Is There a Future Role for Circular 230 in the Internal Revenue Service’s Efforts to Improve Tax Compliance?

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In this post, Michael Desmond of the Law Offices of Michael J. Desmond discusses recent judicial developments highlighting limits on IRS and Treasury’s authority under Circular 230 to regulate aspects of practitioner conduct. The post explains the connection between the IRS’s efforts to use Circular 230 in a more muscular way and its lack of resources. The post comes on the heels of a panel presentation at the ABA Tax Section this past month in Denver where Mike, Stuart Bassin and Professor Steve Johnson appeared on a panel of the Standards of Tax Practice Committee. Les

This is a reposting of this article because something in our software prevented the article from going out on Wednesday.  The article is super and we wanted to make sure that all of our email subscribers got it in addition to those coming to the website.  Keith

In 1984, the Treasury Department and the Internal Revenue Service (“Service”) first amended Circular 230 to target practice standards on “tax shelter” transactions. Since then, Circular 230 has been amended on a number of occasions. Many of these amendments have refined the focus of Circular 230 on new generations of aggressive tax planning through, for example, the much-maligned and now repealed “covered opinion” rules in former section 10.35. Other amendments have addressed more mundane aspects of practitioner conduct ranging from the fees that can be charged to a practitioner’s ability to endorse refund checks and the failure by a practitioner to file a client’s tax return electronically. A common theme reflected in these changes is the use of Circular 230 as a tool to improve compliance, as distinguished from the more general role of fostering good practice standards.

The 30-year evolution of Circular 230 and, more broadly, the Service’s effort to use Circular 230 as a tool to improve compliance, has recently been called into question. The D.C. Circuit’s opinion earlier this year in Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014) was the first shoe to drop. Loving has been discussed extensively in recent months and is noteworthy not only for the fact that it upheld the District Court’s order enjoining the Service from implementing key components of its highly publicized and far reaching return preparer initiative, but also because it marked the reversal of a prior leaning in the courts to uphold the Service’s authority to regulate a broad range of conduct under Circular 230. While Loving raises fundamental questions about what role Circular 230 will play in the Service’s enforcement toolbox going forward, it also highlights shortcomings with other tools in that box, which may be the better place to focus going forward.


Legal Challenges to Service’s Authority to Regulate Practice

Prior to Loving there had been only a handful of court challenges to the scope of the Service’s authority to regulate “practice” under 31 U.S.C. § 330. In Tinkoff v. Campbell, 158 F.2d 855 (7th Cir. 1946), the appellant was a disbarred attorney who moved into the business of “advising taxpayers in filling out income tax returns.” Enforcing the limited practice rules under Circular 230 (currently found in section 10.7(c)), the Service prohibited the appellant from representing taxpayers in a non-legal capacity, “explaining adjustments and computations in their returns” and “accompanying them upon interviews” in connection with an audit of their return. The Seventh Circuit had little trouble dismissing the appellant’s constitutional challenge to the Service’s authority to regulate his return preparation “practice” under Circular 230: “We find no merit whatsoever in any of the contentions raised by appellant and are fully in accord with the District Court in dismissing the petition for injunction.” Id. at 856.

Sixty years later, in Wright v. Everson, 543 F.3d 649 (11th Cir. 2008), the Eleventh Circuit rejected a challenge to the Service’s refusal to allow, under Circular 230, an “unenrolled” return preparer to represent taxpayers through use of an IRS Form 2848 Power of Attorney. In Wright, the court framed the issue as whether the practice limits applicable to unenrolled preparers were “arbitrary, capricious, or manifestly contrary to statute” (a Chevron “Step Two” inquiry), without questioning the Service’s threshold ability to regulate “practice” under 31 U.S.C. § 330 or the scope of its authority under that statute. The Eleventh Circuit in Brannen v. United States, 682 F.3d 1316 (11th Cir. 2012) similarly had little trouble finding authority for the Service to require return preparers to obtain registration numbers, distinguishing what was then the district court’s holding in Loving by citing the specific statutory authority under Code section 6109 for requiring preparer identification numbers. Tinkoff, Wright and Brennen were not cited by the D.C. Circuit in Loving. While not involving the Administrative Procedure Act arguments at issue in Loving, the trend seen in those prior cases to uphold the Service’s broad authority to act under 31 U.S.C. § 330 was nonetheless reversed.

The Service did not seek en banc review or certiorari from the Supreme Court in Loving. Rather, the Service indicated that it would follow the Court’s holding narrowly and not apply its interpretation of the terms “practice” and “representatives” in 31 U.S.C. § 330 to other aspects of Circular 230. In other words, while Loving may have enjoined the Service from mandating testing and continuing education for paid return preparers, its holding would not be applied to other provisions of Circular 230 that also purport to regulate conduct not involving direct interaction with the Service.

The Service’s effort to limit Loving lasted less than six months. In July 2014, the U.S. District Court for the District of Columbia issued its decision in Ridgely v. Lew, 2014 U.S. Dist. LEXIS 96447 (D.D.C. July 16, 2014), enjoining the Service from enforcing the limitation on a practitioner’s ability to charge a contingent fee for “ordinary refund claims” in Circular 230 section 10.27. In doing so, the court rejected the government’s effort to distinguish Loving on the basis that the plaintiff was a practicing CPA who, at some point in his career, had had direct interaction with the Service even if not in connection with the contingent fee arrangements at issue. The Service has long relied on (and continues to rely on) this “once a practitioner, always a practitioner” position as a jurisdictional hook for Circular 230.   (n.b., in the IRS Form 2848 Power of Attorney and Declaration of Representative released in July 2014, the Service now requires that practitioners affirmatively declare that they are “subject to regulations contained in Circular 230.” The Form 2848 previously required only that practitioners declare they were “aware” of the regulations.).

The government did not appeal Ridgely and has since stated, consistent with its reaction to Loving, that it will apply the holding in that case narrowly. William R. Davis, ABA Meeting: OPR Will Narrowly Apply Ridgely, 2014 TNT 184-11 (Sept. 23, 2014 (quoting IRS Office of Professional Responsibility Director Karen Hawkins as saying “I am going to treat Ridgely the same way I treated Loving, which is I’m going to stick to the issue that was decided and the dicta is very colorful but it is not law.”). The Service has, however, yet to confront or develop a response to the basic rationale of Loving: That a person’s conduct in assisting taxpayers in any manner that does not involve direct interaction with the Service does not constitute “the practice of representatives of persons before the Treasury Department” within the meaning of 31 U.S.C. § 330(a). While some have pointed to the Service’s authority under 31 U.S.C. § 330(b) to regulate “incompetent” or “disreputable” representatives, or to the “nothing shall be construed to limit” language of 31 U.S.C. § 330(d) which applies to the rendering of certain written advice, the Service’s authority under those provisions is far more limited than under 31 U.S.C. § 330(a).

Were the logic of Loving and Ridgely to be extended, not only is the Service’s ability to regulate paid return preparers under Circular 230 limited or non-existent, but the vitality of other “non-practice” provisions in Circular 230 has also been called into serious question. If the Service cannot regulate return preparation because it does not constitute “practice” before the Treasury Department, where is its authority to promulgate the “due diligence” standards applicable to communications between practitioners and their clients under Circular 230 section 10.22(a)(3)? To promulgate the standards applicable to advice with respect to documents submitted to the Service other than tax returns under section 10.34(b)?  To enforce the “written advice” standards in new section 10.37? Or to promulgate numerous other provisions in Circular 230 that purport to regulate conduct not involving direct interaction with (or “practice” before) the Service? As a practical matter, there may be little incentive for a practitioner to challenge the Service’s authority to enforce these provisions, at least through an injunction action similar to Loving or Ridgely. If a practitioner were to be sanctioned by the Service under any of these “non-practice” rules, however, it is easy to see a judicial challenge to their validity in a district court appeal of an administrative law judge’s final determination upholding that sanction. And under Loving and Ridgely it is easy to see that challenge succeeding.

Why the IRS Attempted to Use Circular 230 to Regulate Preparers: Resource

While Loving and Ridgely provide an interesting look at the application of the Administrative Procedure Act to tax administration, their holdings—and the potential for a broad extension of their holdings—begs the question of why Circular 230 evolved into a enforcement tool targeted at “tax shelters,” “covered opinions,” contingent fee arrangements and other real and perceived compliance problems in the first place. The holdings similarly beg the question of why Circular 230 was chosen as the vehicle through which the Treasury Department and the Service would subject hundreds of thousands of paid return preparers to mandatory competency testing and continuing education requirements.   A report from the Treasury Inspector General for Tax Administration (“TIGTA”) released on September 25, 2014, helps to highlight an answer: resources.

Apart from Circular 230, the Service has unchallenged authority to regulate the conduct of paid return preparers and others who assist taxpayers in complying with the tax law (or not complying with the tax law, as the case may be) through a broad range of civil and criminal provisions in the Code. These include the preparer penalty provisions in Code sections 6694 and 6695, the penalty for promoting abusive tax shelters under Code section 6701 and the civil injunction provisions in Code sections 7407 and 7408. To enforce these provisions, however, takes a commitment of significant resources. After identifying the bad actors and developing an administrative case against them (itself a resource-intensive effort), the Service can be dragged into protracted litigation in seeking to obtain a court injunction or in defending its penalty determinations against a challenge brought by a preparer or practitioner who is highly motivated to clear their name or delay imposition of an inevitable sanction.

Notwithstanding the wide range of tools that can be used against problematic preparers, the recent TIGTA report found that the Service failed to follow up on more than one third of preparer conduct referrals, most of which were from internal sources within the Service. The TIGTA report references a prior report, which evaluated the Service’s inability to timely respond to thousands of other referrals that are submitted each year on IRS Form 14157, mostly by taxpayers who have been victimized by unscrupulous or fraudulent preparer conduct. Rather than build an entirely new regulatory regime under the questionable authority of 31 U.S.C. § 330 at a cost estimated to be up to $77 million annually, could that same $77 million could be targeted at the thousands of preparer conduct leads that seem to go unopened each year?

The problem, of course, is that committing resources to enforcing existing law must come from the Service’s general enforcement budget, an area that Congress has been moving down on its funding priority list. Using Circular 230 as the vehicle for regulating paid return preparers and “practitioner” conduct more generally sidesteps this problem because, as originally envisioned, the $77 million cost would be self-funded through user fees imposed on all (or most) practitioners. Legislative proposals authorizing the Service to regulate paid preparers (which would address the holding in Loving)similarly envision a user-fee regime to sidestep the funding problem. See Tax Return Preparer Accountability Act of 2014, section 3, H.R. 4470 (113th Con., 1st Sess.).

The funding problem raises the larger policy question of why such a basic tax enforcement issue as regulating paid return preparers should be funded by a user fee, a question the courts might have an opportunity to consider in the context of a pending challenge to the remains of the preparer user fee regime. The politics of that question extend beyond this posting, but they will have to be addressed if there is to be any comprehensive response, legislative or otherwise, to Loving and the largely unchallenged proposition that paid return preparers should be subject to broader oversight than current law appears to permit.


  1. Bob Probasco says


    Great post! I’m sorry I wasn’t in Denver to hear your presentation.

    I’ve always assumed that when 330(d) was enacted, in the American Jobs Creation Act of 2004, Congress used that peculiar “nothing shall be construed to limit” language to avoid any implication that Circular 230’s regulation of written advice since 1984 had been unauthorized. The legislative history for the AJCA does describe it as just a clarification of existing law, but making a positive grant of authority in 330(d) would have been safer. As is, it’s vulnerable to challenge. If 330(a) doesn’t authorize regulating return preparation, it’s hard to argue that it authorizes regulating written advice. And if 330(a) isn’t authority, and 330(d) isn’t a positive grant of authority . . . .

    Back in 2004, so soon after the Senate Finance hearings on tax shelters, getting Congressional authorization for regulating written advice was easy. I’m not sure how easy it would be to persuade Congress or the courts to overturn Loving and Ridgely today. Of course, back in 2004, Loving and Ridgely might have been decided differently; Chevron was applied more deferentially then.

  2. Benjamin Bolas says

    Michael Desmond is correct in noting the drawbacks of the civil and criminal provisions of the Internal Revenue Code (IRC), specifically IRC sections 6694, 6695, 6701, 7407, and 7408. These provisions were enacted to alert paid tax return preparers of what not to do when preparing tax returns for others, but these penalties are properly viewed as a retroactive, costly, and largely ineffective approach to addressing the problems associated with unregulated tax return preparers.

    Not only is it costly for the Internal Revenue Service (IRS) to enforce IRC penalty provisions (as the author of the original post noted), IRS studies have found that penalties do not necessarily promote income tax filing compliance and that better quality taxpayer service may be more beneficial in promoting of overall tax compliance. In the Taxpayer Advocate’s 2013 Annual Report to Congress, the Taxpayer Advocate studied whether accuracy-related penalties improve future reporting compliance by Schedule C filers. It found that not only did accuracy-related penalties not have a significant effect on subsequent reporting compliance, taxpayers who were subject to default assessments or who appealed the assessment were found to be less compliant in the future. Although this study looked at penalties on taxpayers in general, and not specifically return preparers, I believe the study properly exposes the limitations of relying on IRS penalty provisions to promote accurate tax reporting. I think this inference is fair, especially when one considers the fact that the GAO found that paid preparer returns had a higher estimated error percentage than self-prepared returns.

    Additionally, penalties on paid return preparers do nothing to help victims of fraudulent tax return preparation. When a paid preparer defrauds a taxpayer and steals his or her refund, the IRS forces the taxpayer to jump through many hoops in the hope that he or she will ultimately be able to receive the stolen refund. Even where taxpayers can prove that they were not complicit in the fraud, it may take years for the IRS to resolve the problem and issue a refund, and in some cases the taxpayer never receives the refund he or she was entitled to.

    The IRS must be able to take proactive measures to protect taxpayers from paid return preparers. The IRS cannot rely on penalties alone to address the issues surrounding paid tax return preparers. Unfortunately, after Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014), the IRS can no longer address such problems through proactive tax return preparer regulations, so the question becomes, “What can the IRS do to protect taxpayers from incompetent and unscrupulous tax return preparers?”

  3. michael mulroney says

    Students in the course on Professional Responsibility for Tax Practitioners in the Villanova Graduate Tax Program were required to respond to Michael Desmond’s Circular 230 post. Their comments follow.

  4. michael mulroney says

    Matthew McGowen at Wednesday, October 22, 2014 12:03:10 AM EDT

    I think Mr. Desmond’s concerns about the potential extension of the logic of Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014) and Ridgley v. Lew, 2014 U.S. Dist. LEXIS 96447 (D.D.C. July 16, 2014) to other “non-practice” provisions under Circular 230 is valid. That the Internal Revenue Service (the “Service”) declined to seek en banc review or certiorari from the Supreme Court hints at the Service’s trepidation with respect to the potential expansion or entrenchment of these decisions.

    The history of Circular 230 and the manner in which it has been used over the years is somewhat convoluted. In Loving, the D.C. Circuit noted, almost with amusement, that “the language now codified as Section 330 was originally enacted in 1884 as part of a War Department appropriation for ‘horses and other property lost in the military service.’” There are patchwork solutions to address the enforcement of preparer conduct leads, even self-funded ones as Mr. Desdmond highlights (squabbles over the Chevron test and user fees aside). More comprehensive resolution of the issue (the Service’s regulatory authority) and clarification of its application to other “non-practice” provisions, however, would be more firmly rooted and accomplished through new legislation.

    The history of Circular 230 and the manner in which it has been used over the years is somewhat convoluted. In Loving, the D.C. Circuit noted, almost with amusement, that “the language now codified as Section 330 was originally enacted in 1884 as part of a War Department appropriation for ‘horses and other property lost in the military service.’” There are patchwork solutions to address the enforcement of preparer conduct leads, even self-funded ones as Mr. Desdmond highlights (squabbles over the Chevron test and user fees aside). More comprehensive resolution of the issue (the Service’s regulatory authority) and clarification of its application to other “non-practice” provisions, however, would be more firmly rooted and accomplished through new legislation.

    The politics of the response to this matter is left to the speculation. I think it is worth noting the legislative and judicial response to Loving may not break cleanly over political or ideological lines. The Supreme Court found, under Mayo Foundation, the two-step analysis of Chevron should be applied to determine the validity of treasury regulations. Mayo Foundation was a 9-0 decision. Unfortunately, on the legislative side of the equation, I think broader oversight of return preparers through new legislation will require scandal or abuse to buttress public support and galvanize legislators that change is needed. Since a blog is by nature a dialogue, I’ll use this opportunity to pose a question: why did the response in 1984 to the maligned “tax shelter” transactions take the form of Treasury Regulations and not more substantive revisions to the Code?

  5. michael mulroney says

    Brian Kitchen said…
    Friday, October 24, 2014 10:59:37 AM EDT

    I agree completely with the comments in regards to the government study on paid tax return preparers, which concluded that, based on a limited sample, paid tax preparers do make significant errors (Government Accountability Office, [GAO] Publication 14-467T, 2014). I also find interesting the proposed relationship between the National Taxpayer Advocate Service 2013 Report to Congress in which a study concluded that accuracy related penalties do not improve reporting compliance and the GAO study. This relationship has some footing, in that, even with paid tax return preparer penalties (e.g. I.R.C. §6694), compliance is shaky. For example, in an effort to further combat abuse with the earned income tax credit (EITC), the Service mandated that a paid preparer prepare and submit a form substantiating that the credit is fully supportable. In a report issued by the TIGTA in 2013, over 700,000 tax returns claiming the EITC in tax year 2011 excluded the previously mandated form (Treasury Inspector General for Tax Administration. Late Legislation Delayed the Filing of Tax Returns and Issuance of Refunds for the 2013 Filing Season (2013-40-124)). The Service stated that those preparers who did not comply with the filing mandate would be subject to a due diligence penalty. Per the TIGTA report, no penalties were assessed against tax return preparers who were noncompliant for the 2012 filing season. The report suggests that millions were lost as a result of the Service not assessing the pre-determined due diligence penalty.

    The ETIC example above is just that, an example of tax-preparer non-compliance and the Service not following up on penalty provisions. Perhaps the reason some preparers, and even some taxpayers, stretch the rules or just blatantly ignore the rules, is that enforcement is rare. As it relates to tax return preparers, the Service can almost certainly create a system where something as simple as assessing a paid preparer penalty via an automated system is a standard process. The lack of enforcement is certainly a funding issue, but the Service foregoes millions of dollars a year on easily assessed due diligence penalties, such as the EITC penalty. The Service should assess its internal operations as this could assist in raising additional revenue to police taxpayer and tax preparer compliance.

  6. michael mulroney says

    Posted by Schemel Wiley at Tuesday, October 21, 2014 10:55:47 PM EDT

    The lack of funding for using Circular 230 as the vehicle for regulating tax return preparers and imposing the user fee as a funding source is interesting and creative. As mentioned in the blog post, the Service is administratively and fiscally burdened with the task of regulating paid tax return preparers and enforcing existing penalty codes. Add to that, the limited (and shrinking) budget to create new codes for regulating paid preparers. So, why not use a tool already in existence?

    The answer is that the Service’s attempt to use Circular 230 is well meaning, but may be ill-fated. Armed with the Chevron case, the Service attempted to use Circular 230 to broaden their reach in regulating paid tax return preparers by using their interpretation of 31 USC § 330 (a)(1). However, the Service’s interpretation proved problematic in Loving and the interpretation of regulating paid tax return preparers as “representatives of persons before the Department of Treasury” failed. See Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014).

    With the exposed weakness from Loving, Circular 230 is being used to creatively fund regulation and enforcement by imposing user fees with PTIN applications and renewals. The funding cloaked as user fees is being called into question by a class action lawsuit. See Steele v. United States of America, Civ. No. 1:cv-14-1523 (D.C. Cir. 2014). So in addition to the issue regulating paid return preparers in Loving, there may be an issue with the fairness of the user fee. The PTIN fee is $63 with a $13 cost to the Service. Under 31 USC §9701, fees and charges for government services should be fair and based on the costs to the government. If the user fees are deemed unlawful, will the Service continue to use Circular 230 to see what will “stick” or will Congress address the ambiguity?

  7. michael mulroney says

    Posted by Edward Bottone at Tuesday, October 21, 2014 10:35:44 PM EDT

    The Internal Revenue Service’s budgetary constraints and lack of resources resulting from this, have been well documented and much debated. In fact, the National Taxpayer Advocate Nina Olson stated in her 2011 annual report to Congress, “that the most serious challenge facing American taxpayers is the combination of the Service’s expanding workload and the agency’s limited resources to handle this workload.” Given the circumstances, it is not surprising to see the Service begin to rely more on Circular 230 as an asset in its efforts to regulate paid return preparers and practitioner conduct.

    The Service’s increased reliance on Circular 230 has not gone unchallenged, as a group of tax preparers in Loving v. IRS, 742 F.3d 103 (D.C. Cir. 2014) successfully argued that the Service lacked the authority to regulate tax return preparation and in essence overstepped its bounds. What I find interesting is that the Service lacks the authority to regulate tax preparers but they do have the authority to charge preparers $50 annually for something that was provided free of charge just a few years ago.

    The $50 that I am referring to is the user fee or (PTIN) that those who prepare tax returns for compensation must use today or face consequences. Apparently the $50 fee is justified because it confers a special benefit or privilege to preparers allowing us to prepare returns and be compensated for our work. This fee appears to be nothing more than a revenue raiser, based on the fact that I prepared returns for compensation for several years prior to its enactment and don’t feel anymore privileged after renewing my PTIN each year. In fact, I renewed my PTIN today and shortly thereafter received an unsolicited email from a provider asking if I was interested in buying or selling a tax practice. This is not surprising given that the AICPA has informed its membership that the Service makes its PTIN database available to anyone who requests it and pays a $35 fee. So let’s recap, the Service requires paid preparers to pay a $50 user fee annually for something that was free just a few years ago. Then they reserve the right to sell your information to a commercial enterprise for $35 a pop. I think this transaction can best be described as “brilliant.”

    While I generally support the Service’s increased use of Circular 230 as a compliance tool, I can’t help but feel that they are partly responsible for where we are today. I make this statement after reading the report from the Treasury Inspector General for Tax Administration (TIGTA) released on September 25, 2014. I think it is imperative that the Service maximize the resources that it does possess and leverage technology in a way that would allow it to increase collections and potentially gain favor with Congress which may result in increased funding in the future. The legal challenges to the Service’s authority to regulate preparers will only continue and it is important that the Service follow through on the TIGTA’s recommendations which I believe will result in increased collections.

  8. michael mulroney says

    Posted by Mary Cloues at Tuesday, October 21, 2014 10:11:35 PM EDT

    Given the importance of taxes and the nature of our self-assessment tax system, I find it difficult to argue against some regulation of tax return preparers by the Service. However, I agree that the Service should reconsider and refocus its attempts to regulate tax return preparers and the use of its limited resources in doing so. The sound beating the Service received in Loving and Ridgely suggests that further pursuit of regulation of tax return preparers under 31 U.S.C. § 330 may be futile.

    An alternative option would be to seek legislative rescue. Indeed, following Loving, John Koskien asked Congress to explicitly authorize the Service to regulate all tax return preparers. John Koskien, Written Testimony Before the Senate Finance Committee on Regulation of Tax Return Preparers, April 8, 2014, available at Likewise, the administration responded to Loving by including in its 2015 budget a proposal that would allow the Service to regulate tax return preparers. General Explanations of the Administration’s Fiscal Year 2015 Revenue Proposals, pg. 244, March 2014, available at

    However, even putting aside the question of likelihood of any Congressional action, I am not convinced that the proposed regulatory system (e.g., basic competency testing and continuing education requirements) would significantly combat the problem of “bad actors” (to borrow Desmond’s term), or at least combat the problem enough to justify the considerable expense of setting up and administering the system (e.g., overseeing nationwide testing and annual compliance, handling challenges to the testing procedures and results, managing fraud, etc.). Although the testing inevitably would weed out some under-qualified preparers, it seems equally likely that many bad actors would have the wherewithal to pass the exam and comply with continuing education requirements and yet continue to prepare tax returns in the manner the Service seeks to eliminate. The proposed system also would not address the problem of dishonest taxpayers who, for example, provide tax return preparers with inaccurate information (e.g., number of dependents, etc.) that may not be readily verifiable by the preparer.

    On the other hand, as Desmond notes, the Service already can police both tax return preparers and taxpayers through the existing penalty provisions. Desmond’s commentary and the TIGTA report he cites highlight that the Service currently is losing substantial opportunities to investigate and pursue potentially bad actors under the preparer penalty provisions, principally due to lack of resources. Although more time consuming and difficult to enforce, I believe a penalty regime has an overall greater deterrent effect than would a testing/continuing education regime and would therefore prefer to see resources focused more heavily on penalty enforcement.

    In addition, other penalty provisions in the Code aimed at taxpayers should carry some deterring effect for tax return preparers. For example, the Service may impose a penalty on a taxpayer who makes a substantial underpayment of tax due to an accuracy-related error. I.R.C. § 6662. An unhappy taxpayer who incurs this penalty is likely to try to pass some of the cost along to the return preparer by, say, seeking a contribution towards payment of the penalty or a return of fees previously paid, or by bring bring a legal action (e.g., malpractice) against the preparer.

  9. michael mulroney says

    Posted by Michael Vernamonti at Tuesday, October 21, 2014 10:09:22 PM EDT

    Treasury Department Circular No. 230. 31 U.S.C. §330 is described as an additional tool implemented by the U.S. Treasury to improve tax compliance. The limited resources of the IRS has impeded enforcement of the Internal Revenue Code and related Treasury Regulations. The IRS has advanced and modified its tactics in order to increase compliance among taxpayers. Tax return preparers and practitioners remain the untapped aspect of tax compliance; thus the creation of Circular 230.

    The Internal Revenue Code sections are in place to regulate tax preparers (e.g. §6694, 6695, 7407, and 7408), but the IRS does not have the time, money, or manpower to effectively pursue law breaking tax practitioners. According a report from the Treasury Inspector General for Tax Administration (“TIGTA”), the IRS failed to follow up on over one third of tax preparer conduct referrals. In addition to the conduct referrals, stricter rules for tax return preparer would reduce the amount of fraudulent returns prepared. For example, identity theft could be reduced for purposed of fraudulent refunds. A perpetrator would need both the taxpayer’s and the tax return preparer’s secured information. Having designated tax return preparers and practitioners would increase accuracy by raising the standards of the practice, and help reduce fraud. Unfortunately, the ruling in Loving v. Commissioner, 742 F.3d 1013 (D.C. Cir. 2014) did not give Circular 230 the power to do so. “It might be that allowing the IRS to regulate tax return preparers more stringently would be wise as a policy matter. But that is a decision for Congress and the President to make if they wish by enacting new legislation (Loving v. Commissioner, 742 F.3d 1013 (D.C. Cir. 2014)).”

    In the blog post, “Is There a Future Role for Circular 230 in the Internal Revenue Service’s Efforts to Improve Tax Compliance,” Michael Desmond summarizes it by writing; “To enforce these provisions, however, takes a commitment of significant resources.” At the current time, the IRS clearly lacks these resources. It would be logical and efficient for the IRS to seek compliance in other ways. The use of professional committees (e.g. ABA, AICPA, etc.) or an internal fee based professional program would be great IRS resources to increase overall tax compliance.

  10. michael mulroney says

    Posted by Phillip Caramenico at Tuesday, October 21, 2014 9:24:23 PM EDT

    Mr. Desmond makes a compelling argument that the Services attempt to use Circular 230 to regulate is dictated by a lack of resources. The funding issues and constraints facing the IRS are significant and well documented. The Taxpayer Advocate Service in their 2013 report to Congress identified the budget cuts as the second most serious tax problem facing the nation. (Taxpayer Advocate Service, Most Serious Problems, 2013 Annual Report to Congress (2013), Chuck Marr, of the Center on Budget and Policy Priorities has reported that the budget cuts have forced the Service to reduce their workforce and cut back on training thereby reducing their ability to enforce the law and aid taxpayers. (Chuck Marr and Joel Friedman, Cuts in IRS Budget Have Compromised Taxpayer Service and Weakened Enforcement, Center on Budget and Policy Priorities (June 15, 2014), ) Resources are clearly an issue for the Service. If we assume that it is desirable for the Service to enforce the law and aid taxpayers then something has to be done.

    Similar to the underfunding of the Service, I also believe that unscrupulous return preparers is an issue worth combating. The Washington Post investigated return preparers in the states of Arkansas, New York, and North Carolina and found that a “significant number of testers were victims of poor quality tax preparation, or outright tax fraud. (Michelle Singletary, Cracking down on unscrupulous tax-return preparers, The Washington Post (Apr. 15, 2010), I have seen examples of these types of preparers in my hometown of Norristown and I believe that some action should be taken to regulate this type of preparer.

    Circular 230 appears to be a way for the Service to make some headway on this issue without depleting their limited resources. Mr. Desmond makes the argument that the $77 million that the Service would use to regulate preparers under Section 330 could be used in a different manner. Mr. Desmond specifically cites the penalty provisions of Sections 7407 and 7408. The obvious perk to utilizing Circular 230 instead of a penalty provision is that the funds come out of the return prepares pockets instead of out of the Services’ budget.

    Given the current budget constraints I find myself leaning towards the use of user fee funded regulation be it 230 in its current form or some modification. Without an increase in the budget of the IRS it is unlikely that they will be able to regulate preparers in an adequate fashion. In the past the Service utilized under-cover agents to test for unscrupulous return preparers and they utilized the penalty provisions we discussed above. Without adequate funding these are not realistic options. The Court in Loving, also recommended more stringent requirements for preparers and I agree whole-heartedly.

  11. michael mulroney says

    Posted by Richard Beattie at Tuesday, October 21, 2014 8:38:43 PM EDT

    In the wake of both the Loving and Ridgley decisions, it would appear that Mr. Desmond is correct that, for the moment, the IRS will be limited in using Circular 230 as a means to regulate tax preparers who “directly interact” with the IRS. See generally Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014) as well as Ridgely v. Lew, 2014 U.S. Dist. LEXIS 96447 (D.D.C. July 16, 2014). However, there are several positions suggested in Mr. Desmond’s most recent post which must be examined with a rather jaundiced eye.

    To begin, Mr. Desmond does not adhere to the Chevron standard to support his conclusion that Section 330 is “questionable authority.” See generally 31 U.S.C. § 330. “If Congress explicitly leaves a gap in a statute for an agency to fill, ‘there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation.’” Wright v. Everson, 543 F.3d 649, 654 (11th Cir. 2008) (quoting Chevron U.S.A., Inc. v. National Resources Defense Council, Inc., 467 U.S. 837, 843-44 (1984)). In addition, “under § 330, Congress granted to the Secretary the right to regulate the practice of representatives of persons before the Department of the Treasury.” Wright, 543 F.3d at 655. Therefore, Section 330 represents an express delegation and Mr. Desmond simply does not adhere to Chevron or its progeny to support why this particular statute – or more importantly, the regulations interpreting it – are questionable pursuant to the arbitrary, capricious and unreasonable standard.

    In addition, Mr. Desmond does not provide any empirical data to support his position that 33 percent of preparer conduct referrals were not followed up by the IRS and this was due entirely to a lack of financial resources. There are a myriad of reasons, other than a lack of resources, as to why at least a portion of that 33% was not pursued to a conclusion. One of these reasons could be that certain tax payers may habitually file frivolous referrals against tax preparers and the IRS simply knows (from past experience) who these individuals are. Another reason could be that the amount of the alleged loss in a number of these referrals would be so minimal as to not warrant expenditures, regardless of the IRS’s general enforcement budget.

    Finally, for the sake of argument that the IRS does not have enough resources to pursue all of the referrals it receives, Mr. Desmond does not provide a viable alternative to the funding of the regulation of paid return preparers through user fees. It would appear that user fees would indeed provide a viable source of funding for regulating paid return preparers. In 2012, the Eleventh Circuit determined that the Treasury Department had statutory authority to require that tax return preparers use the preparer tax identification number (PTIN) assigned by the Treasury Department. Brannen v. United States, 682 F.3d 1316, 1320 (11th Cir. 2012). The Brannen Court also determined that the Treasury Department had authority to impose an annual fee for the PTIN because the Department was conferring upon the return preparer the right of compliance with the authorizing statute. Id. See generally 26 U.S.C. § 6109(a)(4).

    Moreover, there is guiding precedent that Loving does not apply to user fees. In 2013, the United States District Court for the Northern District of Georgia determined that Congress authorized the PTIN scheme pursuant to a different statutory authority than the one at issue in Loving. Buckley v. United States, 2013 WL 7121182, *2 (N.D. Ga. 2013).

    Finally, user fees, of any variety, will most likely never be found to be arbitrary, capricious and unreasonable under Chevron. Id. With regard to the user fees, “each charge shall be: (1) fair; and (2) based on-(A) the costs to the Government; (B) the value of the service or the thing to the recipient; (C) public policy or interest served; and (D) other relevant facts.” Id. See also 31 U.S.C. § 9701. Therefore, contrary to Mr. Desmond’s position, user fees would provide a viable source of funding for the Service.

  12. michael mulroney says

    Posted by David Meisenhelder at Tuesday, October 21, 2014 8:33:04 PM EDT


    Thank you for posting this topic. What should we make of the Service’s inability to commit resources to pursue so many of the unopened cases involving tax preparer conduct leads? Like most organizations, the Service is constantly asked to do more with less. If it’s a funding issue, that’s an easy fix. Raise the PTIN fee. Aside from the pending case you referred to, Adam Steele, Brittany Montrois et al versus United States of America, a service industry that charges fees based on “added value” services also understands “pay to play.” In 2009, the Service published a report summarizing the Service’s analysis of the tax preparer industry and made a number of recommendations to regulate the industry. See Publication 4832; Return Preparer Review, December 2009. The recommendations of requiring the registration of paid preparers and establishing minimum educational standards were supported by the AICPA and preparer services such as H&R Block and Jackson Hewitt. It was agreed that the adherence to a set of regulated standards would be good for the industry (not to mention create another entry barrier for those preparers who were unqualified).

    In the wake of Loving v IRS, 742 F.3d 1013 (D.C. Cir. 2014) the Service created the Annual Filing Season Program (AFSP). Without the authority to enforce regulations aimed at preparers, the Service is asking preparers to participate voluntarily. Of course, to be able to stay competitive, many unenrolled preparers will seek to participate. Once registered, they are still limited in their ability to represent clients before the IRS. The AICPA ascertained that this would make the voluntary program “de facto” mandatory and “impermissible.” (The AICPA’s letter, dated June 24th, 2014 can be found on the AICPA’s website here.)

    Circular 230’s history as a compliance guide is certainly evident. However, Title 31 U.S.C. §330 was enacted 130 years ago and perhaps it is time to overhaul the system and create legislation addressing the current state of affairs. The Service’s use of Circular 230 as an enforcement tool is rooted in the fact that it has already been disseminated, read and utilized by the tax service industry. Amending or adding to an existing piece of regulation is certainly cheaper than creating new legislation. If Congress were to overhaul the system, the result would be an enhanced Service with greater powers than it already has, as well as accentuate the need to increase funding, neither of which Congress wants to contend with in an election year. And every year seems to be an election year.

  13. michael mulroney says

    Posted by Steven M. Reese, Jr. at Tuesday, October 21, 2014 8:32:46 PM EDT


    I believe that the Services’ idea to expand the interpretation of Circular 230 could have severe consequences. Regardless of the Services’ lack of resources, the argument will be made that the expansion of the interpretation of Circular 230 is an excuse for the Service to use the interpretation to increase its power. This expansion of power through a new interpretation of Circular 230 could cause the service to challenge interpretations for future tax compliance positions, for tax return preparers and potentially lead to abuse of power by the service. Additionally, the expansion of this interpretation could cause anti-service parties to have an even more less than favorable opinion about the service, who’s image at the current period of time is in need of repair. Furthermore, paid return preparers are already subject to penalty under the IRS code.

    The IRS code imposes monetary penalties on paid return prepares under I.R.C. section 6694. Penalties for understatement due to an unreasonable position or due to willful or reckless conduct are enforceable. Penalties for these actions can range anywhere from $1000 or 50% of income derived or $5,000, or 50% of the income derived by the tax return preparer with respect to the claim. A tax return preparer is defined in I.R.C. section 7701(a)(36) as, “Any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of tax imposed by this title or any claim for refund of tax imposed by this title. Nowhere, in this authority does it state that this penalty applies to those prepares which are authorized to practice before the service.

    For anti-service party advocates, this expansion of circular 230 may create an appearance that the service has the authority to not only punish tax return preparers, but to punish tax return prepares more than once or to punish tax return preparers in new ways. This expanded authority would be perceived by the anti-service party members as an increase in power with the potential to lead to abusive outcomes. This is why it is important that the service explore new techniques and methodologies, using their current and existing resources, for monitoring the compliance of paid tax return preparers.

  14. michael mulroney says

    Posted by Brian Kitchen at Tuesday, October 21, 2014 7:21:30 PM EDT

    The regulation of tax return preparers is both an admirable and a necessary endeavor. The court in Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014) concludes their opinion by suggesting more stringent regulation of tax return preparers would be wise as a policy matter. It is true that the Service has ammunition in the form of various Internal Revenue Code sections (e.g. I.R.C. 6694, 6695, 6701) that attempt to prevent paid tax return preparers from taking frivolous positions, but that ammunition is limited in its scope and the enforcement, as the author suggests above, is expensive. It is alluded to above that the Service has a budget that is decreasing, and, thus, has limited resources to combat non-compliance. By using Circular 230 as a revenue generator to assist in enforcement, the Service was taking a practical approach to resolve the enforement budget issue. I believe this self-funded approach was a fair and efficient way of generating the revenue. I also agree with the author in that the enforcement of noncompliance needs additional resources.However, given the recent holdings in Loving and in Ridgely v. Lew, 2014 U.S. Dist. Ct. (D.D.C. July 16, 2014), the Service used its authority too broadly. If obtaining resources to enforce compliance was one of the goals of Circular 230, the Service could have taken a more conservative, non-legislative approach.

    One idea that has proven effective for decades is a volunteer membership system. The system is implemented by the American Institute of Certified Public Accountants in addition to various similar state organizations. These agencies are self-funded and support the field through various means, including, but not limited to, certified professional education courses,guidance on new code provisions and regulations and lobbying for the profession. Membership in these organizations is seen asconducive to promoting ethical and knowledgeable members of the profession. If the Service created a similar membership system, perhaps even working with these established organizations, the reception from the profession may be encouraging. The membership fees generated from the organization could assist in filling the budgetary gap that is needed to police and enforce return preparer compliance and even begin to investigate the numerous complaints already filed by taxpayers in regards to their tax-return preparers.

  15. michael mulroney says

    Posted by Ciera McAllister at Tuesday, October 21, 2014 7:17:02 PM EDT

    In Desmond’s post, “Is There a Future Role for Circular 230 in the Internal Revenue Service’s Efforts to Improve Tax Compliance?” he discusses the Internal Revenue Services (IRS) attempt to use the Circular 230 to regulate aspects of paid return preparers conduct and its lack of resources in providing adequate oversight. Interestingly, while the IRS may have overstepped its bound in regulating paid tax return preparers through the usage of Circular 230, I find their intent to be warranted. In 2011, the IRS responded to the concern about the performance of paid tax return preparers and issued new regulations that required paid tax return prepares to pass an initial certification exam, pay annual fees and complete at least in hours in continuing education courses. However, in Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014), the Court ruled that the IRS’s statutory authority under 31 U.S.C. §330 cannot be stretched so broadly to encompass the authority to regulate tax return preparers.

    Undoubtedly, I believe that there should be oversight over the conduct of paid tax return preparers but I agree with the outcome of the Loving case. The IRS does not have the statutory authority to regulate paid tax return preparer as the code is written and interpreted today. In the past, Congress enacted several provisions that have been use to regulate the conduct of preparers with the preparer penalty provisions in I.R.C. § 6694 and 6695. In order to further regulate paid tax return preparers, a similar course of action, in my opinion, will need to take place. Formal oversight is necessary and is in the best interest of the public. However, this will not come without a cost and the need for additional personnel to provide such oversight. Funding this initiative may not be much of an issue if the funds generated by the user fee were used to cover the costs but I cannot say that for increase in personnel that will be needed to monitor registration, continuing education requirements and preparer conduct referrals.

  16. michael mulroney says

    Posted by Deanna Huntowski at Tuesday, October 21, 2014 6:15:04 PM EDT

    As the author states, the IRS only has so much money, time, and people to regulate paid tax return preparers. If the Service wants to broaden the scope of preparer regulation, it’s going to cost resources. If it wants to investigate claims and conduct audits, it’s going to cost resources. Any action the IRS takes will cost resources; it is a matter of where and when it wants to focus these resources.

    The author suggests that, instead of overhauling the system to enforce compliance, funds could be used to go after paid preparer issues that have historically fallen by the wayside. I think the question that has to be asked is, is it most efficient and effective to go after preparer issues on the “back end,” after returns have been filed, or is it better to invest money on the front end as a form of prevention? The IRS could use funds to pursue more preparer conduct leads, and in doing so, could be a form of preventing unlawful behavior by practitioners in and of itself. “As more potentially unscrupulous paid preparers are indicted and prosecuted, the attention may help deter other paid preparers from completing fraudulent tax returns,” (Treasury Inspector General for Tax Administration. Federal Information Security Management Act Report for Fiscal Year 2014 (2014-20-090)).

    It might be in the IRS’ best interest to pursue legislative changes to broaden the scope of regulation. However, doing so will cost money, and the process will likely be lengthy. At the same time, the Loving case suggests that the only way that the scope of regulation will change is through a law change, and a revision to 31 U.S.C.§ 330. It may be expensive upfront, but would figuratively pay dividends in the long term should all of the IRS’ demands be met, including user fees.

    An easy way for the IRS to earn funds is for paid return preparers to voluntarily submit themselves to an exam and certification process. This way the Service gets the fees and broader regulation that it desires, and preparers have a way of distinguishing themselves from other preparers. Though, the Service must make it a worthwhile endeavor for individuals and small businesses to exert the effort and money to do so.

  17. michael mulroney says

    Posted by Alexander Wynne at Tuesday, October 21, 2014 5:35:17 PM EDT

    The issue at hand in Desmond’s blog post is the attempt to enforce the provisions of Circular 230 in regulating paid tax return preparers while facing the all too familiar story of governmental budget restraints. While Circular 230 has given the power to oversee individuals practicing before them, the resources and funds needed to enforce these regulations do not appear to be anywhere near the top of Congress’s priority list. What good do the preparer penalty provisions of Code sections 6694, 6695 and 6701 do if the IRS can’t devote the necessary time and resources in order to defend penalties assessed against a “bad actor”? This gets down to the million dollar question – how does someone do more with less?

    One answer to this timeless question came in the form of an IRS imposed user fee. This came in the form of the Preparer Tax Identification Number, or PTIN. This was to be the social security number of tax preparers who would rather not share their actual social security number. As was seen in the case of Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014), the IRS’s decision to issue new regulations requiring that tax-return preparers to pay an annual fee was going to be the Service’s attempt to make up for that budget shortfall. The estimation was that 600,000 to 700,000 tax-return preparers were to be affected by this annual fee. At $63 a head this would result in approximately $40 million a year in annual fees. This requirement seems to have been a way to kill two birds with one stone – bridging the gap between necessary funds and available funds while increasing the caliber of tax preparers. All while using limited resources in doing so.

    I’m not sure that this alone will be adequate enough to solve the attempt to weed out the bad tax preparers. There will still be plenty of tax return preparers willing to pay the annual fee but do not receive the proper training and education in order to adequately prepare a tax return. My question is how are companies like H&R block who historically hire seasonal tax preparers addressing the need to register all of their tax preparers. Are they simply passing along these costs to their customers or are the transitioning their staffing approach to retaining more full time employees? I once had my hair cut by a women who cut hair for a living but prepared tax returns for H&R block on the side during tax season. While she did a fine job cutting my hair, I’m not she I would want to put the preparation of my tax return into those same hands. She stated that they didn’t need to do much more than take a one day training course and they were able to help prepare returns. In these cases it’s not that the preparer is a bad actor, it’s just that they are simply unprepared and unqualified. This is one of the issues I feel needs to be further addressed.

  18. michael mulroney says

    Posted by Brian Footer at Tuesday, October 21, 2014 4:55:47 PM EDT

    Specifically, I would like to respond to the following statement, “Legislative proposals authorizing the Service to regulate paid preparers (which would address the holding in Loving) similarly envision a user-fee regime to sidestep the funding problem.” The structure of such proposals would allow IRS to enforce and administer standards to ensure paid preparers are competent and of good character (See, Taxpayer Protection and Preparer Fraud Prevention Act of 2013, H.R. 1570, 113th Cong. (2013). Presumably, those who fail to meet such nebulous criteria would be precluded from preparing returns. Such a proposal would likely function similarly to the PTIN program, albeit with more stringent standards and a higher fee in order to receive the IRS stamp of approval.

    This type of regime is a regrettable trend for the paid-preparer community. Congress is choosing to force the relatively small group of paid preparers to fund compliance efforts. Combined with the electronic filing mandate and enhanced foreign asset reporting, small firms already find such administrative burdens to be expensive and time consuming. Worse yet, these administrative costs are difficult to pass on to clients who see little value or fail to understand such efforts.

    The overwhelming number of paid preparers do not prepare fraudulent tax returns and should not be subject to yet another fee to sustain a practice. Instead, Congress could levy a tax of a few pennies on each tax return filed to fund the program. Ostensibly, if the public needs congressional oversight to ensure “bad actors” are not preparing returns, the cost of such oversight should be borne by the beneficiaries. And, to ensure the funds from the tax are not merely diverted in the general treasury fund, Congress should be required to report to the public the success or failure of such program by advising which preparers have lost their “competent” designation.

  19. michael mulroney says

    Posted by Mary Murray at Tuesday, October 21, 2014 4:33:11 PM EDT

    The IRS has attempted to use Circular 230 as a vehicle to regulate hundreds of thousands of paid return preparers due to its lack of funding and resources from Congress. This attempt has been recently challenged under Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014). This case ruled that the statutory authority under 31 U.S.C. § 330 to “regulate the practice of representatives of persons before the Department of the Treasury” does not authorize Circular 230 to assist in the regulation of tax-return preparers. This is the first instance where the authority of the IRS to enforce Circular 230 has not been upheld. Unfortunately for Circular 230 and the IRS, this is most likely just the beginning of future cases to come in and reduce the authority granted to Circular 230; as evidenced by the Ridgley case, which came only months after the Loving case. See Ridgely v. Lew, 2014 U.S. Dist. LEXIS 96447 (D.D.C. July 16, 2014). The IRS and Circular 230 are currently at an interesting crossroads as Circular 230, which the IRS tapped as the enforcement and financing vehicle is suddenly losing its effectiveness. Unfortunately for the IRS, it appears that Circular 230 is the only revenue raising option it has, as Congress has been and is unwilling to provide the proper amount of financial resources for the IRS to properly regulate the Department of Treasury’s rules. In order to avoid future costs of potential legal challenges to using Circular 230 to regulate paid return preparers, the IRS should refocus itself on enforcing civil and criminal provisions of the Code already established. See 26 U.S.C. §§ 6694, 6695, 6701, 6713, 7407, 7408. While enforcing these provisions could prove to be costly, the costs to defend the application of Circular 230 could be costly not only in the financial sense, but also in the sense it could continually diminish Circular 230’s authority. While it can be conceivably granted that the money collected from the user fees will temporarily assist with the lack of funding, this solution is not permanent. Congress needs to address the fact that nearly one third of questionable preparer conduct referrals went unaddressed according to a recent report from the Treasury Inspector General for Tax Administration released on September 25, 2014. In my opinion, the money that is being left on the table as a result of these unaddressed conduct referrals should be top priority for Congress to examine.

  20. michael mulroney says

    Posted by David Hillegass at Tuesday, October 21, 2014 1:49:03 PM EDT

    It appears to me that the crux of the issue is which group will ultimately bear the cost of regulating tax return preparer compliance. As Desmond aptly points out, utilizing Circular 230 would allow the Service to pass this cost on to the return preparer via mandatory trainings, subscriptions, and classes. This measure would be a proactive step to stop aggressive and detrimental tax planning. To the contrary, utilizing the penalty provision codes forces the Service to not only actively seek out incorrect tax return filings but to also follow through on enforcing the penalty, which can be costly. This would be a retroactive approach served to penalize those that are in violation of the Code.

    I would like to raise an issue that this article does not tackle: upon whom is the actual cost born? I would argue that, if the Service utilizes Circular 230, then the cost will not only be passed to the tax return preparer but will ultimately pass down to the taxpayer purchasing the return preparer’s services. It is a likely conclusion to draw, via simple economics, that the preparer will force this cost upon the taxpayer. If the return preparer is successful, then this cost is watered down significantly as he/she would have numerous clients to which this cost may be allocated. If the preparer is unsuccessful, then this cost would be higher on a per person basis as the preparer would not have as many taxpayers to allocate the cost against. Therefore, in theory, utilizing Circular 230 would serve to perform the following: (1) pass the cost on to the ultimate taxpayer in a negligible manner for successful return preparers, (2) displace unsuccessful return preparers or force them to be more successful, and (3) create more educated preparers through mandatory trainings and classes.

    If the Service were to utilize the penalty provisions, then the cost would be directly that of the Service and indirectly that of the taxpayer (through taxes paid to the federal government). The Service, pursuant to 2011 figures, is afforded 0.o2647% of the total taxpayer revenue. IRS FY 2013 Budget Proposal Summary, FS-2012-10, February 2012. As such, a fraction of taxpayer revenue would be utilized for this matter and would hardly be a reason for increasing the actual taxing regime (though that is for Congress to decide). As such, I would draw the conclusion that the effect on the taxpayer would remain the same but the effect on the Service would be significant in that the same budget, as Desmond points out, cannot be effective against such practices.

    Therefore, I would submit that the Service should utilize Circular 230 as the ultimate negative effect on the taxpayer would be negligible, the positive effect on the Service’s budget would be extensive, the positive effect on a preparer’s tax knowledge would likely be significant, and the added bonus (taken from the perspective of an individual who would like to see a better community of tax professionals) would be that the below average return preparers are either forced out of the market or forced to improve.

  21. michael mulroney says

    Posted by Karen Ellmer at Monday, October 20, 2014 11:47:33 PM EDT

    This topic brings an abundance of thoughts to mind. If paid preparers don’t have to be licensed, then someone must enforce some sort of way to track preparers and their competence. If the Internal Revenue Service does not have the authority to regulate paid preparers, then Circular 230 is the perfect mechanism for such tracking. Although Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014) denies the IRS the power to regulate paid tax return preparers, Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984) gives respect to administrators in regards to their policy making decisions.

    In regards to the costs, if low on funding for this project then why not pass the costs on to the user? The user likely passes the costs on to the consumer. In effect, the people pay for something that benefits them. The enforcement protects the people from fraudulent preparers. The people benefit from the knowledge of the tax preparers, from their ability or attempt to decipher and interpret the tax law, which the average person struggles to do.

    The enforcement of Circular 230 to regulate tax preparers is in the best interest of the public. The law requires any person with or without any level of knowledge or competence to file and sign their own tax return with or without the help of a paid preparer. How is the average person expected to understand the tax law? Does one understand what is reported on his or her own tax return when he or she signs it? The tax law creates the need for a paid preparer. One could argue that the IRS is trying to fund the enforcement of their complex rules by charging a user fee each year to renew a PTIN, but the complexity of the tax code drives the career of a tax professional, and although it may not be effective, the attempt to regulate tax preparers through Circular 230 is an effort to protect the public.

  22. michael mulroney says

    Posted by Steven Chisholm at Monday, October 20, 2014 11:45:47 PM EDT

    The fact that the Internal Revenue Service’s need for resources is why Circular 230 became their chosen tool to regulate tax return preparers is a very interesting idea to think about. According to the post, the Treasury Inspector General for Tax Administration released a report showing that the Internal Revenue Service has been unable to timely respond to thousands of tax preparer misconduct referrals from individual taxpayers, as well as more than one third of internal referrals from within the Service itself. The post also suggests that a few reasons for this inability to follow through are the amount of money this would cost the Service and Congress has become less concerned with providing a sufficient budget to combat these problems. Since the Circular 230 regulations would require paid tax return preparers to pay annual fees to have the ability to perform their jobs, it is easy to see how the Service would be able to raise much of the money needed to regulate the industry and why it was a tempting course of action for them to pursue. As Judge Kavanaugh stated in Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014) the IRS was estimating their new regulations would apply to between 600,000 and 700,000 tax return preparers, which would definitely be a nice revenue raiser for the Service, seeing as all of these preparers would now be required to pay annual fees.

    The IRS has become increasingly more aware that the paid tax preparer industry seems to be having more problems in recent years, partly due to the overly complicated tax code and partly due to some unscrupulous preparers. While I do see the clear need to raise these funds to help regulate the industry, the IRS went about it the wrong way. The Service’s attempt to regulate paid tax return preparers through their use of Circular 230 seems to be a clear example of Executive Branch over-reaching to me, as well as the court in Loving. The Service’s decision to interpret 31 U.S.C. § 330 to give them broad authority to regulate return preparers for the first time in 125 years and issue regulations through Circular 230 definitely should raise some red flags. Why have they never argued this before? The IRS has successfully regulated return preparers the proper way in the past by having Congress enact new laws that were targeted at giving the Service some enforcement powers with Internal Revenue Code sections 6694, 6695, and 6713 (among others), so they clearly know how. While I applaud the Service’s end goals and believe the industry does need to be regulated a bit more, their attempt in doing so was improper here and I am glad that the Loving Court recognized it.

  23. michael mulroney says

    Posted by Alonzo Mitchell, III at Monday, October 20, 2014 10:16:37 PM EDT

    The Internal Revenue Service’s (IRS) reliance on circular 230 as substantiation for the enforcement of regulations for tax return preparers was a stretch beyond their power, but has some merit. The IRS believes the laws currently in place are not enough to provide a standard of protection necessary to protect the public. Their inability to review 100% of referrals that indicate tax preparers potentially guilty of tax misconduct and a constant decrease in funding caused the IRS to rely on legislation already passed to circumvent the wait to implement new legislation and a way to implement laws immediately to obtain funding needed to enforce penalty provisions.

    “In Calendar Year 2013, the IRS processed approximately 81.5 million individual tax returns prepared by paid tax return preparers, which is approximately 60% of all individual tax returns. The Treasury Inspector General for Tax Administration (TIGTA) pulled a sample of returns prepared by 2,134 paid tax preparers who were flagged as completing inaccurate tax returns. TIGTA found an average of 34% of the preparers referred were not audited.” See Treasury Inspector General for Tax Administration, Return Preparer Coordinators Could Improve the Selection of Problematic Paid Preparers for Further Enforcement Actions. The IRS doesn’t have the manpower to review all reports, which may be due to funding, or the funds for litigation, which can be dragged out for years and takes a significant amount of cash flow.

    The IRS used Circular 230 because of its ambiguity and “under Chevron, we must accept an agency’s authoritative interpretation of an ambiguous statutory provision if the agency’s interpretation is reasonable.” See Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984). Their attempt at using the pronouncement may have failed, but their reasoning behind wanting to implement new regulations requiring paid tax return preparers to pass an exam for certification, pay an annual fee and obtain CPE credits has some justification, but their means of doing so was outside of their authority. Their recent attempt to enforce Circular 230 to regulate tax preparers who don’t practice before the IRS makes me wonder if their interpretation was the original intent, if so, why not enforce it 100+ years ago?

  24. michael mulroney says

    Posted by David Achey at Monday, October 20, 2014 9:30:29 PM EDT

    There are two basic issues the preparer regulations are looking to resolve: the prevalence of undereducated and potentially unscrupulous tax return preparers, and the funding gap at the Internal Revenue Service that impedes its efforts to identify and penalize them. While Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014) effectively invalidated the registered return preparer program, the IRS still has a few weapons at its disposal to combat bad actors in the preparer community, as Mr. Desmond points out.

    The Service can’t be expected to perform its enforcement responsibilities without the manpower to do so. It appears that the problem is more one of appropriation than of regulation per se. Reluctance to fully fund the IRS may be politically motivated to some extent, but those all across the political spectrum can see that the enforcement budget is one of the few areas where the government can achieve a return on investment. Removing the minority of dishonest preparers could bring much needed funds to balance the budget while helping to restore trust in the system.

    By modifying Circular 230 to include the registered return preparer regulations, the Treasury attempted to partially resolve the funding gap by charging a stated fee for a preparer tax identification number, which had been free up until that point. However, the Loving case specified that tax preparation only does not constitute practice before the IRS (reserved for attorneys, CPA’s, EA’s, etc.). In light of this, it is debatable whether a fee is appropriate given that no additional service or privilege is being granted along with the PTIN.

    Another consideration is whether a program registering and educating preparers is an efficient or effective way of improving compliance. While some preparers may not have the training needed to accurately complete tax forms and adequately serve their clients, many facilitate questionable or even fraudulent filing positions. It is unlikely that the latter will change course as a result of registration. The responsibility to monitor continuing education for tens if not hundreds of thousands of preparers will only add costs and stretch already thin IRS resources.

  25. michael mulroney says

    Posted by Louise Petrone at Monday, October 20, 2014 9:30:28 PM EDT

    While concluding his admirable analysis of the fiscal pressures forcing the Service to attempt to regulate paid preparers through Circular 230, Mr. Desmond mentions in passing, that “the funding problem raises the larger policy question of why such a basic tax enforcement issue as regulating paid return preparers should be funded by a user fee”. The user fee to which he refers is the fee paid by tax preparers to obtain or renew a preparer tax identification number (PTIN).

    PTINs were created in the 1990s to aid preparers who did not wish to put their social security numbers on the returns they signed. In 2010 that changed. In that year the Service required all tax preparers, a term which it defined broadly, to obtain PTINs and pay a fee for doing so. The issues which that fee and its requirement raise are greater than policy ones.

    According to the Return Preparer Office Federal Tax Return Preparer Statistics, as of 10/1/14 there were 697,033 individuals with current PTINs. At $ 63 per renewal these individuals represent close to 44 million dollars in annual fees. Anyone who has spent the five minutes on line necessary to obtain or renew a PTIN, knows, the required fee vastly exceeds the cost to generate that number. Paid PTINs are an enormous cash cow for the Service.

    This change in requirements and imposition of excessive, mandatory fee s violate if not the letter certainly the spirit of the Service’s own rules which state:

    “At the heart of administration is interpretation of the Code. It is the responsibility of each person in the Service, charged with the duty of interpreting the law to try to find the true meaning of the statutory provision and not to adopt a strained construction in the belief that he is “protecting the revenue.” The revenue is properly protected only when we ascertain and apply the true meaning of the statute” (Rev. Proc. 64-22; 1964-1 C.B 689).

    If there is a better example of a strained construction of an existing regulation than the transformation of a courtesy to preparers into a mandatory revenue-generating machine, I do not know it. While it is true that this requirement is currently and justifiably under attack in the courts, the fact that the Service, no matter what its fiscal constraints, felt it had the right to make this change should worry all practitioners.

  26. michael mulroney says

    Posted by Casandra Lindenberger at Monday, October 20, 2014 7:00:03 PM EDT

    The user fee strategy designed by the Internal Revenue Service to raise funds in order to regulate preparers appears to be an ingenious way of increasing the quality of tax preparers while simultaneously not requesting more resources to do it. It is unfortunate for the Service that tax preparers think otherwise after being unregulated for over a century. It is odd (from the perspective of someone who has not been in the tax industry for very long) that the Service never sought to use such a power in prior years. It seems that a viable solution for receiving non-compliant tax returns would be to have higher quality tax preparers. Why did the Service not address this earlier? The court in Loving v. Commissioner, 742 F.3d 1013 (D.C. Cir. 2014), seems to have questioned this as well. In the court’s opinion they wrote that in 125 years the Executive Branch had never interpreted the statute as giving the Branch the right to regulate preparers until they decided in 2011 to interpret it differently.

    The article mentions the Service’s response of its intent to “follow the Court’s holding narrowly”. The author did not speculate whether the newest challenges (Ridgely v. Lew, 2014 U.S. Dist. LEXIS 96447 (D.D.C. July 16, 2014) in addition to Loving v. Commissioner) to Circular 230 would cause Congress to issue a future statute giving the Service specific power over tax return preparers. I would be interested to hear whether there has been a push to get that power in the last few years aside from using Circular 230 as this vehicle.

    Perhaps it is the right time to begin interpreting the statute differently. Now that tax returns can be generated instantly after a few keystrokes of input data it is incredibly easy for people to rely on a chainstore tax preparer who can promise efficiency for only a small fee. When it comes to the actual filing of the return, however, it does seem reasonable to expect the client to have some responsibility of ensuring that her return is being prepared by someone with appropriate experience. If the Service wants this additional responsibility on top of its ever-growing pile then it should at least make sure it was has this power and that the statute can be interpreted that way. Thus far Circular 230 is not achieving that particular goal.

  27. michael mulroney says

    Posted by Philomena Carroll at Monday, October 20, 2014 4:54:15 PM EDT

    Michael, great post!

    As if the Internal Revenue Service doesn’t have enough power. The IRS is perceived by many as the most powerful and feared agency in all of government. Because of this perception, many independent tax practitioners wouldn’t dare to question their authority and would have just rolled over and did what they were told. Luckily, for independent tax preparers, small self-employed preparers and taxpayers, three brave practitioners sued the internal revenue service, questioning the authority of the IRS to regulate them. See Loving v. IRS, 742 F.3d 1012 (D.C. Cir. 2014). A three judge panel agreed with U.S. District Court Judge James E. Boasberg’s ruling which barred the IRS from regulating tax preparers. The decision was based on the lack of a statute clearly giving the service such authority and the inability of the panel to successfully apply the Chevron test, see Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984) .

    Although, most reasonable people would agree that it is in the public’s interest to increase compliance and accuracy while simultaneously decreasing fraud, most of us would also agree that the paramount point in this case is that the executive branch does not make law. See US Const. art. I, sec. 1. Allowing any organization to unilaterally expand its authority would be an injustice. Allowing an already “all-powerful” organization to do so would be a colossal mistake that would most likely only increase the desire for more power.

    In addition to using Circular 230 in an effort to improve tax compliance, the Internal Revenue Service is also using circular 230 to generate more revenue. Any practitioner can attest to the “fishing” for revenue that all jurisdictions are guilty of in the present economic state, the internal revenue service is no different. As if the Internal Revenue Service doesn’t take enough of our money.

  28. michael mulroney says

    Posted by Therese Salvucci at Monday, October 20, 2014 12:01:21 PM EDT

    Circular 230 is being used as the primary vehicle for regulating paid tax return preparers for what appears to be two main reasons: 1) it is already in existence, thus the cost of funding new legislation is cut and 2) it is essentially a code of conduct framework for tax return preparers to follow in order to ensure quality and ethical behavior in serving clients. When looking at Circular 230 more closely, it is apparent that much of its content aligns with certain codification in the Internal Revenue Code (IRC). As such, the aforementioned reasons go hand-in-hand when questioning why the Treasury used Circular 230 as the vehicle to drive the enforcement of competency and conduct with respect to paid tax return preparers. To exemplify this reasoning, Circular 230 details best practices for tax advisors and corresponding procedures to implement these practices to ensure compliance. See Treasury Department No. Circular 230 (Rev. 6-2014) Sections 10.33 and 10.36, Interestingly enough, the Internal Revenue Service (IRS) considers these best practices and procedures to be “aspirational”; the taxpayer is not bound by law to follow such practices and procedures. See Journal of Accountancy Circular 230 Best Practices, However, Circular 230 also outlines behavior by a practitioner that is unacceptable. Incompetence and disreputable conduct, for example giving a false opinion, knowingly, recklessly, or through gross incompetence, is not tolerated by the Treasury. See Treasury Department No. Circular 230 (Rev. 6-2014) Section 10.51(a)(13), The Treasury is able to impose sanctions or monetary penalties for such disreputable conduct. See Treasury Department No. Circular 230 (Rev. 6-2014) Section 10.50(c), To coincide with the sanctions and penalties in Circular 230, the IRC Section 6694 imposes penalties on understatements of a taxpayer’s liability due to unreasonable positions or willful or reckless conduct. See 26 U.S. Code Section 6694, Because the Code displays intolerance of dishonorable behavior by a practitioner preparing returns and Circular 230 defines best practices and the consequences for unethical and incompetent conduct by such practitioners, it is evident as to why the Treasury chose to use Circular 230 as the driving force behind competent practice by paid return preparers. The Code and Circular 230 run parallel with each other; thus, it is understandable that the Treasury does not fund new regulation when such standards are already set in place.

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