For tax practitioners, Circular 230 is the professional rulebook that governs representation before the IRS. For the first time in nearly 11 years, this rulebook faces proposed revisions that could reshape how credentialed professionals practice.
In a recent episode of the Federal Tax Updates podcast, hosts Roger Harris, EA, and Annie Schwab, CPA, speak with Bob Kerr, EA and founder of Kerr Consulting, about proposed changes to Circular 230 and their potential impact on tax practitioners.
Kerr brings unique insight to the conversation, having spent over a dozen years at the IRS in various compliance and technology research positions, followed by senior leadership roles at the National Association of Enrolled Agents (NAEA).
Their discussion covered proposals that have created considerable concern among professional organizations.
Contingent Fees: From Common Practice to “Disreputable Conduct”
Among the most controversial proposals is the Treasury Department’s stance on contingent fees. The proposed changes would classify all contingent fee arrangements as “disreputable conduct,” regardless of circumstance.
The proposed regulations take an absolute stance, declaring that “contingent fee arrangements reflect conduct that is incompatible with ethical practice,” full stop.
This blanket prohibition generated significant pushback from industry groups. During public hearings, organizations including the AICPA voiced strong opposition.
“The folks who have spoken out on the proposed contingent fees changes—I don’t recall seeing anyone who said, ‘Yeah, that’s a great idea.’ And certainly, the bigger hitters were uninterested,” notes Kerr, who attended the hearings.
The timing of this proposal appears particularly telling. As Roger points out, the proposal seems motivated by recent Employee Retention Credit (ERC) issues, where contingent fee arrangements became commonplace, particularly among non-credentialed preparers.
“It feels a little bit to me like the IRS is fighting the last war,” Kerr observes. “The horse is out of the barn and now you want to shut the barn door.”
The irony? The contingent fee prohibition would primarily affect credentialed professionals who must follow Circular 230, while many of the ERC mills operated without credentials and outside these regulations.
Kerr predicts this proposal may not survive in its current form, especially considering the IRS has already lost related court cases. “I would be surprised to see the final regs come out with the same language as the proposed regs,” he suggests, noting the Ridgely v. Lew case which addressed contingent fee restrictions.
Limited Practice Rights and the Blurring of Professional Boundaries
Another contentious element would expand limited practice rights to participants in the IRS Annual Filing Season Program—a change that many experienced practitioners view as undermining professional standards.
Currently, Circular 230 Section 10.7 primarily allows limited practice through “pro se” representation—essentially representing oneself, family members, or specific business entities with which one has a close connection.
The proposed change would permit Annual Filing Season Program participants to represent taxpayers on returns they prepared, despite not having demonstrated the same level of competence required of credentialed practitioners.
“What IRS is doing here is trying to sneak in within a list of seven or so pro se exemptions. If you are a participant in IRS annual filing season program, then you may represent taxpayers on returns that you prepare,” Kerr explains.
The Annual Filing Season Program emerged after the IRS lost the Loving v. IRS case in 2014, which prevented the agency from regulating all tax return preparers. The program is voluntary, requiring participants to complete continuing education hours and pass a basic quiz.
Kerr uses Abraham Lincoln’s famous analogy to illustrate his objection: “If you call a dog’s tail a leg, how many legs does a dog have? Four, because calling a tail a leg doesn’t make it so.”
This creates potential confusion for taxpayers about practitioners’ qualifications. “The Annual Filing Season thing is not a credential,” Kerr notes. “If you give anybody anything that has even the remotest appearance of a credential, they’re going to slap that thing behind their name and it’s going to mislead the public.”
The inconsistency is striking considering Circular 230 Section 10.35 requires practitioners to “possess the necessary competency to engage in practice before the Internal Revenue Service.” Yet the Annual Filing Season Program requires no knowledge of representation procedures.
“What is a CP2000? What’s the difference between a 30-day letter and a 90-day letter? It would be nice to know,” Kerr notes, highlighting practical representation knowledge missing from the program requirements.
Knowledge of Error Rules and Ethical Conflicts
Perhaps the most concerning aspect for many practitioners is a proposed shift in how they would be required to handle known errors, potentially creating an adversarial relationship with their own clients.
Currently, practitioners who discover errors on tax returns must inform their clients and recommend corrective action. The ethical obligation is fulfilled by advising the client of the issue and potential remedies.
However, the proposed regulations appear to go significantly further by requiring practitioners to disclose these errors to the IRS if clients refuse to correct them, essentially creating what Kerr describes as a “rat out your client” requirement.
Annie highlights the implementation challenges: “What if the client says, ‘I’m going to go down the street and get somebody else to prepare my return?’ Are we policing whether it gets done, gets done correctly, gets done timely?”
Roger points out the troubling incentives this creates: “You’re almost better off to be not represented and see if the IRS can catch it. Because if you go to a really good person and they catch a lot of stuff and they have to turn you in, you’d have been better off to do it yourself.”
This is particularly concerning for limited-scope engagements like audits. If while reviewing a return for a specific audit issue, a practitioner discovers unrelated errors, would they be required to report these to the IRS?
“I’m not an adjunct. I’m not a mini-auditor,” Kerr states firmly. “I’m not on IRS’s staff. If the IRS wants to ask me a question, I will answer honestly because that is my responsibility. I’m licensed. That’s my responsibility. I’m not here to do exam work for the agency and rat out my client.”
This requirement could directly conflict with the Taxpayer Bill of Rights, which guarantees taxpayers the right to representation. If practitioners must report client errors to the IRS, taxpayers might withhold information from their own representatives, undermining the very purpose of professional representation.
Aspirational Best Practices vs. Practical Implementation
The proposed revisions include new “best practices” requirements in three areas: data security protocols, procedures for addressing mental impairment, and succession planning for the sale or cessation of practice.
While these address legitimate concerns, many practitioners question whether Circular 230 is the appropriate vehicle for these issues.
“We’re not opposed to mental health. We’re not opposed to having some sort of plan in place if you become incapacitated,” Kerr notes. “But they’re aspirational and they don’t belong in Circular 230.”
The data security requirement illustrates regulatory overlap concerns. As Kerr points out, data security is already covered under other federal regulations like the Gramm-Leach-Bliley Act, which requires tax professionals to maintain a Written Information Security Plan (WISP).
Mental impairment provisions present definitional and enforcement challenges. “How do you define that?” questions Annie. Kerr adds with characteristic directness, “If one of us gets out there and clearly slips away, what’s the IRS going to do? Are they going to come back and spank me after I’ve lost my mind?”
Most problematic is the succession planning requirement, which conflicts with existing law. IRC Section 7216 strictly limits the disclosure of taxpayer information without explicit consent, creating a situation where practitioners are told to have succession plans but legally restricted from implementing them.
“If you’re an independent firm, Circular 230 tells me I’m supposed to have this person help me, but 7216 says they can’t look at my tax data. Well, how are they going to help you?” Roger observes, highlighting the practical impossibility for solo practitioners.
Rather than adding these requirements to Circular 230, industry representatives suggest the IRS should provide guidance on how to thread the needle on 7216 to make succession planning practically feasible.
Timeline and Implementation: A Long Road Ahead
Despite these significant proposed changes, tax practitioners should understand that any modifications to Circular 230 remain distant prospects rather than imminent requirements.
“These are only proposed regulations,” Kerr emphasizes. “The last time the IRS published proposed regs, it took 20 months for them to go final.” Based on this historical timeline and current circumstances, he projects an even longer process: “I wouldn’t expect to see anything out of this until 2026. And given the current political environment in which the administration is not particularly big on regs, I don’t know if they ever come out.”
This extended timeline reflects broader IRS priorities that currently focus on core operations rather than regulatory revision. “Right now, it seems like the powers that be are focusing on processing returns and getting refund checks out—not a lot of priority on guidance,” Roger explains.
The deliberate pace means practitioners should continue operating under the existing Circular 230 provisions rather than preemptively adapting to proposed changes that may never materialize in their current form.
“If you want to know what’s true today, go read the rules as they exist today,” Roger advises. While the small green printed version of Circular 230 that once occupied space on practitioners’ bookshelves has been replaced by digital versions, the current regulations remain the only binding authority.
For practitioners concerned about specific provisions, this extended timeline provides an opportunity to develop contingency plans while avoiding premature operational changes. It also highlights the importance of staying engaged with the regulatory process through professional organizations that advocate on behalf of practitioner interests.
Looking Forward: Navigating the Circular 230 Horizon
The proposed Circular 230 revisions represent a potential watershed moment for tax practice before the IRS, addressing legitimate regulatory concerns while creating new challenges that could fundamentally alter practitioner-client relationships.
While the IRS aims to enhance ethical standards, several proposed provisions create problematic contradictions that tax professionals would struggle to navigate in real-world practice.
The industry’s pushback during public hearings wasn’t simply resistance to change but rather acknowledgment that effective regulation must balance public protection with practice realities. As Roger aptly points out, absolute prohibitions rarely work in a profession where context matters tremendously. Similarly, Kerr’s observation that these changes feel like “fighting the last war” highlights how reactive regulation often misses its intended target.
For a more comprehensive discussion of these proposed changes and their potential impact on your practice, be sure to listen to the full Federal Tax Updates podcast episode.