When Can An Entity Be Subject to Return Preparer Penalties?

I have been reading a lot of opinions discussing misbehaving tax return preparers. The IRS has a heavy arsenal it can deploy against those preparers short of criminal sanctions: civil penalties, injunctions and disgorgement are the main tools, all of which we have discussed from time to time. A recent email advice that the IRS released  explores when an entity that employs a return preparer can also be subject to return preparer penalties.

One way to think about the uptick in actions against return preparers is that the IRS has taken Judge Boasberg and others to heart when IRS lost the Loving case a few years ago.

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Part of the reason Judge Boasberg (later affirmed by the DC Circuit) tossed the IRS return preparer scheme out was that the IRS approach to including return preparation within 31 USC § 330 (which authorizes the Secretary to regulate “the practice of representatives of persons before the Department of the Treasury” )seemed to disregard or minimize the existing powers the IRS had to combat bad egg preparers:

Two aspects of § 330’s statutory context prove especially important here. Both relate to § 330(b), which allows the IRS to penalize and disbar practicing representatives. First, statutes scattered across Title 26 of the U.S. Code create a careful, regimented schedule of penalties for misdeeds by tax-return preparers. If the IRS had open-ended discretion under § 330(b) to impose a range of monetary penalties on tax-return preparers for almost any conduct the IRS chooses to regulate, those Title 26 statutes would be eclipsed. Second, if the IRS could “disbar” misbehaving tax-return preparers under § 330(b), a federal statute meant to address precisely those malefactors—26 U.S.C. § 7407—would lose all relevance.

As Judge Boasberg flagged, a key aspect of the IRS power to police return preparers is civil penalties under Title 26. Section 6694(b) provides a penalty for a preparer’s willful or reckless misconduct in preparing a tax return or refund claim; the penalty is the greater of $5,000 or 75% of the income derived by the tax return preparer from the bad return/claim.

The recent email advice from the National Office explored the Service’s view on whether the IRS can impose a 6694 penalty on the entity that employs a misbehaving return preparer as well as the individual return preparer who was up to no good.  The advice works its way through the statutory and regulatory definitions of return preparer under Section 6694(f), which cross references Section 7701(a)(36) for the definition of “tax return preparer.”

Section 7701(a)(36) provides that “tax return preparer” means any person who prepares for compensation, or who employs one or more persons to prepare for compensation, tax returns or refund claims.

The regs under Section 6694 tease this out a bit. Treasury Regulation § 1.6694-1(b) provides the following:

For the purposes of this section, ‘tax return preparer’ means any person who is a tax return preparer within the meaning of section 7701(a)(36) and § 301.7701-15 of this chapter. An individual is a tax return preparer subject to section 6694 if the individual is primarily responsible for the position(s) on the return or claim for refund giving rise to an understatement. See § 301.7701-15(b)(3). There is only one individual within a firm who is primarily responsible for each position on the return or claim for refund giving rise to an understatement. … In some circumstances, there may be more than one tax return preparer who is primarily responsible for the position(s) giving rise to an understatement if multiple tax return preparers are employed by, or associated with, different firms.

Drilling deeper the advice also flags Reg § 1.6694-3(a)(2), which sets out when someone other than the actual return preparer may also be on the hook for the 6694 penalty:

  1. One or more members of the principal management (or principal officers) of the firm or a branch office participated in or knew of the conduct proscribed by section 6694(b);
  2. The corporation, partnership, or other firm entity failed to provide reasonable and appropriate procedures for review of the position for which the penalty is imposed; OR
  3.   The corporation, partnership, or other firm entity disregarded its reasonable and appropriate review procedures though willfulness, recklessness, or gross indifference (including ignoring facts that would lead a person of reasonable prudence and competence to investigate or ascertain) in the formulation of the advice, or the preparation of the return or claim for refund, that included the position for which the penalty is imposed.

In the email, the Counsel attorney points to the above reg for the conclusion that  its “interpretation of Treasury regulation § 1.6694-3(a)(2) is that generally, the entity (corporation, partnership, or other firm entity) that employs a tax return preparer will simultaneously be subject to the penalty under section 6694(b) only if the specific conditions set forth in the regulation are met. Otherwise, only the individual(s) that is primarily responsible for the position(s) on the return or claim for refund that gives rise to the understatement will be subject to the penalty.”

The email does refer to a district court opinion case (affirmed by the Sixth Circuit) from a few years ago, US v Elsass, where the court found that the owner of an entity was a “tax return preparer” for the purposes of the return preparer penalty provisions. In that case, the owner was the sole owner and personally prepared a substantial number of the returns at issue and was in its view the moving force on the positions (a theft loss/refund scheme).

The upshot of the advice is that absent circumstances similar to Elsass, or the presence of conditions 1 and either 2 or 3 above in Reg 6694-3(a)(2), an entity that employs return preparers itself is likely not subject to penalties. That conclusion suggests that return preparers should be careful to document and review procedures that are in place to ensure that an employed preparer has supervision and, of course, to make sure that management follows those procedures.

Government Seeks Reversal of District Court Decision That Invalidated PTIN User Fees

One of the more interesting cases from last year was Steele v US, where a DC district court upheld regulations imposing a PTIN requirement for preparers but held that the IRS did not have authority to require preparers to pay a user fee for obtaining or renewing a PTIN. In Steele, the District Court in invalidating the fees largely relied on the reasoning in Loving, and applied the Independent Offices Appropriations Act (IOAA) which authorizes agencies to charge fees for “a service or thing of value provided by the agency.” The lower court essentially held that the IRS’s fees were a backdoor attempt at regulating return preparers, stating that IRS “may not charge fees for PTINs because this would be equivalent to imposing a regulatory licensing scheme and the IRS does not have such regulatory authority” after Loving.

The government appealed, and it just filed its opening brief.

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The main argument that the government makes on appeal is that the district court failed to appreciate the service and value associated with obtaining a PTIN:

The PTIN provides a special benefit to tax return preparers because, as even the District Court held, it is required by statute and regulation to lawfully prepare returns for compensation. If a return preparer does not obtain a PTIN and provide it on returns he or she prepares, the preparer is subject to penalties of up to $25,000 per year, I.R.C. § 6695(c), as well as to being enjoined from preparing returns, I.R.C. § 7407. Return preparers comprise only a tiny fraction of the U.S. population, and the members of the general public who are not preparers have no occasion to request PTINs and receive no direct benefit from their issuance to those individuals who are return preparers. The issuance of PTINs thus provides a special benefit to the recipients of the PTINs, and therefore the IOAA authorizes the IRS to charge a user fee for PTINs.

In addition the government emphasized that the PTIN program helps “to protect preparers’ SSNs, which was Congress’s purpose in authorizing the IRS to create and mandate the use of the PTIN.”

The government on appeal attempts to separate the PTIN requirement from the regulation regime that Loving struck down. In so doing, the government emphasizes that while PTINs played a key role in that ill-fated regulatory regime (essentially only registered or licensed return preparers were eligible for a PTIN in the pre-Loving world) PTINs have a value and role that is distinct from regulating preparers.

As readers may recall, the district court’s conclusion mooted the alternative argument that the user fees IRS charged were excessive. If the government prevails on appeal, that issue will resurface.

Stay tuned.

For a prior post on Steele see here

TIGTA Releases Report on Return Preparers and Refundable Credits

Earlier this month TIGTA released a report discussing its review of compliance issues associated with refundable credit returns prepared by tax return preparers. The report is heavily redacted, but it has some interesting statistics and also provides further evidence as to how resource constraints limit IRS ability to do its job. The report also notes that IRS has not sufficiently referred egregious preparers to other functions, like Criminal Investigations or the Return Preparer Office.

Here are some of the report highlights:

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In processing year 2015 (I assume for 2014 tax returns) IRS identified 27.5 million returns with an EITC, and it approximates that 47%, or 13 million, were prepared by a return preparer. I note that EITC returns prepared by a return preparer have been decreasing, in part likely due to the growth of DIY software and also possibly due to a growth in ghost returns, where preparers fail to sign the return to avoid possible scrutiny and penalty.

Using its secret sauce scoring formula, the IRS was able to identify return preparer EITC returns that have potentially erroneous claims. TIGTA notes that IRS flagged 150,000 return preparers with characteristics that suggest they were preparing returns with errors relating to qualifying children or income misreporting, or both.

IRS has a robust tiered approach to return preparer compliance treatments; that includes phone calls, a variety of letters, “knock and talk” visits, due diligence audits, and even more severe treatment like injunctions or criminal referrals. (For a more detailed summary of IRS approach, see its EITC preparer toolkit summary.)

TIGTA notes that IRS selected 49,563 preparers for potential compliance treatments; due to resource constraints, IRS identification of a preparer needing treatment did necessarily not lead to that preparer getting treated.

In fact in FY 2016, the IRS completed various compliance treatments to address just over 24,000 return preparers identified as filing high rates of tax returns with characteristics of an erroneous EITC claim. The report breaks down the treatment and noted that IRS evaluates the success of its treatments. In part it does so by scoring the preparers’ future years’ returns and compares those to both a control group and the preparers’ past returns.

The TIGTA report not surprisingly found that a visit from an armed CID agent had a positive effect on future compliance (less so when an armed CID agent was not there); so did due diligence audits, and the audits that selected fewer returns had a similar effect as more expansive audits.

TIGTA knocked IRS for insufficiently documenting why certain preparers did not get treated; it also noted that about 39% of preparers who received a knock and talk visit or due diligence visit did not improve their compliance in the next year. TIGTA felt IRS needed a better job of putting in place written procedures discussing referrals to other functions, especially in light of the high number of preparers who apparently did not alter their behavior after the treatment; IRS pushed back a bit and said it did not think more procedures were needed but that there should be greater instances where a different function takes action.

The report also discusses the impact of letters and general contacts before the fact that were meant in a sense to nudge preparers to do the right thing. That is a topic I am keenly interested in; a paper that I and co-authors Dave Williams and Krista Holub (both of Intuit) wrote discusses possible ways that IRS can influence taxpayers and to a lesser extent preparers with behavioral economics techniques. For those with an interest, a draft is here; a final version will come out next year in the Virginia Tax Review.

I suspect that there is more work that IRS can do to examine the impact of letters and communication in general on return preparers. I am intrigued that IRS seems to have a different strategy for new preparers; it seems like reaching out and educating preparers before they develop entrenched bad practices is a good policy.

As Congress has recently expanded due diligence penalties to include CTC and AOTC, interest in preparers and compliance will likely increase. The TIGTA report is a useful reminder that IRS, while not able to regulate preparers in the way it sought before Loving, does have a variety of ways to influence and punish bad preparers. It seems IRS has a pretty good handle on finding preparers who are likely serving up erroneous returns; whether it has the resources or appetite to go after them fully is another issue.

 

Can Tax Preparer Recover Damages for Revoked EFIN

The recent decision rendered by the Court of Federal Claims in Snyder & Associates v. United States provides a stark reminder about the perils of building a business based on a government privilege or license – in this case the ability to electronically file tax returns for clients.  It also provides a reminder of the limitations of federal employees to bind the government for which they work.

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Snyder & Associates engaged in return preparation in the Los Angeles area.  It had a symbiotic relationship with a lender that funded refund anticipation loans (RALs).  Even though RALs ended several years ago, at least in their first decade of the 21st Century form, this case relates back to that era.  The same person owned both the return preparation firm and the lender.  Nothing in the opinion suggests that the businesses or the owner of the businesses engaged in inappropriate activity; however, one of the associates of the business, Nancy Hilton, who prepared returns there in the capacity of an independent contractor, did engage in fraudulent activity.

Ms. Hilton approached the IRS criminal investigators and advised them of the scheme in which she participated.  The scheme used stolen identities to seek benefits through tax filing.  After she brought the scheme to the IRS, Special Agents sought to use her to set up a sting.  For the sting to work, the IRS wanted Ms. Hilton’s co-conspirators to cash the checks written as refund anticipation loans.  Cashing those checks meant pulling money out of the lender side of the business.  The owner initially balked at the plan because of concerns of losing the money.  One of the special agents directly stated or implied that the IRS would make the lender whole.  The sting went forward.  In the end, the IRS declined to make the lender whole and, to add insult to injury, it terminated the EFIN license held by Snyder & Associates – an act which effectively terminated the return preparation business.

The business sued to recover the funds lost through the sting operation and to restore its EFIN privileges.  It lost on both counts.

With respect to the money lost in the sting, the issue turned on the authority of the special agent to bind the government.  I am probably oversimplifying this, but my experience working in the federal government for over 30 years suggests that first line employees like special agents, revenue agents, revenue officers, attorneys, etc., have extremely limited ability to bind the government.  Almost everything that they do which might create a monetary liability for the government must first be approved by their supervisors.  The principle extends beyond contracting for repayment of a sting obligation or other monetary obligations to matters such as settlement authority or referral authority.  There is a fairly elaborate system of delegation orders granting authority for certain acts.  The system generally does not go lower than the front line manager and frequently does not go that low.

Snyder & Associates ran full force into this system.  The special agent who told it that the money used to pay the fraudulent RALs would be repaid to the business by the government simply did not have the authority to bind the IRS.  The Court expended little effort in denying this claim for relief because the IRS had not committed itself to repayment of losses.  Based on my experience, the special agent who made the representation will receive counseling about their scope of employment which will include a discussion about not doing this again.  Such counseling will be cold comfort to the business that has lost the money with little or no hope of recovering it from the participants in the fraudulent scheme who will also owe the IRS and whose debt to the IRS will generally have a higher priority than the debt to the business.

Having lost the money spent to support the sting, the business then sought to reobtain the right to electronically file returns which the IRS pulled at approximately the same time the business cooperated with the sting operation.  The business argued that the termination of the EFIN rights was an improper taking of a property interest.  The Court points out that the IRS did not take the business or in any way deny the business use of the business.  The termination of the EFIN certainly impacted the business but the business had “no cognizable property interest in their EFIN in the first place.”  Citing Mitchell Arms v. United States, the Court stated that “when a party receives a permit to engage in an activity ‘which, from the start, is subject to pervasive Government control,’ no cognizable property interest capable of supporting a takings claim ever arises in that permit.”

Although the Mitchell Arms case involved the import and sale of assault rifles rather than electronic filing of returns, the Court found the action of ATF in that case exactly paralleled the action of the IRS in this one.  Because no property interest attached to the EFIN, the termination of the right to electronically file could not constitute a taking under the constitution.

Conclusion

The decision here, though harsh, does not cover new ground.  The business had good reason to expect the IRS would make it whole for assisting with the sting operation based on the representations of the special agent.  Not everyone knows of the limitations governing federal employees.  The case reminds us to take care in contracting or thinking we have contracted with the federal government.  Authority is critical.  Here, the special agent did not have proper authority to bind the IRS and the actions of other IRS officials did not act to ratify the actions of the special agent.

Similarly, licenses like EFINs do not come with a guarantee or with special protections.  When a business relies on the EFIN for its financial life, it must take extreme care to avoid actions that can result in its removal.  Even though the actions here appear to be those of an independent contractor working with the business, the concern of the IRS about fraudulent return filing schemes ends up punishing the business as well as the individual perpetrator in an effort to keep the system clean.  The result here reaches a much different result for the preparer than the D.C. Circuit in Loving because of the difference in the nature of the fight.  In Loving, the IRS sought to assert its authority over a previously unregulated matter – tax return preparation.  Here, the IRS exercised control over use of its electronic filing procedures something which it has carefully regulated from the start.  The challenge was not to the IRS ability to regulate electronic filing but whether the business had a property interest in the ability to electronically file.

 

District Court Strikes Down IRS’s User Fees for PTINs

Readers may be aware of last week’s Steele v US district court opinion that upheld the IRS’s requirement that preparers obtain a PTIN but struck down the IRS’s requirement that preparers pay a user fee to get the PTIN. In light of the Steele opinion, IRS announced it is suspending PTIN renewal and registration.

This is another big setback to the IRS’s approach to gain oversight over tax return preparer community and may result in the IRS refunding millions of dollars in previously collected PTIN fees. The opinion conflicts with Brannen v US, a 2012 11th Circuit opinion that held that the IRS’s PTIN user fee regime passed muster, and is yet another in the ripples following the DC Circuit’s invalidating the IRS’ plan to regulate unlicensed preparers a few years ago in the Loving case.

I will excerpt the parties’ positions and the way the court resolved the dispute, and offer some observations as to why I think the court’s approach is misguided.

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The Steele district court opinion turns on the Independent Offices Appropriation Act of 1952 (IOAA) codified at 31 USC § 9701. The IOAA provides broad authority to assess user fees or charges on identifiable beneficiaries by administrative regulation. User fees assessed under IOAA authority must be (1) fair and (2) based on costs to the government, the value of the service or thing to the recipient, public policy or interest serviced, and other relevant facts.

Essentially the plaintiffs argued that the user fee scheme provided no value to preparers in light of the DC Circuit’s Loving opinion:

 [P]laintiffs argue that because Congress did not grant the IRS licensing authority—as found by Loving—tax return preparers receive no special benefit in exchange for the fees, rendering them unlawful under the IOAA. In other words, plaintiffs argue that the IRS originally created a licensing scheme that would limit tax return preparers to those certain people who could meet eligibility criteria. But, because Loving found that Congress did not authorize a license requirement for tax return preparers, there are now no restrictions on who may obtain a PTIN and therefore it is no longer true that only a specific set of people may receive PTINs and the “special benefit” of being able to prepare tax returns for compensation. The only beneficiary of the PTIN system is therefore the IRS.

The IRS, looking to the approach of the 11th Circuit in Brannen, distinguished the PTIN rules from the ill-fated regulatory regime that the DC Circuit struck down in Loving:

The government argues that the PTIN and user fee regulations are separate from the regulations imposing eligibility requirements on registered tax return preparers. It argues that the PTIN requirements are not arbitrary and capricious because they make it easier to identify tax return preparers and the returns they prepare, which is a critical step in tax administration, and because PTINs protect social security numbers from disclosure. In support of its position that it may charge fees for PTINs, the IRS states that PTINs are a service or thing of value because the ability to prepare tax returns for compensation is a special benefit provided only to those people who obtain PTINs, who are distinct from the general public. Individuals without PTINs cannot prepare tax returns for compensation. In addition, the IRS argues that PTINs protect the confidentiality of tax return preparers’ social security numbers, and that protection itself is a service or thing of value.

The district court opinion adopted the view that the PTIN rules were part and parcel of the overall regulatory regime:

The Court finds that PTINs do not pass muster as a “service or thing of value” under the government’s rationale. First, the argument that the registered tax return preparer regulations regarding testing and eligibility requirements and the PTIN regulations are completely separate and distinct is a stretch at best. While it is true that they were issued separately and at different times, they are clearly interrelated. The RTRP regulations specifically mention the PTIN requirements and state that PTINs are part of the eligibility requirements for becoming a registered tax return preparer. See Regulations Governing Practice Before the Internal Revenue Service, 76 Fed. Reg. at 32287–89; 26 C.F.R. § 1.6109-2(d) (“[T]o obtain a [PTIN] or other prescribed identifying number, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer authorized to practice before the Internal Revenue Service under 31 U.S.C. 330 and the regulations thereunder.”). Furthermore, the overarching objectives named in the PTIN regulations indicate a connection to the RTRP regulations. They were 1) “to provide some assurance to taxpayers that a tax return was prepared by an individual who has passed a minimum competency examination to practice before the IRS as a tax return preparer, has undergone certain suitability checks, and is subject to enforceable rules of practice;” and 2) “to further the interests of tax administration by improving the accuracy of tax returns and claims for refund and by increasing overall tax compliance.” Furnishing Identifying Number of Tax Return Preparer, 75 Fed. Reg. at 60310. The first objective clearly relates to the RTRP regulations regarding eligibility requirements for tax return preparers. The second objective is less explicit, but it does not stretch common sense to conclude that the accuracy of tax returns would be improved by requiring tax return preparers to meet certain education requirements.

Once it functionally equated the PTIN regime to the testing and eligibility requirements Loving struck down, the Steele opinion concluded that the benefit that the IRS was supposedly conferring for the user fee was in fact the functional equivalent of regulating the practice of preparing returns, with my emphasis below on the key part of the Steele opinion’s discussion:

Having concluded the inter-connectedness of the regulations, the government’s argument begins to break down. The Loving court concluded that the IRS does not have the authority to regulate tax return preparers. Loving, 742 F.3d at 1015. It cannot impose a licensing regime with eligibility requirements on such people as it tried to do in the regulations at issue. Although the IRS may require the use of PTINs, it may not charge fees for PTINs because this would be equivalent to imposing a regulatory licensing scheme and the IRS does not have such regulatory authority. Granting the ability to prepare tax return for others for compensation—the IRS’s proposed special benefit—is functionally equivalent to granting the ability to practice before the IRS. The D.C. Circuit has already held, however, that the IRS does not have the authority to regulate the practice of tax return preparers. See id. In coming to its conclusion, the Circuit considered the statutory language that the Secretary may “regulate the practice of representatives of persons before the Department of the Treasury.” Id. at 1017–18 (quoting 31 U.S.C. § 330(a)(1)). The court found that the IRS improperly expanded the definition of “practice . . . before the Department of Treasury” to include “preparing and signing tax returns” because to “practice before” an agency “ordinarily refers to practice during an investigation, adversarial hearing, or other adjudicative proceeding.” Id. at 1018. The Loving court concluded that “[t]hat is quite different from the process of filing a tax return” in which “the tax-return preparer is not invited to present any arguments or advocacy in support of the taxpayer’s position . . . [and] the IRS conducts its own ex parte, non-adversarial assessment of the taxpayer’s liability.” Id. The ability to prepare tax returns is the “practice” identified by the IRS in Loving, but the court found that such an activity does not qualify as practicing before the IRS. Therefore, it appears to this Court that the IRS is attempting to grant a benefit that it is not allowed to grant, and charge fees for granting such a benefit.

Parting Thoughts

There are over  700,000 PTIN holders, and I have seen estimates that IRS has collected anywhere between $175 and 300 million since the PTIN program started in 2011. One aspect of the opinion is that by deciding the case in this manner (i.e, IRS has no authority to charge fees for PTINs), the court did not address the plaintiffs’ alternate argument that fees the IRS charged were excessive. (IRS reduced the PTIN fee to $50 from $64 a few years ago).

This is obviously a major setback for the IRS. I am surprised by the court’s narrow view of the benefits associated with PTINs. I recall a decade or so ago the many challenges IRS had in assessing the quality of return preparers in a pre-PTIN required world. When discussing IRS efforts to unify the identification requirement under a single identifying number, GAO noted that past practices made it very difficult for IRS to get a sense of the overall preparer community, let alone associate individual preparers and the returns they prepared. While of course the IRS benefits from the uniformity of identifying requirements, so does the public, and, by extension, so do preparers.

It is in the interest of competent and honest preparers to ensure that the public has confidence in the work that they do. The visibility and accountability associated with a uniform identifying requirement benefits the tax system generally. While the impact of Steele is by no means as far-reaching as Loving, it is a major defeat and is further reason why Congress needs to step in and legislate that IRS has the ability to regulate this important aspect of tax administration.

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.