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2013 IRSAC Office of Professional Responsibility Subgroup Report

INTRODUCTION/EXECUTIVE SUMMARY

            The IRSAC OPR Subgroup (hereafter "Subgroup") is comprised of a diverse group of tax professionals, including lawyers, CPAs and an enrolled agent.  This year the OPR Subgroup has continued participating in the promulgation of new and expanded guidance for practitioners, which was the direct result of recommendations made by the 2011 and 2012 IRSAC.   

            The Subgroup has always enjoyed a very good working relationship with the Director of the Office of Professional Responsibility and this year was no exception as all the personnel from the Office of Professional Responsibility were extremely cooperative and forthcoming. 

            IRSAC was asked to provide feedback and recommendations on the following three topics included in this report.

  1. Guidance to Practitioners Regarding Professional Obligations

Following up on the recommendation in our 2012 report concerning guidance regarding the obligations of practitioners under Treasury Circular 230, we recommend that the IRS address this guidance as part of a multi-phase project. We also offer a conceptual framework for this guidance at Appendix A. 

  1. Treasury Circular 230 Enrollment of Former Internal Revenue Service Employees

IRS employees may currently apply to become an enrolled agent (EA) or enrolled retirement plan agent (ERPA) without taking and passing the Special Enrollment Examination. We recommend that all individuals should be required to take and pass the Special Enrollment Examination as a requirement for enrollment as an EA or ERPA.  

  1. Contingent Fees

Section 10.27 of Treasury Circular 230 permits a practitioner to charge a contingent fee only in limited circumstances. We believe that the current limitation on contingent fees is overly restrictive. We recommend that contingent fees be permitted in all instances where (1) the taxpayer’s position is transparent and (2) it is likely that the IRS will examine the taxpayer’s underlying claim or amended return.

ISSUE ONE: GUIDANCE TO PRACTITIONERS REGARDING PROFESSIONAL OBLIGATIONS

Executive Summary

            Following up on the recommendation in our 2012 report concerning guidance regarding the obligations of practitioners under Treasury Circular 230, we recommend that the IRS address this guidance as part of a multi-phase project.  We also offer a conceptual framework for this guidance at Appendix A.

Background

            In our 2012 report, we recommended that the IRS develop a publication that enumerates in reasonable detail the obligations of practitioners under Treasury Circular 230 and of “tax return preparers” under the Internal Revenue Code.  The purpose of this publication would be to assist the majority of practitioners who attempt to fulfill their professional obligations in good faith.  We acknowledged that the development of this proposed publication would constitute a significant undertaking for the IRS.

            In light of the scope of this project and the resources that will be required to develop a publication meeting our 2012 recommendation, we believe that the IRS should not attempt to develop guidance in the form of a comprehensive publication as a single project.  Rather, we believe that approaching this publication and guidance as a multi-phase project will permit the IRS to provide a basic framework for practitioners and to issue additional guidance on a topic-by-topic basis in the order of their importance to practitioners. Our recommendation includes a conceptual framework at Appendix A for providing guidance to tax practitioners concerning those matters having the greatest importance to practitioners, their clients and the tax system in general.

Recommendation

            In furtherance of our 2012 recommendation that the IRS develop a publication enumerating the obligations of practitioners under Treasury Circular 230 and of “tax return preparers” under the Internal Revenue Code, we recommend that the IRS adopt a multi-phased plan to develop this publication and guidance. 

Phase 1 would be to provide guidance on the www.irs.gov website consisting of a description of who is subject to Circular 230, a list of key topics, a brief description of the Treasury Circular 230 requirements, and references to relevant authority (e.g., code sections, Treasury Circular 230, Treasury regulations, or publications).  As part of our recommendation, we offer a conceptual framework for this guidance at Appendix A

Phase 2 would involve the development of more detailed guidance concerning the topics identified in Phase 1, as well as other obligations of practitioners and preparers.  The order in which the various topics would be addressed should be based on a priority list focusing on those matters having the greatest importance to practitioners, their clients and the tax system in general.

ISSUE TWO: TREASURY CIRCULAR 230 ENROLLMENT OF FORMER INTERNAL REVENUE SERVICE EMPLOYEES

Executive Summary  

IRS employees may currently apply to become an enrolled agent (EA) or enrolled retirement plan agent (ERPA) without taking and passing the Special Enrollment Examination.  We recommend that all individuals should be required to take and pass the Special Enrollment Examination as a requirement to enrollment as an EA or ERPA.

Background

            Treasury Circular 230 has historically provided for a waiver of the Special Enrollment Examination for former IRS employees applying to become EAs or ERPAs.  The waiver is provided in §10.4(d), which authorizes the enrollment of former IRS employees based on qualifying past job experience. Qualifying past job experience for EAs is defined as a minimum of five years continuous employment during which time the applicant was "regularly engaged in applying and interpreting the provisions of the Internal Revenue Code and regulations pertaining to income, estate, gift, employment or excise taxes.” Qualifying past job experience for ERPA is defined as five years of continuous employment during which time the applicant was “regularly engaged in applying and interpreting the provisions of the Internal Revenue Code and regulations relating to qualified retirement plan matters.” Absent the waiver, the examination is otherwise required of anyone applying to be an EA or ERPA. 

In December 2009, the IRS issued Publication 4832, the “IRS Return Preparer Review,” which stated that taxpayers, tax administration and the tax professional industry would be better served with the implementation of a number of recommended changes, one of which was to require competency testing for paid tax return preparers who are not attorneys, certified public accountants or enrolled agents.  Publication 4832 also stated that, “There will not be any ‘grandfathering’ from these testing requirements based upon past tax return preparation experience.”  In other words, all paid preparers would have to demonstrate competency through testing, even those who had years of tax return preparation experience.  Since practitioner competence would become an express obligation under proposed §10.35 of Treasury Circular 230, a recommendation to require competency testing for all practitioners is consistent with this proposed new section.

The testing requirement was implemented as part of the Registered Tax Return Preparer (RTRP) regulations inserted into various provisions of Treasury Circular 230 in the years subsequent to the issuance of Publication 4832.  As a result of the regulatory regime, by passing the Special Enrollment Examination, EAs not only have the right to represent taxpayers in controversies before the IRS but also have the right to prepare income tax returns as compensated preparers.  Thus, former IRS employees may not only waive the requirement to pass the Special Enrollment Examination as a result of §10.4(d), but their status as EAs exempts them from the requirement to pass the RTRP.

We continue to believe now, as we believed and recommended in our 2010 report that all individuals should be required to take and pass the Special Enrollment Examination as a requirement to enrollment as an EA.

Former IRS employees are the only group of individuals who can become Circular 230 practitioners without demonstrating competency through a test—attorneys are subject to the bar exam; certified public accountants to the Uniform Certified Public Accountant Examination; EAs and ERPAs (other than former IRS personnel) to the Special Enrollment Examination; and registered tax return preparers to the RTRP exam (assuming the RTRP examination requirement is upheld in court). 

The testing exemption is clearly contrary to the statement in Publication 4832 that “past experience” would not be recognized for any “grandfathering” purpose.  It is difficult to articulate how five years of experience as an IRS employee “regularly. . . . applying and interpreting” federal tax law is qualitatively superior to (1) five years of similar experience in the private sector, or (2) five or more years actually preparing federal income tax returns of the type that are the subject of the RTRP examination.  Moreover, since the provisions of Treasury Circular 230 are drafted and approved by Treasury, continuing to provide a testing exemption only for former IRS employees seems both self-serving and inconsistent with the IRS’s stated objective of requiring all Treasury Circular 230 practitioners to demonstrate competence through testing. 

Recommendations

Treasury should revise Circular 230, §10.4 to remove the authority to grant enrollment to former IRS employees simply based on past IRS work experience.  Treasury Circular 230 should require all persons, including former IRS employees, to take and pass the Special Enrollment Examination as a requirement to enrollment as an EA.

ISSUE THREE: CONTINGENT FEES

Executive Summary

            Section 10.27 of Treasury Circular 230 permits a practitioner to charge a contingent fee in connection with the IRS examination or challenge to an amended return or claim for refund where the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving written notice of the examination of, or written challenge to the original tax return.  This rule generally prohibiting contingent fees went into effect on March 26, 2008.  In our view, the current limitation on contingent fees is overly restrictive.  In many instances, the only opportunity for small businesses taxpayers and individuals to assert a valid claim against the IRS is if their representative is compensated via a contingent fee. 

            The purpose behind the current general prohibition against contingent fees is to prevent taxpayers from taking advantage of the audit lottery by advocating specious claims with nominal economic risk.  However, Treasury Circular 230 provides numerous safeguards against such conduct, such as the due diligence requirement of Section 10.22, the documents submission standards of Section 10.34(b), the proposed competency requirement of Section 10.35 and the prohibition against assisting a client to violate any federal tax laws of Section 10.51(a)(7).  These sections of Treasury Circular 230 provide the Office of Professional Responsibility with sufficient tools to sanction representatives for frivolous or unreasonable claims.  Moreover, the 120-day standard described in the regulations is arbitrary and difficult to defend.  We believe that contingent fees should be permitted in instances other than the filing of an original tax return where (1) the taxpayer's position is transparent and (2) the taxpayer discloses that the paid preparer of the claim or amended return is compensated through a contingent fee.

Discussion

            Treasury Circular 230 permits the use of contingent fees only in very narrow circumstances.  Prior to 2008, Treasury Circular 230, Section 10.27 permitted contingent fees to be charged for the preparation of an amended return, but only if the practitioner reasonably anticipates at the time the fee arrangement is entered into that the amended tax return or refund claim will receive substantive review by the Internal Revenue Service.

However, in 2007 Section 10.27 was substantially revised, eliminating the submission of amended returns from the permitted contingent fee arrangement effective March 26, 2008.

            Current criteria governing contingent fees went into effect on March 26, 2008.  Section 10.27, in part, currently provides as follows:

A practitioner may charge a contingent fee for services rendered in connection with the Service’s examination of, or challenge to:

An original tax return; or

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. 

            The concern with compensating the taxpayer’s advisor via a contingent fee is that the advisor may attempt to assert an unreasonable claim to take advantage of the audit lottery.  The general bar against contingent fees also represents an acknowledgment that such fees were a factor in the marketing of tax products commonly referred to as “abusive tax shelters.”[1]  We agree that under such circumstances, the use of a contingent fee is harmful to our system of voluntary tax compliance and is not appropriate.  However, there are instances when a contingent fee may be the only means by which a taxpayer is able to submit a valid claim to the IRS.

            Attorneys historically have charged contingent fees to enable litigants to assert a claim.  Rule 1.5 of the American Bar Association’s Module Rules of Professional Conduct establishes certain conditions that permit a lawyer to charge a fee that is “contingent on the outcome of the matter for which the service is rendered.”[2]  Certified public accountants may also charge a contingent fee in certain circumstances.

            Many taxpayer claims require the assistance of a professional to draft and submit a claim to the IRS.  Many individual and small business taxpayers lack the resources to pay an upfront fee to the professional to prepare and submit the claim.  Such taxpayers are entitled to submit their claim just as taxpayers who possess the resources to engage a professional and pay an upfront fee may submit a claim.  Accordingly, the use of a contingent fee is not in and of itself problematic; the use of a contingent fee to promote a specious claim by exploiting the audit lottery is the problem.

            Treasury Circular 230 includes numerous provisions that prevent advisors from submitting specious claims to the IRS.  Section 10.22 of Treasury Circular 230 imposes a due diligence requirement.  The document submission standards of Section 10.34(b), the proposed competency requirement of Section 10.35 and the prohibition against assisting a client in violating any federal tax laws in Section 10.51(a)(7) provide the Office of Professional Responsibility with ample enforcement mechanisms to sanction representatives for frivolous claims.  Recently proposed revision to the written tax advice provisions in Section 10.37 of Treasury Circular 230 require that a practitioner, when evaluating a federal tax matter, not take into account the possibility a tax return will not be audited.  Moreover, the penalty regime of the Internal Revenue Code of 1986, as amended, (the "Code") in particular Section 6694 which was recently strengthened, and Code Sections 6700 and 6701 all provide the IRS with ample authority to sanction representatives for egregious conduct. 

            In our view, the rule permitting contingent fees in connection with an examination of an amended return or claim, if the submission is made within 120 days of the commencement of the examination, is not an effective tool.  The 120 day period is somewhat arbitrary.  Moreover, if a practitioner were to submit a claim for refund or an amended return during an examination solely to deter and hinder the examination, that conduct would be a violation of Section 10.34(b)(2)(i) regardless of whether a contingent fee is charged. 

            We believe that a contingent fee should be permissible in instances other than the filing of an original tax return when (1) the use of the contingent fee is disclosed to the IRS and (2) the taxpayer’s position is transparent to the IRS.  Such transparency is found in requests for private letter rulings, request for relief pursuant to Regulation Section 301.9100, application for tax exempt status, and claims for refund.

Recommendation

            Section 10.27 should be revised to permit contingent fees in instances other than the filing of an original tax return where (1) the taxpayer's position is transparent and (2) the use of a contingent fee is disclosed.  Such instances include amended returns and claims for refunds, private letter ruling requests, applications for tax exempt status and similar items.

 

 

[1] Comments on Treasury Circular 230 Section 10.27 by the American Bar Association Section of Taxation, July 15, 2010
[2] Module Rules of Prof’l Conduct R.1.5(2009)

 

Page Last Reviewed or Updated: 21-Oct-2014