely, the proposed amendments remove section 10.27, which regulates contingent fees, and withdraw the notice of proposed rulemaking published Jul. 29, 2009, that proposed regulations on contingent fees. Instead, specific contingent fee arrangements are reclassified as disreputable conduct under section 10.51, including:

• Preparation of original tax returns
• Amended returns
• Claims for refund or credit prior to examination

The Treasury indicates that contingent fee arrangements for return preparation create inherent conflicts of interest by incentivizing unduly aggressive tax positions, which can increase reported tax benefits, resulting in personal gain for practitioners—a practice they consider incompatible with ethical practice. This approach aligns with the professional standards already established by the AICPA and many state accountancy boards.

The proposed amendments also define contingent fees (section 10.51(b)(2)) to encompass fees based on a percentage of refund or taxes saved, fees dependent on specific tax outcomes, and fee arrangements with reimbursement if the position is contested. It also adds unconscionable fees as disreputable conduct.

According to the Treasury, classifying certain contingent fee arrangements as disreputable conduct rather than directly regulating them represents a strategic shift in response to Ridgely. While the court limited the IRS’s ability to prohibit contingent fees for ordinary refund claims based on its practice regulation authority, the Treasury determined it still has authority under 31 USC section 330(c) to sanction practitioners for disreputable conduct even if that conduct occurs during representation.

3. Updates to the Enrolled Agent Program: Under section 10.4(d), former IRS employees, based on past service and technical experience in the IRS, may be granted enrollment as an Enrolled Agent or Enrolled Retirement Plan Agent (ERPA) without testing if specific criteria are met. The proposed amendments eliminate this waiver, though applications submitted before the effective date of this proposed amendment would be processed under current rules. Also, regarding ERPAs, the proposed amendments acknowledge that no new ERPAs have been enrolled since Feb. 12, 2016, while clarifying that current ERPAs can maintain their status by paying annual user fees and completing continuing education requirements. Eliminating the waiver option for former IRS employees is primarily a resource allocation decision by the IRS.

The proposed amendments also update renewal periods and procedures (section 10.6(d)(2)) and provide flexibility in enrollment confirmation documents (section 10.6(b)), replacing “registration card or certificate” with “document” to allow for future electronic or alternative forms of confirmation.

4. Limited Practice and Annual Filing Season Program Participants: The proposed amendments formally incorporate Annual Filing Season Program (AFSP) participants into Circular 230 by adding section 10.7(c)(1)(viii), granting them limited representation rights for returns they prepared and signed. This codifies a program that has been in place since 2014 (Rev. Proc. 2014-42), and that was judicially affirmed several years later in AICPA v. IRS (746 Fed. Appx. 1, D.C. Cir. 2018). Under the AFSP program, participants “voluntarily consent to be subject to Circular 230 duties and restrictions” in exchange for limited practice rights. Thus, the proposed amendment formalizes regulatory clarity regarding the status of uncredentialed preparers and establishes parameters for their limited practice.

Under the proposed amendments, AFSP participant requirements will include a valid Record of Completion for the calendar year in which the return was prepared, as well as for the years in which representation occurred. Representation will be allowed before revenue agents, customer service representatives, similar IRS officers or employees, and the TAS.

5. New Practice Standards: The proposed amendments expand requirements for practitioners who identify errors. Under current section 10.21, upon knowledge of a client’s non-compliance, error, or omission from any submission to the IRS, practitioners must promptly advise clients of the non-compliance, error, or omission and the consequences under Internal Revenue laws. The proposed amendments clarify that this responsibility includes not only the client’s non-compliance, error, or omission  but also those made by the practitioner or past practitioner. The proposed amendments also expand the duties of the practitioner to include recommending corrective actions to be taken regarding non-compliance, error, or omission. Such actions may include disclosure, but only with the client’s agreement. Also, during the representation, the practitioner must take reasonable steps to ensure that the non-compliance, error, or omission is not repeated in any subsequent submission to the IRS. Further, should the client not agree to disclosure, the practitioner should consider whether continued representation is possible under the practitioner’s due diligence (section 10.22) obligations.

The Treasury explains that expanding the requirements for practitioners who identify errors aligns Circular 230 with similar professional standards relating to knowledge of a client’s error. For example, see AICPA Statement on Standards for Tax Services No. 6 (Rev. Apr. 30, 2018).

Also relating to standards, the proposed amendments introduce a technological competence requirement in section 10.35(a), defining competence as the understanding of the benefits and risks associated with the relevant technology used to provide client services and store or transmit confidential information. As the Treasury noted, this proposed amendment recognizes that “competence also includes maintaining familiarity with technological tools used to represent a client,” reflecting the modern practice environment where technology is integral to client representation and protection of confidential information. The amendment is based on Comment 8 to ABA Model Rule 1.1, and it also complements the best new practices for data security.

6. Best Practices: The proposed amendments add new best practices (section 10.33) on data security, assessing competency, and business continuity:

• Developing a data security policy with safeguards and an incident response plan for data breaches, complementing the FTC Safeguards Rule requirements.
• Identifying, evaluating, and addressing mental impairments related to age, substance abuse, and physical or mental health conditions.
• Implementing business continuity and succession planning, including procedures for practice sale or cessation, safeguards for practitioner death or disability, and planning for extraordinary events.

With these proposed amendments, the Treasury acknowledges the evolving technological landscape in which tax practice occurs and notes that practitioners who prepare returns already have legal obligations under the Federal Trade Commission’s (FTC) Safeguards Rule. The proposed data security best practices are intended to complement these existing requirements and the new technological competence standards. The business continuity and succession planning provisions are described as “essential because they proactively protect clients in the event of a practitioner’s death or disability or from the occurrence of an unforeseen event.” Note, however, that the best practices under section 10.35 remain aspirational versus compulsory.

7. Negotiation of Payments to Clients: To reflect changes since Circular 230 was last updated, the proposed amendments expand the prohibitions in section 10.31 on practitioner negotiation of taxpayer refunds processed through electronic means (versus through “checks”). Specifically, the amendments broadened negotiating a taxpayer’s refund to include all forms of electronic payments to clients regarding a Federal tax liability (e.g., prepaid debit cards, phone or mobile payments, or other forms of electronic payments “even if that payment method is not currently used by the Treasury”). The amendments also prohibit directing payments into practitioner-controlled accounts.

8. Appraiser Standards: The proposed amendments create a new Subpart D for appraisers (sections 10.60-10.62), defining “appraiser” as any individual assessing the market value of assets for tax position support, including “qualified appraisers” under IRC section 170(f)(11)(E). Appraisals must adhere to the principles of either the Uniform Standards of Professional Appraisal Practice (USPAP) or International Valuation Standards (IVS). Grounds for an appraiser’s disqualification include willful violation of appraisal standards, a pattern of reckless/grossly incompetent violations, knowingly preparing appraisals supporting substantial/gross valuation misstatements, and appraisers with penalties under IRC sections 6694, 6695A, 6700, or 6701. Appraisals issued by a disqualified appraiser will hold no probative effect in IRS proceedings.

Per the Treasury, the current penalty prerequisite for appraiser disqualification “limits the IRS’s ability to respond to misconduct under Circular 230 when the misconduct is not covered by a specific penalty, an applicable penalty is not imposed, or a proposed penalty assessment has not yet been made.” The proposed new standards would enable the IRS to “proactively address inadequate appraisals submitted in administrative proceedings” by using widely recognized standards (USPAP or IVS) that provide “a generally accepted standard of care.” The Treasury notes that these standards already form the basis for appraisal credibility in US Tax Court cases and are required for state-licensed appraisers, making them an appropriate foundation for establishing minimum standards in IRS proceedings.

9. OPR Jurisdiction and Procedures: Addressing Sexton, the proposed amendments clarify that sanctioned practitioners and appraisers remain under the jurisdiction of the OPR (section 10.99(e)) and are subject to investigation for non-compliance with the terms of their censure, suspension, or disqualification. Further, that non-compliance may result in financial penalties or additional disciplinary action, including disbarment. The Treasury emphasizes that “the ability to investigate compliance by practitioners with the terms of their censure or suspension is critical to ensure compliance and maintain the integrity of practitioner discipline under Circular 230.” The Treasury also noted its explicit disagreement with the court’s holding and asserts continuing jurisdiction over suspended practitioners under 31 USC section 330(c).

The proposed amendments also grant authority to investigate individuals who present themselves as practitioners (section 10.99(f)), including those who are disbarred and non-practitioners. The Treasury stated that expanding the OPR’s authority to investigate those who falsely hold themselves out as practitioners is considered “important to the enforcement of 31 USC 330 and the integrity of Circular 230” to ensure that unauthorized individuals do not claim authority to practice before the IRS.

While these proposed amendments are pending, tax practitioners can take proactive steps to prepare:

1. Review Fee Arrangements: Examine engagement letters and fee structures, identify and change any contingent fee arrangements as necessary, and explore alternatives where applicable.


2. Assess Technology Competence: Evaluate your understanding of technologies used in your practice and review methods for data storage and transmission.


3. Update Data Security Policies: Create or update your written information security plan, develop incident response procedures, and ensure compliance with the FTC Safeguards Rule.


4. Develop Business Continuity Plans: Create or update succession plans, establish procedures for the sale or cessation of practice, and develop disaster recovery protocols.
   

Implementation Timeline

The chief effective date for any amendments to Circular 230 will be 30 days after the final regulations are published in the Federal Register. Prior to finalizing the amendments, the Treasury and IRS must first review all comments received on the proposed regulations. The comment period on the proposed amendments ended Feb. 24, 2025, and over 150 comments were received. Thus, the timing of the Treasury’s and IRS’s review is unknown. However, for perspective, when Circular 230 was last amended in 2014, it was almost two years between when the proposed amendments were issued and when the final amended Circular 230 was published in the Federal Register.

A saving provision (section 10.112) specifies that proceedings started before the effective date will continue under the previous rules and conduct before the effective date will be assessed according to the regulations in effect at that time.

Conclusion

The proposed amendments to Circular 230 represent significant changes to the rules governing practice before the IRS. These proposed amendments reflect efforts to conform practitioner oversight to judicial constraints while modernizing Circular 230 to address today's modern tax practice and the expectations regarding tax practitioners. Tax practitioners should stay updated on these developments and consider preparing their practices to comply with the expected changes. By proactively preparing to adapt to these proposed amendments, practitioners can maintain their professional obligations while continuing to provide valuable services to their clients.

Visit the Federal Register for more information about the proposed amendments.