What You Should Know About Tax and Truth In Advertising

Free Beats. $50 gift cards. A chance to win a cruise to the Bahamas. These are just some incentives that tax preparation services are touting to lure taxpayers in the door. It’s a competitive market: Last year, nearly six out of every ten taxpayers who e-filed their federal income tax return—or more than 80 million taxpayers—relied on the services of a paid preparer.

Marketing campaigns may go beyond free items and rebates, and also include promises about the timeliness or accuracy of tax returns filed, as well as the size and speed of anticipated tax refunds. Many tax preparers may suggest that their services will result in faster or bigger tax refunds than other providers. While some of these promises may be harmless, others might not be legitimate.

With that in mind, the Internal Revenue Service continues to remind taxpayers to choose a tax return preparer wisely. At the same time, tax professionals must be cautious about making statements that might be misleading. It’s not only bad business: it may also be prohibited.

Tax professionals who practice before the IRS, including attorneys, certified public accountants (CPAs) and enrolled agents are subject to rules outlined in Treasury Department Circular No. 230, commonly referred to as “Circular 230.” Specifically, Circular 230 prohibits tax professionals from using communication, including solicitations that contain false, fraudulent, coercive, misleading, or deceptive statements. Specifically, it says tax professionals “may not assist, or accept assistance from, any person or entity who obtains clients or otherwise practices in violation of the solicitation provisions.”

Misleading or deceptive statements aren’t restricted to ads about tax returns or refunds. Tax professionals may not imply that they have licenses or credentials that they don’t have, nor can they imply associations that don’t exist. Additionally, enrolled agents (EAs), enrolled retirement plan agents (ERPAs), or registered tax return preparers (RTRPs), may not use the term “certified” or imply an employer/employee relationship with the IRS in marketing or promoting their services. Tax practitioners can, however, explain or clarify their designations; for example, EAs may properly state that they are “enrolled to represent taxpayers before the Internal Revenue Service,” “enrolled to practice before the Internal Revenue Service,” and “admitted to practice before the Internal Revenue Service.”

Tax practitioners must also be clear about fees. There’s no specific Circular 230 requirement about how prices are determined—they can be fixed or hourly, and can vary by the kind of service. But costs should be clearly communicated to the client, and rates may not be untruthful or deceptive or suggest that the client may be entitled to additional services without noting any extra costs.

If you have a fee schedule, you must stick to it. And you need to keep a dated copy of what you communicated to the client. If you advertised or represented your fees over the radio and television broadcasting, the broadcast must be recorded, and you must retain a recording of the actual transmission. For direct mail and e-mail or web communications, you need to keep a copy of the communication, along with a list or other description of persons to whom the disclosure was mailed or otherwise distributed (for example, your e-newsletter mailing list). You’ll want to hang onto copies of these communications for at least 36 months from the date of the last transmission or use.

And don’t be a nudge: Under Circular 230 rules, you cannot continue to contact a prospective client if the potential client has made it known that he or she doesn’t desire to be solicited. It’s not just bad manners, it’s prohibited.

These rules don’t just apply to tax preparation services. The IRS has made clear that these rules apply to all representation before the IRS, including tax controversy and collection matters. And the agency isn’t afraid to seek enforcement. In 2018, the IRS Office of Professional Responsibility (OPR) reached a settlement agreement with a tax practitioner for violating Circular 230 rules for marketing to tax clients with outstanding collection issues. As part of his marketing efforts, the practitioner created false advertising designed to mislead potential clients to believe that his firm successfully helped thousands of taxpayers and employed multiple tax professionals, including attorneys, EAs, CPAs, and former IRS employees. In reality, the practitioner is an enrolled agent and was the only Circular 230 practitioner at the firm.

The settlement claims that the false advertising was intended to mislead potential clients to believe that hiring a private firm was their “only hope” of resolving taxpayer issues due to alleged widespread misconduct by IRS employees. The advertising also falsely inflated the chances of tax relief by claiming that the percentage of clients receiving offers in compromise were higher than they were. And true to those “pennies on the dollar” type ads that we’ve all seen, the practitioner misled taxpayers into believing that he settled offers in compromise for much less money than he actually did.

As part of the settlement, the practitioner (who wasn’t named publicly) agreed to five years of probation and a 12-month suspension of practice before the IRS if the probation was violated. The firm also agreed to pay a penalty based on a percentage of the gross income earned from the misconduct.

If that sounds harsh, it’s meant to be.

“Monetary penalties are generally not part of Circular 230 cases, but in this situation, we concluded it provided a way to limit the practitioner’s ability to profit from his misconduct,” said Stephen Whitlock, director of OPR. “A five-year probationary period with the threat of losing practice privileges before the IRS should send a strong warning to anyone tempted to mislead taxpayers with false claims.”

Of course, ethical obligations don’t stop with Circular 230. Licensing organizations, including individual state bars or state boards of accountancy, may also have advertising, fee, and solicitation rules that apply. If you’re not sure about the applicable regulations, check with your local ethics board.

This is a weekly column from Kelly Phillips Erb, the TaxGirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.