Circular 230 is a set of rules for attorneys, CPA's, and other tax practitioners, relating to tax shelter issues, tax opinions, and standards for issuing tax advice. These rules aim to reduce the practice of issuing aggressive tax opinions that taxpayers can then rely upon to avoid penalties.
Practitioners who violate these rules may be suspended or disbarred from practice before the Internal Revenue Service. They may also be subject to monetary penalties.
In Notice 2007-39, the IRS provided some guidance on the monetary penalties. The Notice provided:
- The MAXIMUM monetary penalty that the IRS may impose is the collective gross income derived by the practitioner and the employer, firm, or other entity in connection with the prohibited conduct
- The Secretary has discretion to impose a monetary penalty in an amount less than the amount allowed by statute;
- In general, the Service will not impose monetary penalties in cases of minor technical violations, when there is little or no injury to a client, the public, or tax administration, and there is little likelihood of repeated similar misconduct.
- The IRS may also impose monetary penalties against an employer, firm, or other entity, if the practitioner was acting on its behalf in connection with the prohibited conduct giving rise to the penalties and the employer, firm, or other entity knew, or reasonably should have known, of the prohibited conduct.
The Notice provides details on when an employer will be liable to penalty for violations by an employee. Since taking reasonable steps to ensure compliance with Circular 230 by employees can help insulate the employer from penalty, all employers should be instructing their employees on Circular 230 particulars and monitoring compliance to minimize their exposure to penalty.