“Hands Off” of Clients’ Refunds and Other Payments from the IRS

Although the 2026 filing season has drawn to a close, many filed tax returns are still to be processed. And certainly, there are a large number of Form 1040 series tax returns that are on automatic extension, as well as amended returns, that have yet to be prepared and filed. With that backdrop, the Office of Professional Responsibility (OPR) is taking the opportunity to remind tax practitioners about the non-endorsement and non-negotiation of their clients’ individual income or other tax refunds.

The Rule

The prohibition against endorsement or negotiation of taxpayers’ federal tax refunds is a longstanding one in Circular 230, Regulations Governing Practice before the Internal Revenue Service (Part 10 of Title 31 of the Code of Federal Regulations (CFR)),[1] which the OPR administers and enforces. The rule currently appears in section 10.31, Negotiation of taxpayer checks, and states:

A practitioner may not endorse or otherwise negotiate any check (including directing or accepting payment by any means, electronic or otherwise, into an account owned or controlled by the practitioner or any firm or other entity with whom the practitioner is associated) issued to a client by the government in respect of a Federal tax liability.

While the section encompasses refunds of tax, which are the primary focus of the provision, it extends to any “check” drawn on the United States Treasury paid to a taxpayer in connection with their liability for federal taxes. Also, as to refunds, the section’s coverage is not limited to those claimed on tax returns that a practitioner prepared for the taxpayer.[2]

Additionally, the OPR broadly interprets and applies the key phrase “endorse or otherwise negotiate” and the term “check.”

• Section 10.31’s use of “by any means” should be taken literally, and regardless of method or form of deal entered into.
• The use of “check,” in the sense of a tangible, paper one, is simply a continuation from the past and now operates more as an umbrella term.[3] While it still encompasses traditional payments on paper instruments that are cashed or deposited, it now extends to modern forms of payment, including electronic transfers of funds (direct deposit) to a financial account (bank or credit union account or IRA), prepaid or debit card, payment app, or digital wallet. See “Direct deposit” on irs.gov.

Caution: A taxpayer’s oral or written (or otherwise documented) consent given to their CPA, enrolled agent, or other practitioner to negotiate the taxpayer-client’s refund or other tax-related payment is NOT a valid defense and is irrelevant. It does not factually or legally matter, including, for example, in the all too common scenario in which the two mutually agree or arrange to share or split the payment, as an easy fix, because the taxpayer cannot afford to pay for the practitioner’s services other than through the expected refund or because the client is unbanked.

The standard for liability for violating section 10.31 is having acted “willfully” (see section 10.52(a)(1)). A willful violation is a voluntary and intentional disregard of a known legal duty. Black's Law Dictionary (12th ed. 2024), Willfulness (also defining “willful misconduct” as “Misconduct committed voluntarily and intentionally”).[4] The OPR will take into account during an investigation any attempt to circumvent or to mask prohibited endorsement or negotiation by having a client sign a document directing, agreeing to, or requesting the conduct it sets forth. The OPR potentially may treat the activity as contributing to or substantiating willfulness. Also, the OPR will not consider a client’s acceptance of the plan to be a mitigating factor.

 Exemption: Refund Anticipation Loans & Other Products

 

The agreements described above should not be confused with a Refund Anticipation Loan (RAL), which advances funds to a taxpayer as a borrower, based on an anticipated income tax refund. Refund anticipation checks[5] (RACs), and other products or services similar to RACs (and RALs), are likewise predicated on an expected refund. They are contracts between the taxpayer and the lender or other provider, and the IRS is not a party to the contract or otherwise involved in the transaction that is formed.[6] Additionally, the IRS is not responsible or answerable for their use with clients or customers.[7]

The overall point is that appropriately structured refund anticipation financial agreements are not endorsement or negotiation of IRS payments issued to taxpayers.

Consequences of Noncompliance

Practitioners who have or may have violated section 10.31 (or any of the other regulations governing practice) are subject to investigation by the OPR, typically based on referrals received from IRS personnel, submitted to us on Form 8484, Suspected Practitioner Misconduct Report for the Office of Professional Responsibility.[8] Complaints from taxpayers are another source — alleging, for example, that a practitioner they hired to prepare and file their tax return misappropriated their refund in some way. IRS Form 14157, Return Preparer Complaint, is available for taxpayers’ use for that purpose.[9]

Practitioners whom the OPR conclude violated section 10.31 (or when the evidence strongly suggests a violation) may face adverse actions that depend on the facts and circumstances surrounding the violation(s). In non-egregious cases of one or two isolated instances (that could also include legitimate mitigating factors), the OPR may send the practitioner a warning letter or written reprimand (which is private). See section 10.60(a).[10] A single violation of section 10.31 in the context of several violations of one or more other sections, however, will not necessarily receive the same tolerant, less heighted scrutiny and treatment. In situations of more serious misconduct under section 10.31, the OPR will consider pursuing a disciplinary sanction. Especially if there has been a pattern of violations across multiple taxpayers or multiple tax returns or years. For example, for several consecutive tax years a practitioner endorsed or negotiated a client’s income tax refunds from Forms 1040 the practitioner prepared and filed for the client.

Sanctions prescribed in Circular 230 and its underlying statute (section 330 of Title 31 of the U.S. Code) are censure (i.e., a public reprimand), suspension from practice before the IRS, disbarment, and monetary penalties. See section 10.50, Sanctions (paragraphs (a), (c)); 31 USC 330(c).

Some Additional Details Practitioners Should Keep in Mind

• Form 2848, Power of Attorney and Declaration of Representative, echoes the prohibition on negotiation/endorsement.[11]
• The form’s line 5b, “Specific acts not authorized,” mirrors nearly verbatim section 10.31, stating, “My representative(s) is (are) not authorized to endorse or otherwise negotiate any check . . . issued by the government in respect of a federal tax liability.”
• In Part II of the form, Declaration of Representative, the appointed (or each appointed) representative signs and attests “[u]nder penalties of perjury” that “I am subject to regulations in Circular 230 (31 CFR, Subtitle A, Part 10), as amended, governing practice before the Internal Revenue Service[.]”
• NOTE: Turning back to the definition of “willfully,” the statements on the form, and related language in the instructions to the form, underscore the fact that any practitioner who regularly represents taxpayers before the IRS unequivocally knows their legal duty under section 10.31.

• As to third-party endorsement or negotiation of taxpayers’ refunds and tax payments, legal distinctions exist between:

(1) Circular 230 practitioners (and other tax professionals), and

(2) Individuals who act on behalf of taxpayers in other capacities.

In particular, a fiduciary (defined in IRC 7701(6)), such as, a trustee, guardian, conservator, personal representative, administrator, or executor, is subject to different rules, that are outside of Circular 230; they’re unregulated by it. See Circular 230 10.6(e) (“For purposes of this part, a fiduciary . . . is considered to be the taxpayer and not a representative of the taxpayer.”); IRC 6903(a) (“Upon notice . . . that any person is acting for another person in a fiduciary capacity, such fiduciary shall assume the powers, rights, duties, and privileges of . . . [the]  person . . . [for] a tax imposed by this title . . . .”);[12] Treas. Reg.(26 CFR) 301.7701-6(b)(1) (the term “fiduciary” “applies to persons who occupy positions of peculiar [as in distinctive] confidence toward others, such as trustees, executors, and administrators”). In accordance with section 6903, fiduciaries complete and submit Form 56, Notice Concerning Fiduciary Relationship, and not Form 2848.

And they have different authority as to financial matters and federal taxes than a representative or attorney-in-fact appointed in a power of attorney. Further, even though IRC 6903 in effect equates a fiduciary to the taxpayer for whom they act when proper notice is given to the IRS, the notification is not case-by-case determinative of the fiduciary’s powers and limits to, or conditions on, the use of those powers. See Bittker & Lokken, Federal Taxation of Income, Estates and Gifts, ¶ 113.11, Liability of Fiduciaries (Mar. 2026 Update) (“[T]he legislative history of the provision indicates that the purpose of . . . [section] 6903(a) is only to ensure that the IRS can identify a person with whom it may deal and empower the fiduciary in its dealings with the IRS, not to define a fiduciary's duties[.]” (internal footnote omitted)).

The extent and details of a fiduciary’s authority depend on what manner of fiduciary they are, including the laws of the state in which they were appointed that apply to their type, and the terms of the instrument or order appointing them. See, e.g., Robert W. Sheehan, Stocker on Drawing Wills and Trusts (Fifteenth Edition) (Mar. 2026), Ch. 11: Fids. and Admin. Powers, section 11.5, Administrative Powers of Executors and Trustees (“Executors and trustees are given various investment and other administrative powers by applicable law. In many states, these powers can be found in statutes, including Uniform Acts^[[13]] . . . . In the absence of contrary or limiting provisions in a will or trust, such statutory powers automatically apply without being repeated or referred to in the document itself.”); Federal Tax Coordinator 2d., ¶ S-2001, Who is a fiduciary – Fiduciary Income tax returns (“Generally, for tax purposes, a fiduciary must have discretionary power to act on behalf of another.”); IRS Technical Advice Memorandum[14] 200733023 (Aug 17, 2007) (in nonprecedential advice involving a testamentary trust, noting that for a trustee to be a fiduciary as defined in the tax code and regulations, the person “must be vested with some degree of discretionary power to act on behalf of the trust.”). Federal law (whether in the tax code[15] or elsewhere) can apply as well in certain instances.

• This article emphasized earlier that section 10.31’s former condition that applied the rule to any practitioner “who prepares tax returns” was done away with. Practitioners, however, who endorse or negotiate refunds of overpayments of tax shown on returns they prepared are subject to IRC 6695(f), as well as section 10.31. Section 6695, Other Assessable Penalties with Respect to the Preparation of Tax Returns for Other Persons, prescribes several preparer penalties, one of which is subsection (f), Negotiation of Check. It imposes a $500 penalty (adjusted for inflation) on “a tax return preparer who endorses or otherwise negotiates (directly or through an agent) any check made in respect of the taxes imposed by this title which is issued to a taxpayer” and applies “with respect to each such check.” Treasury Regulation (26 CFR) 1.6695-1(f) describes the penalty and certain situations in which it does not apply.

Conclusion

The OPR understands and acknowledges that the vast majority of licensed, credentialed tax practitioners and professionals, in particular, know of and adhere to the laws, regulations, and rules of conduct that apply to them, including section 10.31. We hope that this article serves as a useful refresher or gap filler as needed. This month’s issue of guidance from the OPR and the others in our regular series of alerts may also be resources for firms’ supervisory practitioners to draw on for implementing the “procedures” required under section 10.36 of the circular.

Lastly, we ask that practitioners appropriately advise their colleagues and peers of the endorsement and negotiation restrictions when the individuals are unfamiliar with them and may be, or are on the verge of, unknowingly running afoul of them.

If you have questions about this article, please contact our office by phone at 202-317-6897 or eFax at 855-814-1722. 

More about TAMs/Other References

Treas. Reg. (26 CFR) 301.6110-2(f) (defining a TAM as “a written statement issued by the National Office to, and adopted by, [the field] . . . in connection with the examination of a taxpayer's return or consideration of a taxpayer's claim for refund or credit. A technical advice memorandum generally recites the relevant facts, sets forth the applicable law, and states a legal conclusion.

Revenue Procedure 2026-2, 2026-1 I.R.B. 119 (2025), section 3.01 (“Technical advice is advice furnished by an Associate office in a memorandum that responds to any request . . . for assistance on any technical or procedural question. . . [in] any [IRS] proceeding . . . . The field office may request a TAM when the application of the law to the facts involved is unclear. The question must be on the interpretation and proper application of any legal authority . . . to a specific set of facts that concerns the treatment of an item in a tax period under examination or in Appeals.”).

IRM 33.2.1.1(1) (08-11-2004) (“Associate Chief Counsel offices issue technical advice memoranda . . . to Examination and to Appeals. Technical advice memoranda . . . represent the views of the Office of Chief Counsel as to the application of tax law, tax treaties, regulations, revenue rulings, or other published precedents to the facts of specific cases . . . .”).