Unscrupulous Return Preparers Draw Attention At The ABA Tax Section Midyear Meeting

The Midyear Meeting of the ABA Tax Section concluded last week. There were many terrific panels that I suspect will generate posts in the next few weeks. The Pro Bono and Tax Clinics Committee had an especially insightful panel entitled “Holding Unscrupulous Tax Preparers Accountable.” Moderated by Mandi Matlock, a federal tax litigator at Texas RioGrande Legal Aid, the panel included David Sieminski from Consumer Financial Protection Bureau, Karyna Lopez from Lone Star Legal Aid, and Laura Baek from Taxpayer Advocate Service.

David offered a consumer law perspective on preparers who often use the return filing process as an opening to sell high priced loan products that can carry outrageously high fees. Karyna discussed how taxpayers can use state law causes of action to go after preparers who violate taxpayers’ trust. Laura discussed TAS’s perspective, including summarizing a special research report that was included in the 2022 NTA’s Annual Report to Congress. That research report included a study that explores dividing the earned income tax credit (EITC) into a separate worker and child component.

Any panel considering unscrupulous preparers and the tax system invariably includes a discussion of the EITC.  


Splitting up its work and child component would likely make the IRS’s task of administering the credit more manageable, a primary consideration TAS has explored previously. For example, when I was Professor in Residence at IRS, we prepared a research report in the 2020 Objectives Report to Congress that recommended a similar bifurcation, though the 2022 study drills down deeper and explores seven possible options for a new structure of determining the EITC amount.

Also in this year’s NTA report to Congress was a recommendation in its Purple Book that Congress authorize the IRS to establish minimum competency standards for federal tax return preparers. At the panel, Laura mentioned that longstanding recommendation, and this year’s Purple Book recommendation includes many others who have similarly proposed that Congress explicitly give the IRS that authority.

This recommendation comes at around the ten-year anniversary of the IRS’s defeat in Loving v IRS, a date noted by Dan Alban at the Institute for Justice (IFJ), a group self-described as “fighting outrageous government abuse” (Dan was the lead attorney who represented Sabina Loving and two other preparers who successfully sued the IRS to shut down the IRS’s testing and continuing education for unlicensed preparers). Tackling what the IFJ believes is anti-competitive and anti-consumer occupational licensing is a core part of its work.

Among the tax community the almost universal support for mandatory continuing education and licensing for unenrolled preparers is met by IFJ’s claim that the IRS’s licensing, testing and education regime would have put some mom and pop preparers out of business or resulted in higher taxpayer preparation costs. IFJ also was skeptical that the regime would have an impact on improving the quality and accuracy of the returns. This policy issue is somewhat unrelated from the legal issue in the Loving case itself, which focused on whether the IRS had the authority to impose the regime rather than its merits.

There is a fair bit of data pointing to problems with non-credentialed preparers. At the panel, Laura referred to data discussed in the report’s Most Serious Problems #8 Return Preparer Oversight, which noted that “paid non-credentialed return preparers prepared almost 79 percent of the prepared 2020 individual income tax returns with Schedule EIC….compared to only 52 percent of the prepared individual income tax returns without a Schedule EIC.” Moreover, while paid “return preparers prepared about 79 percent of 2020 EITC returns…over 92 percent of the total amount of audit adjustments (in dollars) occurred on returns prepared by non-credentialed paid return preparers.”

In addition, the MSP discussed how over 75% of all return preparer penalties that the IRS assessed in calendar year 2021 were assessed against non-credentialed preparers. For good measure, DIF scores (suggestive of noncompliance) are higher for non-credentialed preparers: “non-credentialed paid return preparers prepared about 44 percent of 2020 individual income tax returns in the three highest deciles of DIF scores. This is compared to 36 percent of the returns in those same DIF score deciles prepared by credentialed preparers.”

MSP #8 also referred to a 2014 IRS study that showed that “unaffiliated unenrolled preparers (i.e., non-credentialed preparers who are not affiliated with a national tax return preparation firm) were responsible for “the highest frequency and percentage of EITC overclaims.”  That 2014 study “found that half of the EITC returns prepared by unaffiliated unenrolled preparers contained overclaims, and the overclaims averaged between 33 percent and 40 percent.”

Going forward, one key data point that TAS or IRS may wish to explore in a future study is to examine taxpayer preparation costs, RAC/RAL usage and improper payment rates in the handful of states which themselves have regulated preparers. IRS could compare both improper payment rates and (if available) costs and RAL/RAC take-up in those states with other states that do not impose competency and disclosure requirements on unlicensed preparers. This helpful post from Kay Bell’s Don’t Mess With Taxes blog from 2018 summarizes state licensing/testing regimes as of that date. As Kay notes, California, Maryland, New York and Oregon have been at the lead in imposing requirements on preparers, and twenty other states imposed additional disclosure requirements when preparers offered or facilitated access to refund related products like RALs and RACs.


Even among those skeptical of occupational licensing generally, perhaps additional data can inform the debate. Kudos to TAS for focusing on the challenges IRS faces in administering the EITC; it is time to start meaningfully exploring ways to make things better for taxpayers and the IRS, especially as Congress shows no signs of reducing its reliance on IRS to administer credit-based social policy benefits.

An upcoming Inflation Reduction Act mandated study requires the IRS to work with independent third-party experts to explore the feasibility of an IRS-run “direct file” tax return system. I hope that study, to be released this spring, will generate momentum for a truly free and accessible option for taxpayers. That would likely reduce demand for preparers, including the unscrupulous ones that the ABA panel discussed.

Default Judgment

A recent case in which the defendants lost for not responding to a suit filed against them by the IRS caught my eye.  Default judgments are a dime a dozen but this one involved an injunction against a return preparer.  I have recently picked up a case involving a ghost preparer which caused me to take a second look at this case seeking an injunction against the preparer.

Default judgments also represent the flip side of filing a late petition showing that timeliness matters not only in filing the suit but also in responding.  Since we have written so much recently about the importance of timely filing, focusing on the importance of timely responding also deserves a moment in the spotlight.  Don’t get excited, however, if you want to obtain a default judgment against the government.  That is not allowed and for many good reasons.

In United States v. Erica McGowan et al, No. 2:21-cv-10624 (E.D. Mich.), the IRS filed suit on March 22, 2021, seeking:

to obtain (i) an injunction barring Defendants “from engaging in the business of preparing federal tax returns and employing any person acting as a federal tax return preparer” and (ii) an order “requiring Defendants to disgorge to the United States their receipts for preparing federal tax returns making false or fraudulent claims.”

Apparently, one or more of the defendants proved difficult to locate, causing the IRS on June 17, 2021 to seek additional time to serve them.  Service occurred the same day as the motion, making the answer due date July 8, 2021 – 21 days after service.  Defendants failed to file an answer and the IRS obtained a default judgment on August 6, 2021, setting up this case to set aside that judgment.

read more…

On September 1, 2021, defendants filed a motion to set aside the default judgment arguing, inter alia, that the failure to timely file an answer did not result from their culpable conduct.  A reason given for the failure was the mistaken belief that defendants had 60 days to file an answer.  The magistrate judge to whom this motion was assigned was unmoved by this argument because (1) the summons specifically stated the period was 21 days and (2) the defendants did not file an answer within 60 days.

The court looked at three factors in deciding whether to set aside the default judgement:

(1) whether the party seeking relief is culpable; (2) whether the party opposing relief will be prejudiced; and (3) whether the party seeking relief has a meritorious claim or defense.

In order to get to a consideration of factors (2) and (3), the moving party must demonstrate a lack of culpability.  Here, the court found that they could not as it reviewed the determination of the magistrate judge.

Defendants argued that the magistrate judge focused exclusively on their failure to show excusable neglect and did not mention the separate bases for relief of mistake or inadvertence.  The district court, agreeing with the magistrate, pointed out that defendants failed to raise these alternate grounds in its motion.  Having failed to raise them in its argument to the magistrate judge, it could not raise them on appeal.

Defendants then attacked the magistrate judge’s definition of culpability, arguing that the court must find “an intent to thwart judicial proceedings or a reckless disregard for the effect of its conduct on these proceedings.”   Sixth Circuit law, however, does not allow relief from a default judgment where the default results “from a party’s or counsel’s carelessness or ignorance of the law.”  

Defendants next argued that the court should balance the factors necessary for overcoming a default judgment and not stop upon a finding of culpability.  Here again, the district court found that the law clearly created a barrier if the moving party could not overcome the issue of culpability.

In the opinion in this case we don’t even get to learn what the defendants did that caused the IRS to seek the injunction in the first place.  That information can be found in the petition.  The defendant’s motion contains some explanation but their attempt to raise the merits of their possible defense falls to their failure to show good cause for not answering the complaint. 

Twenty one days is not a long time.  It’s even less than the short period allowed for responding to a Collection Due Process notice; however, ignoring the complaint creates a result that proves impossible for the defendants here to overcome.  They needed an excuse similar to the type of excuse we have spoken of in recent posts regarding the late filing of Tax Court petitions and they did not have it.  The case provides another example of the importance of acting on time.  Even if defendants have the greatest reasons for arguing against an injunction barring them from filing tax returns, their failure to respond within the necessary time period keeps them from raising those arguments.

Feinstein Letter Probes Relationship Between Tax Prep and Financial Products

Some tax practitioners charge fees for preparing tax returns and also offer or facilitate sales of financial products. A December 9th letter Senator Diane Feinstein wrote to Rohit Chopra, the Director of the Consumer Financial Protection Bureau, highlights concerns and the limited information lawmakers know about preparers selling financial products.


Senator Feinstein, while noting that there is nothing inherently wrong with preparers selling financial products, observes that for lower-income and vulnerable taxpayers it may dilute federal benefits and not be accompanied by sufficient information describing the products. 

To help understand the scope of the practice as well as properly evaluate the costs and benefits, Senator Feinstein asked for responses to the following questions within 60-days:

  1. What is the quality of information available about the extent to which high-cost financial products are being purchased by taxpayers, the characteristics of those who are most likely to sell and purchase such products, and whether the use of such products is growing or decreasing? How many complaints has the Bureau received about such products?
  2. To what extent are tax preparers making the costs of high-cost financial products tied to tax preparation and tax refunds clear and easily understandable? Is the CFPB considering any actions to improve the ease with which consumers can understand these costs
  3. For its 2006 report on paid tax preparers, the Government Accountability Office sent staff posing as taxpayers to visit tax preparers to see how they operated under two scenarios. Similarly, a 2015 report from the National Consumer Law Center involved sending “mystery shoppers” to paid tax preparers in Florida and North Carolina to check error rates. Would a similar approach be productive for the CFPB to gather additional information about financial products offered by tax preparers?
  4. Is there any evidence that companies that offer high-cost financial products have offered them in conjunction with assisting people in applying for other forms of government aid? If so, is the CFPB taking or considering actions to address these situations? If not, what safeguards are in place in case such companies do so in the future?
  5. The COVID-19 pandemic and the extra responsibilities Congress has conferred on the Internal Revenue Service (IRS) in response have caused substantial delays in tax processing. Is the CFPB concerned that potential delays in processing 2021 tax returns — such as the IRS having to reconcile child tax credit and economic impact payments — will lead to significant accrual or compounding of interest or other charges for taxpayers who have purchased refund advance loans or similar financial products? Has the Bureau received complaints about this?
  6. The CFPB has provided advice and information for taxpayers, including on refund advance loans and checks. Do you have evidence on whether the Bureau’s educational activities in this area have been effective?

Some Quick Observations

Through pandemic relief and expanded child-related tax benefits, millions of people who had no or little exposure to the federal income tax system now must file tax returns. Current House-passed legislation is pushing the IRS to consider what a true IRS-hosted online return platform would look like.  A recent Politico piece by Brian Faler, Democrats hope to get a foot in the door for free tax-filing by the IRS, [paywall], discusses the proposed legislative initiative, as well as possible Byrd-rule problems with the proposal and opposition from anti-tax activist Grover Norquist, who heads Americans for Tax Reform. As reconciliation packages must focus on fiscal matters, the Byrd-rule limits proposals that have budgetary effects that are only incidental. Norquist is a well known opponent of pretty much any substantive tax increase or proposal that would expand IRS capabilities.

There are many reasons related to tax administration to support the IRS developing its own platform, especially for lower income and vulnerable taxpayers.  To be sure, there are also reasons to oppose it. For a point/counterpoint see Professors Joe Bankman and Jim Maule squaring off in the ABA Tax Times Perspectives on Two Proposals for Tax Filing Simplification, which discusses the merits of a pro-forma and data retrieval proposals. The Biden Administration’s Executive Order from earlier this week Transforming Federal Customer Experience and Service Delivery to Rebuild Trust in Government explicitly calls on Treasury to consider expanded e-filing options (Sec 4(b)).

Even if IRS were to create a true public option for e-filing that minimized taxpayer burdens, there will be taxpayers who choose to engage private practitioners. A few years ago when I worked at TAS we produced a report with recommendations on improving the administration of refundable credits. One of our proposals was legislation to require all paid return preparers to provide a fee disclosure statement to taxpayers prior to providing tax preparation and filing service. Senator Feinstein’s letter highlights that policymakers should consider the costs (and possible benefits too) of products that are not directly related to return preparation, especially when millions of lower-income and less sophisticated taxpayers pay to file returns.

Taxpayer Successfully Sues Tax Preparation Firm

The clinic regularly has clients appear who arrive because they received poor assistance in preparing their return.  The proper preparation of the tax return is the single most important act in the tax process.  Good preparation eliminates the need for all manner of downstream problems.  When the clinic assists someone in putting their tax affairs back in order following poor preparation of their return, we often wish that clients could recover, and the clinic could recover, damages from the preparer whose knowing or unknowing actions caused the problem.  Of course, we also wish the IRS could regulate preparers to provide some quality control on the front end rather than having to chase after bad preparers after damage occurs.

The case of Weinstock v. Harvey, No. 8:19-cv-02979 (M.D. Fla. 2020) provides a rare, at least in my experience, example of a taxpayer suing a tax preparation firm for the problems caused by the poor preparation.  The preparers do not show up to defend themselves which causes some education on the importance of pleadings in default cases.


In 2017 Ms. Weinstock went to Harvey’s Tax Service to have her returns prepared for 2014, 2015 and 2016.  I assume from the court’s description that the 2014 and 2015 returns were being filed late.  She does arrive, however, in time to still receive the refunds, if any, for 2014 and 2015.  She reaches an agreement with Harvey’s to pay an initial fee of $750 plus 15% of any refunds she receives.  Paying for return preparation based on a percentage of the refund received sets the situation up to incentivize the preparer to find the biggest refund.  We all see the ads during tax season from various preparers who promise to find the biggest refund, but structuring payment in this way raises red flags.

Before going further in telling the story of Ms. Weinstock’s tax woes, I decided to look up Harvey’s Tax Service to see if anyone else had problems.  That search resulted in a link to the Better Business Bureau of Plant City, Florida.  The BBB site does indeed suggest problems with Harvey’s.  The most notable problem is a description of actions taken by the Department of Justice:

Government Action:

The following describes a pending government action that has been formally brought by a government agency but has not yet been resolved. We are providing a summary of the government’s allegations, which have not yet been proven.

On March 17, 2020, The United States Department of Justice in Tampa, Florida, found that Mr. Jasen Harvey and Harveys Tax Service violated preliminary and permanent injunctions that barred them from preparing, filing, or assisting in the preparation or filing of federal tax returns for others.

For that violation, the court held Mr. Harvey and Harveys Tax Service in contempt and ordered them to pay $19,550 to the United States, representing the fees Jasen Harvey and Harvey’s Tax Service received for 92 tax returns they prepared or filed in violation of the court’s injunctions. In addition, the court ordered those defendants to reimburse the government for $631.04 in travel costs the United States incurred to attend the contempt hearing held on March 13, 2020.

The United States filed a complaint against Catharine Harvey, Jasen Harvey, and Harveys Tax Service on Jan. 9, 2020. According to the complaint, the defendants prepared returns for customers seeking millions of dollars in refunds of tax purportedly withheld on fictitious income reported on fabricated Forms 1099-MISC and on bank deposits reported on fabricated Forms 1099-A. On Feb. 18, 2020, the court issued a preliminary injunction that barred the defendants from preparing returns for customers, finding that the United States offered sufficient evidence to show that defendants had a history of filing fraudulent refund claims, and were likely to continue to file fraudulent returns absent a court order to stop. The court issued a permanent ban on Feb. 24, 2020, finding the defendants “unfit” to prepare tax returns.

The court found that the United States demonstrated by clear and convincing evidence that the defendants willfully violated these court orders, which unambiguously barred the defendants from preparing returns for others. In addition to the monetary sanctions, the court ordered that it will sentence Mr. Harvey for his willful contempt at a hearing on July 9, 2020.

The BBB site suggests that Ms. Weinstock is not the only person interested in Harvey’s.  The web would lead on to believe that Harvey’s has not only been assisting people with taxes for 21 years but is still assisting them.

Ms. Weinstock filed returns showing a refund due to her of $157,472.  I don’t know what sort of business she was in for the years at issue but that’s quite a large refund.  The IRS paid the refund after taking about $20,000 of it to satisfy past due taxes on her account.  After issuing the refund, however, the IRS decided to audit the return and disallowed the entire refund.  It also hit her with a penalty of $31,507.  The opinion does not describe a deficiency process but rather a notice of tax due.  It also states that the IRS issued a Notice of Jeopardy Levy.

Jeopardy levies are quite rare.  The opinion does not give any real facts regarding the jeopardy levy.  Someone at the IRS would have made a determination regarding the likelihood that Ms. Weinstock’s money would soon be out of the reach of the IRS.  The IRS attorneys would have signed off on this determination.  Among other things using jeopardy levy allows the IRS to bypass the collection due process procedures and immediately levy on any assets held by Ms. Weinstock.  The opinion left me with the impression that through the jeopardy levy process the IRS collected $200,119 to satisfy the tax deficiency resulting from reversing the claims on the returns, the penalties imposed, interest, etc.

Ms. Weinstock then turned to recover from Harvey’s.  She alleges that her tax problems resulted from the action of Harvey’s “due to their actions and misrepresentations in preparing Weinstock’s federal tax return….”  Failing to reach a satisfactory agreement with Harvey’s, Ms. Weinstock sued in federal district court “seeking an award of compensatory damages, punitive damages, attorney’s fees, and costs.”

The next several paragraphs of the opinion detail her efforts to obtain a default judgment.  Throughout the remainder of the court process, no one appears to respond to her allegations and the district court seeks to determine what it can award to her in the absence of a response.  The discussion may be instructive to anyone seeking a default judgment in district court.  After requiring Ms. Weinstock to refile, the court determines that she can obtain a judgment against the two individual owners of Harvey’s for four items:

Legal fees incurred associated with the IRS$29,800.00
Penalties paid to the IRS$31,507.40
Interest paid to the IRS$19,937.90
Fees Paid to Defendants$12,190.00

It does not grant her a default judgment for the treble damages due to fraud that she requested.  The court analyzing her pleadings and determines that she alleged sufficient facts to establish a claim for fraud meeting the heightened requirements for such allegations required by FRCP 9(b).  With respect to the punitive damages, however, the court finds that even though her pleadings may be sufficient there must be a trial.  So, the court does not throw out her claim but refuses to rule for her on these damages in the default judgment setting.

I do not know her chances of successfully collecting the $93,000+ that she won and whether it is worth the effort to continue to pursue the larger judgment.  The case encouraged me because I have seen very few cases brought by individual taxpayers against the persons who prepared their returns.  While the Department of Justice is also pursuing Harvey’s, its ability to pursue all parties preparing bad returns is limited by resources.  In order to shut down individual preparers whose actions cause taxpayers downstream pain and suffering as they endure audits and collection action, individual clients may need to take the lead.  The default nature of this judgment provides little guidance on what would happen at a trial.  We don’t know the extent to which, the taxpayer may have known or suspected the claimed refund was too high or other potential defenses to such an action the preparer might raise.  Still, the actions of this one taxpayer could make a difference in helping to police the tax preparation industry to rid it of preparers who do not seek to prepare an accurate return.

American Institute of Certified Public Accountants v. Internal Revenue Service  —  A Contrary Perspective

Last week we discussed the IRS victory in AICPA v IRS. Today we welcome back guest blogger Stu Bassin who offers a different take on the case and critiques the underlying merits of IRS oversight over unenrolled preparers.  Les

The D.C. Circuit’s recent decision in AICPA v. Internal Revenue Service  allowed the Service to continue its voluntary Annual Filing Season Program—a program which grants unlicensed tax return preparers with limited rights to represent taxpayers during audits if they satisfy continuing professional education requirements and pass a competency examination.  In a recent post, Professor Book heralded the decision as a “major victory” for the Service and urged Congress to enact legislation providing the Service with greater authority to regulate unregistered return preparers.  I offer a different perspective.


First, some background. About ten years ago, the Service responded to concerns that incompetent and unscrupulous tax return preparers were taking advantage of taxpayers and producing a disproportionate number of “problem” tax returns.  It  promulgated rules which required all return preparers who are compensated for preparing returns (e.g., attorneys, accountants, and unlicensed preparers) to qualify for and obtain Preparer Tax Identification Numbers (PTINs).  The regulations required preparers to pass a competency examination and complete required continuing professional education as a condition to obtaining a PTIN, although other provisions of the regulations largely exempted attorneys and CPAs from these requirements.

Unlicensed preparers, concerned that the new requirements would increase their cost of operating and possibly put them out of business, filed suit challenging the Service’s authority to regulate preparers who did nothing more than prepare returns [Personal aside. My father was a part-time unlicensed preparer who provided excellent service to taxpayers and used the fees he earned to pay for his children’s college education.  He gave up his practice when he learned of the additional costs and burdens that the new requirements would impose].  In Loving v. Internal Revenue Service, the D.C. Circuit ruled that the Service did not have statutory authority to regulate preparers whose activities were limited to preparing returns for other taxpayers.  In subsequent years, the Service has sought legislation providing it with authority to regulate these unlicensed preparers, although Congress has not granted the Service the requested regulatory authority.

The Service developed its Annual Filing Season Program in response to Loving, offering unlicensed preparers the opportunity to obtain a certificate of completion and limited rights to represent taxpayers during audits if they completed the continuing education requirements and passed the competency examination.  The program is voluntary—unlicensed preparers can continue to prepare returns without participating in the program–although the Service has made substantial efforts to sell the program to unlicensed preparers.   The most recent data suggests that relatively few of the unlicensed return preparers have elected to participate in the program.

Almost from the outset, the AICPA challenged the legality of the program.  After extensive wrangling over standing issues and two trips to the court of appeals, the D.C. Circuit upheld the validity of the program.  The key to the court’s ruling was its characterization of the program as voluntary and, therefore, not subject to the legal analysis developed in Loving.   This post does not address the legal merits of the ruling, but instead focuses upon the contentions of Professor Book and others that the result should be applauded from a policy perspective and that the experience with the Annual Filing Season Program demonstrates that Congress should grant the Service authority to regulate unlicensed preparers.

My analysis begins by accepting the proposition that policies which protect the public from unethical and incompetent preparers by putting them out of business should be applauded. But, has the voluntary Annual Filing Season Program contributed to that effort?  Less than 15% of the unlicensed preparers volunteered to fulfill the education requirements and take the competency examination required by the program. Presumably, these were primarily the most competent, ethical, and professional unlicensed preparers in the marketplace.  Conversely, the Service’s voluntary program did nothing to prevent the unethical and incompetent (along with the “ghost” preparers who prepare returns but do not sign the return as a paid preparer) from continuing to practice as they have in the past.  Ultimately, the question arises is whether the chronically understaffed Service has obtained a significant improvement in the quality and honesty of the preparer community from the resources it has invested in the voluntary program.

A recent report of the Treasury Inspector General for Tax Administration (TIGTA) provides disturbing evidence that the Service has misdirected its resources. The report began by summarizing the surprisingly wide array of penalties and other tools currently available to the Service to police preparer misconduct.  Notwithstanding these tools, TIGTA found—

  •  More than 1.3 million PTINs have been issued, most without any investigation of whether the applicant had a criminal background, a history of defrauding taxpayers, or any record of identity theft.  Once a PTIN is issued, it is only revoked if the holder is incarcerated or legally enjoined from return preparation.
  • More than 26,000 applicants for PTINs stated on their PTIN applications that they were not in compliance with their tax obligations.  The Service has taken no action to closely monitor the conduct of those preparers.
  • During Processing Year 2016, 72,590 preparers with inactive PTINs filed 2.7 million returns, yet the Service assessed penalties against 215 of these preparers.
  • The Service identified 4200 leads during one quarter relating to “ghost preparers” who prepared returns for compensation, but did not sign the returns.  In prior years, the Return Preparer Office referred an average of less than 65 cases for examination.
  • During calendar years 2012-2015, the Service collected only 15 percent of the penalties assessed against individual return preparers.
  • The Service did not identify a single instance where a return preparer audit was instigated based upon an issue which arose through the Annual Filing Season Program.

Interestingly, most of TIGTA’s recommendations concerned basic steps that the Service should have taken years ago to enforce of existing laws to police dishonest preparers, but had failed to take.

The basic question arising from this data is whether the Service’s Annual Filing Season Program has represented a wise investment of the Service’s scarce resources.  We know that the vast majority of the return preparers in the marketplace are honest and competent, yet the Service’s Annual Filing Season Program focuses on them, burdens them with added paperwork filing requirements, and expends a substantial amount of the Service’s resources in administering a program directed at honest and competent preparers.  The program, however, does not require dishonest and incompetent preparers to participate, take the continuing education courses, or pass the competency examination.  Indeed, it appears that the Service does little to enforce existing laws which could be employed to put dishonest preparers out of business.  More startling, as TIGTA reported, even when the data currently collected by the Service identified preparers filing returns using inactive PTINs or as ghosts, the Service rarely proceeded with investigations or other action against these miscreants.  And, the Service cannot excuse this inaction based upon the lack of resources—the Return Preparer Office alone employs nearly 200 employees. Rather, those resources are being directed toward administering an Annual Filing Season Program focused upon collecting forms from honest preparers.

All of this brings us back to the basic question of whether the Service should be granted more regulatory authority over unregistered preparers.  While Professor Book says it should, I believe that new legislation and expanded regulatory authority is the wrong idea.  All agree that the principal problem is dishonest and incompetent return preparers. The record developed by TIGTA shows that the Service focuses its efforts on collecting forms and data from honest preparers who choose to participate in the Annual Filing Season Program.  It does little, however, to enforce the rules already on the books to police miscreants by investigating preparers it already knows are using inactive PTINs or have their own unpaid tax liabilities. Increasing the Service’s authority to impose additional requirements upon return preparers will not alter the conduct of these wrongdoers.  Unfortunately, it seems that they will continue to flout any new rules (and the existing rules) with little risk that the Service will act against them.

In sum, I believe that giving the Service additional statutory authority to regulate several hundred thousand more unregistered preparers is a bad idea.  Additional regulatory authority will impose substantial compliance burdens and costs upon reputable preparers while devoting more of the Service’s resources to managing even more forms and data relating to honest preparers.  Yet, the Service does not employ the data and legal authority it currently has to identify and weed out wrongdoers.  Expanding its regulatory authority over unregistered preparers will channel more of the Service’s resources into managing regulation of the honest, not using existing law to address misconduct by the disreputable, inept, and unethical. That is hardly good public policy.  Rather, the orientation of the Service and the Congress should be to devoting the Service’s resources to aggressive enforcement of the existing rules against the unethical and incompetent.  That is the better route to removing the bad apples from the system.

In Major Victory for IRS DC Circuit Upholds IRS Annual Filing Program

In a major victory for IRS, in AICPA v IRS, the DC Circuit upheld the voluntary annual filing season program. The annual program allows unenrolled preparers to take a competency test and satisfy continuing education requirements in exchange for limited representation rights before Exam and publication in the IRS’s database of preparers, along with enrolled agents, CPAs and attorneys. The opinion reaches the merits of the IRS’s authority to create the annual program. In a prior opinion, the district court had found that AICPA did not have standing to bring the action that challenged the program. The DC Circuit, by reaching the merits of AICPA’s challenge, analyzed the reach of Loving and whether the program was a legislative rule that should have been issued via regulations rather than via a revenue procedure.


To get to the merits of the dispute the DC Circuit reversed the lower court on statutory standing.  The lower court held that AICPA did not have standing to bring the challenge. The DC Circuit felt that the additional supervisory responsibilities of CPAs and other licensed preparers, and the concomitant possibility that failing to supervise those preparers may bring sanctions under Circular 230, meant that AICPA had enough skin in the game to challenge the program.

The real importance of this decision is twofold:  first, the majority opinion takes a somewhat limited read of Loving, and second, in finding that the program is not a legislative rule for APA purposes and thus was not required to be issued under the APA notice and comment regime, the opinion provides cover for other IRS actions that the IRS may argue are merely interpretive and thus not subject to notice and comment.

As to the AICPA view that the annual program was a backdoor way to avoid Loving and regulate return preparation, the court disagreed, emphasizing that the rules allow for establishing competence in representing taxpayers in the exam process rather than regulate return prep per se:

We see nothing in the Program that attempts to resurrect regulations of the type enjoined in the Loving decisions. Unenrolled tax preparers who participate in the program “consent to be subject to the duties and restrictions relating to practice before the IRS in [certain sections of] Circular 230,”id. § 4.05(4); they do not consent to be governed by Circular 230 insofar as they are engaged in the business of tax preparation.

The Program also ties violations of Circular 230 to the limited practice right, not to the preparation of tax returns: Record of Completion holders “who violate Circular 230 during the course of [their] representation [before the IRS]will have their Record of Completion and ability to represent a taxpayer before the IRS under this revenue procedure revoked.” Id. § 7.01(2). When seen in this light, it is clear that the participants’ commitment to follow Circular 230 is coextensive with the IRS’s authority under § 330(a) to regulate practice before it.

The issue that generated a spirited dissent was whether the program required notice and comment. This case is another in a line of cases where courts (mostly in the nontax context) have struggled to define what in fact is a legislative rule which, under the APA, requires notice and comment, as compared to an interpretive rule that is not required to be issued through notice and comment. Here, that was a crucial issue because the IRS served up these rules via a revenue procedure, rather than via regulations. AICPA argued that the program was in fact a legislative rule and the IRS failure to comply with notice and comment meant that it was improperly established.

The majority’s view that the rules were not legislative stemmed mostly from the voluntary nature of the program:

In this case the Revenue Procedure and associated Program do not bind unenrolled preparers at all; the Program merely provides an opportunity for those unenrolled preparers who both choose to participate and satisfy its requirements.

As to the argument that the rules imposed new burdens on supervisors (more akin to a legislative rule), the majority noted that supervisors had responsibilities under Circular 230 prior to the program, and that the opt in to Circular 230 for the unlicensed preparers who take the annual program does not extend to additional supervisory responsibilities pertaining to return preparation:

Nor does it impose any new or different requirement upon supervisors or unenrolled agents; Circular 230 bound supervisors and unenrolled agents before the Program took effect and continues to bind them now. [note omitted]

In further finding that the rule was interpretive, the majority took a dig at IRS for not being clearer in its revenue procedure that it meant to illustrate the meaning of the statutory term competence:

The AICPA also argues the Revenue Procedure cannot be an interpretive rule, and in its view therefore must be a legislative rule, because it “contains not a word of the reasoned statutory interpretation … that typifies an interpretative rule.” We disagree, although we acknowledge the agency could have been more clear. By clarifying how an unenrolled preparer seeking to practice before the IRS may “demonstrate … necessary qualifications … and competency” within the meaning of § 330(a), the Revenue Procedure “reflects an agency’s construction of a statute that has been entrusted to the agency to administer.” Syncor Int’l Corp. v. Shalala, 127 F.3d 90, 94 (D.C. Cir. 1997); see Interport Inc. v. Magaw, 135 F.3d 826, 828-29 (D.C. Cir. 1998) (holding a rule interpretive where “it explains more specifically what is meant” in another authority, in that case a legislative rule). As stated above, the Program requires unenrolled preparers who want to participate to complete a set number of hours of instruction, on specific topics, and pass a test before gaining the limited practice right. See REV. PROC. 2014-42 §§ 4, 6. Those requirements are the agency’s interpretation of what § 330(a) means by “competency” and the other criteria it lists. [footnote omitted]

The dissent focused on two main issues: first, it noted that the IRS power to allow unenrolled preparers limited rights in examinations initially arose via regulations that were issued with notice and comment, and changes to those rules likewise had to follow from notice and comment. Second, it argued that the majority opinion failed to appreciate the reach of Circular 230 and its possible imposition of monetary sanctions for violations of the annual program.

Practitioners and academics will be digging in deeper on the spirited disagreement between the dissent and majority on whether the program is in fact the product of a legislative rule. The disagreement between the majority and dissent over the reach of Circular 230 (and whether the program imposes the possibility of newer sanctions on supervisors)  reminded me of Karen Hawkins’ insightful 2017 Griswold lecture, where she discussed how “because it has not been amended to reflect current case law, legislation or clarifications….” parts of Circular 230 have “become vague, ambiguous, outdated and, in some instances unadministrable.”

My quick takeaway of the case is that there is significant uncertainty in the reach of Circular 230 and the contours as to what is a legislative rule. IRS should tread carefully when establishing new programs as significant as this. IRS could have benefitted from the input that notice and comment provides, as well as perhaps given it more time to think through how the program could be more effectively administered.

TIGTA Criticizes IRS Efforts at Curbing Preparer Misconduct

TIGTA reports are, by their nature, often critical of IRS performance. IRS Lacks a Coordinated Strategy to Address Unregulated Return Preparer Misconduct details TIGTA’s view that IRS is not doing enough to curb preparer misconduct.

There is a lot in this report. It lays out the recent history of IRS efforts; starting in 2009 with the ill-fated plan to regulate unlicensed preparers via compliance and background checks, qualifying examinations and continuing education requirements. When Loving struck down the 2009 rules, IRS pivoted and the TIGTA report discusses in detail the IRS procedures at SB/SE for examining preparers and the sanctions that IRS can bring on unscrupulous or incompetent preparers even in the absence of the direct oversight.

The main takeaway from the report is that IRS does not have a consistent national return preparer strategy. As the report details, IRS stated that its “overall strategy for addressing preparer misconduct was generally to use the tools at the IRS’s disposal as effectively as possible within resource constraints to improve tax compliance by increasing the accuracy of tax returns and holding tax return preparers accountable for misconduct.” Post-Loving, IRS has shifted resources to a relatively undersubscribed voluntary program for unenrolled preparers while the vast majority of unenrolled preparers continues to operate outside direct oversight.


TIGTA takes direct issue with IRS claims to address the issue “as effectively as possible.” Starting from a macro perspective, TIGTA notes that there is no evidence of a coordinated IRS strategy; and little in writing that could serve as a blueprint for efforts to address unenrolled preparers. While SB/SE has the main responsibility for addressing preparer misconduct, its Business Performance Review documentation in recent years barely mentions the Return Preparer Coordinator functions in the seven main geographic areas; it also has little discussion of Lead Development Centers, which are the hubs for reviewing referrals of preparer misconduct.

The report goes into great detail as to how this lack of strategy manifests itself in particular problems. Here are some of the highlights:

Limited Priority in Exams: TIGTA notes the relative scarcity of focused preparer examinations (called PACS, or Program Action Cases) in recent years; for example in FY 2016 there were only 140 developed PACs compared to Criminal Investigation’s 248 investigations and 204 indictments in the same period.  As TIGTA notes, the lesser number of civil cases “is unexpected given the respective resources of these two IRS functions, as well as the intensive nature of criminal investigations versus civil penalty cases. The SB/SE Division Examination function has approximately 6,500 revenue agents and tax compliance officers compared to Criminal Investigation’s nearly 2,200 special agents.”

Inconsistent Criteria and Limited Impact For PAC Referrals: TIGTA criticized the differing approaches to focused preparer examinations in the seven geographical areas, with some areas focusing on high refund rates and others looking to numbers of taxpayers connected to a preparer. That contributes to a lack of a national approach to the issue of preparer oversight.Furthermore, TIGTA noted that the preparer exam impact  is often limited as IRS often failed to examine all of the identified preparer’s tax returns.

Assessment of Penalties Not Maximized: The report examines the failure to assess penalties when conduct may have warranted them. For example, it discusses a lack of PTIN penalty enforcement. TIGTA notes that “if penalties had been proposed when the invalid PTINs were identified, more than $122,747,250 could have been assessed, yet only 215 penalties were assessed for all of I.R.C. § 6695(a)-(e) penalties, inclusive of § 6695(c) penalties, totaling $1,572,055 which is 1 percent of the potential penalty assessment for just one of the possible violations.”  Of course, assessing more penalties against a group such as bad preparers in no way guarantees collection of the penalties assessed as discussed in the next section.

Collection of Preparer Penalties is Minimal: TIGTA notes that IRS no longer prioritizes collection of return preparer penalties. TIGTA notes that from CY 2012 to CY 2015, the IRS collected just $46.3 million (15 percent) of the $317.2 million of penalties assessed on individual return preparers; the numbers are even worse for penalties assessed against preparers failing to put a PTIN on returns, with IRS collecting just 8% of those penalties in 2016.  Prioritizing collection from this group would not necessarily ensure a higher return.  Collection may have directed their limited resources to persons more likely to have the ability to pay.

RPO Doing Little to Combat Unregulated Preparer Misconduct:The report discusses the efforts of the IRS Return Preparer Office following Loving. It is not a pretty picture.

The Return Preparer Office, which was originally established to lead the now defunct regulatory effort, is still in existence but now primarily focuses its efforts on tax professionals and those few tax return preparers who volunteer to be subject to certain annual training. The Return Preparer Office checks tax compliance for tax professionals but not for most unregulated preparers. More than 26,000 Preparer Tax Identification Number recipients acknowledged being tax noncompliant. Additionally, while preparing tax returns without a Preparer Tax Identification Number is subject to a penalty, the penalties are assessed on a limited ad hoc basis. In Processing Year 2016, the IRS failed to assess $121,175,195 in Preparer Tax Identification Number penalties.

TIGTA notes that a main part of RPO, the Suitability Office, produces limited benefits:

The resources used by the Suitability Office to conduct credentials research are not commensurate with the benefits realized. At best, preparers who have misrepresented themselves will stop after being notified by the Suitability Office. However, if the preparers continue with the behavior, the IRS is not taking additional steps to address it. The Suitability Office takes no further action if the preparer is unregulated. Even when cases are referred to the OPR, nearly all of them are closed upon receipt because the preparers are not currently practicing before the IRS and therefore, the OPR lacks jurisdiction. The appropriate function to report unregulated preparers misrepresenting themselves as tax professionals is TIGTA’s Office of Investigations.

The report notes that “an even more significant problem is that the Suitability Office no longer devotes any resources to unregulated preparers. Ensuring the tax compliance of tax preparers yields benefits to tax administration; however, the Suitability Office is only checking the status of the relatively small number of tax professionals and volunteers for the AFSP, e.g., those who present the least risk to tax administration.”

IRS Failing to Use Its Information: One of the key benefits of a uniform preparer identification number is the greater ease that the number affords the IRS to track preparer behavior. The report notes that PTINs “allow the IRS to keep track of preparers’ behavior, such as the number of returns they prepare and file, the number of returns by filing method (paper or electronically filed), returns filed with refunds, and returns filed with balances due.”

All of the IRS’ information on preparers is consolidated in the Return Preparer Database. Despite the presence of the information, TIGTA notes that IRS has failed to maximize its potential:

IRS has not yet taken full advantage of its capabilities. Much of the analyses and resulting corrective actions could be performed systemically, with minimal need for employees’ direct involvement. Expansion of the database’s capabilities could allow the IRS to identify and deter additional preparer misconduct, while also freeing employees who are currently performing manual tasks that could be performed systemically by the database.

Given the resources reductions over the past several years, it is particularly important for the IRS to continue developing and taking full advantage of its available systemic capabilities.


No doubt the IRS could improve its police role for return preparers.  Many of the recommendations presented by TIGTA could assist the IRS in improving this role.  The IRS has continued to push for a legislative fix to Loving – a fix that would have come quickly in past decades but not in the Congress since 2010.  The hope for a legislative fix that would allow the IRS to go back to the strategy it had finally decided to employ coupled with the diminution of resources may have something to do with the sluggish action TIGTA perceives coming out of the IRS.  Collection from bad preparers will never be easy.  The IRS will not fix the problem of bad preparers by assessing more penalties.  It needs strong tools to stop them from preparing.  Getting the return right at the outset saves the IRS and taxpayers from time consuming efforts to reconstruct a correct tax assessment.  TIGTA is right to keep reviewing IRS efforts on this important issue.  The IRS is right to keep pushing for legislation to allow it to robustly regulate preparers.  While waiting for Congressional approval, the IRS should look carefully at those suggestions from TIGTA that will allow it to shut down bad tax preparers and pay little attention to the suggestions that cause it to assess large amounts of penalties it will struggle to collect and that may not stop the bad action.







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.


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.