Many TEI members are acquainted with the IRS’s Office of Professional Responsibility (OPR) and Karen Hawkins, its director until just a few months ago. In the first day of her new life, Hawkins graciously agreed to talk to Tax Executive about her tenure at OPR and the impact of two significant court rulings—Loving and Ridgely—on corporate tax practitioners. Tax Executive invited several experts in this area to join this discussion, including Linda Galler, professor of law at the Maurice A. Deane School of Law at Hofstra University; Mitch Frank, director of federal and state income tax at American Airlines Group; and Armando Gomez, tax partner at Skadden, Arps, Slate, Meagher & Flom LLP and the immediate past chair of the ABA Tax Section.
Galler provided the historical background for these two cases and the importance of Circular 230—a key regulatory document in the area of professional responsibility. Prior to 2011, Galler noted, there were essentially three groups that were covered by Circular 230—attorneys (including in-house corporate counsel), CPAs, and enrolled agents (referred to collectively in Circular 230 as practitioners).
In 2011, Treasury amended Circular 230 to create a new class of practitioners—registered tax return preparers—which includes persons who prepared and filed tax returns for compensation. Under the revisions to Circular 230, Galler said, these individuals were required to pass an examination, take continuing education courses annually, and, most notably, adhere to the provisions of Circular 230. The cost of implementing this new program was to be paid for by annual fees collected from all practitioners, including the new group as well as attorneys, CPAs, and enrolled agents who were now required to obtain and annually renew numbers referred to as PTINs (preparer tax identification numbers). It was this expansion of Circular 230 to registered tax return preparers that was explicitly rejected by the D.C. Circuit in Loving v. IRS, Galler explained.
“The court said that the statutory authority that the IRS has to regulate practice before the IRS is limited to representing a taxpayer in a case before the agency. The court, in my view, somewhat surprisingly held that preparing tax returns does not constitute presenting a case,” Galler said. A tax return is not adversarial, the court reasoned; a tax return preparer merely assists the taxpayer in fulfilling the legal requirement to file a tax return, she explained. The Loving court therefore concluded that the IRS does not have the authority, in Circular 230, to regulate noncredentialed individuals who prepare tax returns for paying customers, because they do not engage in practice before the IRS.
The Ridgely case, Galler noted, addressed the parameters of Loving’s limited definition of “practice before the IRS” in the context of attorneys, CPAs, and enrolled agents: If a tax practitioner is otherwise covered by Circular 230, does the IRS have authority to regulate that individual when he or she is not presenting a case to the IRS? “The Ridgely case,” she noted, “involved someone who was definitely a Circular 230 practitioner—a CPA who reviewed returns that had already been filed and then filed what the court referred to as ordinary refund claims and charged a contingent fee.” In other words, if that practitioner was able to successfully get a refund for a client, his or her firm would then get a percentage of the refund, which is specifically prohibited under the terms of Circular 230.
The court, citing Loving, ruled that an ordinary refund claim is like a tax return because it doesn’t amount to presenting a case, and therefore it is not practice before the IRS. Therefore, the court concluded, the fees charged for this service are outside the authority of the IRS to regulate. Several cases are pending in federal district courts involving PTINs and whether the IRS has the authority to collect monies for that, Galler added.
Hawkins asserted that stakeholders often view these two cases and Circular 230 from a skewed perspective, worried about whether or not an individual is a practitioner rather than looking at what that individual is doing vis-à-vis the relationship or interaction with the IRS. “When I was at OPR, my team was focused on a part of 31 U.S.C. Section 330 that neither of those two courts reviewed—subparagraph (b)—which details the criteria for due process proceedings and for removal from practice of representatives who demonstrate themselves to be incompetent, disreputable, knowingly fraudulent, or violative of the regulations in Circular 230,” Hawkins explained.
“I took the position as director that the agency had the right to keep people out of representation activities if they were otherwise unfit to be there. So it wasn’t a matter of what were they doing in terms of tax activities; it was a matter that we didn’t want them operating in the system,” she asserted. “It’s one of the reasons why OPR has always moved to expedite the suspension of attorneys and CPAs who were convicted of crimes—even if they weren’t tax crimes. If they were financial crimes or crimes of breaches of fiduciary duty, we still took the position that those convictions reflected on the fitness of that practitioner to come into the system to represent taxpayers before the agency. OPR obviously wanted some connection between that convicted individual and tax practice—we weren’t just looking at lawyers or CPAs generally—they had to be people who had demonstrated in the past that they had interacted with the system.”
“I took the position as director that the agency had the right to keep people out of representation activities if they were otherwise unfit to be there.” —Karen Hawkins
The bottom line, Hawkins said, was that the fixation some professionals have had on Circular 230 has always “bemused” her, especially among professionals who have other licenses with their own sets of ethical rules.
Gomez noted that the standards in Circular 230, in fact, derive in large part from ethical obligations that are imposed on attorneys under the rules of the bar and on accountants through the standards to which they subscribe. “It’s not as if the rules of Circular 230 are some entirely separate set of concepts that lawyers and accountants aren’t already subject to, and given that the vast majority of TEI members tend to be in the category of either lawyer or accountant, you’re already subject to these rules,” he explained. “What I take, however, from the Loving and Ridgely cases, is that when the Office of Professional Responsibility comes knocking, I now have another tool that I can use to defend my client. And that is that OPR only has jurisdiction that has been granted to it in Title 31, Section 330.
“I may be able to challenge the agency’s ability to go after my client, and that is something that has changed with these cases,” he added.
Galler asserted that it’s not productive for tax practitioners to try to circumvent Circular 230 in an attempt to claim that a practice may be outside the regulatory authority of the IRS or OPR.
Frank said that addressing these types of ethical issues that Hawkins raised are a critical part of maintaining the credibility of the tax profession, and that the continuing ability for someone to present in front of the IRS also is critical.
The reason this entire issue is so important, Gomez explained, is that OPR is the only office that really has the ability to undertake an inquiry and to pursue discipline against practitioners in matters that arise in dealings with the IRS. “A state bar or a state board of accountancy ordinarily would not have access to any of the information that the IRS has access to, because Section 6103 prohibits the IRS from disclosing that information to those organizations,” Gomez noted.
Hawkins noted that OPR was not “looking at Mr. Ridgley—he had no case pending—he just stood up and said, ‘I don’t like this rule. I happen to practice in this area. Whether it’s true or not, I’m going to say it’s intimidating and impeding my ability to practice in this area, and so I want the regulation stricken.’ I think the agency has a flipside to that argument in that, the agency has cases—and I think there are myriad cases, not just from administrative law judges but in district courts and probably a few circuit courts as well—where there’s a clear acknowledgement that the agency has some authority and needs to be concerned about regulating those who are speaking for taxpayers before the IRS. So then I guess the unanswered question is whether the agency can make preemptive strikes to determine whether someone’s conduct was inappropriate.”
“As a TEI member,” Frank said, “my greatest concern is that we as a body of professionals are able to do our jobs in a way that is appropriate for our clients and within the bounds of the law. I think that OPR definitely has a role, although perhaps not as extensive as that office may desire, and I think Armando’s perspective definitely has a role, because there are instances where a tax professional may make a misstep accidentally (or purposefully to prove a point regarding an area with a perceived need for change), where we in fact need protection.
“As a TEI member, my greatest concern is that we as a body of professionals are able to do our jobs in a way that is appropriate for our clients and within the bounds of the law. I think that OPR definitely has a role.” —Mitch Frank
“The professional needs access to a forum to be able to explain why what occurred should not preclude them from continuing to do their work, and yet OPR has a role of oversight similar to that which the state bodies would have with regards to oversight of our practice. I think as TEI views this, we want to maintain a profession that is respected, a profession that’s able to work with the IRS in a productive way, in a way that advocates for our clients and accomplishes what we believe is the appropriate result within the bounds of the law for that particular client on their facts,” Frank said. “It’s interesting to think about this controversy and to hope, as a tax professional and a TEI member, that it really involves very few individuals in our profession. I hope it’s not as large of an issue for the majority of practitioners that maybe it could become for the few.”
Hawkins, Gomez, Frank, and Galler agreed on one critical point: the importance of ethical responsibility in the tax profession. “It’s critical to me that we put the controls in place and that we communicate them to students and people who are learning about this business to understand there is an ethical responsibility that we have that preserves the validity of our profession,” Frank said. Galler agreed: “One of the things that I have noticed over the last several years is that with mandatory CLE programs as part of the continuing education requirement, there’s certainly a demand for panels and programs that deal with ethical issues relating to people in the tax field, and there’s a lot more discussion of these issues at various bar association or accounting or tax meetings.”
“I think it’s unfortunate,” Gomez said, “that over the last couple of years so much of the discourse about Circular 230 has focused on the scope of OPR’s authority as a result of the Loving and Ridgley cases and less so on the concepts and best practices that are embodied in Circular 230, because those are the things that people should be following.” —M.L.E.
Hawkins on OPR Referrals, PTINs, Loving, and Ridgely
Karen Hawkins, former OPR director, described for Tax Executive the kinds of cases OPR dealt with in her tenure at IRS and the impact of Loving and Ridgely:
“I think the kind of people OPR saw on an annual basis were really what I would call the one-offs. The office received fewer than 1,000 referrals a year, we process about the equivalent amount of cases through the system, also in that same year. It’s hard to extrapolate from the numbers if there was a most egregious profession. There really isn’t a way to do that, because the numbers are so skewed. There are 275,000 CPAs with PTINs, which is the only way we have to count. There are fewer than 40,000 lawyers: But that only identifies the tip of the iceberg, I think, with lawyers, because the PTINs only identify those who are expecting to have some role as a tax return preparer. There are many more attorneys who are outside of that PTIN count, so I’ve always assumed that my constituency for lawyers is far larger than any number we could really get our hands around
“But the fact is the numbers are leaving out the unlicensed, unenrolled return-preparer groups—the professionals account for about 300,000 to 350,000 practitioners, and we’re processing fewer than 1,000 referrals a year. We’re obviously not getting them all; the field doesn’t get extra credit for sending these to us. But still, I think it should give everybody comfort that the numbers are not rampant by any means.
“As director, I found Ridgely to be much more disturbing than Loving. I wasn’t happy that the circuit court decided to go out of its way to make the IRS look bad in Loving. But in Ridgely I was disturbed and concerned because I didn’t think the judge really got it, and of course, from my point of view, that’s always the fault of the lawyers arguing the case, for not educating the judge properly. In Loving, the district court judge makes a very specific statement, which the circuit court does not contradict, that CPAs and lawyers are covered. He goes right by that, and I think he did that for the right reasons, which is that they’re professionals licensed by the states with automatic entitlements to come in and practice before the IRS, subject to Circular 230. So he passed it by. The Ridgely judge did not appreciate, and I don’t think it’s even a subtlety or a nuance, the fact that Mr. Ridgley, as a CPA, had more of an obligation in that regard—that it wasn’t just the mere preparation of refund claim anymore, by virtue of the professional license involved.
So, for me, Ridgely is a disappointing case, although I don’t think it would have gotten any better if we had appealed it. So I’m certainly glad that didn’t happen. It has allowed people to tee off from its rationale, which I don’t think is as good as the decision in Loving, to tee off from and make one-off and two-off arguments about some of the rest of Circular 230, which is probably where I find the most disturbing issues.” —M.L.E.