Practitioner Standards & Tax Advice — Circular 230 §§10.34, 10.36, 10.37

Rule

Circular 230 sets the standards practitioners must meet when taking tax positions on returns and when giving written tax advice. A "tax position" is the stance a taxpayer/practitioner takes on how the tax law applies to a specific situation (income reporting, deductions, credits, elections). Positions must comply with current law even when seeking to minimize tax.

§10.37 — Written Advice

Written advice (now defined broadly to include emails, texts, and any electronic communication on any federal tax matter) must:

• Be based on reasonable facts and law assumptions
• Consider all relevant facts/circumstances the practitioner knows or reasonably should know
• Use reasonable efforts to ascertain the facts relevant to each federal tax matter
• NOT rely on a client's (or third party's) statements, findings, or agreements when reliance would be unreasonable
• Relate applicable law and authority to the facts

Audit lottery prohibited: Practitioner may NOT consider whether a return will be audited or whether an item will be raised on audit when giving written advice. Advising a client to take a noncompliant position because audit risk is low violates §10.37.

Reliance on others: A practitioner may rely on another practitioner's advice/work product if reasonable and in good faith — UNLESS the practitioner knows or reasonably should know that: (a) the opinion should not be relied on, (b) the person lacks competence/qualifications, or (c) the person has a disqualifying conflict of interest.

Review standard: IRS evaluates compliance using a "reasonable practitioner" standard, considering all facts and circumstances, the scope of the engagement, and the type/specificity of the advice.

Exceptions: §10.37's written-advice rules do NOT apply to (1) continuing-education speeches on federal tax matters, or (2) government submissions on general policy.

§10.34 — Standards for Returns and Documents

§10.34 has four parts and ties directly to the IRC §6694 preparer penalty:

1) Positions on a return: Practitioner must NOT knowingly sign a return/claim knowing (or reasonably should know) it:

• Lacks a reasonable basis
• Is an unreasonable position under IRC §6694(a)(2)
• Reflects a willful attempt to understate liability, or a reckless/intentional disregard of rules/regulations

Position standards (know these thresholds):

Disclosure (Form 8275 / 8275-R): Form 8275 (Disclosure Statement) discloses a position that has reasonable basis but not substantial authority. Disclosure can avoid the accuracy-related penalty for substantial understatement or disregard — BUT disclosure does NOT protect against: negligence, disregard of regulations, or tax-shelter substantial understatement. Form 8275-R (Regulation Disclosure Statement) is used only when taking a position contrary to a Treasury regulation. A position with NO reasonable basis cannot be saved by disclosure.

2) Documents submitted to IRS: Practitioner must NOT advise a client to submit documents that: delay/obstruct tax administration, are frivolous, or omit information showing intentional disregard of a rule/regulation (unless the client also submits a disclosure statement evidencing a good-faith challenge).

3) Advising on penalties: Practitioner MUST inform the client of any penalty that may reasonably apply to a position when the practitioner (a) advised on the position, OR (b) prepared/signed the return. Must also tell the client about any opportunity to avoid the penalty through disclosure. This applies even if the practitioner is not personally subject to the penalty.

4) Reliance on client information: Practitioner may rely in good faith on client-provided information, but must NOT ignore the information's implications and MUST make reasonable inquiries if the information appears incorrect, inconsistent, or incomplete.

Tax Shelter / Reportable Transaction Reporting

A "reportable transaction" (also called a listed transaction) is one IRS has identified as having tax-avoidance/evasion potential. Rules apply to all individuals/entities.

• Form 8886 (Reportable Transaction Disclosure Statement) must be attached to the return for any year the taxpayer participates
• A separate statement required for each reportable transaction
• Penalty for understatement: 20% if properly disclosed; 30% if not disclosed
• Additional penalty (IRC §6707A(b)): 75% of the reportable-transaction understatement, minimum $10,000 (individuals $5,000), up to $200,000 (individuals $100,000)
• Even with disclosure, if IRS later disallows the shelter, a 20% accuracy-related penalty can still apply

§10.36 — Firm Compliance Procedures

Practitioners who oversee a firm must take reasonable steps to ensure the firm has procedures so all members/partners/employees comply with Circular 230.

• If a firm does not designate a principal, IRS may designate one or more practitioners to carry §10.36 duties
• A practitioner who fails to take reasonable steps — and who knows of a pattern of violations by others at the firm but does not act — may be sanctioned

Authority

• Circular 230 §10.34 (return/document standards; penalty advice; reliance on client info)
• Circular 230 §10.36 (firm compliance procedures)
• Circular 230 §10.37 (written advice; reasonable practitioner standard)
• IRC §6694(a) (unreasonable position — greater of $1,000 or 50% of preparer income)
• IRC §6694(b) (willful/reckless — greater of $5,000 or 75% of preparer income)
• IRC §6707A (reportable transaction penalty)
• Form 8275 / Form 8275-R (disclosure statements)
• Form 8886 (Reportable Transaction Disclosure Statement)

Edge Cases

• Reasonable basis vs. substantial authority: A 35% likelihood of prevailing can still meet reasonable basis if supported by authority — but only protects the preparer if the position is disclosed on Form 8275. Without disclosure, an undisclosed position lacking substantial authority is an "unreasonable position."
• Frivolous positions cannot be signed — ever: Disclosure does NOT protect a frivolous return (e.g., "wages are not income," "tax is voluntary," "sovereign citizen" arguments). The practitioner must refuse to sign.
• Reliance on another practitioner's work: Allowed if reasonable and in good faith, but reliance is unreasonable if the other person was sanctioned/has a conflict/lacks competence. A practitioner cannot hide behind a discredited advisor.
• Knowing the implication of client info: A preparer who prepared a child's parents' return (showing the child lived with parents) cannot ignore that fact when the grandmother later claims the same child — the known information must be considered.
• Penalty advice duty is broad: Triggers even if the practitioner would not personally be penalized for that position.

Common Traps

• "Audit lottery" advice: Telling a client a dubious position is "worth it" because audit rates are ~2% violates §10.37. Candidates often miss that considering audit probability in written advice is expressly prohibited.
• Confusing the position standards: MLTN (>50%) is required for tax shelters/reportable transactions; substantial authority is the standard to avoid §6694(a) without disclosure; reasonable basis is the floor. Mixing these up is a classic exam trap.
• Form 8275 limitations: Disclosure avoids the substantial-understatement and disregard penalties, but NOT negligence or tax-shelter understatement penalties. Candidates wrongly think disclosure cures everything.
• §10.34 penalty-advice duty: Many think the duty to advise on penalties only arises if the preparer signs — it also arises if the preparer merely advised on the position.
• Firm oversight (§10.36): A supervising practitioner who stays silent about a partner's improper credit claims can be sanctioned personally — ignorance is not a defense once a pattern is known.
• Reportable transaction penalties: The 30% understatement penalty (non-disclosure) is in ADDITION to the §6707A 75% penalty — they stack.

Connected Rules

• circular-230-rules — §§10.22 due diligence, 10.33 best practices, 10.35 competence, 10.21 client omission
• penalties-refund-professional-responsibility — §6694/§6695 preparer penalties, §6662 accuracy-related penalty
• due-diligence-refundable-credits — Form 8867 due diligence for refundable credits
• practitioner-misconduct — OPR sanctions for §10.34/10.37 violations
• irs-authority-practice-requirements — substantial authority definition, tax law hierarchy

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