Representation before the IRS · Building the Taxpayer's Case: Preliminary Work

Competence, expertise and time to handle issue

Three separate Circular 230 duties meet at the moment a practitioner decides whether to take a matter on: competence to do it, diligence in doing it, and not unreasonably delaying it once taken. The competence rule is the shortest of the three and the most misread — it does not say a practitioner may only accept work in areas they already know. It says competence is required, and then says how it may be acquired.

The rule

Competence is required, and it is defined. “A practitioner must possess the necessary competence to engage in practice before the Internal Revenue Service. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged” (Circular 230 § 10.35(a)). See the figures table.

And it can be acquired. The same paragraph continues: “A practitioner may become competent for the matter for which the practitioner has been engaged through various methods, such as consulting with experts in the relevant area or studying the relevant law.” Competence is measured at the point the work is done, not at the point of engagement.

Diligence, and where it applies. See the figures table (§ 10.22(a)). Due diligence is owed in three places: preparing, assisting in preparing, approving and filing returns, documents, affidavits and other papers relating to IRS matters; determining the correctness of oral or written representations made to the Treasury Department; and determining the correctness of oral or written representations made to clients on any matter administered by the IRS.

Reliance on other people’s work. See the figures table (§ 10.22(b)). A practitioner “will be presumed to have exercised due diligence” where they rely on another person’s work product and used “reasonable care in engaging, supervising, training, and evaluating” that person, “taking proper account of the nature of the relationship.” The presumption is modified by §§ 10.34 and 10.37.

Time. “A practitioner may not unreasonably delay the prompt disposition of any matter before the Internal Revenue Service” (Circular 230 § 10.23). It is one sentence, and it is a free-standing duty.

Firm-level responsibility. See the figures table (§ 10.36). Anyone with, or sharing, “principal authority and responsibility for overseeing a firm’s practice” must “take reasonable steps to ensure that the firm has adequate procedures” for compliance by all members, associates and employees. Where the firm identifies nobody, “the Internal Revenue Service may identify one or more individuals” as responsible.

The threshold for firm-level discipline is high. See the figures table (§ 10.36(b)). It requires willfulness, recklessness or gross incompetence in failing to ensure adequate procedures exist, or that they are followed, or in failing to take prompt corrective action — and a pattern or practice of non-compliance by one or more people at the firm.

Current figures

How it works in practice

Unfamiliar is not the same as incompetent. The rule expressly contemplates a practitioner becoming competent for a matter they were engaged on — by consulting experts or studying the law. So an enrolled agent asked about an area they have not handled is not obliged to decline. They are obliged to close the gap before the work is done, and to be honest with themselves about whether that is realistic in the time available.

Time is part of competence, not separate from it. The standard is “knowledge, skill, thoroughness, and preparation necessary for the matter.” Thoroughness and preparation take time. A practitioner who has the knowledge but not the hours to apply it properly does not meet § 10.35 — and taking the matter on anyway puts them on the wrong side of § 10.23 as well, because the predictable result is delay.

Say no in the right way, and early. Where the matter cannot be handled competently in the time available, the decision belongs at the start. Declining costs a fee; accepting and then failing costs a client’s position, and may cost the practitioner more than that. If the answer is to bring in help, the engagement letter should say who is doing what.

Diligence reaches what you tell the client, not just what you file. Section 10.22(a)(3) is the limb practitioners forget: due diligence in determining the correctness of representations made to clients. Advice given casually on the telephone is within it. So is a confident answer given without checking.

The reliance presumption has two halves and both are required. Relying on someone’s work product is not enough — the practitioner must also have used reasonable care in engaging, supervising, training and evaluating them. A firm that hires without checking, or never reviews, has the reliance without the care and loses the presumption.

A prior preparer’s return is a reference, not a presumption of error. Where a new client brings last year’s return prepared by someone else, the practitioner is not obliged to re-audit it as though they had prepared it. Reasonable care in using it as a reference is the standard, and § 10.22(b) is why. What the practitioner may not do is rely on it where something on its face should have prompted a question.

Firm procedures are somebody’s named responsibility. Section 10.36 puts the duty on whoever has principal authority for overseeing the firm’s practice — and if the firm has not identified that person, the IRS may. Small firms often assume the rule is for large ones. It is not; it is for whoever is in charge, however few people that is.

Firm-level discipline needs a pattern, not an incident. The § 10.36(b) threshold is willfulness, recklessness or gross incompetence plus a pattern or practice of non-compliance. One employee’s mistake is not it. A recurring failure that the responsible individual knew or should have known about, and did not correct, is.

How this has changed

Competence became a duty in its own right in 2014. Circular 230 § 10.35 is “applicable beginning June 12, 2014” (T.D. 9668). Before that revision § 10.35 was the covered opinion rule — a long, prescriptive standard for written tax advice that practitioners built disclaimers around. The 2014 revision removed it entirely and replaced it with two sentences on competence. Anyone trained before then remembers a completely different § 10.35, and material referring to covered opinions under that number is superseded.

The reliance-on-others presumption arrived at the same time. Circular 230 § 10.22(b) is also applicable from 12 June 2014. Paragraph (a), the core diligence duty, dates from 26 September 2007. So the duty is older than the safe harbour for relying on staff and other professionals.

Firm procedures were made a named responsibility in 2014. Section 10.36 is likewise applicable from 12 June 2014, and it replaced a narrower predecessor aimed at covered opinion procedures. The current section reaches the firm’s whole practice under subparts A, B and C — and gives the IRS power to identify a responsible individual where the firm has not.

Section 10.23 has not changed and remains a single sentence. Prompt disposition is one of the oldest and plainest duties in Circular 230. It is easy to overlook precisely because there is nothing to it beyond the words.

Exam focus

Know that competence is “the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter,” and that a practitioner may become competent by consulting experts or studying the relevant law.

Know the three limbs of § 10.22(a) diligence, and in particular that it reaches representations made to clients as well as to Treasury.

Know the reliance presumption in § 10.22(b) and that it requires reasonable care in engaging, supervising, training and evaluating the person relied on.

Know that § 10.23 forbids unreasonably delaying the prompt disposition of any matter before the IRS.

Know that § 10.36 puts firm compliance procedures on whoever has principal authority for overseeing the practice, and that the IRS may identify that person if the firm has not.

Know the § 10.36(b) threshold: willfulness, recklessness or gross incompetence plus a pattern or practice of non-compliance.

Check yourself

1. An enrolled agent is engaged on a matter in an unfamiliar area. What does Circular 230 § 10.35 require? (A) The agent must decline (B) The agent must refer the matter to an attorney (C) The agent must possess the necessary competence, which may be acquired by consulting experts or studying the relevant law (D) The agent may proceed without further preparation Answer: C. Competence is measured for the matter engaged on, and the rule expressly contemplates acquiring it.

2. Which of these is within the § 10.22 due diligence duty? (A) Only returns and documents filed with the IRS (B) Only written representations (C) Also determining the correctness of oral or written representations made to clients on matters administered by the IRS (D) Only representations made to Treasury Answer: C. There are three limbs, and the one covering advice to clients is the most easily forgotten.

3. A practitioner relies on work performed by a staff member. When is due diligence presumed? (A) Always, where the work is delegated (B) Where the practitioner used reasonable care in engaging, supervising, training and evaluating that person (C) Never — delegation does not satisfy diligence (D) Only where the staff member is credentialed Answer: B. Reliance plus reasonable care; the presumption is modified by §§ 10.34 and 10.37.

4. A new client provides the prior year’s return prepared by another enrolled agent. What does due diligence require? (A) No review at all (B) Review for reasonable accuracy — the prior preparer’s work is not presumed wrong (C) A complete re-audit as though the practitioner had prepared it (D) That it not be used as a reference Answer: B. But reliance stops being reasonable where something on the face of the return should prompt a question.

5. What must exist before an individual with principal authority over a firm’s practice is disciplined under § 10.36(b)? (A) Any compliance failure at the firm (B) Willfulness, recklessness or gross incompetence, together with a pattern or practice of non-compliance (C) A referral from OPR (D) A conviction Answer: B. Both elements are required; a single incident is not enough.