The revamping of Circular 230 has been a year in the making, but is now final. Of the changes, it seems that the famous “Circular 230 disclaimer” comment is garnering the most attention. The Treasury noted that it will take action against accountants who use the disclaimer, but who also note that the disclaimer is required by Circular 230. The disclaimer can (and should) be left in the written correspondence, however.
Beyond this, there are additional changes that are also note-worthy. Many commenters explain the changes as going from a rules-based regulation to a principles-based regulation. It is important to note the new principles when forming risk management guidelines for accounting firms. Here is a quick look at some of the changes that may impact the risk profile of accounting firm’s engagements:
- Competency – The Treasury explains that tax work must be performed by accountants that are “competent” to give the advice and do the work. However, there is no definition of what makes a firm or an accountant competent. The Treasury does give some clarity when it explains that the accountant can perform research on a particular matter to become competent. They can also consult with an expert when the accountant’s background is not adequate to handle a particular tax situation. These are best practices that firms should employ on all engagements – not simply tax engagements.
- Compliance Responsibility – Circular 230 places the burden of compliance on the person at a firm who maintains principal authority. This person must form procedures that ensure that the firm complies with Circular 230 and also spearhead the implementation of those procedures. Failure to do so could result in this person being held accountable if their firm is found to have violated the regulations.
- Reliance on Another’s Work – The “Diligence as to Accuracy” section of the Circular has also been amended to enforce accuracy when one accountant relies on the work of another. Each accountant has the responsibility to be assured that all information going to the IRS is accurate. This even extends to the use of another accountant’s work product. The accountant does not need to re-hash the work, but should consider the competency and expertise of the person whose work they are using. This is also a best practice for firms and even speaks to the importance of a second partner review to ensure that work is done accurately for each engagement.
While these changes are significant, they can also help firms institute sound risk management protocols on engagements. It is also important to note that there are two risks when a firm does not comply with Circular 230 – or any other regulation. The first risk is a regulatory investigation from the governing body. Many insurance policies can be structured to provide coverage for regulatory investigations, but typically they will not insure the penalties for non-compliance. Secondly, if a client were to sue and it was discovered that the engagement did not comply with Circular 230, the plaintiff would have all the more fodder with which to sue.
Contact us to learn how your firm’s insurance would respond to allegations of accountant’s professional malpractice or to a regulatory investigation.