Getting Suspended From a Practice That Did Not Exist

In the case of Bowman v. Iddon, No. 15-7118 (D.C. Cir. 2017), Mr. Bowman seeks to recover damages based on a wrongful suspension from practice in a situation in which he never had authority to engage in that practice before the suspension.  The D.C. Circuit decided that appellant was not entitled to damages for reasons that made good sense to me.  The case leaves you scratching your head at how it could come to exist.  The post will discuss Bivens actions against government employees, something I have posted on before, and the suspension from practice mechanism of the Office of Professional Responsibility (OPR).  Read this post for amusement and not enlightenment.

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The underlying suit seeks damages from five IRS employees who allegedly barred Mr. Bowman from representing taxpayers before the IRS without due process of law.  That premise for the suit and a several page opinion enticed me to read further.  The problem with Mr. Bowman’s theory of the case stems from the fact that before he was allegedly suspended from practice without due process he did not have the authority to engage in practice before the IRS anyway because he had never become an attorney, CPA or enrolled agent.  He was a return preparer.

It is easy to poke holes in Mr. Bowman’s theory of the case but it makes you wonder why the IRS, or at least 5 employees alleged to have taken this action, suspended him from a practice in which he was not authorized to engage.  It seems that while Mr. Bowman was working as a return preparer in 2005, he pled guilty to mail fraud, wire fraud and money laundering.  He received a sentence of 57 months and began to serve in August 2005.  I did not go and look for details of his criminal activity beyond those described in the opinion but his return prep business must have been an interesting one.

Shortly after Mr. Bowman went to the big house, Revenue Agent Iddon sent OPR a report of Mr. Bowman’s misconduct.  The form she used required her to check a box indicting that he was an attorney, CPA, enrolled agent or enrolled actuary.  She checked the box for enrolled agent citing personal knowledge as her basis for knowing this and attaching articles about his prosecution.  Unfortunately, or maybe fortunately for those of us who like to believe the 4th Estate is mostly trustworthy, the articles did not state that he was an enrolled agent and she never searched the IRS records to confirm his status.

After receipt of this report, OPR began disciplinary proceedings against Mr. Bowman to suspend him from practicing as an enrolled agent.  Apparently, part of the investigation did not involve double checking to make sure he was an enrolled agent.  Additionally, although it was clear from the newspaper articles attached to the initiating document that he now resided at the big house, apparently no one looked to correct his address from the business address he used as a return preparer.  This caused the correspondence about the proposed disciplinary action to go unanswered since it did not make its way to Mr. Bowman.

Because he did not answer the charges against him, OPR issued a decision by default suspending him from practicing as an enrolled agent and OPR published this decision in the quarterly bulletin identifying practitioners with disciplinary problems.  One of the defendants, an OPR manager, also emailed the announcement to 20 people asking them to further disseminate the information.

When Mr. Bowman left prison in 2011, he did what every prisoner does (?), he sent a FOIA request to the IRS and through that request learned for the first time that he was suspended from practice as an enrolled agent.  This is where the facts get a little crazy, because those of you who are tax history buffs will remember that shortly before Mr. Bowman’s release, the IRS had promulgated the rule extended Circular 230 to tax preparers.  So, now the mistaken suspension may have actually become a suspension that mattered to Mr. Bowman vis a vis his livelihood as a tax preparer.  So, in November of 2012, he filed a petition for reinstatement with OPR.

Fast forward a couple of years and the D.C. Circuit strikes down the rule extending Circular 230 coverage over return preparers.  After that decision, the IRS writes to Mr. Bowman recognizing that he was never an enrolled agent and informing him that he may not practice as an enrolled agent.  It also restored his “ability to engage in limited practice before the IRS, as defined in section 10.7 of Circular 230, by removing [his] name from the list of individuals currently barred from practice before the IRS.”  Just when it seemed normalcy might return to the practice world, Mr. Bowman decided to further complicate matters by suing the IRS officials he identified as causing his wrongful suspension.  The mechanism he chose for bringing the suit was a Bivens action.

He argued that the named IRS employees violated the 5th Amendment by “harming his reputation and business without due process.”  The defendants moved to dismiss the complaint and the District Court granted the motion concluding that the remedial scheme under Circular 230 precluded any Bivens remedy even though some mistakes occurred here.  Mr. Bowman brought the matter pro se.  On Appeal the court appointed an amicus to assist it in understanding the issues.

The D.C. Circuit decided that it did not need to reach the issue of whether a Bivens action could succeed under these circumstances because the complaint failed to state a claim on which relief could be granted.  It stated that accepting all of the factual statements as true he must lose because “he identifies no constitutionally protected interest lost through Defendants’ actions.”  Since he was never an enrolled agent the misguided actions of the IRS employees suspending him from a status he never held had no impact on his property rights.

Amicus brought up that although misguided in suspending him as an enrolled agent, the actions had an impact on him for the period of time the IRS sought to regulate mere preparers.  The Court pointed out that although this was possible, it was not what he alleged in his complaint.  Two judges wrote separately to explain that if he had alleged “that Defendants barred him from preparing taxes, I would have concluded that he was entitled to pursue his claim against Defendants.”  The concurring opinion concluded by saying that “had Bowman alleged that Defendants disciplined him without authority and barred him from preparing taxes, I would have concluded that Circular 230’s remedial scheme presents no bar to a Bivens claim in the narrow and unique circumstances of this case.”  So, it looks like the IRS employees dodged a bullet because Mr. Bowman did not plead correctly.

We do not often focus on pleadings but they do matter as this case points out.  I see it often in Tax Court cases because we regularly come into cases after the taxpayer has filed a pro se petition.  Taxpayers will fail to contest penalties or other matters in the notice of deficiency.  If we are actually going to take the case to trial, we must seek permission from the court and file amended pleadings alleging all of the matters in the notice of deficiency with which the taxpayer has a dispute.

Mr. Bowman’s case is unusual.  I suspect it has led to some procedural changes in OPR regarding double checks concerning the status of alleged wrongdoers and addresses of wrongdoers brought to its attention who are incarcerated.  If it has not brought about those changes, perhaps we will see a successful Bivens suit at some point in the future.

Summary Opinions for the weeks of 3/06/15 through 3/20/15

Image from https://storesafewasnotsafe.wordpress.com/

This will be the last post for the week, as we will all be busy with family activities (and taxes).  We should be back on Monday with some new content, and it looks like next week will cover some really interesting areas, including the recent Godfrey case, and sealing Tax Court records.

We have been very lucky over the last month to have a lot of really great guest posts.  We cannot thank those guest posters enough for the quality content, especially as the three of us have been very busy with our various other jobs (or appearing before the Senate–perhaps more on that next week also).  For the weeks that SumOp is covering in this post, we had Mandi Matlock writing on TPA Most Serious Problem # 17 on how deficient refund disallowance notices are harming taxpayers.  Peter Lowy wrote on the really interesting Gyorgy case, which deals with the taxpayer’s requirement to notify the Service on a change of address, but also highlights a host of other procedure items.   Patrick Smith joined us again, writing on Perez v. Mortgage Bankers Associate, and illuminating us on APA notice and comment requirements for different types of rules and the possible eventual reversal of Auer.  We also welcomed Intuit’s CTO, David Williams who wrote a response to Les’ prior post on H&R Block’s CEO indicating it should be harder to self-prepare (which Les was potentially in favor of).  And, another first time guest blogger, Patrick Thomas, joined us writing on the calculation of SoLs on collections matters.

We were also very lucky again to have Carl Smith writing for us, this time updating us on the Volpicelli jurisdiction case and the Tax Court pleading rules on penalties looking at the El v. Comm’r case.  A thank you to all of our guests over those two weeks, and a special thanks to Carl for his continued support.

To the other procedure items (if you keep reading, the image will make more sense):

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  • The Service released CCA 201510043, in which Chief Counsel stated a taxpayer is entitled to two sets of collection due process rights for the same period when there were two assessments; one for assessment arising out of a civil exam and the other from restitution-based assessment.  Section 6201(a) was recently (five years ago) amended to require assessment and collection of restitution in the same manner as tax.  The advice has a nice summary of cases outlining why this double assessment of the same tax is not double jeopardy.  Although the general rule is that a taxpayer is entitled to one CDP hearing with respect to tax and tax years covered by the CDP notice, there are situations where multiple hearings are appropriate.  The advice highlights Treas. Reg. 301.6320-1(d)(2) Q&A D1 and Treas. Reg. 301.6330-1(d)(2) Q&A D1 as examples of allowing two CDP hearings when there has been additional assessments of tax or new assessments for additional penalties.  The Advice determined that this situation was analogous and warrants two separate CDP hearings.
  • The Northern District of California in In Re Wilson held that penalties for failure to timely file were dischargeable when the original due date was outside of the three year look back under BR Code 523(a)(7)(b), but the taxpayer had extended the due date and the extended date was within the three years.  The Court indicated this was a case of first impression.  Another interesting BR Code Section 523 issue.
  • This clearly only pertains as a practitioner point, and not something any of our readers would personally need, but OPR has announced a standard information request letter to make a Section 6103 request for information maintained by OPR relating to possible violations of Circ. 230.  Info about the letter is found here, and you can get the actual letter here.
  • The Ninth Cir. affirmed the Tax Court in Deihl v. United States in finding a widow spouse did not qualify for innocent spouse relief.  In the case the Court did not find there was clear error by the Tax Court in reviewing the widow’s testimony and find it was not credible.  The surviving spouse provided testimony that conflicted with other evidence regarding the couples’ business, and she did not offer any third party testimony regarding the abuse.  The widow argued that since the Service did not offer contrary testimony regarding the abuse, the Tax Court had to accept her testimony, which the Ninth Circuit stated was incorrect.  Further, looking to Lerch v. Comm’r, a Seventh Circuit decision, stated that the Tax Court did not have to accept testimony that was questionable, even if uncontradicted (tough to overcome the presumption of guilt that comes along with a name like Lerch).
  • Gambling causes fits for the Service.  Tipped casino employees used to underreport frequently, but apparently casinos will provide estimates to the Service.  Gambling website accounts might be offshore accounts (even if sourced in US banks). Add to that list of problems how to treat bingo, keno and slot machine winnings.  This blurb will focus on slot machines.  New proposed regulations offered in a recent IRS Notice would provide a safe harbor to determine gains and losses from a slot machine.  The issue is that gains from “transactions” are included in income.  Losses are deductible to the extent of winning, but generally as itemized deductions.  For slot machines, a “transaction” is session based.  What is a session can be a point of disagreement between the Service and taxpayers.  This is apparently becoming more murky now that people don’t use actual coins.   So, what are those retirees on the bus trips to AC or Vegas to do?  The Service is soliciting suggestions, but the current proposed safe harbor states that a session of play:

A session of play begins when a patron places the first wager on a particular type of game and ends when the same patron completes his or her last wager on the same type of game before the end of the same calendar day. For purposes of this section, the time is determined by the time zone of the location where the patron places the wager. A session of play is always determined with reference to a calendar day (24-hour period from 12:00 a.m. through 11:59 p.m.) and ends no later than the end of that calendar day

The Notice then goes on to explain how to calculate gains and losses during the session.

  • Add this to the list of things that will not get you out of the failure to timely file penalties – taxpayer could not access tax records because his storage unite doors had frozen over.  The argument received an icy reception (oh, man that was bad) with both the Service and the Tax Court. See Palmer v. Comm’r., TC Memo 2015-30 (for some reason this isn’t up on the TC web page anymore – sorry).
  • If you are going to cheat on your taxes, you probably should do so using offshore accounts (I usually charge clients a .5 for that advice, and you all just got it for free!).  Check out Jack Townsend’s blog on US v. Jones, an “ordinary tax cheat”, as Mr. Townsend put it, who got dinged with 80% of the bottom of the guideline range for sentencing.  He was using “sophisticated means”, which seemed fairly run of the mill.  Jack compares this to the sentencing of another UBS client, who ended up getting 22% of the bottom of the guideline range.  Switzerland should use this in its promotional materials.
  • In MSSB v. Frank Haron Weiner, the Eastern District of Michigan found that Section 6332(a) did not establish priority for competing liens, and instead Sections 6321, 6322 and 6323 established the priority (in favor of the IRS in this case).  In MSSB, a debtor owed funds to the IRS and a lawyer named Frank.  The Service recorded four liens, each before December 3, 2012.  Around $1.6MM was owed.  On December 6, 2012, Frank sued the debtor to recover unpaid legal fees and won.  In 2013, Frank obtained a writ to garnish the debtors IRA (Michigan must not offer much in terms of creditor protection for IRAs).  The Service stepped in, arguing it had priority on the IRA.  Frank countered, arguing that Section 6332(a) would give him the money.  The Section states:

Except as otherwise provided in this section, any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

Frank’s position was that his claim was the type of claim referenced by the “subject to an attachment or execution under any judicial process.”  The Court, however, held that the language did not direct which claim (that of the IRS or Frank) had priority, and only stated that the financial institution did not have to turn the funds over to the IRS.  The Court then looked to the other lien provisions, and found the IRS had priority and directed payment.

  • I went to see roller derby one time, which was really entertaining.  A perfect mix of roller skating and WWF.  All of the young women have funny/clever names, and often have slogans.  The announcer said of one that she had “champagne for her real friends, and real pain for her sham friends.”  Unfortunately, this has really nothing to do with this next case, except the tax court was dropping some real pain on a sham partnership.  In Bedrosian v. Comm’r, the Tax Court held that whether legal fees paid by a sham partnership were deductible was an affected item subject to TEFRA, and the Court had jurisdiction to make such a determination.  This was not the Bedrosians’ first Tax Court rodeo, and they keep making new TEFRA law, which now comprises a substantial chunk of revised Saltzman and Book Chapter 8 dealing with general exam procedures and a growing subsection dealing just with the complex world of TEFRA.

IRS Power To Regulate Tax Practitioners Slipping Away

This post is by Christopher S. Rizek and was originally published by PT on Forbes. Chris is a member of Caplin & Drysdale, Chtd. in Washington, D.C. Chris was formerly an Attorney-Advisor and Associate Tax Legislative Counsel with the U.S. Treasury Department, Office of Tax Legislative Counsel, as well as a trial attorney with the US Department of Justice. He is a nationally known tax controversy practitioner who frequently speaks and writes about major issues in tax procedure and tax administration. In today’s post, Chris discusses last week’s district court order in Sexton v. Hawkins, another case testing the limits of OPR’s authority.

The power of the IRS’s Office of Professional Responsibility seems to be draining away in the aftermath of Loving v. IRS, 742 F.3d 1013 (D.C. Cir. Feb. 11, 2014), and Ridgely v. Lew, 2014 WL 3506888 (D.D.C. July 16, 2014).  What appears to be the latest drop comes in Sexton v. Hawkins, No. 2:13-cv-00893-RFB-VCF (D. Nev. Oct. 30, 2014).

James Sexton used to be a practitioner representing taxpayers before the IRS.  I say “used to be” for two reasons.  (Some of these facts are drawn from the complaint (and exhibits) in the case, not just the opinion, so at this point they are just allegations, but like the court I am assuming for now that they’re correct.)  One, Mr. Sexton apparently at one time represented taxpayers before the IRS, since he is a lawyer licensed in South Carolina who also has an LL.M. in Taxation.  But in 2005 he pled guilty in federal court to four counts of mail fraud and one count of money laundering.  As a result, in 2008 OPR suspended him from practice before the IRS for an indefinite period.  Since then he has made a living providing tax advice and return preparation services to taxpayers in Las Vegas.

Two, according to Loving, a person who does not actively represent taxpayers in proceedings with the IRS but merely prepares returns is not engaged in “practice before the IRS” as that term is used in the applicable statute, 31 U.S.C. § 330(a).  Since his suspension by OPR, therefore, Mr. Sexton contends that he has not been a “practitioner” before the IRS; and the rationale of Loving supports that claim.  He acknowledges that he prepares returns for clients, but again he relies on Loving to contend that he is not thereby subject to regulation under section 330.

Here’s where it gets interesting.  OPR had apparently received a complaint that Mr. Sexton was engaged in practice before the IRS, and in February, 2013 it sent him an inquiry letter.  It asked a number of questions about his practice, and requested many documents related to his clients, such as copies of returns he had prepared, any documents he used or relied upon in preparing returns, and any explanations of the tax law he had provided to clients.  OPR specifically relied on provisions of Circular 230 in its request letter, citing section 10.20 as authority for its request and for his purported obligation to comply, and sections 10.50 and 10.52 for sanctions that might apply.  In May, 2013 Mr. Sexton sued under the Administrative Procedure Act, seeking declaratory relief that he was not subject to OPR regulation and asking the court to enjoin the OPR request for information.  The Justice Department moved to dismiss.

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Before reviewing the opinion, let’s pause a moment to reflect on some of the seeming paradoxes in this dispute.  First, Mr. Sexton (and perhaps the court) might consider it strange that OPR is threatening sanctions against someone whom it has already sanctioned once with an open-ended, indefinite suspension.  Perhaps the only thing left that OPR could seek to do to Mr. Sexton now would be to disbar him permanently or impose some kind of monetary penalty on him.  See Cir. 230 § 10.50.  And at the same time it is arguing that he is not authorized to practice before the IRS, OPR is relying on provisions of Circular 230 that, well, apply only to practitioners before the IRS.  Under the Loving rationale, return preparation is not practice, so perhaps OPR is investigating to see if Mr. Sexton is engaged in other activities that might constitute practice.  But what is its authority to ask a return preparer (who post-Loving is by definition a non-practitioner) about that?

On the other hand, OPR would presumably contend that it is merely investigating to see if Mr. Sexton is in compliance with his previous sanction; or it might argue that Mr. Sexton is still at least potentially an authorized practitioner by virtue of being a lawyer, that he was merely suspended not disbarred, and that its present inquiry is necessary to see if an additional sanction is necessary.  Either of these contentions would be consistent with OPR’s position, which OPR personnel repeat in various forms at every opportunity (and which I’m paraphrasing), that “once you’re in the system you’re in for all purposes” and OPR has continuing jurisdiction over you.  (I have argued elsewhere that the authority for that ongoing jurisdiction over practitioners derives from section 330(b), not section 330(a), but that discussion is for another day.)

These are all intriguing questions, and they may eventually be resolved by the Sexton court.  But they’re not in the opinion just issued, which is interesting in its own right for other reasons.  First, over the Government’s motion to dismiss, the court held that it had jurisdiction under section 702 of the APA, because the OPR investigation constitutes a “final agency action for which there is no other adequate remedy in a court.”  It may seem strange (and I’m sure OPR feels this way) to characterize a mere inquiry letter as a final agency action.  But to that, the court essentially responds that OPR is hoist by its own petard.  It finds that OPR’s assertion of jurisdiction over Mr. Sexton and his business is itself a final agency action that has consequences, among which would be application of the very provisions OPR cites, i.e. the obligation under section 10.20 to respond to its inquiry and the possibility of additional sanctions under 10.50.  Other consequences might also ensue: Mr. Sexton claims that OPR has threatened to withdraw his ability to e-file returns if he fails to respond to the inquiry letter, and the opinion points out that the letter would require him immediately to turn over otherwise confidential client records and returns.  OPR’s position, the court states, “elides the important distinction between a mere investigation, which is likely not final, and the instant demand for documents under color of law and threat of consequences, which is.”  And the court finds that there is no adequate remedy to prevent the harm that could flow from that, pointedly noting the Justice Department’s concession at oral argument that there was “no possible administrative remedy or process for contesting the production of the material.”

In a second holding, and largely for the same reasons, the court finds that Mr. Sexton has adequately asserted a claim for relief.  The issues it describes include whether Mr. Sexton is a “practitioner,” whether OPR jurisdiction extends to a “former practitioner” and his business, and most interestingly “whether the giving of tax advice is beyond the scope of the regulatory authority” of OPR.  That the court even appears intent on deciding that third issue, which has been the subject of much speculation since Loving, should give the government some pause.

Third and finally, the court enters a preliminary injunction, again based mainly on the lack of any other adequate remedy.  It notes that once the  requested documents are produced they cannot be “unproduced” (its word), and it specifically finds that the production itself could constitute irreparable injury, whereas on the other hand there is no hardship to the IRS or adverse impact on the public from waiting.  The court thus specifically enjoins the production of documents – but not the entire investigation – and prohibits the IRS from suspending Mr. Sexton’s ability to e-file because he has failed to produce those documents.

There are many other thought-provoking asides and comments in the opinion, which I urge readers to review carefully.  And while I don’t want to speculate how this case will eventually turn out, it does seem, as I said at the start, to be at the very least another temporary setback for OPR.  The government has now suffered three consecutive losses in its effort to reach return preparation activities, whether conducted by non-practitioners (Loving),former practitioners (Sexton), or even current CPAs (Ridgely).  Given the court’s comments and holdings in this initial opinion, a final loss in Sexton could further seriously undercut OPR’s authority.

On the other hand, the court’s conclusion that there is no potential harm to the public from letting a convicted felon and suspended practitioner continue to prepare returns seems questionable.  It is certainly inconsistent with the findings of the IRS’s return preparation study, the regulations overturned in Loving, and the views of the organized tax bar and accounting profession.  Many of us believe additional legislative authority is required and urge a thorough re-writing of section 330, although it is hard to believe a Republican-controlled Congress will be inclined to give the IRS new and expansive regulatory powers.

So the most likely result may just be continued fights over – and possibly further erosion of – OPR’s authority.