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The U.S. Treasury Department has introduced proposed regulations to update Circular 230, targeting tax professionals who charge contingent fees for preparing tax returns. Announced Friday, the new rules would classify certain contingent fee arrangements as disreputable conduct and require practitioners to demonstrate technological competency.

Key Changes to Circular 230

The proposed regulations aim to limit contingent fees for services such as preparing original or amended tax returns or refund claims. Tax professionals, including enrolled agents, CPAs, attorneys, and others practicing before the IRS, would be prohibited from charging fees deemed "unconscionable" under the facts and circumstances.

Treasury explained that these arrangements incentivize aggressive tax positions that could lead to evasion or abuse of federal tax laws. By restricting such fees, the rules seek to reduce undue risks to tax compliance.

“This proposal makes substantial changes to the regulation of contingent fees under Circular 230,” Treasury said, replacing prior fee regulations proposed in 2009 that were never finalized.

Expanded Focus on Technology and Data Security

The proposed regulations emphasize technological competency as part of professional standards. Tax practitioners would need to understand the benefits and risks of relevant technologies used to manage client information.

Additionally, the rules encourage practitioners to establish data security policies to safeguard sensitive information and create a response plan for potential data breaches.

Historical Context and Legal Considerations

The proposal follows a 2014 D.C. federal court decision that limited the IRS's authority to prohibit contingent fees for ordinary refund claims. Unlike earlier iterations, the proposed regulations do not hinge on whether a practitioner's activities constitute practice before the IRS, broadening their potential impact.

Practitioners currently may charge contingent fees in specific scenarios, such as handling whistleblower claims, determining penalties and interest, or representing clients in judicial proceedings. The new rules, however, would tighten these allowances significantly.

Next Steps

A public hearing on the proposed regulations is scheduled for March 6, providing an opportunity for stakeholders to weigh in. If finalized, the regulations would reshape how tax professionals handle contingent fee arrangements and require adjustments to practice standards, particularly in data security and technological understanding.