Section 10.34 of Circular 230 (31 CFR 10.34) sets the conduct standards for a practitioner who signs returns, advises on positions, files documents with the IRS, or relies on client information. It has four parts: returns and refund claims, documents and affidavits, penalty advice, and reliance on client information. A violation is a Circular 230 conduct issue, separate from any preparer penalty under the Internal Revenue Code. This article walks through each part and shows how they connect to section 6694.
What does 10.34(a) say about signing a return?
Paragraph (a) bars a practitioner from willfully, recklessly or through gross incompetence signing a return or claim for refund that contains a position that:
- lacks a reasonable basis;
- is an unreasonable position as described in section 6694(a)(2) of the Code; or
- is a willful understatement of liability or a reckless or intentional disregard of rules, as described in section 6694(b)(2).
The same limits apply to advising a client to take such a position on a return or claim, and to preparing a portion of a return that contains one. A pattern of conduct is a factor in deciding whether the practitioner acted willfully, recklessly or with gross incompetence.
Two features matter in practice. First, the paragraph borrows the section 6694 standards, so the penalty analysis and the discipline analysis run on the same position. Second, the conduct words (willfully, recklessly, gross incompetence) set the mental state required, and a pattern of conduct is a listed factor.
How do the position standards line up?
Section 6694(a)(2) makes a position unreasonable unless substantial authority exists for it. A disclosed position escapes the penalty if there is a reasonable basis. For tax shelters and reportable transactions the test is that it is reasonable to believe the position would more likely than not be sustained. Reading 10.34(a) with these provisions gives a working ladder:
| Position type | Minimum support under section 6694(a) |
|---|---|
| Undisclosed, ordinary | Substantial authority |
| Disclosed, ordinary | Reasonable basis |
| Tax shelter or reportable transaction | More likely than not |
Under 10.34(a), no position may lack a reasonable basis at all. The detail on the penalty side is in section 6694 preparer penalties.
What does 10.34(b) say about documents and affidavits?
Paragraph (b) covers documents, affidavits and other papers submitted to the IRS. A practitioner may advise a client to take a position on such a document only if the position is not frivolous. A practitioner may not advise a client to submit a document if:
- its purpose is to delay or impede the administration of the tax laws;
- it is frivolous; or
- it intentionally disregards a rule.
The exception is when the practitioner also advises the client to submit a document that makes a good-faith challenge to the rule.
What does 10.34(c) require about penalties?
Paragraph (c) is a communication duty, and it is the most overlooked part. A practitioner must inform the client of any penalty that is reasonably likely to apply to a position taken on a return if the practitioner advised on the position, or prepared or signed the return, and to a position on a document submitted to the IRS. The practitioner must also tell the client about any opportunity to avoid the penalty by disclosure, if relevant, and the requirements for adequate disclosure.
The duty applies even if the practitioner is not personally subject to a penalty. A position can be safe for the preparer and still risky for the taxpayer.
This is also where the preparer's own protection sits. Under Treas. Reg. 1.6694-2(d), a signing preparer can avoid the section 6694(a) penalty on a disclosed, reasonable-basis position by disclosing on Form 8275 or 8275-R, giving the taxpayer a return that includes the disclosure, or advising the taxpayer of the applicable penalty standards and documenting that advice. That advice must be particular to the taxpayer and contemporaneously documented. General disclaimers do not suffice, though established forms or templates are allowed for explaining the penalty rules.
What does 10.34(d) say about relying on client information?
A practitioner may generally rely in good faith, without verification, on information the client furnishes. The practitioner may not ignore the implications of information furnished or actually known. If the information appears incorrect, inconsistent or incomplete, the practitioner must make reasonable inquiries.
This mirrors the SSTS rule on reliance on information from others (see the SSTS overview). The file test is whether the inquiry was made and recorded when a red flag appeared.
Which effective dates apply?
The Cornell text of the regulation lists paragraph (a) as applying to returns, claims for refund and advice beginning August 2, 2011, and paragraphs (b) through (d) as applying to submissions on or after September 26, 2007.
How does 10.34 compare with 10.35?
Section 10.35 sets competence and delegation rules for the practitioner, while 10.34 governs the content of what the practitioner signs and advises. A firm that delegates return preparation must satisfy both. See Circular 230 section 10.35.
What should the file show?
- Authority memo for each position below clear authority, identifying the standard met (substantial authority or reasonable basis with disclosure).
- Penalty advice record, dated, specific to the client, stating the penalties reasonably likely to apply and the disclosure option.
- Disclosure copy of any Form 8275 or 8275-R, or the client's written decision not to disclose.
- Inquiry log for client information that looked incorrect, inconsistent or incomplete.
- Document review for any submission to the IRS, confirming it is not frivolous and is not meant to delay.
- Pattern review at firm level, because 10.34(a) treats a pattern of conduct as a factor.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- Cornell Law School Legal Information Institute, 31 CFR 10.34, Standards with respect to tax returns and documents, affidavits and other papers: https://www.law.cornell.edu/cfr/text/31/10.34
- Cornell Law School Legal Information Institute, 26 U.S.C. 6694: https://www.law.cornell.edu/uscode/text/26/6694
- Cornell Law School Legal Information Institute, 26 CFR 1.6694-2: https://www.law.cornell.edu/cfr/text/26/1.6694-2
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