Counsel Clarifies the Limited Rights of Unenrolled Preparers in Tax Court Cases

Taxpayers who have filed a petition in Tax Court often still rely on their tax return preparers to help try to resolve the matter. Most unlicensed tax return preparers are not admitted to practice before IRS Counsel attorneys. Despite that, in a 2014 Chief Counsel notice the IRS emphasized that Counsel attorneys should interact with a taxpayer’s representative if there is a valid POA on file authorizing the representative to act on the taxpayer’s behalf.

Last week, in  Notice CC-2017-007 Counsel clarified its earlier procedure and discussed issues relating to a representative who is an “Unenrolled Return Preparer.”

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As we have discussed before, following the judicial rejection of the Service’s plan to require unlicensed preparers to pass a test and complete continuing education requirements, the Service launched a voluntary testing and education program called the Annual Filing Season Program (see for example Some More Updates on IRS Annual Filing Season Program and Refundable Credit Errors). Under that program, unlicensed preparers take 18 hours of continuing education and take a test on federal tax law. The return preparer seeking to obtain certification of compliance with the annal filing season program must also renew their preparer tax identification number (PTIN) and consent to adhere to and be subject to the obligations in Circular 230 addressing duties and restrictions to practice before the Service and Circular 230 § 10.51, which addresses sanctions and disreputable conduct. The benefits of opting in to the Annual Filing Season Program include becoming part of a searchable database of preparers and the right to represent taxpayers in examinations, though not before Appeals, Counsel or Collection.

That representation ability is a key perk for unenrolled preparers; it generally was available to all signing preparers before 2015 though by now limiting representation to the unenrolled preparers who comply with the Annual Filing Season Program, the Service has hoped to generate interest in and demand for what it required through its ill-fated mandatory testing and education regime.

Form 2848 specifically now has a designation for the class of unenrolled preparers who opt in to the Annual Filing Season Program; designation “h”, which is for “Unenrolled Return Preparer.”

Last week’s Chief Counsel notice discussed the limits of these representational rights for Unenrolled Return Preparers. Most importantly, representation is still limited to matters involving examination of a tax return. A challenge for the Service is drawing the line between assistance in an exam matter and in a matter that progresses beyond an exam because the taxpayer, often with shadow assistance by an unlicensed preparer, has filed a petition in Tax Court. Despite the limits of the representational powers of unenrolled return preparers, in the current Chief Counsel Notice the Service clarified that “if the involvement of an unenrolled return preparer is beneficial to the resolution of the case, Counsel attorneys may work with the unenrolled return preparer, in a non-representative capacity, to develop the facts of a case.”

In the Notice, Counsel thus takes a practical approach to the issue. Most cases in Tax Court involve pro se taxpayers, and many disputes in court revolve around facts. My experience is that in many instances the involvement of a third party can assist in the resolution of the case. The 2017 Chief Counsel Notice states that the preparer may assist the taxpayer in gathering information or in substantiation of items on the return, and that Counsel attorneys may permit the preparer to attend meetings.

The Notice does remind its attorneys to clarify with the taxpayer and the preparer that for the unenrolled return preparer there is no general authority to represent taxpayers in Tax Court cases, and that Counsel has no obligation to communicate with the preparer or even include the preparer in meetings if the preparer is abusive or if the interests of the preparer conflict with the interests of the taxpayer.

There are a couple of points worth highlighting in the Notice. First, with the increased reach of special due diligence penalties applying to more refundable credits, it is becoming somewhat more likely that a conflict between a preparer and a taxpayer may arise. In addition, as with other third parties who are not representatives of a taxpayer, Counsel’s communications with unenrolled preparers could expose the Service to possible 6103 violations if the communications proceed without the involvement of the taxpayer. As such, the Notice reminds its attorneys that it should communicate with the unenrolled preparer only if the taxpayer “is present, either in person or on the telephone, or in the unenrolled return preparer’s capacity as a third party record keeper or a potential witness.” In addition, because I suspect that taxpayers may not fully appreciate the limited powers of unenrolled preparers, the Notice states that to “avoid confusion Counsel attorneys should clarify with both the petitioner and the unenrolled return preparer that unenrolled return preparers do not have the authority to represent petitioners in dealings with Chief Counsel, even if the petitioner purports to consent to the representation.”

Conclusion

In sum, the Notice seems helpful for all parties. As taxpayers become more familiar with the limits associated with preparers who have not opted in to the Annual Filing Season Program, the Service encourages what it could not mandate; that is, the use of preparers who in fact have demonstrated some minimal level of competence and who demonstrate the additional accountability and visibility associated with the annual filing season program. I think that the approach of providing the incentive to use some preparers as compared to others, so long as that incentive is tied to furthering the goal of good tax administration rather than lining the pockets of some preparers over others, is a good model for IRS oversight over an industry that plays a key role in tax administration.

Brief Follow up to Today’s Post on Refund Loans

Today’s post noted that we are likely to hear from consumer groups regarding the return of refund loans. It turns out that yesterday the National Consumer Law Center issued a press release called Tax Time Kick-Off: Delays and Risks Await Many Taxpayers This Year, discussing some of this filing season’s challenges. In the release, the NCLC, which was a leading voice against the earlier use of refund loans, again warns consumers against their use:

Advocates recommend that taxpayers avoid no fee RALs if possible. One risk is that some unscrupulous tax preparers might charge more in their tax preparation fees to “no fee” RAL borrowers. Also, in the last tax season some lenders, such as EPS and River City Bank, appeared to actually impose a price for “no fee” RALs by charging a higher price for a refund anticipation check (RAC) if the preparer was offering these loans.

With RACs, the bank opens a temporary bank account into which the IRS direct deposits the refund. After the refund is deposited, the bank issues the consumer a check or prepaid card, minus tax preparation fees paid to the preparer, and closes the temporary account. RACs do not deliver refunds any faster than the IRS can, yet cost $25 to $60. Some preparers charge additional “add-on” junk fees for RACs, fees that can range from $25 to several hundred dollars.

The NCLC also discusses some of the other challenges this year, including the need for many taxpayers to get a renewed Taxpayer ID number (ITIN), the coming of private debt collectors and the need to select competent and honest preparers.

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Further note: I have updated the link to the IRS web page for this filing season.

Class Action Lawsuit Filed in New Mexico Seeking to Toss Out IRS Voluntary Filing Season Program

I recently discussed the AICPA’s unsuccessful efforts to have the courts invalidate the IRS’s annual filing season program (AFSP) in IRS Wins Latest Battle on Voluntary Return Preparer Testing and Education Though Other Battles Likely Remain. In the AICPA opinion, Judge Boasberg suggested that while AICPA was not an appropriate plaintiff to challenge the IRS’s plan, “the Court has little reason to doubt that there may be other challengers who could satisfy the rather undemanding strictures of the zone-of-interests test.” This week in a federal district court in New Mexico a group of low to moderate income taxpayers and an individual doing business as tax return preparer Columbia Tax Services filed a complaint alleging that the IRS was targeting its clients for examination because the preparer did not enter the IRS’s voluntary filing season program.  In addition to seeking a declaratory judgment and injunctive relief relating to violations of the APA and the equal protection clause stemming from what the complaint alleges as unfair targeting of clients of unregistered preparers, the case potentially tees up the legality of the AFSP. Though the complaint does not focus on the IRS issuing the AFSP in a revenue procedure rather than through the regulatory process, it does (Count 1) question the IRS’s statutory jurisdiction and authority to issue those rules.

There are some other aspects of the complaint that stand out on a quick read. For one, the plaintiffs are seeking class certification. That has been a tactic that was not typically associated with challenges to IRS but is now more common. In addition, in Count 4 the complaint seeks to join the National Taxpayer Advocate as an involuntary plaintiff in the case, claiming that she has the “authority and right to take action and intervene” and that her being named as an involuntary plaintiff would facilitate participation without the delay of intervention. I question the conclusion about the NTA’s authority to intervene in lawsuits against the IRS (though have not researched this). Federal Rule of Civil Procedure 19(a)(2) permits courts to join necessary parties as involuntary plaintiffs “in a proper case.” Rule 19(a)(1)(B)(i) requires that an involuntary plaintiff claims an interest in the subject of the action and that disposing of the action in her absence may as a practical matter impair or impede her ability to protect the interest. That seems to me to be a tough standard, though no doubt the NTA is a more than capable lawyer she has been on record as being a proponent of the AFSP. The suit does make allegations and seeks relief stemming from what it describes as illegal and unconstitutional conduct stemming from the examinations of the taxpayers whose returns were prepared by Columbia Tax Services and claims that the pre-assessment notices the IRS issued to the taxpayers fell short of APA standards. With respect to the allegedly misleading and inaccurate notices, as we have discussed before, the Tax Court at least has been rather dismissive of using the APA to impose additional requirements on IRS stat notices and correspondence to taxpayers in light of the Tax Court’s de novo review of the underlying merits in deficiency cases. Moreover, while recent cases have exposed holes in the Anti-Injunction Act and Declaratory Judgment Act, those statutes generally serve as a bar to pre-enforcement relief of the kind this complaint seeks for alleged IRS misconduct in the examinations of the taxpayers themselves.

We will keep an eye on this suit, as well as others that may come to challenge the IRS’s voluntary filing season program.

 

IRS Wins Latest Battle on Voluntary Return Preparer Testing and Education Though Other Battles Likely Remain

Last week in AICPA v IRS the DC District Court ruled in favor of the IRS in the latest round of the AICPA’s fight to dismantle the IRS’s Annual Filing Season Program. As some of you may recall, the Annual Filing Season Program (AFSP) was the IRS’s reaction to losing in its efforts to impose on unlicensed preparers a mandatory testing and education regime in Loving v IRS. Rather than force unlicensed preparers to take an entrance test and take continuing education, the IRS now allows preparers to opt in, with the benefit that those who sign on appear in an online searchable database of preparers. The AFSP also imposes a cost to those who do not opt in; they are not permitted to engage in limited representation of the clients whose returns the IRS audits.

Last year the DC Court of Appeals, reversing the District Court, held that the AICPA had standing to bring the suit challenging the AFSP. After the case was remanded to the District Court and prior to that court getting to the heart of the merits argument, IRS filed another motion to dismiss, this time not on constitutional standing grounds (where it lost on appeal). Instead, IRS argued that the case should be dismissed because AICPA was not within a zone of interests that Congress sought to protect. In last week’s opinion, the District Court held that while AICPA had standing to bring the suit the suit should be dismissed because AICPA was not within the zone of interests protected by 31 U.S.C. § 330(a) (dealing with regulating practice before Treasury and conditioning practice upon qualifications) and 31 U.S.C. § 330 (b) (comprising of penalties and rules for the disbarment of practitioners).

In this post I will briefly discuss the zone of interests issue and also address some of the procedural implications of the opinion, including how the opinion foreshadows other challenges to the AFSP.

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The AICPA is Not in the Zone of Interests

As last week’s opinion discusses, the zone of interests question is not a constitutional standing question (though it is similar); instead, “it is a ‘statutory question’ that asks ‘whether ‘a legislatively conferred cause of action encompasses a particular plaintiff’s claim.’ Mendoza v. Perez, 754 F.3d 1002, 1016 (D.C. Cir. 2014). Likely for this reason, satisfaction of the zone-of-interests test is no longer a “jurisdictional requirement” and is instead “a merits issue.” Crossroads Grassroots, 788 F.3d at 319 (citations omitted).

Was AICPA within the class of persons Congress sought to protect with 31 U.S.C. § 330(a) and (b)? The court said no. The upshot of the opinion is that AICPA brought this suit because it felt that the Annual Program would threaten its members’ market share; worried that the public would view the Annual Filing Season as a credential that would draw consumers from CPAs during tax season, the AICPA sought to stop the program:

AICPA’s objective here, as it relates to its competitive injury, is to “remov[e] the AFS Rule’s spurious credential from the marketplace.” Opp. at 2; see id. at 3 (“[A]s competitors of unenrolled preparers, AICPA members’ interests” consist of, inter alia, “ensuring that their hard- won qualifications are not diluted by the Rule’s unlawful credential.”). Digging deeper, however, its interest relates to “maximizing . . . profits, apparently by avoiding competition with” unenrolled preparers in the market for tax services. See Liquid Carbonic Indus. Corp. v. F.E.R.C., 29 F.3d 697, 705 (D.C. Cir. 1994).

That, according to the District Court ran counter to the protective purpose of 31 USC § 330, which Congress enacted in the mid-19th Century as a means to protect Civil War veterans against unscrupulous agents:

On the surface, it seems difficult to square AICPA’s interest in dismantling the IRS’s program with Congress’s goal of safeguarding consumers. In creating the AFS Program, the IRS aimed to improve unenrolled preparers’ knowledge of federal tax law, thereby “protecting taxpayers from preparer errors.” Rev. Proc. 2014-42, § 2. This objective appears closely aligned with Congress’s goal of ensuring taxpayers are provided “valuable service.” 31 U.S.C.
§ 330(a)(2)(C). AICPA does not impugn the IRS’s motive in creating the program or otherwise argue that, apart from the risk of “consumer confusion” – i.e., that consumers might confuse a more-qualified but higher-priced CPA with a less-qualified but cheaper unenrolled preparer – the AFS program does not flow logically from Congress’s objective of protecting consumers. Rather, it seeks to eliminate the Program notwithstanding its potential benefit to consumers precisely because the program’s “‘government-backed credential[]’” renders “unenrolled preparers . . . ‘better able to compete against other credentialed preparers,’ ‘uncredentialed employees of [AICPA] members,’ and ‘CPAs and their firms.’” Opp. at 10 (quoting AICPA II, 804 F.3d at 1197-98).

The zone of interests test is more nuanced than this snapshot provides, and I leave to those who wish to dig deeper to read the opinion itself as well as Ed Zollar’s excellent write up of the case and that issue in Federal Tax Developments.

Not the Final Word on Challenges to the IRS Program

In addition to providing a roadmap on the zone of interests test, the opinion itself is worth a careful read for its suggestion that other parties may in fact have a beef with IRS even if the AICPA does not. To that end, while Judge Boasberg, the judge who wrote the district court Loving opinions, carefully recounts the history of IRS efforts to regulate preparers, he also offers a not so subtle critique of the IRS’s decision to use a Revenue Procedure to promulgate the AFSP. He does so by reminding that he issued a clarifying opinion after IRS lost in Loving.  There he rejected IRS’s request for a stay of the injunction pending appeal, though he noted that IRS might choose to keep in place some of the apparatus of its licensing regime as “it is possible that some preparers may wish to take the exam or continuing education even if not required to. Such voluntarily obtained credentials might distinguish them from other preparers.” He notes that “[p]erhaps taking this clarification to heart, the IRS decided to retain much of the rule’s infrastructure, but did so by relying on tax preparers’ willingness to voluntarily participate.”

While referring to the IRS’s possibly taking his advice, this opinion also discusses that IRS put this process in place in a revenue procedure, “albeit without notice and comment.” The IRS use of revenue procedures to carry the hefty weight of meaningful rules is something we have discussed before; as is the IRS penchant for getting rules in place without formal notice and comment (see Dan Hemel’s post  earlier this week for the Chamber of Commerce challenge to Treasury’s inversion regs, for example).

More from the opinion and the hint to other challengers:

A final word. While AICPA does not have a cause of action under the APA to bring this suit, the Court has little reason to doubt that there may be other challengers who could satisfy the rather undemanding strictures of the zone-of-interests test. “The same claim may be viable in the hands of one challenger and not in those of another that, for example, has interests that make it less than a reliable private attorney general to litigate the issue of the public interest in the . . . case.” HWTC IV, 885 F.2d at 925-26 (citations and quotation marks omitted). Given the points raised in the merits briefing, which the Court now has no occasion to consider, Defendant may wish to ensure that its Program was properly promulgated before a suitable party mounts its own challenge.
 (emphasis added)

A few years ago I wrote an article explaining why I thought it was important for IRS to seek greater input especially on rules that have a significant impact on those whose interests are not typically represented through trade associations or lobbying groups. In writing the article, I drew upon a deep literature in administrative law that discusses the pros and cons of requiring agencies to more closely adhere to the requirements to use the notice and comment procedure to promulgate rules. I am no zealot on these issues, and while it has been a while since I deeply waded in those waters I am sympathetic to those who feel IRS should more meaningfully and systematically engage with those whose perspective would improve the quality of the rules the IRS issues. As an added benefit it would also likely engender greater acceptance of the rules from those who may not necessarily like the outcome but who feel that their voice was heard. (I do recognize that before IRS did come up with its ill-fated mandatory testing and education program that the courts invalidated IRS did seek input in the form of hearings and an informal comment period).

We likely have not seen the last of the challenges to the IRS Annual Filing Season Program; nor have we seen the last procedural challenge to the issuance of rules. While this round is a nice IRS victory, Judge Boasberg’s opinion is perhaps a reminder that IRS ignores strict adherence to some administrative law norms at its peril.

 

 

 

 

 

 

 

 

Return Preparer Shenanigans

An original version of this post appeared on the Forbes PT site site on May 18, 2016.

Recently the Senate Finance Committee wrestled with the issue of whether to provide the IRS with authority to regulate return preparers. Congress remained deadlocked on party lines and did nothing.  This post is not about what they did or did not do but about the problem of finding the right way to fix the current system.  I am not convinced that just giving the IRS the right to impose tests and continuing education requirements creates the correct system but we need to work toward some solution that eliminates the bad preparers in a way not currently possible.

It is old news that the IRS tried to regulate preparers based a post-Civil War era law that the DC Circuit, in the case of Loving v. United States, found did not provide a basis for such regulation.  Since losing the case in 2014, the IRS has sought to convince Congress to grant it authority to regulate preparers.  The IRS was slow to come to the point of wanted to regulate preparers but seems committed to the idea now.  Based on clinic clients for almost a decade, I would like regulation that removes bad preparers from the system and particularly from preparing returns with refundable credits.  I am not so concerned about making the preparers take ongoing training courses because I think they will learn what to do and keep up changes if they want to be effective.  I am interested in the system for rooting out bad preparers and keeping them away from my clients.  The recent case of United States v. Edmond demonstrates how much effort it takes to keep bad preparers from plying their trade.

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Under the current system, the IRS cannot regulate preparers before they start preparing returns. We know from the stories and based on general knowledge that except for a handful of states that regulate preparers, essentially anyone can become a return preparer with no test, no minimum education requirement, no criminal record check or any other barrier.  The IRS can, however, work with the Department of Justice Tax Division to take bad preparers to court one at a time (sometimes more than one are lumped together from the same practice) and obtain injunctions ordering them to stop preparing or to only prepare returns in a monitored fashion.  For at least 15 years the Tax Division has taken these cases very seriously and has brought numerous suits to stop bad preparers.  These hand crafted pieces of litigation take great effort by the Tax Division attorneys and the supporting IRS employees.  The Edmond case shows even the limitations of this trench warfare against bad preparers.

Stephanie Edmond of Memphis Tennessee ran a tax preparation business under the name The Tax Factory Enterprise. The IRS filed a complaint against her on December 3, 2013, and an “Order and Judgment of Permanent Injunction” was entered on April 17, 2015 – two filing seasons later.  I do not know why it took so long in this case but getting an injunction preventing someone from working will rarely come easy.  Then the IRS filed an order to show cause why Ms. Edmond should not be held in contempt in July, 2015 and December 2015.  The Court held a hearing on January 15, 2016, and issued an injunction against Ms. Edmond and the employees of her firm, then held another hearing and then affirmed the injunction.  This is a lot of work to shut down one bad preparer and her operation.  If the IRS receives authority to regulate preparers it needs authority to shut down bad preparers without this much effort and yet any alleged bad preparer needs the opportunity to be heard

When the district court entered the first injunction in this case two filing seasons after the case was brought, it did not enjoin Ms. Edmond from preparing returns but rather from preparing bad returns. She was required to hire a monitor within 30 days of that order and send at least 3% (at least may not be the right adjective here though that is the one chosen by the Court) of the returns prepared to the monitor for the monitor to check for accuracy and to file a report with the IRS.  She chose a local CPA as the monitor three months later, sent him a total of two returns from the period from April 2015 to December 2015 and failed to pay the monitor.  Meanwhile Ms. Edmond contacted a college friend to use the electronic filing number of his tax preparation firm and shifted operations to a new entity , the Tax Firm.  Essentially all of the same employees continued to work with Ms. Edmond and none of the returns prepared by The Firm were sent to the monitor.

At the hearing earlier this year the court found that Ms. Edmond’s actions described here coupled with “filing returns with fictitious Schedule C losses and otherwise claiming improper deductions” justified the permanent injunction. She and her colleagues at the Tax Firm or the Tax Factory are now enjoined from preparing returns and ordered to disgorge all fees from the 2016 filing season, the third filing season after the Tax Division brought the injunctive action.  Maybe I am a skeptic about these things but I will be surprised if the return preparation fees are sitting around in a bank account just waiting to be disgorged.

In this season of lawn care and nourishment, I find an analogy to what has happened here to trying to pull up individual dandelions instead of putting down a fertilizer that kills them and prohibits growth. Aside from having to pull them up one by one, you invariably do not get the roots so it pops back up before long.  I do not find fault with the IRS and the Tax Division from trying to root out the bad preparers one at a time.  It is the system they must use.  I find fault with the system.  We need to find a way to cut off the bad preparers but also to make it possible for good preparers to thrive.  This requires care and feeding and protection of the good preparers because they are not offering to taxpayers the wondrous results available at tax preparation sites run by the bad ones.  Good preparers do not necessarily need special designations and training but they need support.  If Congress gets to the place where it gives the authority to regulate, it needs to look at cases like this one so it can build a system that will work   This case shows the dysfunction of the current system but does not necessarily make the point that the system the IRS was preparing to impose would create the needed functionality.

My clients need protection and the terrific volunteers at VITA and AARP sites together with the many honest and dedicated tax professionals are not always there to steer them in the right direction when the time comes to file their returns.

Summary Opinions for November

1973_GMC_MotorhomeHere is a summary of some of the other tax procedure items we didn’t otherwise cover in November.  This is heavy on tax procedure intersecting with doctors (including one using his RV to assist his practice).  Also, important updates on the AICPA case, US v. Rozbruch, and the DOJ focusing on employment withholding issues.

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I’ve got a bunch of Jack Townsend love to start SumOp.  He covered a bunch of great tax procedure items last month.  No reason for me to do an inferior write up, when I can just link him.  First is his coverage of the Dr. Bradner conviction for wire fraud and tax evasion found on Jack’s Federal Tax Crime’s blog.  Why is this case interesting?  Because it seems like this Doc turned his divorce into some serious tax crimes, hiding millions offshore.  He then tried to bring the money back to the US, but someone in the offshore jurisdiction had flipped on him, and Homeland Security seized the funds ($4.6MM – I should have become a plastic surgeon!).  His ex is probably ecstatic that the Feds were able to track down some marital assets.   I am sure that will help keep her in the standard of living she has become accustom to.

  • I know I’ve said this before, but you should really follow Jack Townsend’s blogs.  From his Federal Tax Procedure Blog, a write up of the Second Circuit affirming the district court in United States v. Rozbruch.  Frank Agostino previously wrote up the district court case for us with his associates Brian Burton and Lawrence Sannicandro.  That post, entitled, Procedural Challenges to Penalties: Section 6751(b)(1)’s Signed Supervisory Approval Requirement can be found here.  Those gents are pretty knowledgeable about this topic, as they are the lawyers for the taxpayer. As Jack explains, the Second Circuit introduces a new phrase, “functional satisfaction” (sort of like substantial compliance) as a way to find for the IRS in a case considering the application of Section 6751(b) to the trust fund recovery penalty.
  • The Tax Court in Trumbly v. Comm’r  has held that sanctions could not be imposed against the Service under Section 6673(a)(2) where the settlement officer incorrectly declared the administrative record consisted of 88 exhibits that were supposed to be attached to the declaration but were not actually attached.  The Chief Counsel lawyer failed to realize the issue, and forwarded other documents, claiming it was the record.  The Court held that the Chief Counsel lawyer failed to review the documents closely, and did not intentionally forward incorrect documents.  The Court did not believe the actions raised to the level of bad faith (majority position), recklessness or another lesser degree of culpability (minority position).  Not a bad result from failing to review your file!
  • This isn’t that procedure related, but I found the case interesting, and I’ve renamed the Tax Court case Cartwright v. Comm’r as “Breaking Bones”.  Dr. Cartwright, a surgeon, used a mobile home as his “mobile office” parked in the hospital parking lot.  He didn’t treat people in his mobile home (which is good, because that could seem somewhat creepy), but he did paperwork and research while in the RV.  Cartwright attempted to deduct expenses related to the RV, including depreciation.  The Court found that the deductions were allowable, but only up to the percentages calculated by the Service for business use verse personal use.  I’m definitely buying an Airstream and taking Procedurally Taxing on the road (after we find a way to monetize this).
  • The IRS thinks you should pick your tax return preparer carefully (because it and Congress have created a monstrosity of Code and Regs, and it is pretty easy for preparers to steal from you).
  • Les wrote about AICPA defending CPA turf in September.  In the post, he discussed the actions the AICPA has been taking, including the oral argument in its case challenging the voluntary education and testing regime.  As Les stated:

The issue on appeal revolves whether the AICPA has standing to challenge the plan in court rather than the merits of the suit. The panel and AICPA’s focus was on so-called competitive standing, which essentially gives a hook for litigants to challenge an action in court if the litigant can show an imminent or actual increase in competition as a result of the regulation.

On October 30th, the Court of Appeals for the District of Columbia reversed the lower court, and held that the AICPA had standing to challenge the IRS’s Annual Filing Season Program, where the IRS created a voluntary program to somewhat regulate unenrolled return preparers.  The Court found the AICPA had “competitive standing”, which Les highlighted in his post as the argument the Court seemed to latch on to.   For more info on this topic, those of you with Tax Notes subscriptions can look to the November 2nd article, “AICPA Has Standing to Challenge IRS Return Preparer Program”.  Les was quoted in the post, discussing the underlying reasons for the challenge.

  • Service issued CCA 201545017 which deals with a fairly technical timely (e)mailing is timely (e)filing issue with an amended return for a corporation that was rejected from electronic filing and the corporation subsequently paper filed.  The corporation was required to efile the amended return pursuant to Treas. Reg. 301.6011-5(d)(4). Notice 2010-13 outlines the procedure for what should occur if a return is rejected for efiling to ensure timely mailing/timely filing, and requires contacting the Service, obtaining assistance, and then eventually obtaining a waiver from efiling.  There is a ten day window for this to occur.  The corporation may have skipped some of the required steps and just paper filed.  The Service found this was timely filing, and skipping the steps in the notice was not fatal.  The Service did note, however, that efiling for the year in question was no longer available, so the intermediate steps were futile.  A paper return would have been required.  It isn’t clear if the Service would have come to the same conclusion if efiling was possible.
  • Sticking with CCAs, in November the IRS also released CCA 201545016 dealing with when the IRS could reassess abated assessment on a valid return where the taxpayer later pled guilty to filing false claims.   The CCA is long, and has a fairly in depth tax pattern discussed, covering whether various returns were valid (some were not because the jurat was crossed out), and whether income was excessive when potentially overstated, and therefore abatable.  For the valid returns, where income was overstated, the Service could abate under Section 6404, but the CCA warned that the Service could not reassess unless the limitations period was still open, so abatement should be carefully considered.

 

 

TIGTA Report on PTINs Finds IRS Not Fully Using its PTIN Powers

While IRS lost the battle in Loving to impose mandatory education and testing requirements over paid preparers, it still holds the keys to allowing paid preparers access to earning money though its oversight of the e-file program and the requirement that all preparers register for a Preparer Tax Identification Number (PTIN). Last month TIGTA released a report reviewing the IRS’s administration of the PTIN program, and its study reveals that IRS has failed to revoke PTINs for preparers who themselves were not compliant with tax return filing or payment obligations.

The following highlights parts of the TIGTA report I found interesting.

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The IRS created the Return Preparer Office in 2010 in part to administer the PTIN rules. Part of that responsibility includes reviewing applicants and renewals for suitability. As TIGTA explains,  “a fully completed suitability check includes the IRS matching the preparers in the [Tax Professional PTIN System] to lists of individuals who may be unsuitable for the PTIN program, researching and contacting the preparer, and using judgment to decide which action to take on each case. ”

While the report redacts a portion describing exactly what goes into suitability determinations, that appears to focus on a preparer’s tax compliance history. The suitability review generally occurs after IRS doles out the numbers in applications or renewals. According to TIGTA it does so after issuing PTINS  because “IRS does not want to prevent tax return preparers from completing tax returns during this process.”

There are about 700,000 preparers with PTINS; about 406,000 PTIN holders (or 58%) are unlicensed professionals. Only about 50,000 PTIN holders are enrolled agents and the rest, about 240,000, are licensed professionals like CPAs.

On the positive side, TIGTA found RPO had done a good job administering rules relating to the post-Loving voluntary testing and education program for unlicensed preparers as well as ensuring that preparers met certain minimum requirements, such as being at least 18:

Our review identified that the Return Preparer Office (RPO) has established processes and procedures to ensure that individuals assigned a PTIN were at least 18 years of age, were not using identifying information associated with a deceased individual, and correctly reported professional credentials.

In addition, the RPO ensured that individuals participating in the new Annual Filing Season Program met educational requirements and consented to be subject to the duties and restrictions of practicing before the IRS under Treasury Department Circular 230.

In its main criticism TIGTA found IRS and RPO failed to “revoke PTINs of tax return preparers who were not compliant with their tax filing and payment obligations.” In addition,  TIGTA found that RPO failed to assess suitability of preparers who self-reported felonies or ensure that preparers who had been previously enjoined no longer had PTINs. For an illustration of the extent of preparers with tax compliance issues, TIGTA elaborates:

For example, in January 2015, the RPO identified 19,496 preparers with PTINs that were potentially noncompliant with tax filings and payments. These preparers have over $367.6 million in total taxes due as of January 26, 2015. The RPO also identified 3,055 preparers who failed to file required tax returns for one (2,374 preparers) or more (681 preparers) tax years; eight tax return preparers who failed to file required tax returns for five years, and one tax return preparer who failed to file required tax returns for six years. While the RPO has a process to identify noncompliant return preparers, no actions were taken by the RPO to resolve these cases.

TIGTA connects the preparers’ lack of compliance to extra risk that the returns those preparers prepare are likely to have compliance problems (“[t]hese tax return preparers can negatively affect taxpayers as well as tax revenue if the tax returns they prepare are incorrect or fraudulent.”), though there is no research that I am aware of that TIGTA or IRS has done on that point.

In addition to the findings, TIGTA discussed Section 6109 and the regs under 6109 which contain the underlying PTIN rules and the compliance requirement for preparers. Here is the background on the issue as TIGTA frames it:

Treasury Regulation Section 1.6109-2(f) grants the IRS the authority to conduct tax compliance checks for tax return preparers, stating that the IRS may conduct a Federal tax compliance check on a tax return preparer who applies for or renews a PTIN or other prescribed identifying number. The IRS’s decision to not fully complete tax compliance checks and revoke PTINs as warranted allows some preparers to maintain their PTIN even though they are not in compliance with Internal Revenue laws.

Consistent with the regulatory authority, IRS established tax compliance as a suitability requirement in Notice 2011-6; 2011-1 C.B. 315, Implementation of Rules Governing Tax Return Preparers. The notice states:

Until further guidance is issued, the IRS, in accordance with the authority to provide exceptions to the PTIN rules under section 1.6109-2 (h), will permit any individual eighteen years or older to pay the applicable user fee and obtain a PTIN permitting the individual to prepare, or assist in the preparation of, all or substantially all of a tax return or claim for refund for compensation if: the individual passes the requisite tax compliance check and suitability check (when available).

TIGTA elaborated on IRS views with respect to suitability and compliance checks, including the process within the IRS’s Return Preparer Office and IRS’s views that Section 7803 also provides statutory background for IRS authority to impose requirements on those seeking to obtain or retain PTINS

In May 2011, IRS Chief Counsel issued a memorandum to the Director of the RPO stating that “[n]either section 6109 nor the PTIN regulations provide specific suitability requirements to be satisfied before an individual receives a PTIN other than a Federal tax compliance check.” This memorandum also indicates that the IRS has the authority, under both Internal Revenue Code section 6109 and its general tax administration powers under Internal Revenue Code section 7803, to deny PTINs to certain individuals or classes of individuals when the issuance of PTINs to those individuals or classes of individuals would be inconsistent with the sound administration of Internal Revenue laws. However, the IRS assigns or allows an individual to renew a PTIN prior to performing suitability checks to avoid delays for the tax return preparers and to promote the use of PTINs by tax return preparers. After the PTIN is issued or renewed, the RPO Suitability function performs suitability and other checks to determine if the PTIN holder should retain the PTIN. This process was developed to allow tax return preparers to continue to prepare tax returns while the suitability checks are being completed.

The reference to Section 7803 is interesting, as that provides the Commissioner of Internal Revenue with “the power to administer, manage, conduct, direct, and supervise the execution and application of the internal revenue laws or related statutes and tax conventions to which the United States is a party.” IRC 7803(a)(2)(A). There has been some controversy regarding the powers that are associated with the general provision. For example, AICPA in its criticism and lawsuit over the IRS’s voluntary testing and education program has taken aim at the substantive reach of 7803(a)(2)(A) and whether it provides cover for IRS’s attempt to provide more oversight over unlicensed preparers (see e.g., last year’s AICPA letter on IRS Regulation of Tax Return Preparers After the Loving Decision).

As a related aside, the issue of how much room Title 26 provisions give IRS to oversee unlicensed preparers has been getting some additional attention recently.  Astute tax administration observer (and guest PT poster) Professor Bryan Camp in a recent Tax Notes article How the IRS Can Regulate Return Preparers Without New Law makes a compelling policy case for additional oversight of unlicensed preparers. In that article, Professor Camp explores how IRS may be able to use Title 26 itself to regulate the submission of tax returns as way to expand oversight over unenrolled preparers in light of IRS losses in Loving and Ridgley (the case striking down Circular 230 limits on contingent fees). He explains as follows: “if Treasury has the ability to regulate all returns [looking to Sections 6001, 6011 and 7805], it may also have the ability to respond to the concerns about the unreliability of [unenrolled return preparer] returns with regulations directed at all return preparers, including CPAs, attorneys, and enrolled agents.”

We hope to have more on Professor Camp’s article soon, but bringing it back to PTINs, despite IRS’s own view that Section 6109 allows it to conduct compliance checks on unlicensed preparers,  it appears that IRS does not revoke PTINs or even make inquiries of unlicensed preparers following its compliance or suitability checks. To that end, consider TIGTA’s recommendation that IRS “should ensure that tax compliance checks are complete by timely issuing inquiry letters to preparers after identifying noncompliance with Federal tax laws and that appropriate actions are taken to revoke PTINs when warranted.”

IRS agreed, to a point:

Management’s Response: The IRS agreed with this recommendation. The RPO conducts weekly tax checks on all PTIN holders in the [Tax Professional PTIN System]. Consistent with the IRS’s existing procedures to send letters following the end of the filing season, the IRS began sending letters on June 17, 2015, to credentialed preparers (practitioners governed by Circular 230 guidelines) and preparers participating in the AFSP [voluntary education and testing program] who were noncompliant with their tax obligations. The RPO will continue sending inquiry letters annually after each filing season.

On page 9 and 10, surrounded by a redacted portion of the TIGTA report, IRS stated, however, that at the time of TIGTA’s audit it was not taking action with respect to unlicensed preparers:

After the Loving decision was upheld…management proceeded with caution and decided to not issue inquiry letters to noncompliant preparers and to not revoke the PTINs as warranted.

Parting Thoughts

In reading the TIGTA report, it seems that IRS was not fully using the powers it has at its disposal to oversee preparers and perhaps is still gunshy following Loving when it comes to unlicensed preparers. As someone who believes that additional oversight over unlicensed preparers is an important way to increase accountability and visibility in our tax system, the TIGTA report at a minimum may raise questions as to whether IRS should use its existing powers fully before having more added to its plate.

To be sure, IRS is licking its wounds over Loving and related cases, and there is no doubt that it would welcome explicit legislative cover when it comes to the largest segment of the preparer community, unlicensed preparers. In this environment, that explicit legislative authority is far from a sure thing, and taxpayers and others are testing the limits of IRS powers, including in the AICPA’s challenge to the IRS voluntary testing and education program for preparers. Perhaps IRS reticence is a resource issue, or maybe just an aversion to additional possible setbacks. In any event, the challenges associated with higher errors associated with returns prepared by unlicensed preparers remains a problem still in search of solutions.

Senate Again Takes Aim at Improper Payments in Federal Programs

Last week the Senate Finance Committee held a hearing on reducing improper payments in federal programs. The hearing considered not just tax. It covered 124 programs across the federal government in FY 2014 that have resulted in about $124.7 billion misspent, though the IRS got special attention as the EITC, along with Medicare and Medicaid, account for about 75% of the government-wide improper payments. The only witness at the hearing was GAO Comptroller Gene Dodaro, a graduate of Lycoming College, the alma mater of the great Stephen Olsen.

The hearing highlights the continued IRS emphasis on EITC, with Dodaro testifying that EITC claimants are twice as likely to get audited as non-claimants and that about 45% of all IRS correspondence audits focus on EITC. Moreover, Dodaro believes that the two most important legislative fixes Congress could do to help IRS administer EITC would be to give it authority to regulate unenrolled preparers and to accelerate the time to file information returns.

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The hearing itself is good theater and also informative. Senator Hatch kicks it off at the 35 minute mark, noting the importance of the issue and framing the severity of the problem with what could be done with the money if it were not misspent (e.g., the improper payments would be enough to buy every American an Ipad or a year’s worth of meals at Chipotle, or on a more serious level health insurance for every person in Florida). Senator Wyden’s opening remarks starts off at the 42 minute mark, framing the discussion by noting that there are two key defining issues: one, that improper payments include payments that are too big, too small or documented in some wrong way. The second issue is out and out fraud. Senator Wyden notes that conflating fraud and improper payments generally is wrong.

GAO Comptroller Dodaro’s testimony starts at the 51 minute mark. His written testimony has lots of data and graphs and charts. He goes into EITC in great detail on page 13, and it looks at IRS compliance trends and that how in FY 14 IRS reported EITC program payments of $65.2 billion and estimated that about 27.2% or $17.7 billion in those EITC payments were improper.

Despite that attention-grabbing number, the GAO written testimony (page 33) describes the most significant source of the tax gap for individuals not as errors with credits such as EITC, but small business individual income underreporting:

Individual income tax underreporting accounted for most—about $235 billion—of the underreporting tax gap estimate for tax year 2006. Of that amount, IRS reported that over half—$122 billion—comes from individuals’ business income, including income from (1) sole proprietorships (persons who own unincorporated businesses by themselves), (2) partnerships (a group of two or more individuals or entities, such as corporations or other partnerships, that carry on a business), and (3) S-corporations (corporations meeting certain requirements that elect to be taxed under subchapter S of the Internal Revenue Code).

In his written testimony he summarized GAO’s view on the tax gap as follows and how IRS and Congress can reduce it as follows:

Addressing the estimated $385 billion net tax gap will require strategies on multiple fronts. Key factors that contribute to the tax gap include limited third- party reporting, resource trade-offs, and tax code complexity. For example, the extent to which individual taxpayers accurately report their income is correlated to the extent to which the income is reported to them and the Internal Revenue Service (IRS) by third parties. Where there is little or no information reporting, such as with business income, taxpayers tend to significantly misreport their income. GAO has many open recommendations to reduce the tax gap. For example, GAO recommended in 2012 that IRS use return on investment data to reallocate its enforcement resources and potentially increase revenues. Since 2011, GAO also recommended improvements to telephone and online services to help IRS deliver high-quality services to taxpayers who wish to comply with tax laws but do not understand their obligations. Other strategies GAO has suggested would require legislative actions, such as accelerating W-2 filing deadlines. Additionally, requiring partnerships and corporations to electronically file tax returns could help IRS reduce return processing costs and focus its examinations more on noncompliant taxpayers. Further, a broader opportunity to address the tax gap involves simplifying the Internal Revenue Code, as complexity can cause taxpayer confusion and provide opportunities to hide willful noncompliance.

At about the 58 minute mark, a good snapshot of the GAO position on EITC was in Dodaro’s response to questioning from Senator Hatch when the Senator described the EITC as “one of the most poorly administered federal programs” and asked if Dodaro agrees with that characterization. There Dodaro deflects from IRS bashing and notes that the EITC is difficult and complex to administer based on the challenges it faces in determining family arrangements and often its lack of information about income. Dodaro again emphasizes that IRS needs legislation to help it administer the program successfully. In particular, as I mention above, Dodaro believes that the two most important legislative proposals would be giving IRS authority to regulate paid preparers and accelerate the filing of information returns.

For those interested in the issue of regulating preparers, at about 1:01 is where GAO’s Dodaro gives his endorsement of legislation regulating preparers, including references to Oregon, one of the handful of states that has its own mandatory education and testing regime.

Parting Thoughts

There are many other specific proposals in the GAO testimony, including expansion of math error authority that I have many reservations about (and discussed previously), and a general call for simplifying the laws. For many reasons, Congress will always focus on errors in transfer programs such as the EITC. Given that the administration has proposed extending the prior expanded levels of EITC and has with some bipartisan support also called for expanding the EITC for childless workers it seems likely that the issues surrounding EITC compliance will receive an even greater amount of Congressional attention in the months ahead.