Under Section 10.36 of Circular 230 two requirements arise for practitioners: first, they must have procedures to comply with Circular 230 and second, they must be following the procedures they created to comply with Circular 230. Failure to do either can subject a practitioner to sanctions from the IRS Office of Professional Responsibility.
The person in the firm that can get hit with a sanction under 10.36 is typically a partner, since the person needs to have principal authority and responsibility for overseeing a firm’s tax practice.
The interesting aspect is that firms need to have the rules and actually use them, so it really becomes a two prong analysis when analyzing any violation under this section. For most firms, this means having employees look over firm procedures and such. Some firms have the employees sign a document acknowledging that they have reviewed firm procedures. When doing Circular 230 audits, written acknowledgements one of the first policies I suggest firms start completing.
The reason 10.36 is so important is that it covers the entire tax practice of a firm. When looking at section 10.50(c)(2), the amount of penalty that OPR can assess, "shall not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty." This means a violation of Circular 230 10.36 could lead to a monetary sanction equal to the past five years of the firm's gross receipts for their tax practice. (OPR can only go back five years due to the statute of limitations imposed from the Baldwin case).
This is why all firms need a written policy covering Circular 230 procedures and need employee acknowledgement that they have read and understand the procedures.
Relevant Cites:
Circular 230
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