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Internal Revenue Service Advisory Council 2009 Public Report: Office of Professional Responsibility Subgroup

INTRODUCTION/EXECUTIVE SUMMARY

The IRSAC OPR Subgroup (hereafter “Subgroup”) is comprised of nine members either representing or actively involved in the governing bodies of national practitioner organizations, a national income tax preparation company, the software industry and the valuation industry.  Members include two tax attorneys who are also certified public accountants (CPA), four other CPAs, two enrolled agents and one appraiser.

The Subgroup enjoys a very good working relationship with the Office of Professional Responsibility and provides feedback from the practitioner community on a range of issues designed to increase the transparency of OPR.  IRSAC was asked to provide feedback and recommendations on the following five topics which are included in this report.

1.  Discussion of the Monetary Sanctions Under Circular 230 – IRSAC was asked to provide recommendations to OPR regarding the proposed use of monetary sanctions against firms.  The American Jobs Creation Act of 2004 expanded the sanctions the Secretary of the Treasury may impose on a practitioner to include a monetary penalty.  If the practitioner was acting on behalf of a firm in connection with the conduct giving rise to such penalty, the Secretary may impose a monetary penalty on such employer, firm or other entity if it knew, or reasonably should have known, of such conduct.  To date, OPR has not sought any monetary sanctions against practitioners or firms; in part due to perceived ambiguity of the calculation of the penalty.  The Subgroup researched the issues, reviewed the comments and analysis of practitioner organizations and proposed recommendations to help clarify the use of the sanction in an unambiguous manner.

The Subgroup recommends that monetary penalties be treated no differently than other available sanctions under Circular 230 and should not be used in every case.  Monetary penalties can be the sole sanction or in combination with other disciplinary sanctions available to OPR.  The Subgroup recommends that a “safe harbor” from monetary penalties be established for a firm that can show it uses “best practices for tax advisors” as set forth in Section 10.34(b).  Gross income should be limited to include only fees from those services that are directly attributable to the prohibited conduct.  The “gross income” derived by a practitioner employee on a set salary or a partner whose share of the profits are not specifically based on the prohibited conduct, should be proportioned based on hours devoted to the engagement or some similar factor(s).  The Subgroup also recommends the monetary penalty should be limited to the gross income from the prohibited conduct less any other monetary penalties assessed under the tax code (e.g. Sec 6694) for the same conduct.  Monetary penalties should only apply to employers, firms, or other entities that engage in providing tax services or advice to others and should not be imposed for the acts of a practitioner having an agency relationship with the firm but whose prohibited conduct is outside the scope of this agency.

2.  Comments on Proposed Changes to Circular 230 §10.34 – IRSAC was asked to provide comments on proposed changes to Circular 230 §10.34(a), aligning it with the standards contained in IRC §6694.  While there are a number of proposed changes, we focused on the language regarding the adoption of the same levels of confidence as found in IRC §6694 and the related regulations for the tax preparer penalties.  We recommend adoption of a minimum standard of reasonable basis for disclosed positions, which is the same as the minimum standard in §6694.  For undisclosed positions, we recommend an approach that focuses on whether the practitioner has demonstrated due diligence and due care consistent with §§10.22 and 10.52 of Circular 230.

3.  Circular 230 Applicability to Appraisers - IRSAC was asked to provide input and feedback to OPR regarding the issue of whether appraisers are practitioners under Circular 230. The Subgroup reviewed Circular 230 and identified several ambiguities and inconsistencies with respect to its application to appraisers.  The Subgroup recommends revisions to Circular 230 to resolve these issues.

4.  Enrolled Agent (EA) Lookup Feature – The Subgroup was asked to solicit feedback from various organizations regarding the possible addition of a lookup or listing feature on the IRS website for the benefit of the IRS and the general public.  The Subgroup solicited anecdotal responses from their representative professional organizations/companies regarding the pros and cons of establishing such a resource.  The Subgroup recommends OPR add an EA lookup feature (not a listing) to the IRS website.  The lookup feature should contain the names of EAs and their current status.  The lookup feature should contain a statement that the IRS does not endorse any tax preparer, and that the lookup feature is designed to assist the general public in ascertaining the status of EAs.  The page containing the lookup feature should include a statement that the status of certified public accountants (CPAs) and attorneys can be verified by contacting the appropriate state licensing bodies.

5.  Comments on the Return Preparer Review – Due to the wide ranging impact of the Return Preparer Review on the practitioner community and its possible impact on OPR, the Subgroup provided feedback on the most commonly discussed issues.  The Subgroup believes OPR should be the sole organization responsible for the oversight of unenrolled tax preparers and recognizes that in order for OPR to undertake these additional responsibilities, significant additional resources must be committed to them to guarantee the success of the initiative.  Circular 230 should set forth the ethical standards applicable to unenrolled tax return preparers.  Some level of competency must be established by unenrolled tax return preparers and those tax return preparers who have demonstrated competency and are governed by professional ethical standards meeting or exceeding the minimum standards suggested for unenrolled tax return preparers should be grandfathered in or exempted from those standards.  The Subgroup embraces the principle of having one universal identifying number for all tax return preparers and suggests that a substantial public education campaign be undertaken to educate the general public about the importance of engaging a tax return preparer who has been issued a universal identifying number.

ISSUE ONE:  DISCUSSION OF THE MONETARY SANCTIONS UNDER CIRCULAR 230

Executive Summary

In 2004, the Office of Professional Responsibility (OPR) was authorized to impose monetary penalties on practitioners in addition to the other disciplinary sanctions available. The ability to impose monetary sanctions allows OPR to impose penalties on firms (not considered to be practitioners) in certain situations. However, OPR has yet to impose any monetary sanctions due to a perceived lack of clarity regarding how the sanctions should be applied and how the sanctions should be calculated.  Guidance in these areas could allow OPR to begin utilizing monetary sanctions effectively and efficiently.

Background

Legislation

Section 822 of the American Jobs Creation Act of 2004 expanded the sanctions that the Secretary may impose to include a monetary penalty on any practitioner.  If the practitioner was acting on behalf of an employer or any firm or other entity in connection with the conduct giving rise to such penalty, the Secretary may impose a monetary penalty on such employer, firm or other entity if it knew, or reasonably should have known, of such conduct.  Such penalty shall not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty and may be in addition to, or in lieu of, any suspension, disbarment, or censure of the practitioner.

Notice

Notice 2007-39 further states that the “aggregate” amount of the monetary penalty (or penalties) may not exceed the “collective” gross income derived (or to be derived) by the practitioner and the employer, firm, or other entity.  The Notice goes on to state that the monetary penalties may be imposed for a single act of prohibited conduct or for a pattern of misconduct.  If a single act of prohibited conduct giving rise to a monetary penalty is an integral part of a larger engagement, the amount of the penalty will be limited by the gross income derived (or to be derived) from the larger engagement.

In determining the amount of the monetary penalty (or penalties), the Secretary will consider amounts that the practitioner, employer, firm or other entity could reasonably expect to realize, irrespective of whether the amounts have actually been received.  The Secretary of the Treasury has discretion to impose a monetary penalty in an amount less than the amount allowed by statute.

In determining the amount of the penalty (or penalties), the IRS will consider several factors including the existence of aggravating or mitigating factors.  The IRS will not impose monetary penalties in cases of minor technical violations (not specifically defined in the Notice).

Recommendations

  1. Monetary penalties should be treated no differently than other available sanctions under Circular 230.
  2. Monetary penalties should not be imposed in every case as a matter of practice, but only after careful consideration of the facts.
  3. Monetary penalties can be the sole sanction or in combination with other disciplinary sanctions available to OPR. 
  4. There should be a “safe harbor” from monetary penalties for a firm that can show it uses “best practices for tax advisors” as set forth in Section 10.33(b). 
  5. Gross income should be limited to include only fees from those services that are directly attributable to the prohibited conduct.  Whether services are “directly attributable” to prohibited conduct would incorporate a “but for” test of causation such that income from other services would be included in computing the monetary penalty only if the other services would not have been provided but for the prohibited conduct.

a.  Proportion the “gross income” derived by a practitioner employee on a set salary or a partner whose share of the profits are not specifically based on the prohibited conduct, based on hours devoted to the engagement or some similar factor(s).
b.  The monetary penalty shall be limited to the gross income from the prohibited conduct less any other monetary penalties assessed under the tax code (e.g. Sec 6694) for the same conduct.
c.  Monetary penalties should only apply to employers, firms, or other entities that engage in providing tax services or advice to others. Monetary penalties should not be imposed on an employer, firm or other entity for the acts of a practitioner having an agency relationship with the firm but whose prohibited conduct is outside the scope of this agency.
d.  The amount of the penalty should in part be based on aggravating and mitigating factors.  The following list of factors should be considered when determining the amount of the penalty: 

  • Mitigating – self-correcting actions before discovery by the Internal Revenue Service / Office of Professional Responsibility
  • Mitigating – if an employee of the business as opposed to an owner of the business
  • Mitigating – no substantial profits generated from the potentially aberrant behavior
  • Mitigating – little likelihood of repeat aberrant behavior
  • Mitigating – employee following the orders of a superior
  • Mitigating – employee on a set salary (not directly benefitting from the aberrant activity)
  • Mitigating – following standard practices in the industry
  • Mitigating – firm uses best practices to identify potentially aberrant activities 
  • Aggravating – practitioner is undertaking actions which betray the trust of the general public
  • Aggravating – part of a pattern of aberrant behavior, not an isolated incident
  • Aggravating – prolific advertising of the aberrant activity (e.g. OIC mill commercials on the radio)
  • Aggravating – aberrant activity is a significant part of the firm’s or individual’s overall practice

ISSUE TWO:  COMMENTS ON PROPOSED CHANGES TO CIRCULAR 230 §10.34

Executive Summary

The members of IRSAC were asked to provide comments on proposed changes to Circular 230 §10.34 (a).  While there are a number of proposed changes, we focused on the language regarding the adoption of the same levels of confidence as found in IRC §6694 and the related regulations for the tax preparer penalties.  We recommend adoption of a minimum standard of reasonable basis for disclosed positions, which is the same as the minimum standard in §6694.  For undisclosed positions, we recommend an approach that focuses on whether the practitioner has demonstrated due diligence and due care in accordance with §§10.22 and 10.52 of Circular 230.  This approach is more flexible and focuses on demonstrating ethical behavior over a more mechanical satisfaction of particular level, which for example is different for tax shelters than other positions.

Background

In May 2007, changes to the IRC §6694 preparer penalty provisions were enacted that increased the standard for tax return positions from “realistic possibility of success” to “more likely than not”.  On September 26, 2007, Treasury published proposed changes to §10.34 Circular 230 which would incorporate the “more likely than not” standard of §6694 into Circular 230.  In October 2008, the standard in §6694 was retroactively changed from “more likely than not” “to substantial authority”.  Circular 230 has not yet been modified to reflect this change.  The question is whether Circular 230 should mirror whatever standard is found in §6694.

Section 10.34 was originally added to Circular 230 as a stand alone analog to the preparer penalties in IRC §6694.  It adopted the same language, such as not frivolous for disclosed positions and realistic possibility of success (RPOS) for undisclosed positions.  We were told by OPR that they have rarely used §10.34 for disciplinary actions because the RPOS standard is so easy for practitioners to meet.  Instead, OPR often uses §§10.51 and §10.52 of Circular 230 to take disciplinary action against practitioners for unethical conduct.

We believe practitioners should not sign returns that contain one or more positions they know do not have a reasonable basis.  At a minimum, ethical behavior requires that a practitioner have a reasonable basis for positions taken on a return.  We therefore agree that the existing language which requires a reasonable basis for disclosed positions should be retained.  

For undisclosed positions, we believe that Circular 230 should contain an ethical standard different than, and separate from, the standards contained in the penalty provisions of IRC §6694.  Penalty statutes are designed to punish a specific position or action.  Ethical provisions should instead focus on conduct and patterns of behavior.  We are recommending the standard in Circular 230 be changed to focus on conduct and patterns of behavior.  Judgments regarding a practitioner’s conduct should take into account the reasonableness of the conduct in light of the standard of care for the industry.  Ethical behavior is not defined by a bright line but by intent and the exercise of due care or diligence.

Recommendations

  1. Circular 230 §10.34 should contain a separate standard for ethical behavior and not just track the standards found in the IRC §6694 penalty provisions.
  2. Retain the current language which requires a reasonable basis for disclosed positions.
  3. Remove the “more likely than not” standard and replace it with a general ethical requirement for undisclosed positions which requires practitioners to demonstrate they exercised due care (as defined in Circular 230 §10.52) and due diligence (as defined in Circular 230 §10.22) in arriving at the conclusion that a particular position did not need to be disclosed.  The determination of accepted behavior should be based on the specific facts and circumstances.

ISSUE THREE:  CIRCULAR 230 APPLICABILITY TO APPRAISERS

Executive Summary

IRSAC was asked to provide input and feedback to OPR regarding the issue of whether appraisers are practitioners under Circular 230.  The Subgroup reviewed Circular 230 and identified several ambiguities and inconsistencies with respect to its application to appraisers. For example, Circular 230 authorizes sanctions against appraisers for violations but does not specifically include appraisers within the list of practitioners governed by Circular 230 or include appraisals within the definition of practice before the Internal Revenue Service (IRS).  IRSAC recommends revisions to Circular 230 to address these issues. 

Background

The title of Circular 230 is “Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service.” In addition, Circular 230, section 10.50(b) authorizes sanctions against appraisers for violations of Circular 230.

Despite the mention of appraisers in the title to Circular 230 (and numerous references to appraisals and appraisers throughout Circular 230), providing appraisals is not specifically included within the Circular 230 definition of practice before the IRS and appraisers are not specifically included in the list of practitioners who may practice before the IRS.

According to Circular 230, section 10.0, Circular 230 contains the rules governing “attorneys, certified public accountants, enrolled agents, and other persons representing taxpayers before the Internal Revenue Service.”  Circular 230 defines practice before the Internal Revenue Service in section 10.2(a)(4) as

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, or other plan or arrangement having a potential for tax avoidance or evasion, and representing a client at conferences, hearings and meetings. 

Appraisers perform none of the functions described in section 10.2(a)(4).  An appraisal report does not address a taxpayer’s rights, privileges, or liabilities.  Appraisers do not file documents, do not communicate directly with the IRS (unless ordered to do so), and do not render written advice.  Appraisers do not “represent” taxpayers.  They are engaged to prepare and deliver an independent report on the value of an asset.

Circular 230 defines practitioners in section 10.2(a)(5) as “any individual described in paragraphs (a), (b), (c), (d) or (e) of section 10.3.” Appraisers are not listed or mentioned in any of those paragraphs.  As currently written, Circular 230 does not infer that appraisers are practitioners.  Rather, the document uses the terminology “practitioners and appraisers” which infers appraisers are not practitioners.

Recommendations

1.  Treasury should revise Circular 230, section 10.0 to clarify that Circular 230 contains rules governing all persons who are practitioners engaged in practice before the Internal Revenue Service.

2.  Treasury should revise Circular 230, section 10.2(a)(4)  as follows to include appraisals within the definition of practice before the Internal Revenue Service. (Proposed revision is shown in italics.)

10.2 Definitions.
(a)(4) Practice before the Internal Revenue Service comprehends 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, or other plan or arrangement having a potential for tax avoidance or evasion, rendering a written opinion with respect to the value of property for Federal tax purposes, and representing a client at conferences, hearings and meetings.

3.  Treasury should revise Circular 230, section 10.2(a)(5) to indicate that the term practitioner includes individuals described in new section 10.3(f).

4.  Treasury should revise Circular 230, section 10.3 as follows to add appraisers to the list of practitioners who may practice before the IRS.

10.3 Who may practice.
Add new subparagraph (f) Appraisers and renumber the remaining subparagraphs.
(f) Appraisers.
   (1) Any appraiser who is not currently disqualified from practice before the Internal Revenue Service may practice before the Internal Revenue Service.
   (2) Practice before the IRS is limited to rendering written opinions with respect to the value of property (tangible or intangible) for Federal tax purposes.
  (3) An individual who practices before the Internal Revenue Service pursuant to paragraph (f)(1) of this section is subject to the provisions of this part in the same manner as attorneys, certified public accountants and enrolled agents.

5.  Treasury should revise Circular 230, section 10.50 as follows to indicate that the sanctions applicable to appraisers are the same as those applicable to other practitioners.

(Proposed revision is shown in bold italics.)

10.50 Sanctions.
(a) Authority to censure, suspend, or disbar. The Secretary of the Treasury, or delegate, after notice and an opportunity for a proceeding, may censure, suspend, or disbar any individual described in section 10.3(a)-(f) from practice before the Internal Revenue Service if the practitioner is shown to be incompetent or disreputable (within the meaning of § 10.51), fails to comply with any regulation in this part (under the prohibited conduct standards of § 10.52), or with intent to defraud, willfully and knowingly misleads or threatens a client or prospective client. Censure is a public reprimand.

(b) Delete

 6.  Treasury should revise Circular 230 to change all references to “practitioners and appraisers” to simply refer to “practitioners” to reflect the inclusion of appraisers in the definition of practitioners.

ISSUE FOUR:  ENROLLED AGENT LOOKUP FEATURE

Executive Summary

IRSAC recommends a lookup feature for enrolled agents (“EAs”) on the IRS website. This will enable both the IRS and the general public to quickly ascertain the current status of EAs.

Background

Attorneys and CPAs both have state licensing bodies that maintain an updated listing of their status.  EAs are licensed by the IRS pursuant to Circular 230 and the IRS is the only organization that maintains current information regarding their status.

The Office of Professional Responsibility (OPR) handles a large volume of inquiries from members of the public and IRS employees who are seeking to determine whether a particular individual is an EA and, if so, whether the individual is in good standing.  OPR explained that handling these inquiries takes significant resources. If a lookup or listing feature were added to the IRS website, OPR could devote more of its resources to handling practitioner misconduct cases.  Such a feature would also make it quicker and easier for members of the public and IRS employees to verify whether an individual claiming to be an EA is in fact an EA. 

The Director of OPR asked IRSAC to solicit feedback from various organizations regarding the possible addition of a lookup or listing feature on the IRS website for the benefit of the IRS and the general public. 

The Subgroup solicited anecdotal responses from their representative professional organizations/companies regarding the pros and cons of establishing such a resource.  The following questions were utilized to solicit responses from the various representative professional organizations/companies:

  1. Should the IRS make a listing of EAs available to the public?
  2. List the pros and cons to making an EA listing public.
  3. Provide suggestions for the type of information the IRS should make public.

Recommendations

  1. OPR should add an EA lookup feature (not a listing) to the IRS website.
  2. The lookup feature should contain the names of EAs and their current status.
  3. The lookup feature should contain a statement that the IRS does not endorse any tax preparer, and that the lookup feature is designed to assist the general public in ascertaining the status of EAs.
  4. The page containing the lookup feature should include a statement that the lookup only includes status information for EAs and that the status of attorneys and certified public accountants (CPAs) can be verified by contacting the appropriate state licensing bodies.

ISSUE FIVE:  COMMENTS ON THE RETURN PREPARER REVIEW

Executive Summary

 The members of IRSAC discussed issues concerning the tax return preparer community with Commissioner Douglas Shulman, Deputy Commissioner Mark Ernst and Director, Office of Professional Responsibility (OPR) Karen Hawkins on July 23, 2009.  During this meeting, the OPR subgroup provided feedback/comments on potential issues involving the regulation of tax return preparers and the standards of conduct they should follow.

Background

In June 2009, the IRS announced plans to propose a comprehensive set of recommendations by the end of 2009 regarding how the tax return preparer community can help increase taxpayer compliance and how to ensure that tax return preparers meet both uniform and high ethical standards of conduct.  Notice 2009-60 invited public comments regarding the IRS’s review of issues concerning tax return preparers. 

To assist in developing its proposals and to ensure that input is received from a broad range of stakeholders, the IRS scheduled a number of meetings with constituent groups.  The information collected from these meetings will assist the IRS in drafting recommendations.

Feedback/Comments

The OPR subgroup provided the following feedback/comments during the July 23, 2009 meeting:

  1. Due to the experience and expertise available in the Office of Professional Responsibility for the regulation of Circular 230 practitioners, we believe OPR should be the sole organization responsible for the oversight of unenrolled tax preparers.  
  2. In the interest of providing some form of assurance to the public, some level of competency must be established by the unenrolled tax return preparers.
  3. Circular 230 should set forth the ethical standards applicable to unenrolled tax return preparers.
  4. Those tax return preparers who have demonstrated competency and are governed by professional ethical standards, meeting or exceeding the minimum standards suggested for unenrolled tax return preparers, should be grandfathered in or exempted from those standards.
  5. We embrace the principle of having one universal identifying number for all tax return preparers.
  6. A substantial public education campaign must be undertaken to educate the general public about the importance of engaging a tax return preparer who has been issued a universal identifying number.
  7. We recognize that in order for OPR to undertake these additional responsibilities, significant additional resources must be committed to them to guarantee the success of the initiative.  
Page Last Reviewed or Updated: 06-Jan-2014