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.

 

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.