The rules that govern tax practice: a map for new tax staff

• Identify the five rule sets that apply to a paid return preparer and who enforces each
• Distinguish a professional conduct rule from a statutory penalty and a criminal provision
• Locate the rule that governs a given task, from intake through e-file and record retention
• Explain why staff who never sign a return are still inside the rules

Five rule sets, one return

A first-year tax associate who prepares a Form 1040 is working under at least five overlapping rule sets at once. Each comes from a different authority, carries a different sanction, and asks a different question about the same work.

State boards of accountancy add their own conduct rules for licensees, and the FTC Safeguards Rule adds data security duties. Those come up in the last lesson of this track.

Conduct rules versus penalties

Circular 230 is a set of conduct rules. A violation leads to censure (a public reprimand), suspension, disbarment from practice before the IRS, or a monetary penalty under section 10.50. It does not produce a tax bill.

The Code penalties are civil money penalties assessed against the preparer. Section 6694 targets understatements caused by unreasonable positions or willful or reckless conduct. Section 6695 targets procedural failures such as not signing, not furnishing a PTIN, or not meeting due diligence on refundable credits. The amounts in 6695 are adjusted for inflation each year.

Some provisions are criminal. Section 7216 makes knowing or reckless disclosure or use of return information a misdemeanor, with a fine of up to $1,000 and up to one year in prison. Section 6713 is the civil counterpart for the same conduct.

One set of facts can trigger all three. A preparer who invents business expenses to inflate a refund can face a 6694(b) penalty, a Circular 230 referral and, at the extreme, prosecution.

Why staff are covered

Section 10.8(a) of Circular 230 says any individual who for compensation prepares or assists with all or substantially all of a tax return must have a PTIN and is subject to the duties in subpart B and the sanctions in subpart C. Section 7701(a)(36) of the Code defines a tax return preparer to include a person who prepares a substantial portion of a return for compensation, so a non-signing preparer can be liable under section 6694. The IRS PTIN guidance says anyone you hire to prepare returns needs a PTIN regardless of whether you review and sign the returns. Being junior does not take you outside the rules.

Where each rule bites in the workflow

• Engagement and intake: conflicts check (10.29), section 7216 consents, engagement letter terms.
• Preparation: diligence (10.22), reliance on client information and reasonable inquiries (10.34(d)), Form 8867 knowledge requirement for refundable credits.
• Review and signing: position standards (10.34 and 6694), penalty and disclosure advice to the client (10.34(c)), client copy no later than when the return is presented for signature (6107(a)).
• Filing: Form 8879 signature authorization, e-file mandate.
• After filing: retention of the copy or list (6107(b)), Form 8867 records, return of client records (10.28), data security.

The tax season workflow guide shows how a firm sequences these steps. The rest of this track takes each rule in turn, starting with Circular 230 scope.

One error, three rule sets: Lena at Harbor Row Tax