Practices and Procedures · Requirements for Enrolled Agents

Rules for refund check negotiation

Two prohibitions cover the same conduct from different directions, and they are not co-extensive. Circular 230 § 10.31 is a practice rule enforced by the Office of Professional Responsibility; IRC § 6695(f) is a money penalty enforced by assessment. One act can trigger both, and the exam tests the differences.

The rule

Circular 230 § 10.31(a) — a practitioner may not endorse or otherwise negotiate any check issued to a client by the government in respect of a Federal tax liability. The parenthetical inside that sentence is the operative modern language: negotiating includes “directing or accepting payment by any means, electronic or otherwise, into an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated.” The section is applicable beginning June 12, 2014 (§ 10.31(b); T.D. 9668, 79 FR 33693).

IRC § 6695(f) — any person who is a tax return preparer who endorses or otherwise negotiates, directly or through an agent, any check made in respect of the taxes imposed by title 26 which is issued to a taxpayer other than the tax return preparer shall pay a penalty with respect to each such check. The statute carries its own exception: the sentence does not apply to the deposit by a bank (within the meaning of IRC § 581) of the full amount of the check in the taxpayer’s account in that bank for the benefit of the taxpayer.

Reg. § 1.6695-1(f) adds the practical carve-out. No tax return preparer as described in Reg. § 301.7701-15 may endorse or otherwise negotiate, directly or through an agent, a check (including an electronic version of a check) for the refund of tax issued to a taxpayer other than the preparer, if that person prepared the return or claim that gave rise to the refund check. But a preparer is not treated as having endorsed or negotiated a check “solely as a result of having affixed the taxpayer’s name to a refund check for the purpose of depositing the check into an account in the name of the taxpayer, or in the joint names of the taxpayer and one or more other persons (excluding the tax return preparer), if authorized by the taxpayer or the taxpayer’s recognized representative.”

The regulation also carves out the preparer-bank: a bank that is also the preparer may cash a refund check and remit all the cash to the taxpayer, or accept it for deposit in full to the taxpayer’s account, so long as it does not initially endorse or negotiate the check and has not made a loan on the basis of the anticipated refund (Reg. § 1.6695-1(f)(2)(i)). It may endorse the check later in the ordinary clearing process (Reg. § 1.6695-1(f)(3)).

Current figures

How it works in practice

Start with who each rule binds, the sharpest difference between them. § 6695(f) binds a tax return preparer — and, per Reg. § 1.6695-1(f)(1), only where that person prepared the return or claim that gave rise to the refund check. § 10.31 binds a practitioner, full stop: since the 2014 amendment it does not matter whether the practitioner prepared the return or is a return preparer at all. An enrolled agent who represents a client only in collection, who prepared nothing, is bound by § 10.31.

Next, what counts as negotiation. The old mental model — a paper check and an endorsement on the back — is the smallest part of the modern rule. Both provisions reach electronic movement of the money. § 10.31 does so by naming “directing or accepting payment by any means, electronic or otherwise, into an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated.” That reaches:

• entering the firm’s routing and account number on the direct-deposit line of the return;
• routing the refund to a settlement account, a fee-deduction account, or a card product the firm controls;
• routing it to an account owned by a related entity — the wording expressly includes “any firm or other entity with whom the practitioner is associated.”

The permitted alternative is narrow. Reg. § 1.6695-1(f)(1) lets the preparer affix the taxpayer’s name to a refund check for the purpose of depositing it into an account in the taxpayer’s name, or a joint account of the taxpayer and others — with the preparer expressly excluded from the joint-account holders — and only if authorized by the taxpayer or the taxpayer’s recognized representative. Every element must hold, and it is a carve-out from being treated as endorsing, not a general permission to handle client refunds.

The § 6695(f) penalty is per check, and Reg. § 1.6695-1(f)(4) states it in those terms. There is no annual cap. A preparer who deposits ten clients’ refunds into the firm account faces the penalty ten times over.

Two collateral rules travel with this topic. A power of attorney on Form 2848 does not confer authority to endorse or negotiate a refund check. And the IRS limits how many refunds it will deposit electronically into one financial account — see the figures table — a fraud control that also catches preparers routing many clients’ refunds to one place; the fourth and later refunds convert to a paper check mailed to the taxpayer.

How this has changed

The current § 10.31 is the product of T.D. 9668, 79 FR 33693, applicable beginning June 12, 2014. The amendment did two things that matter.

First, it removed the limitation to preparers. The earlier § 10.31 opened “A practitioner who prepares tax returns may not endorse or otherwise negotiate any check…” The current text opens simply “A practitioner may not…” — reaching every practitioner within Circular 230, whether or not they prepare returns.

Second, it added the electronic parenthetical, making explicit that directing or accepting payment by any means into an account owned or controlled by the practitioner or an associated firm or entity is negotiation. That closed the gap that opened as refunds moved from paper to direct deposit, and it is why the modern fact pattern is a routing number rather than a signature.

IRC § 6695(f) has not been rewritten; only the amount changes, adjusted for inflation. Reg. § 1.6695-1(f)(4) still states the penalty at its original unindexed figure — the current amount comes from the annual inflation-adjustment revenue procedure, not from the regulation text.

A violation of § 10.31 is sanctionable under Circular 230 § 10.52(a)(1) on a showing of wilfulness; § 10.31 is not among the sections named in the reckless-or-gross-incompetence limb of § 10.52(a)(2). The § 6695(f) penalty, by contrast, requires no mental state at all — it applies to the act.

Exam focus

The most reliably tested point is that a representative may not endorse or negotiate a client’s refund check, and that this sits alongside things a representative may do under a Form 2848 power of attorney — sign a consent extending the assessment period, a closing agreement, a waiver of restrictions on assessment. Expect the check to be the odd one out.

Second, the prohibition covers electronic direction of the refund and extends to accounts owned or controlled by the practitioner’s firm or associated entity, not just the practitioner personally.

Third, keep the two exceptions apart: the taxpayer-account deposit carve-out in Reg. § 1.6695-1(f)(1) — taxpayer’s name on the account, preparer absent from it, taxpayer’s authorisation; and the bank exception in IRC § 6695(f) — a § 581 bank, the full amount, the taxpayer’s account, no initial endorsement, no refund-anticipation loan. The § 6695(f) penalty is per check with no cap.

Check yourself

1. Which of the following may a representative holding a Form 2848 power of attorney not do? (A) Sign a closing agreement (B) Sign a consent extending the period of limitations on assessment (C) Endorse or negotiate the taxpayer’s refund check (D) Sign a waiver of restrictions on assessment of a deficiency Answer: C. Circular 230 § 10.31(a) prohibits it, and IRC § 6695(f) penalises it where the practitioner prepared the return; a power of attorney does not confer the authority.

2. A preparer enters the firm’s own bank account on the direct-deposit line of a client’s return, with the client’s written permission. Which is correct? (A) Permitted, because the client consented in writing (B) Permitted, because no paper check was endorsed (C) Prohibited, because directing payment electronically into an account owned by the practitioner’s firm is negotiation (D) Prohibited only if the preparer deducts a fee Answer: C. Section 10.31(a) expressly includes directing payment by any means, electronic or otherwise, into an account owned or controlled by the practitioner or an associated firm. Neither section contains a consent exception.

3. A preparer affixes the taxpayer’s name to a refund check, with the taxpayer’s authorisation, to deposit it into an account held jointly by the taxpayer and the preparer. Is the deposit within the Reg. § 1.6695-1(f)(1) carve-out? (A) Yes, because the taxpayer authorised it (B) Yes, because the taxpayer is an account holder (C) No, because the carve-out excludes joint accounts that include the tax return preparer (D) No, because the carve-out applies only to electronic refunds Answer: C. The regulation permits a joint account of the taxpayer and one or more other persons excluding the tax return preparer.

4. Which condition is not required for the bank exception in IRC § 6695(f)? (A) The bank deposits the full amount of the check (B) The deposit is to the taxpayer’s account for the taxpayer’s benefit (C) The bank has made a loan to the taxpayer based on the anticipated refund (D) The bank does not initially endorse or negotiate the check Answer: C. A refund-anticipation loan defeats the exception rather than being required by it — Reg. § 1.6695-1(f)(2)(i).

5. Which statement about the scope of Circular 230 § 10.31 as amended in 2014 is correct? (A) It applies only to practitioners who prepare tax returns (B) It applies to any practitioner, whether or not they prepare returns (C) It applies only to paper refund checks (D) It applies only to accounts owned personally by the practitioner Answer: B. T.D. 9668 removed the “who prepares tax returns” limitation and added the electronic parenthetical reaching accounts owned or controlled by the practitioner or an associated firm or entity.