Practices and Procedures · Requirements for Enrolled Agents

Practitioner supervisory responsibilities (Circular 230)

Circular 230 § 10.36 is the only section in Part 10 that sanctions a practitioner for what other people in the firm did. It is short — one duty, three grounds of discipline — but the grounds are structured with care, and the pieces that make each one work are what the exam tests.

The rule

The duty (Circular 230 § 10.36(a)). Any individual subject to Part 10 who has, or individuals who have or share, principal authority and responsibility for overseeing a firm’s practice governed by Part 10 — including the provision of advice concerning Federal tax matters and the preparation of tax returns, claims for refund, or other documents for submission to the IRS — must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees for purposes of complying with subparts A, B, and C of Part 10, as applicable.

The paragraph then closes a gap. In the absence of a person or persons identified by the firm as having that principal authority, the IRS may identify one or more individuals subject to Part 10 as responsible for compliance with § 10.36. A firm cannot escape the section by declining to name anyone.

The three grounds of discipline (§ 10.36(b)). An individual with principal authority is subject to discipline for failing to comply with § 10.36 if:

1. § 10.36(b)(1) — the individual, through wilfulness, recklessness, or gross incompetence, does not take reasonable steps to ensure the firm has adequate procedures, and one or more members, associates or employees of the firm are, or have been, engaged in a pattern or practice of failing to comply with Part 10 in connection with their practice with the firm;
2. § 10.36(b)(2) — the individual, through the same mental states, does not take reasonable steps to ensure that procedures in effect are properly followed, and the same pattern or practice exists; or
3. § 10.36(b)(3) — the individual knows or should know that one or more members, associates or employees are, or have been, engaged in a pattern or practice that does not comply with Part 10, and the individual — through wilfulness, recklessness, or gross incompetence — fails to take prompt action to correct the noncompliance.

The section is applicable beginning June 12, 2014 (§ 10.36(c); T.D. 9668, 79 FR 33693).

Current figures

How it works in practice

Read § 10.36(b) as three doors, each requiring its own combination of elements. All three share two features: a culpable mental state on the supervisor’s part, and a pattern or practice of noncompliance by someone else in the firm. Neither alone is enough.

The mental state is the higher standard used elsewhere in Circular 230 for the drafting and advice sections. Ordinary negligence does not reach it. A supervisor who genuinely tried, and whose procedures turned out to be inadequate, has not acted wilfully, recklessly or with gross incompetence — and § 10.36 does not reach them. That is a deliberate calibration: § 10.36 targets the firm principal who did not care, not the one who got it wrong.

“Pattern or practice” does the second half of the work. A single lapse by a single employee is not a pattern, however serious. The section is aimed at systemic failure — the same non-compliance recurring, or several people failing in the same way. That is why the duty is framed around procedures rather than outcomes: the point is whether the firm has a system, not whether a given return was right.

Now the difference between the three grounds, which is where questions live:

• (b)(1) attacks the absence of procedures. The firm has nothing adequate in place.
• (b)(2) attacks the failure to make procedures work. The firm has procedures, on paper, but the supervisor took no reasonable steps to see they were followed.
• (b)(3) attacks the failure to fix a known problem. It is the only ground with a knowledge element — “knows or should know” — and the only one whose breach is defined by inaction after the fact: failing to take prompt action to correct.

Note carefully that (b)(3) has two mental-state requirements stacked. The individual must know or should know of the pattern, and must fail to take prompt corrective action through wilfulness, recklessness or gross incompetence. A supervisor who learns of a problem and moves promptly is outside the section even if the correction proves imperfect.

The scope of “principal authority” is functional, not titular. § 10.36(a) speaks of authority and responsibility for overseeing the firm’s practice governed by Part 10, expressly including advice on Federal tax matters and the preparation of returns, claims and other submissions. A managing partner with no involvement in tax may not have it; a tax department head who is not a partner may. And the authority may be shared — the section says “individuals who have or share,” so more than one person can be bound simultaneously for the same firm.

The IRS’s residual power to designate is a real enforcement tool. Where a firm has not identified anyone, the IRS may name one or more individuals subject to Part 10 as responsible. The section therefore rewards firms that make the designation deliberately: naming a person is how a firm controls who carries the exposure.

Finally, place § 10.36 against the sections around it. § 10.22(b) presumes a practitioner exercised diligence when relying on another’s work, provided reasonable care was used in engaging, supervising, training and evaluating that person — the individual-level counterpart. § 10.36 operates at the firm level and asks whether procedures exist and work. And § 10.36 is one of the four sections named in § 10.52(a)(2), so a violation is sanctionable on recklessness or gross incompetence without any showing of wilfulness — consistent with the mental states written into § 10.36(b) itself.

How this has changed

Section 10.36 was issued by T.D. 9668, 79 FR 33693, applicable beginning June 12, 2014. That rewrite replaced a much narrower predecessor. The pre-2014 section was directed specifically at covered opinions under the old § 10.35 — it required firms to have procedures to ensure compliance with the covered-opinion rules, and its reach ended there.

The 2014 project removed the covered-opinion regime entirely and rebuilt § 10.36 as a general compliance-procedures duty. Three consequences follow, and each is examinable.

First, the duty now covers subparts A, B and C of Part 10 — authority to practise, duties and restrictions, and sanctions — rather than one species of written advice. Second, it now covers the provision of advice concerning Federal tax matters and the preparation of tax returns, claims for refund, or other documents, so return preparation is squarely within it where it never clearly was before. Third, the three-ground structure in § 10.36(b), with its explicit mental states and pattern-or-practice threshold, is new; the predecessor had no comparable articulation.

The other structural change made by T.D. 9668 that bears on this section is the treatment of § 10.36 in § 10.52(a)(2). Sanctions for a wilful violation of any Part 10 regulation are available under § 10.52(a)(1); § 10.52(a)(2) adds recklessness or gross incompetence as sufficient for violations of §§ 10.34, 10.35, 10.36 and 10.37. So § 10.36 is enforceable on a mental state below wilfulness — which matches the “wilfulness, recklessness, or gross incompetence” formula inside § 10.36(b) itself. Sanctions available are those in § 10.50: censure, suspension, disbarment, and a monetary penalty.

Exam focus

Know the two universal elements: a culpable mental state — wilfulness, recklessness, or gross incompetence — and a pattern or practice of noncompliance by firm members, associates or employees. Questions that describe a single isolated error are testing the pattern requirement.

Distinguish the three grounds by what failed: no adequate procedures (b)(1); procedures not followed (b)(2); known problem not promptly corrected (b)(3). Only (b)(3) has a knowledge element.

Know that principal authority may be shared, that it is defined by function rather than title, and that where the firm identifies nobody, the IRS may identify one or more individuals.

Finally, know that § 10.36 is among the sections in § 10.52(a)(2), so recklessness or gross incompetence suffices for sanction — wilfulness is not required.

Check yourself

1. A firm principal takes no steps to adopt compliance procedures, and one employee makes a single error on one return. Is § 10.36 engaged? (A) Yes, the absence of procedures is itself the violation (B) No, because each ground requires a pattern or practice of noncompliance (C) Yes, if the error caused an understatement (D) No, unless the principal is a partner Answer: B. Sections 10.36(b)(1), (2) and (3) each require that firm members, associates or employees are, or have been, engaged in a pattern or practice of failing to comply.

2. Which ground applies where adequate procedures exist but the supervisor took no reasonable steps to ensure they were followed? (A) § 10.36(b)(1) (B) § 10.36(b)(2) (C) § 10.36(b)(3) (D) None; procedures on paper satisfy the section Answer: B. Section 10.36(b)(1) addresses the failure to ensure adequate procedures exist; (b)(2) addresses the failure to ensure procedures in effect are properly followed.

3. What mental state must be shown under § 10.36(b)? (A) Negligence (B) Simple failure to supervise (C) Wilfulness, recklessness, or gross incompetence (D) Wilfulness only Answer: C. All three grounds use the same formula, and § 10.52(a)(2) names § 10.36 among the sections sanctionable on recklessness or gross incompetence without wilfulness.

4. A firm has never designated anyone as responsible for Circular 230 compliance. What follows? (A) Section 10.36 does not apply to the firm (B) The most senior partner is automatically responsible (C) The IRS may identify one or more individuals subject to Part 10 as responsible (D) Responsibility falls on whoever signs the most returns Answer: C. Section 10.36(a) provides that in the absence of a person identified by the firm, the IRS may identify one or more individuals subject to Part 10.

5. A principal learns in March of a pattern of noncompliance and acts on it in August, having deferred it for the filing season. Which ground is in play? (A) § 10.36(b)(1) (B) § 10.36(b)(2) (C) § 10.36(b)(3) (D) None, because she eventually acted Answer: C. Section 10.36(b)(3) covers an individual who knows or should know of the pattern and, through wilfulness, recklessness or gross incompetence, fails to take prompt action to correct it. Eventual action is not prompt action.