Bodies of Law Governing Professional Responsibility
Business attorneys who focus on small businesses and entrepreneurs encounter numerous ethical considerations when representing new businesses and entrepreneurs. As such, one must know where to turn to find answers. This ebook will use the ABA’s Model Rules of Professional Conduct when looking at specific rules. However, as a practicing attorney, one must use the rules that are from your jurisdiction, your state. Remember, ABA Model Rules, together with comments, are a great resource, but they have no jurisdictional power. Always look to your state rules, comments, and ethics opinions when questions arise.
Business attorneys need to consult other laws that ensure attorneys adhere to ethical standards: Attorneys who practice in front of the Internal Revenue Service (IRS) must be compliant with U.S. Treasury Department’s Circular 230, and those who practice in front of the U.S. Securities and Exchange Commission (SEC) must be compliant with the Sarbanes Oxley Act of 2002. Sometimes these rules overlap and sometimes they do not. Business attorneys need to be aware of all of these rules so that they remain compliant.
Practicing before the IRS – Circular 230
Attorneys (and other tax professionals) who practice before the IRS must abide by the rules in Circular 230. Circular 230 is embodied in the regulations under 31 U.S.C. § 330 and outlines the duties and restrictions relating to practice before the IRS. The term “practicing” before the IRS is construed broadly, so as an attorney, pretty much everything you do that is federal tax-related is going to come under its purview. Circular 230 covers many areas that a start-up attorney may encounter. For instance, if you prepare or file documents (including tax returns) with the IRS, correspond or communicate with the IRS, request a comment letter on a proposed transaction, represent a client at a conference, hearing, or meeting, you are subject to the rules under Circular 230.
The Office of Professional Responsibility (OPR) is the governing body responsible for enforcing Circular 230. It is the “standard-bearer for integrity in tax practice,” and its mission is “to interpret and apply the standards of practice for tax professionals in a fair and equitable manner.” OPR has the ability to hold disciplinary proceedings and pursue sanctions, including censure, suspension or disbarred from interaction/practicing before the IRS.
A non-exclusive list of important sections when representing entrepreneurs and start-ups are:
To give an example of the wide reach of Circular 230, § 10.27 addresses both set and contingent fees. Here is the general rule:
Sarbanes Oxley Act of 2002
As an attorney for an entrepreneurial client, one can imagine some interaction with the SEC when the business is raising capital. Rules promulgated by the SEC pursuant to the Sarbanes Oxley Act (SOX) establish attorney conduct rules when practicing before the SEC in the representation of an issuer. (For our purposes, an issuer is a company that is raising capital and subject to the SEC’s rules.)
Attorneys are required to report evidence of a material violation “up-the-ladder” within the company to the chief legal counsel or the chief executive officer, or some equivalent. If the chief legal counsel or chief executive officer does not respond appropriately, the attorney is to report to the audit committee, some other independent committee, or the full board of directors. Ultimately, an attorney is to reveal confidential information to the SEC when the attorney believes necessary to (1) prevent the issuer from committing a material violation likely to cause substantial financial injury to the financial interests or property of the issuer or investors; (2) to prevent the issuer from committing an illegal act; or (3) to rectify the consequences of a material violation or illegal act in which the attorney’s services have been used.
The above rules are important to keep in mind if an attorney finds issues with SEC filings.
A practitioner who, having been retained by a client with respect to a matter administered by the Internal Revenue Service, knows that the client has not complied with the revenue laws of the United States or has made an error in or omission from any return, document, affidavit, or other paper which the client submitted or executed under the revenue laws of the United States, must advise the client promptly of the fact of such noncompliance, error, or omission. The practitioner must advise the client of the consequences as provided under the Code and regulations of such noncompliance, error, or omission.
(a) In general. A practitioner must exercise due diligence -
(1) In preparing or assisting in the preparation of, approving, and filing tax returns, documents, affidavits, and other papers relating to Internal Revenue Service matters;
(2) In determining the correctness of oral or written representations made by the practitioner to the Department of the Treasury; and
(3) In determining the correctness of oral or written representations made by the practitioner to clients with reference to any matter administered by the Internal Revenue Service.
(b) Reliance on others. Except as modified by §§ 10.34 and 10.37, a practitioner will be presumed to have exercised due diligence for purposes of this section if the practitioner relies on the work product of another person and the practitioner used reasonable care in engaging, supervising, training, and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person.
(c) Effective/applicability date. Paragraph (a) of this section is applicable on September 26, 2007. Paragraph (b) of this section is applicable beginning June 12, 2014.
[T.D. 9011, 67 FR 48765, July 26, 2002, as amended by T.D. 9359, 72 FR 54547, Sept. 26, 2007; T.D. 9668, 79 FR 33693, June 12, 2014]
(a) In general. A practitioner may not charge an unconscionable fee in connection with any matter before the Internal Revenue Service.
(b) Contingent fees.
(1) Except as provided in paragraphs (b)(2), (3), and (4) of this section, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service.
(2) A practitioner may charge a contingent fee for services rendered in connection with the Service's examination of, or challenge to -
(i) An original tax return; or
(ii) An amended return or claim for refund or credit where the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return.
(3) A practitioner may charge a contingent fee for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service.
(4) A practitioner may charge a contingent fee for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.
(c) Definitions. For purposes of this section -
(1) Contingent fee is any fee that is based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the Internal Revenue Service or is sustained either by the Internal Revenue Service or in litigation. A contingent fee includes a fee that is based on a percentage of the refund reported on a return, that is based on a percentage of the taxes saved, or that otherwise depends on the specific result attained. A contingent fee also includes any fee arrangement in which the practitioner will reimburse the client for all or a portion of the client's fee in the event that a position taken on a tax return or other filing is challenged by the Internal Revenue Service or is not sustained, whether pursuant to an indemnity agreement, a guarantee, rescission rights, or any other arrangement with a similar effect.
(2) Matter before the Internal Revenue Service includes tax planning and advice, preparing or filing or assisting in preparing or filing returns or claims for refund or credit, and all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer's rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing and filing documents, corresponding and communicating with the Internal Revenue Service, rendering written advice with respect to any entity, transaction, plan or arrangement, and representing a client at conferences, hearings, and meetings.
(d) Effective/applicability date. This section is applicable for fee arrangements entered into after March 26, 2008.
[T.D. 9359, 72 FR 54548, Sept. 26, 2007]
(a) A practitioner must possess the necessary competence to engage in practice before the Internal Revenue Service. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged. A practitioner may become competent for the matter for which the practitioner has been engaged through various methods, such as consulting with experts in the relevant area or studying the relevant law.
(b) Effective/applicability date. This section is applicable beginning June 12, 2014.
[T.D. 9668, 79 FR 33693, June 12, 2014]
(a) Any individual subject to the provisions of this part who has (or individuals who have or share) principal authority and responsibility for overseeing a firm's practice governed by this part, including the provision of advice concerning Federal tax matters and preparation of tax returns, claims for refund, or other documents for submission to the Internal Revenue Service, must take reasonable steps to ensure that the firm has adequate procedures in effect for all members, associates, and employees for purposes of complying with subparts A, B, and C of this part, as applicable. In the absence of a person or persons identified by the firm as having the principal authority and responsibility described in this paragraph, the Internal Revenue Service may identify one or more individuals subject to the provisions of this part responsible for compliance with the requirements of this section.
(b) Any such individual who has (or such individuals who have or share) principal authority as described in paragraph (a) of this section will be subject to discipline for failing to comply with the requirements of this section if -
(1) The individual through willfulness, recklessness, or gross incompetence does not take reasonable steps to ensure that the firm has adequate procedures to comply with this part, as applicable, and one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, of failing to comply with this part, as applicable;
(2) The individual through willfulness, recklessness, or gross incompetence does not take reasonable steps to ensure that firm procedures in effect are properly followed, and one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, of failing to comply with this part, as applicable; or
(3) The individual knows or should know that one or more individuals who are members of, associated with, or employed by, the firm are, or have, engaged in a pattern or practice, in connection with their practice with the firm, that does not comply with this part, as applicable, and the individual, through willfulness, recklessness, or gross incompetence fails to take prompt action to correct the noncompliance.
(c) Effective/applicability date. This section is applicable beginning June 12, 2014.
[T.D. 9668, 79 FR 33693, June 12, 2014]