REG, Regulation

Sources for Ethics and Responsibilities in Tax Practice

Last reviewed 2026-09-14

The standards and authorities behind PocketCPA's REG lessons on Ethics and Responsibilities in Tax Practice. The topic rests on Circular 230 / IRC Sec. 6694-6695 / AICPA SSTS.

About this topic

A paid preparer signs a client's return. What that person may do, must do, and answers for is the whole of this topic.

The same undisclosed position can trigger all four at once, and a well-built question will offer the right rule from the wrong book.

Key points

• Circular 230 governs practice before the IRS; violations lead to censure, suspension, or disbarment.
• The AICPA Statements on Standards for Tax Services set the professional standard for tax practice.
• A tax return position requires a reasonable basis (for undisclosed positions) or a realistic possibility of being sustained (AICPA).
• Sec. 6694 penalties apply to preparers for unreasonable positions and willful or reckless conduct.

What the lessons cover

1. Circular 230 and practice before the IRS
2. AICPA Statements on Standards for Tax Services
3. Return-position standards and Section 6694
4. Assessable penalties and due diligence
5. Who is a tax return preparer (Sec. 7701(a)(36))
6. Confidentiality: Sec. 7216, Sec. 6713, and the Sec. 7525 privilege
7. Contesting a preparer penalty: Sec. 6694(c) through (e), Sec. 6696, and injunctions

Authoritative references

Where these requirements sit in the literature. Each entry names the provision, then breaks it out subsection by subsection.

• IRC Sec. 7216 is the criminal statute on unauthorized disclosure or use of return information. It makes it a misdemeanor for a person who prepares returns for compensation to knowingly or recklessly disclose information furnished for return preparation, or use it for any purpose other than preparing the return. The parallel civil penalty is Sec. 6713, so read the facts for whether criminal or civil exposure is being asked about.
• IRC Sec. 6694(a)(2) is the three-subparagraph engine of the position penalty.
  • (A) requires substantial authority by default.
  • (B) lowers the standard to reasonable basis for a position disclosed as provided in Sec. 6662(d)(2)(B)(ii)(I), but only where subparagraph (C) does not apply.
  • (C) requires that it be reasonable to believe the position would more likely than not be sustained, where the position is with respect to a tax shelter as defined in Sec. 6662(d)(2)(C)(ii) or a reportable transaction to which Sec. 6662A applies.
• IRC Sec. 6694(a)(1) and Sec. 6694(a)(3) carry the elements and the escape. The penalty applies only if part of an understatement of liability is due to a position described in paragraph (2) and the preparer knew or reasonably should have known of it, and it is the greater of $1,000 or 50 percent of the income derived. Sec. 6694(a)(3) excuses the penalty for reasonable cause and good faith, and by its own words only "under this subsection".
• IRC Sec. 6694(b) carries the willful-or-reckless tier, and there is no reasonable cause exception anywhere in it.
  • (b)(2)(A) is a willful attempt in any manner to understate the liability.
  • (b)(2)(B) is a reckless or intentional disregard of rules or regulations.
  • (b)(1) sets the amount at the greater of $5,000 or 75 percent of income derived.
  • (b)(3) reduces that amount by the subsection (a) penalty paid on the same return.
• IRC Sec. 6694(c) is the collection-stay provision. Paying at least 15 percent of the penalty within 30 days after notice and demand and filing a claim for refund blocks levy or a collection proceeding for the remainder until the proceeding under Sec. 6694(c)(2) is finally resolved. (c)(3) suspends the Sec. 6502 collection period while the Secretary is barred from collecting.
• IRC Sec. 6694(d) and Sec. 6694(e) work as a pair. Subsection (e) defines understatement of liability and says it is determined without regard to any administrative or judicial action involving the taxpayer, "except as otherwise provided in subsection (d)". Subsection (d) is that exception: a final administrative determination or final judicial decision that there was no understatement forces abatement, and any portion paid is refunded as an overpayment of tax without regard to any period of limitations that would otherwise apply.
• IRC Sec. 6695 collects the assessable preparer penalties. Subsections (a) through (e) each carry their own stated maximum and their own reasonable cause and not willful neglect relief, and (f) and (g) carry neither. Sec. 6695(h) indexes every dollar amount in (a) through (g), with the rounding rules in Sec. 6695(h)(2). The seven subsections are:
  • (a) failure to furnish a copy under Sec. 6107(a).
  • (b) failure to sign.
  • (c) failure to furnish the identifying number required by Sec. 6109(a)(4).
  • (d) failure to retain a copy or list under Sec. 6107(b).
  • (e) failure to file the information return required by Sec. 6060.
  • (f) negotiation of a taxpayer's refund check.
  • (g) failure of due diligence on head-of-household status under Sec. 2(b) and on the credits under Sec. 24, Sec. 25A(a)(1) and Sec. 32.
• IRC Sec. 6696 supplies the procedure for Sec. 6694, Sec. 6695, Sec. 6695A and Sec. 6695B.
  • (a) makes those penalties additional to other penalties.
  • (b) switches off the deficiency procedures of subchapter B of chapter 63.
  • (d)(1) gives a 3-year assessment period measured from the filing of the return or claim for a penalty under Sec. 6694(a), Sec. 6695 or Sec. 6695A, 6 years for Sec. 6695B, and no limit at all for a penalty under Sec. 6694(b).
  • (d)(2) gives a matching 3-year (or 6-year) refund-claim window, "except as provided in section 6694(d)".
  • (e) defines return and claim for refund for all four penalty sections.
• IRC Sec. 6701 penalizes aiding and abetting an understatement of another person's liability.
  • (a) sets the three elements.
  • (b)(1) and (b)(2) set the amount at $1,000, and at $10,000 where the document relates to a corporation's liability.
  • (b)(3) limits it to one penalty per person per taxpayer per period.
  • (c) defines procures to reach a subordinate's acts.
  • (d) applies it without the taxpayer's knowledge or consent.
  • (e) exempts mechanical assistance.
  • (f)(2) bars a Sec. 6694(a) or (b) penalty on the same person for the same document.
• IRC Sec. 6107 is the duty behind two of those penalties.
  • (a) furnish a completed copy to the taxpayer not later than the time the return is presented for signature.
  • (b) for the period ending 3 years after the close of the return period, retain a completed copy or a list of the taxpayer's name and taxpayer identification number, and make it available on request.
  • (c) lets one preparer's compliance be deemed compliance by others on the same return under regulations.
  • (d) borrows "return" and "claim for refund" from Sec. 6696(e) and "return period" from Sec. 6060(c).
• IRC Sec. 6713 is the civil twin of Sec. 7216.
  • (a) imposes $250 per improper disclosure or use with a $10,000 calendar-year ceiling and no state-of-mind element.
  • (b)(1) substitutes $1,000 and $50,000 where the disclosure or use is made in connection with a crime relating to misappropriation of another person's taxpayer identity, whether or not any tax filing is involved.
  • (b)(2) applies the ceiling separately to the enhanced and ordinary categories.
  • (c) imports the Sec. 7216(b) exceptions.
  • (d) switches off deficiency procedures.
• IRC Sec. 7216(b) carries the three exceptions to the criminal prohibition.
  • (b)(1) disclosures made pursuant to another provision of this title or pursuant to a court order.
  • (b)(2) use of the information in preparing State and local returns and declarations of estimated tax of the same person.
  • (b)(3) disclosures or uses permitted by regulations, which must permit disclosure or use for quality or peer reviews.
• IRC Sec. 7525 is the federally authorized tax practitioner privilege.
  • (a)(1) extends the common-law confidentiality protections that apply between a taxpayer and an attorney to a taxpayer and a federally authorized tax practitioner, but only with respect to tax advice and only to the extent the communication would be privileged between taxpayer and attorney.
  • (a)(2) limits assertion to a noncriminal tax matter before the IRS and a noncriminal tax proceeding in Federal court brought by or against the United States.
  • (a)(3) defines the practitioner by reference to section 330 of title 31 and defines tax advice by the scope of that authority.
  • (b) removes any written communication made in connection with promoting a person's direct or indirect participation in a tax shelter as defined in Sec. 6662(d)(2)(C)(ii).
• IRC Sec. 7701(a)(36) defines tax return preparer.
  • (A) any person who prepares for compensation, or employs one or more persons to prepare for compensation, any return or claim for refund under this title, with preparation of a substantial portion treated as preparation of the return.
  • (B)(i) excludes typing, reproducing or other mechanical assistance.
  • (B)(ii) excludes preparing the return of the employer by whom the person is regularly and continuously employed, or of an officer or employee of that employer.
  • (B)(iii) excludes preparing as a fiduciary.
  • (B)(iv) excludes preparing a claim for refund in response to a notice of deficiency or to a waiver of restriction after an audit has commenced.
• IRC Sec. 7407 authorizes a civil action in the name of the United States to enjoin a tax return preparer. Under (b)(2) the relief must be appropriate to prevent recurrence, and where the conduct was continual or repeated and a conduct-specific injunction would not suffice, the court may enjoin the person from acting as a tax return preparer at all. The grounds in (b)(1) are:
  • conduct subject to penalty under Sec. 6694 or Sec. 6695, or to any criminal penalty in the title.
  • misrepresentation of eligibility to practice before the IRS, or of experience or education.
  • guaranteeing a refund or the allowance of a credit.
  • other fraudulent or deceptive conduct substantially interfering with tax administration.
• Circular 230 sections most often cited:
  • Who may practice. Sec. 10.3.
  • Advising the client of an error. Sec. 10.21.
  • Due diligence. Sec. 10.22, with the reliance presumption in Sec. 10.22(b).
  • Contingent fees. Sec. 10.27, with the exceptions in Sec. 10.27(b).
  • Return of client records. Sec. 10.28, with the work-product carve-out in Sec. 10.28(b).
  • Conflicts of interest. Sec. 10.29, covering waiver and 36-month retention of written consents.
  • Standards for returns. Sec. 10.34, with client-information reliance in Sec. 10.34(d).
  • The sanctions. Sec. 10.50, censure, suspension, disbarment and monetary penalty.
  • The conduct that draws them. Sec. 10.51, incompetence and disreputable conduct.
• AICPA SSTS by section, under the numbering in force since 2024-01-01:
  • Section 2.1 of SSTS No. 2, tax return positions and the realistic possibility standard at 2.1.6, with disclosure for a reasonable-basis position; the audit-lottery prohibition is 2.1.8.
  • Section 2.4 of SSTS No. 2, use of the taxpayer's estimates.
  • Section 2.5 of SSTS No. 2, departing from a position concluded in a prior year's proceeding or court decision.
  • Section 1.2 of SSTS No. 1, knowledge of errors, which reaches advice and administrative filings as well as filed returns.

How PocketCPA uses these sources

Every lesson is written in original words and cites the paragraph each rule comes from. No standard's text is reproduced. How lessons and questions are written and checked is set out in our methodology.

See also

• Sources for every REG topic
• Free REG sample questions
• The CPA exam glossary