Fundamentals · Brief · Intro level
Circular 230, explained
Circular 230 is the Treasury regulation governing practice before the IRS: competence, diligence, standards for return positions, and fee rules. Its restriction on contingent fees for refund claims is why the specialty-tax fee model deserves scrutiny.
Circular 230 — formally 31 C.F.R. Part 10 — is the Treasury regulation that governs who may practice before the IRS and how they must behave while doing it. It binds attorneys, CPAs, and enrolled agents; it sets duties of competence and diligence, minimum standards for return positions and written advice, and rules on fees and solicitation; and it gives the IRS Office of Professional Responsibility the power to censure, suspend, or disbar practitioners who violate it. For anyone hiring specialty-tax help, it is the accountability framework the provider either operates inside — or conspicuously does not.
What Circular 230 requires
The operative duties, condensed:
- Competence (§10.35). The practitioner must possess, or acquire through study or association, the knowledge and skill the engagement requires. A generalist signing a cost segregation or research credit position is vouching for specialist competence.
- Diligence and reliance (§10.22). Due diligence in preparing filings and in determining the correctness of representations made to clients and to the IRS. A practitioner may rely on another's work product only with reasonable care — "the study firm said so" is not, by itself, diligence.
- Position standards (§10.34). No signing a return, or advising a position, that lacks a reasonable basis or amounts to a willful understatement. These standards run parallel to the preparer penalties in the Code and the accuracy penalties taxpayers face under Section 6662.
- Written advice (§10.37). Advice must be based on reasonable factual and legal assumptions and cannot ignore facts the practitioner knows or should know.
- Errors and omissions (§10.21). A practitioner who learns of a client's noncompliance or error must advise the client promptly of the error and its consequences.
Enforcement runs through the Office of Professional Responsibility; the taxpayer-facing counterpart of this framework — what taxpayers themselves are owed in dealings with the IRS — is set out in the Taxpayer Bill of Rights.
Why contingent fees around refund claims are restricted
Section 10.27 of Circular 230 generally bars contingent fees for services relating to preparing returns, with narrow exceptions — principally claims or amended returns being examined or challenged by the IRS, penalty and interest disputes, and judicial proceedings. The logic is not subtle: a fee computed as a percentage of the refund pays the practitioner to inflate the refund, precisely the incentive the position standards exist to check.
The specialty-tax industry is where this rule meets practice. "You pay nothing unless we find credits" is a contingent fee on an as-filed claim — a structure the rule was written to prevent, offered routinely by firms whose staff are often not Circular 230 practitioners at all. (A 2014 district court decision, Ridgely v. Lew, limited the IRS's authority to police contingent fees for ordinary refund claims prepared by practitioners, which is why the marketing persists; the incentive problem the rule identified is unchanged, and credentialed firms largely still follow it.)
What this means when vetting providers
| Signal | What it suggests |
|---|---|
| Fixed or hourly fee, credentialed signer | Operating inside Circular 230's standards |
| Percentage-of-refund fee | Incentive to inflate; likely outside or testing §10.27 |
| Deliverable is a number, not workpapers | Nothing for your CPA to exercise §10.22 diligence on |
| "Audit defense included" without a named practitioner | Ask who, with what credential, appears before the IRS |
Your own CPA's Circular 230 duties are also in play: they cannot blindly sign a return incorporating a specialty study, so a provider whose workpapers cannot survive your CPA's review is a provider your CPA may refuse to rely on. The full vetting framework — methodology, exam support, fee structure — is in choosing a specialty tax provider; the statutory backdrop for practitioner discipline sits in Title 31 rather than Title 26, which is itself a clue that these are professional-conduct rules, not tax computations.
Frequently asked questions
- What is Circular 230?
- Circular 230 is the Treasury Department regulation (31 C.F.R. Part 10) governing practice before the IRS by attorneys, CPAs, enrolled agents, and other practitioners. It sets duties of competence and diligence, standards for tax return positions and written advice, fee and advertising rules, and the disciplinary framework — censure, suspension, or disbarment from practice — administered by the IRS Office of Professional Responsibility.
- Are contingent fees allowed for tax work?
- Only narrowly. Circular 230 §10.27 generally prohibits contingent fees for preparing original returns, permitting them mainly for claims and amended returns challenged or under examination by the IRS, and for judicial proceedings. A fee calculated as a percentage of a credit or refund on an as-filed claim sits at or beyond the edge of what the rule allows, which is why many CPA firms decline that structure.
- Why does Circular 230 matter when hiring a specialty tax provider?
- Because it defines the professional duties — competence, diligence, reasonable-basis standards for positions — that a credentialed practitioner owes, and the discipline they risk by ignoring them. A provider whose fee is a straight percentage of the refund, or who is not subject to Circular 230 at all, is operating outside that accountability structure, and the taxpayer keeps all the audit risk.