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The Sexton Has Sounded - For Whom Does the Bell Toll? It Tolls Once More for the IRS!

by
Philip Storrer
on
4/9/2017
The Sexton Has Sounded - For Whom Does the Bell Toll? It Tolls Once More for the IRS!

We knew it was coming, and it's been confirmed: Loving is living, alive and well. You will, no doubt, recall that the D.C. Federal Circuit Court of Appeals, in the celebrated 2014 decision Loving v. I.R.S., 742 F.3d 1013, 1015, 408 U.S. App. D.C. 281 (D.C. Cir. 2014), affirmed the Federal District Court ruling that Circular 230--the venerated Holy Grail of tax representation regulations--shockingly does NOT grant the Treasury Department/IRS the authority to regulate tax return preparation. Circular 230 does give the Treasury and the IRS, its subordinate agency, the authority to "regulate the practice of representatives of persons before the Department of the Treasury,"2 but tax preparation is not representation. The Appeals Court for Loving stated it this way: "...tax-return preparers do not practice before the IRS when they simply assist in the preparation of someone else's tax return."3 The Court, however, left unanswered questions regarding just how wide and how limited Loving's reach is.4

Two of those unanswered questions were: 1) whether the IRS has authority under Circular 230 (31 U.S.C. 330) to bar a tax professional from tax return preparation who is not authorized to practice before the IRS because he/she has been suspended from practice due to misconduct; and 2) whether Circular 230 (31 U.S.C. 330) extends to tax professionals who merely offer written tax advice and do not represent clients in any tax controversy before the IRS. The answer to both questions, according to a recent Nevada District Court decision, is a resounding "NO."5 

Enter, stage left, James C. Sexton, Jr., Attorney, who was suspended indefinitely from practice before Treasury/the IRS by a default decision in an expedited proceeding under § 10.82 of Circular 230 for conviction of mail fraud under 18 U.S.C. § 1341 and for money laundering under 18 U.S.C. § 1956(h). His suspension was effective January 28, 2008. In other words, Mr. Sexton was hardly the paragon of virtue. While virtue is certainly desirable, it--perhaps surprisingly--is not a federal prerequisite for tax-return preparers.

On March 17, 2017 the Nevada Federal District Court breathed life back into Sexton's professional corpse as a tax-return preparer and tax adviser. Sexton v. Hawkins, 2017 U.S. Dist. LEXIS 38706, reaffirmed the ruling in Loving and extended its application. The court stated emphatically that the IRS may not regulate tax return preparation of... huh... well... of anyone... at least not under the authority of Circular 230 (31 C.F.R. Subtitle A Part 10 is Circular 230 promulgated under 31 U.S.C. 330). Sexton continues to be barred from "practice before the IRS," but that bar does not extend to tax-return preparation or written tax advice (and certainly not oral advice).

The startling effect of Sexton is immediate resuscitation of the hundreds of tax practitioners, CPAs, EAs and attorneys who remain suspended or disbarred from practice before the IRS.6 They are now free to be tax return preparers and/or tax advisors, again. This, of course, assumes that the IRS either decides not to appeal or loses on appeal as it, in my considered opinion, will.

Sexton will undoubtedly give rise to more soul searching on the part of Treasury/the IRS as to whether to pursue legislation that would empower them to register, license, and/or otherwise regulate tax-return preparers. The D.C. Court of Appeals in Loving virtually invited this approach when it stated, "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." In fact, this is (was) the recommendation of the 2016 Office of Professional Responsibility Subgroup Report. Also, a bill to prevent identity theft and tax-refund fraud contained an anti-Loving proposal that would have authorized the Treasury Department and IRS to regulate all paid return preparers.7 It was a nonstarter.

But two other statements of the Loving D.C. Appeals Court could be read to discourage this approach. The first is, "If we were to accept the IRS's interpretation of §330, the IRS would be empowered for the first time to regulate hundreds of thousands of individuals in the multi-billion dollar tax-preparation industry," an industry currently consisting of between 600,000 and 700,000 paid tax-return preparers nationwide. This certainly would cause Congress to pause and auger in favor of less--not more--IRS oversight, particularly in the wake of relatively recent IRS oversight indiscretions.

The second statement made by the D.C. Appeals Court and repeated in Sexton refers to the IRS's existing statutory authority to regulate tax-return preparer conduct: "Over the years, Congress has enacted a number of targeted provisions specific to tax-return preparers, covering precise conduct ranging from a tax-return preparer's failing to sign returns to knowingly understating a taxpayer's liability. See, e.g., 26 U.S.C. §§ 6694, 6695, 6713. Each of those statutory proscriptions comes with corresponding civil penalties. Congress has continued to revise those statutes. See, e.g., Pub. L. No. 112-41, § 501(a), 125 Stat. 428, 459 (2011) (amending 26 U.S.C. § 6695(g) to increase penalties)."

While neither Loving nor Sexton refers to the IRS's existing authority to enjoin8 a tax practitioner from preparing returns, § 7407 supplies just that. Section 7407(b)(1)(A)-(D) describes the conduct to be enjoined. Section 7407(b)(2) provides: "If the court finds that a tax return preparer has continually or repeatedly engaged in any conduct described in subparagraphs (A) through (D) (see *** below) of this subsection and that an injunction prohibiting such conduct would not be sufficient to prevent such person's interference with the proper administration of this title, the court may enjoin such person from acting as a tax return preparer" (emphasis supplied). The courts have been understandably reluctant to permanently enjoin a tax practitioner from preparing tax returns or offering tax advice under section 7407(b)(2) and have recognized that provision as a "business death penalty"9 

This means that the only legislation the IRS might continue to desire is the statutory authority to "require that paid tax-return preparers pass an initial certification exam, pay annual fees, and complete at least 15 hours of continuing education courses each year." This is what the Treasury Department attempted to do in the 2011 regulations issued as 76 FR 32286 (TD 9527).

As indicated above, however, there appears to be very little current congressional appetite for such an extension of the IRS's regulatory oversight.

____________________________________________________

[1] A sexton is a caretaker of a church or synagogue and is often its bell-ringer and gravedigger.

[2] 31 U.S.C. § 330(a)(1)

[3] This result is notwithstanding the amici brief filed by five former IRS commissioners in support of the government's appeal in Loving, arguing that Treasury has the authority to regulate the conduct of tax-return preparers. (See 2013 TNT 67-24 FORMER IRS COMMISSIONERS FILE BRIEF WITH D.C. CIRCUIT IN PREPARER OVERSIGHT CASE.) (Sabina Loving et al. v. United States et al.) (No. 13-5061) (United States Court of Appeals for the District of Columbia Circuit) (Section 7701 -- Definitions) (Release Date: APRIL 05, 2013) (Doc 2013-8273)

[4] Using reasoning similar to Loving’s Appeals Court, the D.C District Court permanently enjoined the IRS from enforcing the ban in Circular 230 on the use of contingent fee arrangements to compensate preparation of refund claims, notwithstanding that the plaintiff—as a certified public accountant—was generally subject to the regulations of Circular 230. The Court held that preparation of refund claims did not constitute practice before Treasury, and thus, fees for such services were not subject to regulation by Treasury. Ridgely v. Lew, 55 F. Supp. 3d 89 (D.D.C. 2014).

[5] Other questions remain, with more to be raised. One question may be the extent to which the annual Treasury Department enrollment exam should be restricted to questions pertaining to representation before the IRS. The exam consists of three parts: Part 1, on technical tax rules and law affecting individuals; Part 2, on technical tax rules and law affecting businesses; and Part 3, on rules and law related to representation, practice, and procedure. It must certainly be a waltz in the theater of the absurd to conclude that the exam should be limited to Part 3. But then, many of us—including five former IRS commissioners—thought that Loving was such a waltz. Ibid Footnote 3.

[6] More than 1,400 tax practitioners were suspended or disbarred from practice during the 10-year period 1998-2008. During 2016, forty-seven (47) were suspended or disbarred

[7] Joint Committee on Taxation, "Description of the Chairman's Mark of a Bill to Prevent Identity Theft and Tax Refund Fraud" (JCX-108-15), September 11, 2015. This document can also be found on the Joint Committee on Taxation website at www.jct.gov.

“Description of Proposal

The proposal provides the Department of the Treasury and the IRS authority to regulate all aspects of Federal tax practice, including paid tax return preparers. It amends Title 31 of the U.S. Code to encompass all aspects of Federal tax practice, without regard to whether or not it includes representation before the Treasury. It specifies that preparation of tax returns for compensation within the meaning of the Internal Revenue Code is subject to regulation. As a result of those changes, the interpretation of Loving I and Loving II is overridden legislatively, and the provisions of Circular 230 are enforceable.”

[8] (A) …any conduct subject to penalty under section 6694 or 6695, or subject to any criminal penalty provided by this title,

(B) misrepresentation of eligibility to practice before the Internal Revenue Service, or otherwise misrepresented experience or education as a tax return preparer,

(C) guarantee payment of any tax refund or the allowance of any tax credit, or

(D) engaging in any other fraudulent or deceptive conduct which substantially interferes with the proper administration of the Internal Revenue laws.”

[9] (See United States v. Cruz, 611 F.3d 880 affirming 618 F. Supp. 2d 1372, 2008 U.S. Dist. LEXIS 106873 (S.D. Fla., 2008) “The Court will not levy the business death penalty on these facts”; However see United States v. Stinson, 2017-1 U.S. Tax Cas. (CCH) P50,169, March 6, 2017 where the court delivered the “business death penalty” permanently enjoining, tax return preparer, Jason Stinson, under §7407(b)(2), from:

 “(1) acting as a federal tax return preparer or requesting, assisting in, or directing the preparation or filing of federal tax returns, amended returns, or other related documents or forms for any person or entity other than himself;

(2) preparing or assisting in preparing federal tax returns that he knows or reasonably should have known would result in an understatement of tax liability or the overstatement of federal tax refund(s) as penalized by I.R.C. § 6694;

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Philip Storrer

Philip Storrer

Philip P Storrer is a Certified Public Accountant (CPA) practice based in Discovery Bay, CA. Philip P Storrer can assist you with your tax preparation, planning, bookkeeping, and accounting needs.

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