AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Comments on Proposed Regulations, REG-122380-02
Regarding Regulations Governing Practice before the Internal Revenue Service
Developed by:
Tax Practice Responsibilities Committee
Eve Elgin, Chair
J. Edward Swails
Timothy J. Burke, Jr.
Arthur J. (Kip) Dellinger, Jr.
Jeffrey Frishman
Mary Lou Gervie
Sharon S. Lassar
Keith R. Lee
Jay M. Levine
Susan Rosenberg
Gregory M. Fowler
Mark N. Schneider
Gerard H. Schreiber, Jr.
Approved by:
Tax Executive Committee
Submitted to the Internal Revenue Service
May 9, 2006
AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS
Comments on Proposed Regulations, REG-122380-02
Regarding Regulations Governing Practice before the Internal Revenue Service
In REG 122380-02, the Treasury Department has proposed amendments to Circular 230, the regulations governing practice of Certified Public Accountants (CPAs), attorneys, enrolled agents, enrolled actuaries, and appraisers before the Internal Revenue Service (IRS or Service). In general, Circular 230 requires persons who practice before the IRS to be knowledgeable and competent in tax law matters and to adhere to certain ethical standards.
EXECUTIVE SUMMARY
The proposed revisions to Circular 230 (REG-122380-02), and other recent changes to Circular 230, reflect a great deal of effort by the Treasury Department and the IRS to generally enhance standards of tax practice for all tax practitioners. While we support the efforts and the goals to enhance standards of tax practice for all tax practitioners, these proposed changes reinforce some general concerns that we believe are held by a large segment of the practitioner community. We have highlighted some of these issues below. More specific comments are in the body of this document.
GENERAL COMMENTS
Unfortunately, many of the proposed Circular 230 revisions appear to reflect a lack of balance that may both undercut the goal of enhanced standards and compromise fundamental fairness. In particular, several of the proposed changes (like prior changes) appear to sacrifice legitimate practitioner rights in the interests of unnecessary and overreaching administrative interference in daily tax practice. One very significant example is the mandatory publication of a practitioner’s name at an early stage in OPR proceedings before there has been any adjudication of guilt.
This is also apparent, for example, by the provisions that would further restrict a practitioner’s right to an administrative appeal of an adverse decision of an Administrative Law Judge (ALJ), limiting a practitioner’s right to receive exculpatory evidence from the IRS Office of Professional Responsibility (OPR), authorizing OPR to introduce supplemental charges in a proceeding, and broadening the circumstances in which OPR, in its sole discretion, may summarily suspend a practitioner’s license by means of the expedited suspension rules.
The proposed regulations also create additional grounds for sanction without any explanation of why the additional provisionsare necessary or when they might be satisfied in a particular case. Examples, which are discussed in our specific comments, include the Circular 230 sections relating to delays (10.34), failure to sign returns (10.51) and improper disclosures (10.51).
The net effect of these changes, if adoptedin their proposed form, unfortunately may be to unnecessarily subject practitioners to discipline and sanction Similarly, we are concerned that the possibility of bad publicity or other sanction being usedas leverage to force a practitioner to admit to a sanction that he or she otherwise would contest. We understand that, to some extent, these concerns predate these proposed regulations. However, the concerns have been heightened by the overhaul and expansionof OPR and key Circular 230 provisions.
Finally, we also believe OPR must adopt a written policy for handling referrals and should make this guidance publicly available to the practitioner community. We note that an April 5, 2006 report on OPR operations by the Treasury Inspector General for Tax Administration (TIGTA report) voiced similar concerns.[1]Also, if such policy is adopted, we strongly urge Treasury and the Service to issue detailed guidance to IRS employees on when it is appropriate to make a referral to OPR.
SPECIFIC COMMENTS
- Subpart B – Duties and Restrictions Relating to Practice Before the IRS
A. Proposed section 10.25 – Practice by former Government employees, their partners and their associates
We support Treasury’s decision to better align section 10.25’s post-employment conflict rules with those in the United States Code (USC); for example, by substituting the definition of “particular matter” in 18 USC § 207 and its implementing regulations, 5 CFR Part 2637, for the term “transaction.” Among other reasons, the Office of General Legal Services (GLS), when issuing guidance to practitioners in this area, also adopts many of the USC rules. However, as the rules in 18 USC § 207 and the implementing regulations are not limited to former employees of the Treasury Department, the guidance extends to non-tax matters and often is unclear when applied in the tax context. Accordingly, we urge Treasury to work with the Office of Government Ethics to clarify a number of issues, including the definition of “particular matter” in the tax context. Similarly, in furtherance of transparency, we strongly recommend that OPR work with GLS to publish redacted versions of the written advice GLS gives to tax practitioners in this area.
We also support elimination of what had been a two-year prohibition on “behind the scenes” assistance in matters under the former government employee’s official responsibility in his last year of government service. In addition, we believe it makes sense to require that isolation statements, if required, be retained by the firm rather than sent to OPR. However, the preamble of the proposed regulations appears to conflict with the language of the proposed regulations. The preamble requires that the isolation statements automatically be sent to OPR, while the proposed regulations require that the statements be retained by the firm and provided to OPR upon request.
A number of instances recently have come to our attention concerning limitations that Internal Revenue Code (IRC) section 6103 may impose on the preparation of isolation statements. We hope that the final rules in this area will either clarify how IRC section 6103 is to be applied in the context of isolation statements, or dispense with the isolation statement requirement altogether.
Currently, a former government employee must be isolated, while in private practice, from matters in which the individual participated personally and substantially while in government. Also, a former government employee must be isolatedfor a period of one year after leaving government from matters that were formerly under his or her official responsibility. If isolation is required, section 10.25 of Circular 230 requires that the individual list on an “isolation statement” all matters from which he or she is recused. Each isolation statement must be signed by the former government employee as well as another member of his or her firm.
IRC section 6103 problems arise, however, if the information identifying the matter to be listed on the isolation statement is tax return information, protected from disclosure under IRC section 6103. This would be the case, for example, if the matters requiring recusal were IRS audits or requests for Technical Advice Memoranda (TAMs). The former government employee is barred by IRC section 6103 from disclosing details about such audits or TAMs (including the taxpayer’s name) to anyone in his firm. Accordingly, another member of his firm could not sign the isolation statement, as required, if it contained such taxpayer identifying information. In addition, if the former government employee calls the IRS to refresh his memory of prior audits, the IRS is barred by IRC section 6103 from furnishing that information to him. If the isolation statements were to be generic or redacted, it is questionable how much use they could be in helping to prevent involvement in such matters by other firm personnel. Accordingly, at a minimum, we believe any final rules concerning isolation statements must be consistent with IRC section 6103 and offer a clear explanation of why compliance with any isolation statement requirement would not violate IRC section 6103. Alternatively, it may make sense to forego the requirement of isolation statements altogether, while retaining the prohibition on the former government employee engaging in inappropriate post-employment activities. We are not aware of any other law that requires isolation statements.
- Proposed section 10.27 – Fees
Proposed regulation section 10.27(b) permits a practitioner to charge a contingent fee for services rendered in connection with the IRS’s examination of, or challenge to: (i) an original tax return; or (ii) an amended return or claim for refund or credit filed prior to the taxpayer receiving a written notice of the examination of, or a written challenge to, the original tax return.
Presumably, the primary intent of this rule is to permit contingent fees on a limited basis but only in situations that do not exploit the audit selection process. Following this reasoning, we question why the proposed regulations do not permit a contingent fee for “pre-filing services” such as representation of taxpayers in connection with private letter ruling requests, pre-filing agreements, advanced pricing agreements, applications for changes in accounting method (requiring advance approval of the IRS National Office), and requests for relief under Treas. Reg. § 301.9100-1, et. seq. Similarly, we wonder why other services such as a master file analysis of (1) interest or penalty calculations, or (2) the crediting of deposits of taxes, are not permitted to be offered for a contingent fee. As with an examination, all of these services require the IRS to make a determination of the appropriateness of the taxpayer’s position, but only in a fashion that is independent of the examination of any associated tax return. The IRS has rightfully encouraged taxpayers to avail themselves of the pre-filing procedures noted above, as they support the IRS’s publicly stated goals regarding disclosure and the complete transparency of positions claimed by taxpayers. Allowing contingent fee arrangements for the services described above would likely encourage more taxpayers to participate in appropriate pre-filing procedures or post-payment analysis - a worthwhile result from a voluntary compliance perspective. (See our attached letter of October 1, 2002 for a further discussion of this matter.)
Furthermore, other than administrative concerns of the Service, there does not appear to be any clear basis to distinguish between services rendered in connection with the IRS’s examination of an amended return or claim for refund filed prior to or after the taxpayer receives a written notice of examination. The threshold factor should turn on whether the services are being rendered in connection with the IRS’s examination of, or challenge to, such amended return. Such determination should not be affected by the actual timing of the amended return or claim for refund. Therefore, we urge the IRS to modify the proposed rule to delete the provision requiring that the amended return or claim for refund or credit be filed prior to the written notice of examination or challenge.
Finally, if these new restrictive provisions become final, we request that the new rules provide appropriate transitional relief. Thus, any additional restrictionsshould not apply to engagements that were subject to a binding written agreement entered into prior to the effective date of the amendments.
- Proposed section 10.29 – Conflicting interests
Section 10.29 of the proposed regulations would tighten the existing conflicts of interest provision by requiring that clients both waive and give informed consent to conflicts and that such waivers and consents be confirmed in writing by the affected client at the time the practitioner knows of a conflict. Previously, there was no waiver requirement, as long as there was informed consent, and a client’s informed consent could be confirmed in writing by the practitioner. As proposed, copies of the written consents must be retained for at least 36 months by the practitioner and provided to any officer or employee of the IRS upon request. The net result is one of the strictest (if not the strictest) conflict of interest regimes in the professional standards area.
We have concerns thatthe proposed changes are too rigid to fairly address all potential conflict situations. It is not clear why the prior, more principle-based approach, needed to be supplanted by a more stringent, rule-based approach. For example, it is difficult to discern why both a waiver and informed consent should be required, or why the consent or waiver always must be confirmed in writing by the client. There is no indication of abuse that had not been, or could not be,adequately addressed by the former provision (which was recently overhauled in July 2002 to mirror American Bar Association (ABA) Model Rule 1.7). The lack of flexibility in the proposed approach is unnerving given the lack of clarity as to whether a conflict exists in many situations, as well as the blanket requirement that consents simply be provided to the IRS upon request. Accordingly, we respectfully recommend that the proposed changes not be adopted.
D. Proposed section 10.34 – Standards with respect to tax returns and documents, affidavits and other papers
Section 10.34 has been significantly broadened beyond its original focus on tax return preparation. Now, section 10.34 would apply to “documents, affidavitsand other papers” submitted to the IRS. In particular, the proposed changes would prohibit a practitioner from submitting any document to the IRS “[t]he purpose of which is to delay or impede the administration of the Federal tax laws” or “[t]hat contains or omits information in a manner that demonstrates an intentional disregard of a rule or regulation.”
Again, it is not clear why the regulations need to be broadened in this manner. For example, existing section 10.23 of Circular 230 already provides that “[a] practitioner may not unreasonably delay the prompt disposition of any matter before the Internal Revenue Service.” Is it intended that section 10.23 be stricken or is there a distinction between what is to be covered by existing section 10.23 and proposed section 10.34(b)?
Regardless, the emphasis in the proposed regulations on conduct allegedly engaged in for purposes of delay, suggests that Treasury and the Service intend to focus additional attention in this area. In this regard, we believe it would be helpful if Treasury and the Service could provide examples of the types of delay they believe warrant sanction. We also have concerns that a renewed focus on delay, if not coupled with procedural safeguards for practitioners, could compromise legitimate practitioner and client rights, such as a practitioner’s response to a poorly drafted or overbroad Information Document Request. Would a response that an IRS agent considered inadequate now be grounds for referral to OPR and possible sanction? Would IRS agents be able to use the new section 10.34 powers as a bargaining chip in negotiations with practitioners and their clients? We would assume that these results were not intended, but they represent real concerns to the practitioner community.
Further, while submissions to the government obviously must comply with the law, we donot understand why the proposed regulations also single out submissions demonstrating an intentional disregard of a rule or regulation (section 10.34(b)(2)(iii)). First, such an approach discounts (indeed dispenses with) all precedent apart from a “rule or regulation,” such as judicial decisions. Second, other areas of the law permit positions contrary to rules or regulations if the positions are not frivolous and are adequately disclosed (see the IRC section 6694 preparer penalty provisions and Treas. Reg. § 1.6694-3). Accordingly, we recommend that any changes to existing law accord appropriate deference to judicial decisions and be more consistent with existing preparer penalty rules. At a minimum, it would be helpful if there were a clear articulation as to the intended scope of any changes.
- Subpart C – Sanctions for Violation of the Regulations
- Proposed section 10.50 – Sanctions
Section 822 of the American Jobs Creation Act of 2004 authorizes the imposition of a monetary penalty against a practitioner or his or her firm for certain Circular 230 violations. The preamble to the proposed regulations provides that “[t]he Treasury Department and the IRS will issue procedures relating to the imposition of the monetary penalty through separate guidance.” We ask that the public be permitted to comment on any such guidance before it is finalized.
- Proposed section 10.51 –Incompetent and disreputable conduct
Section 10.51(a)(14) of the proposed regulations broadens “disreputable conduct” to include willful failure to sign a tax return prepared by the practitioner. The AICPA is not aware of significant problems in this area. What is the underlying problem the IRS seeks to rectify?
Further, inclusion of “failure to sign a tax return” as a type of disreputable conduct warranting sanction seems inappropriate in the absence of clarification on how the practitioner should appropriately handle competing duties. For example, a practitioner reviewing a tax return as a “preparer” may feel that he or she cannot sign the return as required under IRC section 6695 without violating the practitioner’s responsibilities under IRC section 6694 or section 10.34 of Circular 230. More specifically, the practitioner may discover during the course of a review of a taxpayer-prepared return, or during the physical preparation of a return, that certain positions taken do not satisfy the realistic possibility standard or, that the client refuses to make required disclosures. It may be too late for the practitioner to avoid being a “preparer,” because he may already have provided advice on past events directly relevant to an entry on a return regarding a substantial portion of the return. See Treas. Reg. § 301.7701-15. The practitioner, thus, is caught between conflicting requirements. If he or she signs the return, the practitioner may be in violation of IRC section 6694 andsection 10.34 of Circular 230. If he or she does not sign the return, the practitioner may be in violation of IRC section 6695. It seems inappropriate to compound the situation with additional sanctions under Circular 230.
The proposed changes to the regulations raise the question “Is the IRS changing the priority given to “signing a return” versus other responsibilities? It would seem that public policy would favor a practitioner not signing– rather than signing --a return that is believedto violate applicable reporting or disclosure standards. At a minimum, we believe it should be made clear in Circular 230 that failing to sign a tax return in such a case will not be cause for sanction under Circular 230. Ideally, the Treasury regulations under IRC section 6695 also should be clarified.