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Tax professionals who charge clients contingent fees for preparing returns and other services before the IRS could face sanctions under new rules proposed by the U.S. Treasury Department. The proposed changes, issued on Friday, are intended to update Treasury Department Circular 230, which governs tax practitioners' conduct before the Internal Revenue Service.

Under the proposed regulations, certain contingent fee arrangements would be deemed disreputable conduct. The regulations would apply to a broad range of tax professionals, including registered tax return preparers, enrolled agents, attorneys, certified public accountants (CPAs), enrolled retirement plan agents, enrolled actuaries, and other practitioners.

The proposed changes aim to make significant revisions to the regulation of contingent fees and withdraw a similar set of fee regulations proposed in 2009, according to the Treasury Department. Currently, tax practitioners can charge contingent fees for services related to the IRS’ examination of amended returns, refund claims, and certain whistleblower claims. They are also allowed to charge such fees for services connected to judicial proceedings and determining interest and penalties.

However, the new regulations would redefine "disreputable conduct" to include the charging of contingent fees for the preparation of original or amended returns or refund claims. It would also include "unconscionable" fees, which may encourage evasion or abuse of federal tax laws by incentivizing aggressive tax positions that increase the client’s reported tax benefits for the personal gain of the practitioner.

While the IRS had previously proposed similar rules in 2009, these proposals were never finalized. Furthermore, a 2014 federal court decision in Washington, D.C., ruled that the IRS could not prevent tax professionals from charging contingent fees for ordinary refund claims based on the IRS’ power to regulate practice before the agency.

Unlike the previous rule proposals, the regulations released on Friday do not rely on the preparation of returns or refund claims as constituting practice before the IRS. This change reflects an expansion of the authority of the IRS to regulate tax practitioners in this area.

The proposed regulations also call for tax practitioners to maintain safeguards for client information and to establish a data security policy, including procedures for responding to data breaches. In addition, they would expand the current competency requirements for tax professionals to include proficiency in relevant technology. This would include understanding the benefits and risks associated with technology used to serve clients and transmit or store sensitive information.

A public hearing on these proposed regulations is scheduled for March 6. The IRS has declined to comment on the proposals at this time.