Practices and Procedures · Requirements for Enrolled Agents

Due diligence requirements

Section 10.22 is the general diligence rule, and its structure is worth reading closely. Diligence is owed in three directions — to the papers, to Treasury, and to the client — and the reliance paragraph that follows is not a safe harbour for delegating work. It is a presumption, and the practitioner earns it by doing four things properly.

The rule

Diligence in three directions. A practitioner must exercise due diligence:

1. In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits and other papers relating to IRS matters;
2. In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and
3. In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the IRS (Circular 230 § 10.22(a)).

The reliance presumption, and what earns it. Except as modified by §§ 10.34 and 10.37, a practitioner will be presumed to have exercised due diligence if they rely on the work product of another person and used reasonable care in engaging, supervising, training and evaluating that person, taking proper account of the nature of the relationship between them (§ 10.22(b)).

Note the carve-out. The presumption is expressly modified by § 10.34 — the return and document standards — and by § 10.37, the requirements for written advice. Reliance does not answer a § 10.34 unreasonable position or a § 10.37 written advice failure in the same way it answers a general diligence charge.

It can be violated without willfulness. Section 10.22 is not among the four sections § 10.52(a)(2) makes violable recklessly or through gross incompetence — those are §§ 10.34, 10.35, 10.36 and 10.37. So a willful violation of § 10.22 is sanctionable under § 10.52(a)(1). But a practitioner whose lack of diligence produced a bad return position will usually be charged under § 10.34 as well, where the lower mental state does apply.

Effective dates differ within the section. Paragraph (a) applies from 26 September 2007; paragraph (b), the reliance presumption, only from 12 June 2014 (§ 10.22(c)).

How it works in practice

The second and third limbs are the ones practitioners forget. Most people read § 10.22 as a return-preparation rule. It is not: it also governs the accuracy of what the practitioner says to the IRS and what the practitioner says to the client. An assurance to a revenue agent that no other accounts exist, or a confident answer to a client about how a transaction will be treated, is inside the rule and must be diligently determined before it is given.

Reliance is not delegation. The presumption in (b) has four named components — engaging, supervising, training, evaluating — and all of them are the practitioner’s own work. Handing a return to a junior and signing what comes back is not reliance within the meaning of the rule; it is the absence of the supervision the rule requires. “Taking proper account of the nature of the relationship” is what distinguishes relying on an unknown outside contractor from relying on a long-supervised employee.

The §§ 10.34 and 10.37 carve-out is the practical limit. A practitioner who relies on a subordinate’s research and signs a return taking a position with no reasonable basis cannot answer the § 10.34(a) charge by pointing at the subordinate. Section 10.22(b) opens with “except as modified by §§ 10.34 and 10.37” precisely so it cannot be used that way.

Diligence and the § 6695(g) due diligence rules are different things. Section 10.22 is a general professional standard enforced by OPR. The credit and filing-status due diligence in Reg. § 1.6695-2 is a specific documentary regime enforced by penalty, per benefit, with Form 8867. A practitioner can satisfy one and fail the other, and the exam tests them separately.

How this has changed

Paragraph (a) took its present form in T.D. 9359 (72 FR 54547, 26 September 2007), the same revision that rewrote § 10.34 around the § 6694 standards. The reliance presumption in paragraph (b) is much newer: T.D. 9668 (79 FR 33693) added it effective 12 June 2014, in the revision that also removed the covered opinion regime from § 10.35 and rewrote § 10.37. Before 2014 there was no stated presumption at all, and a practitioner relying on a subordinate argued diligence from first principles. Material predating that revision does not describe the current rule.

Exam focus

The three limbs of § 10.22(a), and particularly that representations to Treasury and to clients are covered. The reliance presumption and its four components, with “taking proper account of the nature of the relationship”. That the presumption is expressly modified by §§ 10.34 and 10.37. That § 10.22 is absent from the § 10.52(a)(2) reckless-or-gross-incompetence list. Expect the distinction between this rule and the § 6695(g) credit due diligence regime.

Check yourself

1. Circular 230 § 10.22 requires due diligence in: (A) Preparing returns only (B) Preparing, approving and filing papers; determining the correctness of representations to Treasury; and determining the correctness of representations to clients (C) Written advice only (D) Determining eligibility for refundable credits Answer: B.

2. A practitioner relies on a subordinate’s work product. The presumption of diligence applies if the practitioner: (A) Reviews the final output (B) Used reasonable care in engaging, supervising, training and evaluating the person, taking proper account of the relationship (C) Obtains the subordinate’s written confirmation (D) Is not personally aware of any error Answer: B. Section 10.22(b).

3. The reliance presumption is expressly modified by: (A) Sections 10.20 and 10.21 (B) Sections 10.34 and 10.37 (C) Section 10.51 (D) No other section Answer: B.

4. A practitioner tells a revenue agent something inaccurate, honestly believing it, without checking. This: (A) Is outside § 10.22, which governs returns (B) Engages § 10.22(a)(2), which requires diligence in determining the correctness of representations to Treasury (C) Is excused by the honest belief (D) Engages § 10.21 Answer: B.

5. Section 10.22 may be violated recklessly or through gross incompetence: (A) Yes, like §§ 10.34 to 10.37 (B) No; it is not listed in § 10.52(a)(2), so a violation must be willful (C) Only in written advice (D) Only where a penalty results Answer: B.