DISCIPLINARY ACTIONS FOR CIRCULAR 230 VIOLATIONS

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2 Hour(s) - Ethics

IRS Provider #: UBWMFIRS Course #: UBWMF-E-00236-21-S

NASBA: 116347

CTEC Provider #: 6209CTEC Course #: 6209-CE-0067

The information provided in this publication is for educational purposes only, and does not necessarily reflect all laws, rules, or regulations for the tax year covered. This publication is designed to provide accurate and authoritative information concerning the subject matter covered, but it is sold with the understanding that the publisher is not engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

To the extent any advice relating to a Federal tax issue is contained in this communication, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

COURSE OVERVIEW.............................................................................................................................................................. 7

Course Description ....................................................................................................................................................................... 7

Learning Objectives ...................................................................................................................................................................... 7

PRACTITIONERS SUBJECT TO DISCIPLINARY ACTION BY THE IRS ................................................................................... 7

In General ...................................................................................................................................................................................... 7

The Loving and Ridgely Cases ..................................................................................................................................................... 8

REPUTABLE CONDUCT BEFORE THE IRS ............................................................................................................................ 9

Background ................................................................................................................................................................................... 9

SANCTIONS ........................................................................................................................................................................ 11

Sanctions That May Be Imposed...............................................................................................................................................11

Increased Sanctions upon Appeal ............................................................................................................................................12

The Process for Imposing Sanctions ........................................................................................................................................13

CONDUCT GIVING RISE TO SANCTIONS........................................................................................................................... 14

Standards.....................................................................................................................................................................................14

Incompetence and Disreputable Conduct...............................................................................................................................15

WHAT KINDS OF CASES RESULT IN DISBARMENT? ......................................................................................................... 18

Distinction between Disbarment and Suspension .................................................................................................................18

Disbarment for Failure to File ...................................................................................................................................................19

Disbarment Involving Incompetence .......................................................................................................................................20

Disbarment Based on Criminal Convictions............................................................................................................................21

WHAT KINDS OF CASES RESULT IN SUSPENSIONS?........................................................................................................ 22

Suspension for Failure to File ....................................................................................................................................................22

Suspension for Misrepresentation ...........................................................................................................................................22

Sanctions Imposed for Anger Management Issues................................................................................................................23

CONDUCT THAT DOES NOT VIOLATE CIRCULAR 230...................................................................................................... 24

Introduction.................................................................................................................................................................................24

Valid Excuses for Nonpayment .................................................................................................................................................24

Disclosure in Collection Cases...................................................................................................................................................24

BEING WRONG IN A WRITTEN OPINION ......................................................................................................................... 25

Being Wrong in a Written Opinion............................................................................................................................................25

Course Description 7

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COURSE OVERVIEW

COURSE DESCRIPTIONThis course outlines the basic sanctions imposed under Circular 230 and the process for imposing them. More importantly, the material digests dozens of disciplinary cases instituted under Circular 230 and categorizes the specific types of conduct leading to sanctions. Upon completing this course the practitioner will have a firm grounding in the patterns of activities that are likely to result in disciplinary actions, those defenses that may be successful, and the excuses that do not work.

LEARNING OBJECTIVESIdentify the different sanctions the OPR may impose for violations of Circular 230

Determine party responsible for violations of Circular 230

Recognize the difference between frivolous arguments and reasonable basis

Define violations of Circular 230

PRACTITIONERS SUBJECT TO DISCIPLINARY ACTION BY THE IRS

IN GENERALThe IRS has authority to impose sanctions on individuals who “practice” before the IRS. The concept of “practice before the IRS” is extremely broad, and includes all matters connected with representation of a taxpayer with regard to the taxpayer’s rights, privileges, or liabilities under any law or regulation administered by the IRS. Specifically, preparing and filing documents, corresponding and communicating with the IRS, and representing a taxpayer at conferences, hearings, or meetings with the IRS constitute practice before the IRS.

The IRS Office of Professional Responsibility (“OPR”) is responsible for pursuing disciplinary action against those who transgress the rules of Circular 230. If OPR decides to institute formal disciplinary proceedings, a disciplinary hearing governed by the Administrative Procedures Act is held before an administrative law judge (“ALJ”). The Office of the Associate Chief Counsel (General Legal Services) represents OPR in any such proceedings. The Tax Division of the Department of Justice may also take action against an individual for violations of Circular 230, most often seeking an injunction in a U.S. District Court under the authority of Internal Revenue Code (“Code”) section 7408.

The professionals subject to these rules (i.e., the types of persons that may practice before the IRS) include attorneys, certified public accountants, enrolled agents, enrolled actuaries, and enrolled retirement plan agents. In addition, appraisers meeting certain qualifications may provide supporting valuations with respect to matters before the IRS.

An otherwise unlicensed practitioner who prepares a tax return may also represent the taxpayer before the IRS with respect to that return subject to certain limitations. Starting with the tax year 2016, unenrolled tax preparers need to have an Annual Filing Season Program Record of Completion (discussed later) in order to have limited representation rights on returns they prepared. Frequently, state law regulates those who may prepare income tax returns for a fee, but absent state regulation, there are no restrictions on who may prepare a federal income tax return.

Amid calls for greater regulation of tax preparers by the National Taxpayer Advocate, among others, in 2009 the IRS undertook a study designed to form the basis of further regulation of tax preparers. The findings and recommendations that grew out of that study were subsequently incorporated into proposed regulations in 2011. Among other things, the proposed regulations required that paid tax return preparers pass an initial IRS certification exam, pay annual fees, and complete at least 15 hours of continuing education courses each year.

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8 Practitioners Subject to Disciplinary Action by the IRS

THE LOVING AND RIDGELY CASESThese proposed new requirements led to much controversy among the practitioner community and three independent tax return preparers filed suit against the IRS in federal court contending that the proposed regulations exceeded the agency’s authority under the statute to regulate practice before the IRS. The federal District Court ruled against the IRS and the United States Court of Appeals for the District of Columbia Circuit affirmed that decision.

The appellate court rejected the IRS’s argument that regulating all federal return preparation (as opposed to other activities constituting practice before the IRS) fell within its authority to “regulate the practice of representatives of persons before the Department of the Treasury.” The court found that the IRS’s interpretation was foreclosed by at least six considerations.

First, the court noted that a return preparer does not “represent” a taxpayer; rather, a return preparer merely assists the taxpayer in meeting a compliance obligation. Second, the court found that simply preparing a return does not constitute practice “before” the IRS. Further, the relevant statutory history does not support the IRS’s interpretation in the view of the court, and neither does the broader statutory framework, because Congress has enacted other statutes that cover the conduct of return preparers.

Fourth, the court felt that adopting the IRS approach would unreasonably broaden its authority beyond what was intended by Congress. Finally, the court found that the IRS’s past approach to the statute was inconsistent with its assertion of authority in the proposed regulations. Therefore, the court enjoined the IRS from implementing its new requirements concerning “unregistered” tax preparers.

The IRS declined to appeal the Loving decision to the Supreme Court, thereby as a practical matter terminating the agency’s efforts to enforce testing and continuing education requirements with respect to tax preparers who do not otherwise practice before the IRS. While the IRS may be able to regulate these tax preparers in the future if Congress changes the law, in the meantime the agency has decided to institute a voluntary certification program.

Specifically, the IRS created the voluntary annual filing season programs (“AFSP”). This new program aims to recognize the efforts of non-credentialed return preparers. Return preparers meet the requirements by obtaining 18 hours of continuing education, including a six-hour federal tax law refresher course with a test. Upon successful completion, the practitioner receives an AFSP “Record of Completion” from the IRS.

AFSP participants are also included in a public database of return preparers which now appears on the IRS website. The Directory of Federal Tax Return Preparers with Credentials and Select Qualifications includes the name, city, state, zip code, and credentials of all attorneys, CPAs, enrolled agents, enrolled retirement plan agents, and enrolled actuaries with a valid PTIN, as well as all AFSP – Record of Completion holders.

The AFSP is primarily designed for return preparers who are not already enrolled agents, which is the same target population as the regulations that were invalidated in the Loving case. Essentially, under the AFSP preparers will receive benefits if they do voluntarily what the invalidated regulations would have compelled them to do. Even this voluntary program, however, has not been immune from attack. Both the American Institute of Certified Public Accountants (“AICPA”) and the National Association of Enrolled Agents expressed to the IRS their doubts about the wisdom and legality of this program.

In fact, in June of 2014, the AICPA filed suit for declaratory and injunctive relief to invalidate the AFSP in the same federal court that heard the Loving case. The suit alleged that the IRS lacks statutory authority to create such a program and also that it will confuse consumers and will not effectively address policy issues concerning unethical return preparers. The AICPA asserted that the AFSP is nothing more than an attempt to get around the Loving case. The concern is that the “voluntary” program will create such strong competitive pressures to comply that it will function as if it were mandatory.

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Background 9

Unfortunately for its case, none of the AICPA’s members are unenrolled return preparers. Concluding that the AICPA lacked standing, the district court granted the government's motion to dismiss the suit. Needless to say, however, the story does not end there.

Undoubtedly there was little joy at OPR due to the dismissal of the AICPA’s suit. Following on the heels of the Lovingdecision was a case brought by James Sexton against OPR. Sexton had been practicing before the IRS until he pleaded guilty to mail fraud and money laundering in 2005. Subsequent to his guilty plea, OPR suspended his status as a practitioner. However, Sexton continued to possess a valid preparer tax identification number (“PTIN”) and prepared tax returns for clients.

In early 2013, OPR issued a directive to Sexton demanding several documents and interrogatory responses in connection with his tax preparation work. To justify this directive, OPR stated that Sexton’s status as a practitioner before the IRS required him to respond or face disciplinary action. Rather than comply with the directive, Sexton sued. In his complaint, he stated that he was not a practitioner before the IRS and therefore not subject to its regulatory authority, citing the Loving case.

The federal court found that Sexton adequately stated claims for declaratory and injunctive relief against OPR. The court noted that the directive from OPR did not seek merely voluntary compliance and that OPR had threatened to withdraw Sexton’s ability to electronically file tax returns. The court found that Sexton was not required to produce the documents or respond to inquiries during the pending court action and that the IRS could not suspend his ability to electronically file returns on behalf of clients for failure to comply with the demand for documents.

Another blow for the IRS’s ability to regulate tax compliance practice came in the context of fee restrictions. "To prevent exploitation of the audit selection process," the IRS in 2007 prohibited those practicing before it from charging contingent fees for certain services relating to preparing, filing, or presenting tax returns or refund claims. Gerald Lee Ridgely, Jr., a practicing CPA, brought suit against the IRS, arguing that the agency exceeded the scope of its statutory authority in regulating the preparation and filing of “ordinary refund claims”—refund claims that practitioners file after a taxpayer has filed his original tax return but before the IRS has initiated an audit of the return.

The IRS argued that it has “inherent authority” to regulate those that practice before it and that this authority extends broadly to regulate those preparing and filing ordinary refund claims regardless of the capacity in which they act. In other words, the IRS asserted that it had authority to regulate all actions of Ridgely or any other CPA who—at some point—“practice” before it, regardless of whether they are acting in a representational or non-representational capacity. The court rejected this contention out of hand.

If the IRS’s position in Ridgely were correct, it would lead to the absurd result that contingent fee restrictions would only apply to those practitioners who previously engaged in practice before the IRS, and no such restrictions would be imposed on the preparation and filing of ordinary refund claims by non-CPAs and those who never "practice" before the IRS.

Both Loving and Ridgely presented some challenges for OPR. While OPR Director Karen Hawkins had stated that the two cases restricted OPR’s actions in only a “handful” of matters, the agency had been receiving a number of challenges from people who, in the view of OPR, were misconstruing the effect of the two cases. Hawkins had, however, conceded that, short of a permanent injunction against all tax return preparation, the agency had no authority to take a practitioner’s tax identification number (“PTIN”) away from them. Tax return preparers can remain tax return preparers until they are enjoined by an order of court.

REPUTABLE CONDUCT BEFORE THE IRS

BACKGROUNDFederal law provides that the Internal Revenue Service (“IRS”) (pursuant to authority granted to the Secretary of Treasury by statute) may impose certain sanctions against individuals who practice before the agency under certain

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10 Reputable Conduct before the IRS

circumstances. Before doing so, the agency must provide the individual with notice of the proposed sanction and an opportunity to participate in an administrative hearing.

The rules of conduct applicable to those who practice before the IRS are contained in Treasury regulations found in the Code of Federal Regulations at 31 C.F.R. part 10. These regulations are also published in a pamphlet referred to as “Treasury Department Circular No. 230,” more commonly referred to as simply “Circular 230.” Circular 230 also prescribes specific rules regarding the imposition of sanctions against those as to whom violations of its standards have been alleged.

Changes to Circular 230 were proposed in 2012 and became final on June 9, 2014. Those revisions substantially changed the rules governing the provision of written tax advice and imposed additional requirements on those who oversee a firm’s tax compliance practice. Previously, Circular 230 imposed special restrictions on written advice that was classified as a “covered opinion.” A more flexible standard has replaced these rules and is now contained in section 10.37 of Circular 230.

The rules govern a practitioner who gives “written advice” (including by means of electronic communication) concerning one or more federal tax matters. Beyond this description, there is no specific definition of “written advice,” although the regulation goes on to specify certain things that are not considered to fall within this definition. For example, government submissions on matters of general policy are not considered written advice on a federal tax matter for this purpose. Furthermore, continuing education presentations provided solely for the purpose of enhancing practitioners’ professional knowledge on federal tax matters (such as this course) are not considered written advice. However, presentations marketing or promoting transactions are not considered to be continuing professional education.

The standards set forth six different requirements related to written advice. First, the practitioner must base the written advice on reasonable factual and legal assumptions (including assumptions as to future events). Second, the practitioner must reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know. Also, the practitioner must not rely upon representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) of the taxpayer or any other person if reliance on them would be unreasonable.

Thus, any reliance of information obtained directly from the taxpayer or from others in complying with these standards must be “reasonable.” A practitioner cannot follow these rules by simply pointing to some information that is clearly erroneous or comes from an obviously suspect source. Specifically, reliance on representations, statements, findings, or agreements is considered unreasonable if the practitioner knows or should know that one or more representations or assumptions on which any representation is based are incorrect, incomplete, or inconsistent.

Furthermore, a practitioner may only rely on the advice of another person if the advice was reasonable and the reliance is in good faith considering all the facts and circumstances. Reliance is not reasonable when there are circumstances that would indicate to a reasonable person that the practitioner knows or should know that the opinion of the other person should not be relied on. Likewise, reliance is not reasonable when the practitioner knows or should know that the other person is not competent or lacks the necessary qualifications to provide the advice. Finally, reliance on the advice of another person is not considered reasonable if the practitioner knows or reasonably should know that the other person has a conflict of interest.

A fourth standard regarding written advice is that the practitioner use reasonable efforts to identify and ascertain the facts relevant to the written advice with respect to each federal tax matter addressed. In other words, the practitioner is under an affirmative obligation to inquire as to any facts that may be relevant with respect to the written advice he or she is rendering.

Fifth, the practitioner must adequately relate the applicable law and authorities to the facts that are obtained. Analysis is not just a good idea, it is required. It is not sufficient to merely set forth the facts and the law. To comply with these

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Sanctions That May Be Imposed 11

standards the practitioner must make an effort to integrate the legal rules and the factual circumstances that are being addressed.

Finally, in rendering written advice, the practitioner is prohibited from taking into account the possibility that a tax return will not be audited or that a matter will not be raised on audit. While it is clear in most cases that the chance of a taxpayer being audited is relatively remote, a practitioner cannot base his or her advice on this fact. Nor can a practitioner base his or her analysis on the assumption that the issue is not likely to be addressed in the event of an audit. Essentially, any written advice has to be based on the presumption that there will be an audit and the issue will be raised by the IRS.

Whether or not written advice complies with these standards will not be judged in a vacuum. Instead, all facts and circumstances will be considered, including, the scope of the engagement and the type and specificity of the advice sought by the client. Thus if the engagement to provide written advice is limited to a consideration of specific facts only or an analysis of a particular tax rule, the practitioner may be incompliance even though the end product does not address some related issues. It behooves the practitioner to get a clear understanding of what the client the advice to cover, and to explicitly document any scope limitations in the engagement letter or otherwise.

With respect to those who oversee a firm’s tax practice, section 10.36 of Circular 230 provides that any individual who has (or individuals who share) such authority and responsibility for overseeing a firm’s tax practice must take reasonable steps to ensure that the firm has adequate procedures in effect for compliance with Circular 230 by all members, associates, and employees of the firm. A firm’s “tax practice” for this purpose includes the provision of advice concerning federal tax matters and preparation of tax returns, claims for refund, or other documents for submission to the IRS. In the absence of a person or persons identified by the firm as having the principal authority and responsibility described above, the IRS may identify one or more individuals as being responsible for compliance with Circular 230 on behalf of the firm.

Any such individual will be subject to discipline if that individual through willfulness, recklessness, or gross incompetence, does not take reasonable steps to ensure that the firm has adequate procedures and, in fact, one or more individuals who are members of, associated with, or employed by, the firm are found to have engaged in a pattern or practice that fails to comply with Circular 230. Furthermore, it is not enough to simply have adequate procedures in place; the responsible individual must also assure that the procedures are being followed, and can be disciplined if they are not (and there is some pattern or practice within the firm that fails to comply with Circular 230.

Lastly, the person responsible for overseeing the firm’s tax practice must take prompt action to correct any noncompliance on the part of the firm’s members, associates, or employees that the individual knows or should know about. As with the other standards, simple ignorance of the facts giving rise to the noncompliance will not alone justify disciplinary action. Rather, the failure must be due to willfulness, recklessness, or gross incompetence.

SANCTIONS

SANCTIONS THAT MAY BE IMPOSEDFour different sanctions are authorized: censure, suspension, disbarment, and monetary penalties. Censure is a public reprimand, usually accomplished by a notice published in the Federal Register. Suspension from practice before the IRS may be imposed for an indefinite duration or for a specified period of time. Disbarment, of course, is permanent, although someone who has been disbarred may petition OPR for reinstatement after waiting a period of five years following the disbarment.

Unlike disbarment or suspension, censure does not per se impact the individual’s ability to practice before the IRS. However, once an individual is censured, OPR may impose conditions on that individual’s practice activities for a reasonable period of time in light of the gravity of the practitioner’s violations.

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12 Sanctions

Likewise, conditions may be imposed on an individual after a period of suspension has expired. For example, if the censure or suspension resulted from a failure to obtain the clients’ written consents regarding potential conflicts of interest, OPR may require the practitioner to provide a copy of all consents obtained by the practitioner for an appropriate period following the sanction.

The authority to impose the sanctions of censure and monetary penalties were both added to OPR’s arsenal with the passage of the American Jobs Creation Act of 2004, and thus apply only with respect to prohibited conduct that occurs after October 22, 2004, the date of enactment.

Monetary penalties may be imposed for a single act of prohibited conduct or for a pattern of misconduct, and may be imposed in addition to, or in lieu of, any suspension, disbarment, or censure of the practitioner. There is no set or standard penalty amount. Rather, the law provides that monetary penalties can be imposed up to the amount of gross income derived (or anticipated to be derived) from the conduct giving rise to the penalty.

The specific amount of any monetary penalty imposed, subject to the limits described above, is left to the discretion of OPR. Furthermore, not only can OPR impose a penalty on the individual whose conduct ran afoul of Circular 230, a monetary penalty may also be levied against that person’s firm or employer if it is determined that the firm or employer knew, or reasonably should have known, of the prohibited conduct. While public censure has been used in a few cases, no reported cases to date involve the actual imposition of a monetary penalty.

Practice Tip: Being proactive and responding in a responsible way to allegations of Circular 230 infractions is an entity’s best defense against monetary sanctions. All firms whose employees or members practice before the IRS should require that the practitioners be familiar with any developments regarding Circular 230 through continuing professional education or otherwise. Once an allegation is made, the firm or employer should conduct its own investigation, isolate the circumstances that allowed the alleged infraction to occur, and take appropriate remedial actions to prevent a recurrence.

OPR publishes all disciplinary actions in the Internal Revenue Bulletin (“IRB”). The most common sanction is suspension. In 2018 there were 285 disciplinary actions concluded, 58 of which resulted in suspension, and 3 cases resulted in disbarment.

INCREASED SANCTIONS UPON APPEALIn determining whether to appeal a sanction, practitioners are well advised to carefully consider their options. One reason is that on appeal, the Office of Chief Counsel can not only uphold or overturn the ALJ’s decision, it can actually increase the sanction imposed by the ALJ. CPA Martin Chandler learned this the hard way.

Chandler failed to file his federal income tax returns for 2000, 2001, and 2003. OPR filed a Complaint seeking a 36 month suspension. When it was learned that Chandler had, in fact, paid his tax liability, OPR amended its Complaint to seek a sanction of only 33 months.

The ALJ agreed with OPR that Chandler’s failure to file was sanctionable conduct, although Chandler argued that he did not believe he had any tax liability and was therefore not required to file, an argument that both the ALJ and the Office of Chief Counsel found less than compelling. The ALJ did find, however, that the requested sanction was too harsh. Given the fact that Chandler was 72 years old and had paid his tax liability, the ALJ felt it was proper to reduce the suspension to 18 months.

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The Process for Imposing Sanctions 13

Martin Chandler was not happy with this result. He appealed to the Office of Chief Counsel, which viewed his case very differently. Chief Counsel felt that Chandler had not taken appropriate responsibility for his actions, that he considered the failure to file returns to be “no big deal” or some sort of “foot fault.” Chandler’s age, in Chief Counsel’s opinion, should have no effect absent some added showing of mental or physical disability.

As a result of the appeal, Chief Counsel determined that a more appropriate sanction would be a 36 month suspension, and that was the term of the suspension imposed in the final agency decision.

An even harsher lesson was learned by Harold Hurwitz. When served with a Complaint alleging a failure to file for five years, Hurwitz responded that he was “painfully aware of the legalities” as to the timely filing of returns, but he intended to file as soon as he could. Asserting that his late filings were not willful and were due to health problems, among other things, he pointed out that he had subsequently filed the returns and paid all amounts due.

OPR sought a sanction of 36 months’ suspension, which was granted by the ALJ. Feeling that a punishment of that length was not justified, Hurwitz appealed to Chief Counsel. The Chief Counsel agreed that a suspension of 36 months was inappropriate. Unfortunately for Hurwitz, Chief Counsel felt disbarment was a more appropriate sanction and the final agency decision was changed to disbarment.

THE PROCESS FOR IMPOSING SANCTIONSWhatever sanction is imposed, it generally results from a formal hearing that commences with a Complaint served on the practitioner and resembles civil litigation. The Complaint must specify the sanction being sought and the practitioner must file a written answer. An ALJ conducts an evidentiary hearing and issues a decision imposing the sanction sought or a lesser penalty. Either party may appeal the ALJ’s decision to the IRS Office of Chief Counsel (which is located outside of the IRS, but within the Treasury Department).

If appealed, the Office of Chief Counsel may uphold the sanction, overturn it, modify it (including increasing it, as noted above), or remand the case to the ALJ for further fact development. Either party may further appeal the decision of the Office of Chief Counsel to the U.S. District Court, where the ALJ and Office of Chief Counsel decisions will be reviewed using an “abuse of discretion” standard, meaning it will only be overturned if the federal judge determines that the decision was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law” or “unsupported by substantial evidence.” If no appeal is filed within 30 days of the ALJ or Office of Chief Counsel decisions, however, that decision becomes final.

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If the practitioner fails to file an answer, he or she is deemed to have admitted the allegations contained in the Complaint and waived the right to a hearing. As such, OPR will file a motion for a default decision. Assuming no response to the motion is filed within 30 days, the practitioner will be deemed not to oppose the motion and the ALJ will issue its decision based on the information contained in the Complaint.

Under certain circumstances, a practitioner may be suspended from practicing before the IRS pursuant to a conference with OPR rather than a hearing before an ALJ. These so-called “expedited hearing” suspensions are authorized by Circular 230 when the practitioner has: (1) had his or her professional license suspended or revoked for cause (other than for a failure to pay a professional licensing fee); (2) been convicted of any tax crime, any crime involving dishonesty or breach of trust, or any felony for which the conduct involved renders the practitioner unfit to practice before the IRS; (3) violated conditions previously imposed on the practitioner by OPR; or (4) been sanctioned by a court of competent jurisdiction relating to any taxpayer’s tax liability or relating to the practitioner’s own tax liability, for: (a) instituting or maintaining proceedings primarily for delay; (b) advancing frivolous or groundless arguments; or (c) failing to pursue available administrative remedies.

The majority of sanctions are imposed in this manner. Although the expedited hearing procedure is sometimes instituted when a practitioner has been convicted of a crime, in the vast majority of circumstances it is used as a result of the revocation or suspension of the professional license of an attorney or CPA.

In lieu of a disciplinary proceeding being instituted or continued, an individual may consent to a specific sanction. Typically, an offer of consent will provide for: suspension for an indefinite term; conditions that the individual must observe during the suspension; and the individual's opportunity, after a stated number of months, to file a petition for reinstatement affirming compliance with the terms of the consent and affirming current eligibility to practice (i.e., an active professional license or active enrollment status). An enrolled agent or an enrolled retirement plan agent may also simply offer to resign in order to avoid a disciplinary proceeding.

Practice Tip: A disciplinary hearing under Circular 230 is a serious matter and is governed by specific rules of evidence and procedure. Practitioners, even those who are themselves attorneys, are well advised to consult with legal counsel familiar with this process. The practitioner may want to check with his or her malpractice or general insurance carrier; often these policies will cover the cost of legal representation.

An additional route that may be used against an errant practitioner is an injunction imposed by a federal district court. Injunctions are handled by attorneys in the Tax Division of the Department of Justice and may be pursued in lieu of, or in addition to, sanctions sought by OPR.

CONDUCT GIVING RISE TO SANCTIONS

STANDARDSThere are four (and only four) circumstances in which Congress has statutorily authorized the imposition of sanctions. Those circumstances are when an individual is found to be “incompetent” or “disreputable,” violates the provisions of Circular 230, or willfully and knowingly misleads or threatens his or her client with the intent to defraud.

While the statute specifies the type of conduct that is subject to sanction, Circular 230 sets forth the characterization of the conduct that will result in the imposition of sanctions. Under this approach, sanctionable conduct must generally be “willful.” The term “willful” has been interpreted to mean the voluntary, intentional violation of a known legal duty. Thus, in most cases, inadvertent violations of Circular 230 will not result in sanctions. However, OPR does not have to make a showing of malicious intent or bad purpose, only that the accused purposefully disregarded or was indifferent to his or her obligations.

Willfulness is not required when the alleged impropriety involves: (1) frivolous positions or positions used primarily for delay; (2) failing to advise a client of reasonably likely penalties related to a position taken on a return; or (3) written

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Incompetence and Disreputable Conduct 15

advice (including covered opinions). With respect to these three categories of conduct OPR does not have to show that the practitioner acted willfully, but only that the practitioner acted recklessly or with gross incompetence.

Gross incompetence focuses on the practitioner’s attention to client matters and preparation. Such conduct would include actions that reflect gross indifference to the law or facts or a consistent failure to perform obligations to the client. Also, the failure to adequately prepare under the circumstances can be considered gross incompetence.

INCOMPETENCE AND DISREPUTABLE CONDUCTCircular 230 does not differentiate between the concepts of “incompetence” and “disreputable conduct,” but rather provides a laundry list of fourteen specific instances that fall under those general concepts. This list is intended to be illustrative rather than comprehensive and “disreputable conduct” is meant to include “any conduct that violates the ordinary standard of professional obligation and honor.” A partial list of incompetent or disreputable activities contained in section 10.51 of Circular 230 includes:

CRIMINAL CONVICTIONS

Involvement in a civil litigation, such as a bankruptcy, divorce, and even a malpractice claim will not in and of itself give rise to sanctions under Circular 230. It is certainly possible, however, that the facts and circumstances underlying such civil actions could constitute incompetence or disreputable conduct resulting in sanctions.

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Likewise, mere arrest or indictment on a criminal charge will not result in sanctions. However, three categories of criminal convictions are specifically deemed to constitute disreputable conduct. Those categories are: (1) conviction of any federal tax crime; (2) conviction of any crime involving dishonesty or breach of trust; and (3) any felony conviction rendering the practitioner “unfit to practice before the IRS.”

“Dishonesty” encompasses the act or practice of cheating, deceiving, defrauding, lying, or stealing. Ordinarily, the statutory elements of a crime will indicate whether it is one of dishonesty. Criminal offenses such as identity theft,bribery, housebreaking, larceny, forgery, fraud, and collection of extensions of credit by extortionate meanshave all been characterized as crimes of dishonesty. “Breach of trust” crimes generally involve the abuse of some relationship of trust or the fraudulent acquisition of property by using a position of trust for personal gain and may include embezzlement or larceny. Some courts have even characterized certain sex crimes as a breach of trust by a caregiver.

The third category of criminal conviction constituting disreputable conduct under Circular 230 (felonies rendering the practitioner “unfit to practice before the IRS”) is the most subjective and least defined. Perhaps the only thing certain about this category is that it does not encompass misdemeanors.

In 2009 attorney James J. Everett asserted that the term “conviction” as used in Circular 230 means only a “final” disposition after the exhaustion of all appeals. Everett was an attorney who had practiced law in both Arizona and Texas. He filed a Chapter 7 bankruptcy petition in 2002 and received a discharge of more than $450,000 in liabilities the following year.

As it turns out, two months prior to filing the bankruptcy petition Everett had arranged a lease-purchase agreement for a house in Paradise Valley, Arizona, paying $5,500 in monthly rent. He later purchased the house (approximately 19 months after the bankruptcy discharge) for over a million dollars. These transactions led to further investigation that resulted in Everett being charged in a 34 count indictment with, among other things, making false declarations in his bankruptcy proceeding by concealing his interest in a corporation, his lease, two bank accounts, and interest in his deceased mother’s estate. He was also charged with devising a scheme to defraud the bankruptcy court by concealing property. He was found guilty on all but one count.

On June 17, 2009, OPR filed a Complaint against Everett alleging that his criminal convictions constituted incompetence or disreputable conduct and rendered him unfit to practice before the IRS and sought to have him disbarred. Everett filed an Answer to the Complaint asserting that he had appealed the convictions and requesting that the disciplinary proceeding be stayed pending the outcome of the appeal. Because the convictions could be overturned on appeal, he argued that they could not serve as a basis for his disbarment. Furthermore, Everett noted that he had never been

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the subject of disciplinary proceedings before in the many years he had practiced before the IRS and that the allegations underlying his criminal convictions emanated from his personal affairs and not his conduct as a practitioner before the IRS. OPR disagreed, taking the position that a trial conviction was a sufficient basis for sanction, regardless of any pending appeals.

The ALJ granted OPR’s motion for summary judgment, concluding that OPR had sufficiently established that Everett had engaged in “incompetence and disreputable conduct,” by virtue of his conviction of crimes involving dishonesty or breach of trust. The ALJ denied OPR’s request for the imposition of a sanction, however, and scheduled a hearing to address the remaining issue of the appropriate sanction to impose against Everett. The hearing was subsequently stayed pending a decision on Everett’s appeal of his criminal convictions.

Presumably, if Everett’s convictions had been overturned OPR would have been denied its request for disbarment. Unfortunately, the Ninth Circuit affirmed Everett’s conviction and specifically affirmed the jury’s finding that Everett created a corporation to conceal assets from the bankruptcy court and to facilitate the lease and purchase of the house. Everett had no further contact with OPR or the ALJ concerning his disciplinary hearing and he was disbarred by default pursuant to a motion for summary adjudication filed by OPR.

TAX PROTESTORS AND TAX SHELTER PROMOTERS

Incompetence may also arise from adopting so-called “tax protester” positions. These are well-refuted positions based on a strained and unsupported interpretation of the law, such as the standard tax protestor position that the federal income tax is illegal because the Sixteenth Amendment to the United States Constitution was not ratified.

Other equally fanciful tax protester positions include arguments that the authority of the federal government is confined to the geographic limits of the District of Columbia, the term “income” as used in the Code is unconstitutionally vague and indefinite, only receipt of gold and silver can be constitutionally taxed, and only federal government employees are subject to federal taxation.

Courts have addressed and uncontrovertibly emasculated each of these arguments, but some taxpayers and, it appears, some practitioners persist in using them. In a high profile case involving California CPA and former IRS Criminal Investigations Special Agent Joseph Banister, OPR made it clear that use of frivolous tax protester arguments may result in disbarment from practice.

Disbarment may also result from the promotion of abusive tax shelters. In 1992 Thomas Settles, an attorney and CPA, began developing a tax strategy involving the transfer and lease of a taxpayer’s “goodwill” as well as the setting up of related entities such as living trusts, limited partnerships and management companies. Under this strategy the taxpayer would transfer his or her “goodwill,” residence and automobiles to a living trust of which the taxpayer was the trustee.

The trust would then transfer the “goodwill,” the residence and sometimes the automobiles to a family limited partnership (“FLP”) consisting of the taxpayer, spouse, any children and a general partner. The spouse and children would contribute nothing to the partnership for their partnership interest. A corporation owned by the taxpayer was set up as the general partner of the FLP with a one percent interest (the “management company”).

The FLP would then pay the management company a management fee for managing the assets and the management company would hire the taxpayer, his spouse and children as employees of the company. The taxpayer would concurrently enter into a facilities fee arrangement with the FLP to rent back his “goodwill,” residence and automobiles; deducting the rent expense on his or her tax return. The facilities fee would be reported as income by the FLP, but would be reduced by the personal living expenses of the family. The management company would pay its employees a salary in the form of tax free fringe benefits, such as health insurance, split dollar life insurance and tuition reimbursement; and any of the rent income to the FLP that was not reduced by the facilities fee payment would be distributed as income to the family members.

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In 1998 Settles began selling this tax strategy to his clients. In 2000, he set up a website providing income tax planning information to his clients and the public. A Final Judgment of Permanent Injunction was entered by the United States District Court against Settles on March 24, 2003. In it, Settles was enjoined from organizing, promoting, marketing or selling his tax strategy. In addition, OPR filed a Complaint seeking that Settles be disbarred from practice before the IRS, a request that was granted by the ALJ’s decision on March 2, 2006.

LAZINESS LEADING TO SANCTIONS FOR INCOMPETENCE AND DISREPUTABLE CONDUCT

Nevada attorney Alan Jones runs what appears to be a thriving tax controversy practice in Las Vegas where he maintains a website in which he advertises his practice as “American Tax Payers Defense.” The website contains testimonials, such as one which reads: “I could have faced time in jail for this. My kids could have been without their father. Alan Jones and his plan saved me.”

In 2005 the website identified Jones and two employees as principals in the firm with Jones listed as president and other employees listed as an “Enrolled IRS Agent” and an “IRS enrolled agent,” respectively. He routinely had two of his employees sign and file IRS Form 2848 (power of attorney) as enrolled agents. The problem was that the employees in question were not enrolled agents. The defense asserted by Jones when OPR charged him with incompetence and disreputable conduct confirmed that his procedures were rooted in convenience, so that the employees could deal with the IRS directly in assisting clients.

Apparently with the same motivation, Jones was found to have signed and filed with the IRS several powers of attorney (Forms 2848) that the named taxpayers had not signed, but whose signatures had been “cut and pasted” onto the form.

In imposing a suspension of two years, the ALJ noted that Jones’s violations did not appear to be motivated by fraud or any evil intent. Rather, his actions seemed to be borne out of sheer laziness. “He would rather . . . his office manager misrepresent her status to the IRS than suffer the inconvenience of speaking to the IRS himself when arranging a conference or hearing for a client,” noted the ALJ. “He would rather have signatures of clients cut and pasted onto forms rather than suffer the inconvenience of having the clients come to his office to sign the forms or mailing the forms to the clients for their signatures,” continues the opinion. Finally, the ALJ noted that Jones preferred to deceive the IRS and the public into believing that his employees were enrolled agents, “rather than suffer the inconvenience of requiring those persons to follow the regulations.”

WHAT KINDS OF CASES RESULT IN DISBARMENT?

DISTINCTION BETWEEN DISBARMENT AND SUSPENSIONDisbarment is the most severe sanction that can be sought under Circular 230. Interestingly, the regulations do not provide any standards for determining when it is appropriate to order disbarment as opposed to suspension.

Although it seems intuitive that disbarment is distinct from a suspension, the sanctions have been confused by OPR and the ALJ in at least one case. In 2009 OPR sought to have attorney Jennifer K. Suits “disbarred for a minimum of 48 months.” The requested sanction was imposed without correction.

Despite this confusion, there is a distinction between the two sanctions set forth in Circular 230. For example, if a practitioner is disbarred, he or she must wait at least five years before petitioning for reinstatement. Under this provision it is clear that there can be no “disbarment” lasting only 48 months and the sanction in Suits operates as a suspension, not disbarment. It should be noted, however, that it is not unusual for an ALJ to impose a suspension for “an indefinite period” with a specified minimum period of suspension.

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DISBARMENT FOR FAILURE TO FILEDisbarment cases almost always involve a failure to file or pay personal tax obligations by the practitioner. Most often, the failure to file is the only transgression contained in the Complaint. It should be noted that whether or not a practitioner has timely paid his or her taxes is irrelevant to a proceeding predicated on a failure to timely file returns.

A total of five separate (although not necessarily consecutive) years of failing to file personal tax returns in a timely manner seems to be OPR’s trigger for seeking disbarment. In almost every reported noncompliance case resulting in disbarment the practitioner either failed to file or failed to pay his or her tax obligation in a timely manner for five or more separate years.

OBSERVATION: OBLIGATIONS

Keeping current with tax filing and payment obligations is essential for any practitioner representing clients before the IRS. In addition to exposure to sanctions under Circular 230, some states will revoke a CPA or law license for failure to file or pay with respect to state tax obligations.

It should be noted that multiple years of noncompliance do not always result in disbarment. Cases involving as much as seven years of noncompliance have resulted in suspensions. For example, enrolled agent June Gittleson was suspended for only 36 months for failing to file returns for seven years and attorney Charles Stewart received a suspension of 48 months for failing to file for six years (Stewart also failed to pay interest and penalties related to five of those years).

Most disbarment cases involving noncompliance are not contested, and when they are the reasons offered in defense of the practitioner’s actions typically carry little weight with the ALJ or Chief Counsel. For example, Tim Kaskey, a CPA, failed to file personal tax returns for seven years, from 2001 through 2007. In his defense he cited “on-going medical problems,” despite the fact that during the same period he filed many tax returns on behalf of clients. The only evidence he produced regarding his medical problems was a single prescription. Both the ALJ and, upon appeal, Chief Counsel discounted Kaskey’s excuse for his noncompliance.

Attorney Alex Llorente cited marital difficulties in response to allegations that he willfully failed to file tax returns for a five year period. Not only did the Office of Chief Counsel uphold the ALJ’s decision to impose sanctions, it actually

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increased the sanction to disbarment, despite the fact that OPR had only sought a suspension. Attorney Peter DeLiberty claimed that his diabetes was the cause of his inability to file. On appeal the Chief Counsel, who unfortunately for the appellant was also a diabetic, sympathized but posited that a bout of the disease severe enough to be the legitimate cause for multiple years of nonfiling would have killed the practitioner. Since the practitioner lived, he was disbarred.

Jeff Parrack, a CPA from Fort Worth, Texas was also disbarred in part for noncompliance with personal tax filing and payment obligations. Parrack’s web site touts him as “specializing in IRS negotiations in wage and levy releases” and boasts that he “talks and works with the IRS . . . at least five times a day,” has “released wage levies in all 50 states,” and claims that “every wage levy release I have ever attempted, I have released!!!” On a marketing web site Parrack ironically states “You can check my current licensing and see that I have had no complaints with the Texas State Board of Public Accountancy (TSBPA).”

Despite this self-aggrandizement, the allegedly astute Mr. Parrack failed to file his own returns for 2008 and 2009. He did manage to file returns for 2004 through 2007, but they were inaccurate. He also failed to pay federal tax assessments for the years 2001, 2002, 2003, 2007, and 2008. As if this were not enough, Parrack failed to include his tax identification number on returns he prepared during the period from 1997 through 2003 and was alleged to have failed to exercise due diligence in the preparation of his clients’ returns. Although he claimed great success against the IRS on behalf of his clients, alas poor Parrack did not bother to present a defense to these charges and was disbarred by consent.

 

DISBARMENT INVOLVING INCOMPETENCEAlthough a willful failure to file or pay federal tax obligations is among the transgressions described in Circular 230 as constituting “incompetence and disreputable conduct,” disbarments often involve other conduct as well.

In the case involving CPA Tim Kaskey, during the course of an audit of one of his corporate clients, it was found that the officer compensation reported on the corporate return did not match the wages reported on the corresponding individual returns of the officers, even though all the officers of the corporation were Kaskey’s clients. Furthermore, the corporate books clearly identified personal items of the individual officers that were being paid by the corporation with no loans or distributions being shown on the returns. Kaskey claimed that his clients had misrepresented their income to him, a claim that the Office of Chief Counsel concluded lacked any merit.

As a result, Kaskey was found to have failed to determine the correctness of representations he made to the IRS during the audits and failing to inform his clients of the penalties reasonably likely to apply to them, as well as the opportunities to avoid such penalties. These actions, as well as the continuous failure to meet his own filing obligations for an extended period of time, were deemed to be incompetent or disreputable conduct warranting disbarment.

There is a somewhat troubling observation made by the Chief Counsel in the appellate decision regarding the Kaskeycase. The Chief Counsel commented that it was “inconceivable” that the officers could pay their living expenses based on the income reported on their returns. Does this imply that practitioners are expected to determine whether clients could sustain their living expenses based on the reported income as part of the standard due diligence requirement?

The Kaskey decision was based on a variety of factors and there is insufficient information to determine how “obvious” the expanse was between the reported income and the taxpayers’ lifestyles. Nonetheless, practitioners should be on notice that an observable disconnect between reported income and known lifestyle may give rise to an obligation for further inquiry. In a press release regarding the Kaskey case, OPR Director Karen Hopkins stated that “Practitioners who think OPR isn’t serious about due diligence should take heed,” and “may not ignore the implications of information already known.” The OPR Director also observed that “This is yet another decision highlighting that practitioners have a duty to the system as well as to their clients. Practitioners who do not take this duty seriously can expect to be held accountable.”

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Practice Tip: Treasury regulations provide that the “tax return preparer generally may rely in good faith without verification upon information furnished by the taxpayer” and that the preparer “is not required to audit, examine or review books and records, business operations, documents, or other evidence to verify independently information provided by the taxpayer.” However, a tax preparer cannot wear blinders or hide his or her head in the sand. Facts that should be obvious to the preparer cannot be ignored and there is an affirmative obligation to make reasonable inquiries if the information supplied to the preparer appears, on its face, to be incorrect, inconsistent, or incomplete. It is always a good idea to obtain written representations from the taxpayer.

DISBARMENT BASED ON CRIMINAL CONVICTIONSInterestingly, there were no decisions prior to the 2010 Everett case in which a practitioner was disbarred solely on the basis of a criminal conviction. In persuading the ALJ that disbarment was appropriate for Everett, OPR pointed to the multiple decisions in which practitioners were disbarred for failure to file federal tax returns, arguing that Everett’s convictions and the loss of his law license were far more serious and egregious than the failure to file federal tax returns.

The ALJ noted that, in determining which sanction is appropriate, Circular 230 Section 10.50 provides only that the sanctions imposed... shall take into account all relevant facts and circumstances.” As noted above, Circular 230 provides no guidance as to when disbarment or any other sanction is appropriate. Consequently, the ALJ decided to look to the American Bar Association (“ABA”) Standards for Imposing Lawyer Sanctions.

The ABA standards indicate that disbarment is the appropriate sanction when a lawyer (a) engages in serious criminal conduct a necessary element of which includes intentional interference with the administration of justice, false swearing, misrepresentation, fraud, extortion, misappropriation, or theft; or the sale, distribution or importation of controlled substances; or the intentional killing of another; or an attempt or conspiracy or solicitation of another to commit any of these offenses; or (b) engages in any other intentional conduct involving dishonesty, fraud, deceit, or misrepresentation that seriously adversely reflects on the lawyer’s fitness to practice. On the other hand, if the lawyer engages in criminal conduct that seriously adversely reflects on the lawyer’s “fitness to practice” but does not contain the elements listed above, suspension is the appropriate sanction. The ABA Standards go on to list a series of aggravating and mitigating factors that should be considered.

The ALJ concluded that Everett’s actions, as indicated by his conviction, reflected “serious criminal conduct a necessary element of which includes intentional interference with the administration of justice, false swearing, misrepresentation, or fraud,” or “intentional conduct involving dishonesty, fraud, deceit, or misrepresentation that seriously adversely reflects on the lawyer’s fitness to practice,” which suggests that the proper sanction is disbarment. Furthermore, the ALJ noted that Everett’s conduct also reflected aggravating factors of dishonest or selfish motive, and multiple offenses.

Therefore the ALJ determined that Everett’s criminal convictions and subsequent disbarment from the practice of law in two states warranted his disbarment from practice before the IRS, which is commensurate with the seriousness of his disreputable conduct. The ALJ noted that this conclusion was supported by Everett’s failure to file a response to OPR’s motion, in which he could have offered evidence of any mitigating circumstances or could have raised a genuine issue of fact material to what sanction was appropriate.

It is difficult to predict when disbarment will be sought as a sanction by OPR. For example, in 2008 James Napolitano, a 55-year old CPA from Long Island was representing a taxpayer with respect to a contested assessment. Apparently the client was not happy with the progress being made until Napolitano presented him with a letter from the IRS indicating that the situation had been resolved in the client’s favor. Unfortunately, Napolitano had forged the letter and used what looked like IRS letterhead in an effort to trick the client.

Because the matter had not, in fact, been resolved, Napolitano’s falsification eventually came to light. On April 10, 2008 Napolitano was arrested by local authorities and a U.S. Treasury agent and charged with forgery in the second degree and criminal possession of a forged instrument in the second degree. Two months later OPR filed a Complaint.

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Perhaps because Napolitano had not yet been convicted, the Complaint did not seek disbarment, but rather a suspension of 48 months, which was granted.

WHAT KINDS OF CASES RESULT IN SUSPENSIONS?

SUSPENSION FOR FAILURE TO FILEAs noted above, the failure to file personal income tax returns for five or more years often results in disbarment. When disbarment is not sought for a failure to file for five years, suspension for three to four years is commonly the result.Lesser suspensions may be imposed for failing to file for three of four years, and suspensions may even be imposed for merely filing late returns.

Excuses involving medical or marital problems are typically ineffective as a defense to a charge of failure to file, particularly if the accused practitioner has continued to prepare and file returns for clients during the relevant period.

For example, enrolled agent Juanita Gonzales claimed that an emotional disability and other personal problems prevented her from filing her tax returns. In support of this assertion, she submitted a statement from a therapist indicating that she “did not have the emotional reserves to file her own taxes in a timely manner.” In rejecting this defense, the Chief Counsel noted that Gonzales refused to present the therapist as a witness for cross-examination and continued to prepare and file returns for clients during the period of treatment.

Practitioners should note that the obligation to file an income tax return is independent of any tax liability. Assuming the income threshold is met, every U.S. citizen is required to file a federal income tax return by statute, whether or not any tax payment is due. Because the penalties for not filing are based on the amount due, it is true that there may be no tax penalty for nonfiling in a particular case. Circular 230, however, requires that practitioners follow the law, not just that they avoid the imposition of tax penalties.

An interesting case regarding this point involved Daniel Yoder, an enrolled agent from Michigan. Yoder claimed a religious exemption from the payment of self-employment tax. In addition, the exemptions to which he was entitled eliminated any income tax liability so that it was undisputed that Yoder had no tax liability, and for that reason, he did not file his returns for four years. In imposing a suspension of two years for failure to file, the ALJ noted that, “the requirement to file a return is based upon gross income levels, not taxability of the income.” Yoder’s claim to a religious exemption from self-employment taxes and the other factors eliminating his income tax liability, therefore, were irrelevant to the issue of whether or not he had to file.

SUSPENSION FOR MISREPRESENTATIONIn another case, an Enrolled Agent was suspended for two and a half years in 2006, primarily for his conduct representing clients in controversy matters. With respect to an employment tax investigation of a corporate client, the EA failed to supply documents requested and repeatedly changed his story with respect to such document requests, first saying he had provided them, then making promises to provide them at a later date, then blaming the delay on his clients, and finally stating that the documents did not exist. The EA eventually even alleged that the Revenue Officer had “a history of misfiling or losing documents.”

Similar results ensued after the EA insisted that the case be transferred to another Revenue Officer. He refused to provide a Form 433-B to the second Revenue Officer, again providing multiple inconsistent reasons for his failure and blaming the Revenue Officer for not being clear as to what information was being requested. He also again blamed his client for not providing the information.

In a case involving an individual taxpayer, the same EA attempted to get a Notice of Federal Tax Lien released by calling IRS group, territory, and area managers and telling them, variously, that he had not been informed about the lien and that a subordination of the lien had already been agreed to. Both claims were verifiably false. The EA is reported to have become angry and made several false statements to the area manager, among them that he was not

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aware of the trust fund recovery penalty assessment, that he was not advised that the lien would be filed and that he had not had a conversation with the Revenue Officer when in fact he had.

With respect to yet another case, the Florida EA falsely maintained in a conversation with an IRS manager that other IRS personnel had agreed to lien subordination. He later requested a withdraw of a CAP appeal of the subordination denial on the basis that the Taxpayer Advocate Office had upheld his position as to an allocation of payments and approved the subordination of the lien. The Taxpayer Advocate Office, in fact, never approved the subordination. In the words of the Chief Counsel “The evidence is clear that when [he] did not get his way, he began making false assertions that the subordination had been agreed to in an attempt to bully the IRS officials into approving it.”

The EA argued that he should not be sanctioned for an occasional late, or lack of, response. The problem, according to the Chief Counsel, was that the instances of failure to provide information were not occasional. “In every case there were multiple instances, a course of conduct that resulted at the very least in delay in the resolution of the case, not to mention the waste of the IRS employees’ time and efforts.” Due to his pattern of behavior, he was sanctioned for neglecting or refusing to promptly submit records or information in a matter before the IRS on proper and lawful request, failing to exercise due diligence in preparing and filing returns, documents and other papers relating to IRS matters and in determining the corrections of oral or written representations made to the Treasury Department, unreasonably delaying the prompt disposition of matters before the IRS, and engaging in disreputable conduct by knowingly giving false or misleading information to the IRS.

SANCTIONS IMPOSED FOR ANGER MANAGEMENT ISSUESPractitioners use a variety of approaches in dealing with the IRS. Some prefer to maintain a cordial, polite relationship and some are more adversarial in nature. Regardless of approach, practitioners are expected to zealously represent their clients, but sometimes the line between zealousness and abusive behavior is crossed. Practitioners are well advised to be careful in their choice of words, as Circular 230 includes the use of threats, false accusations, duress or coercion to influence an IRS employee among the actions considered incompetence and disreputable conduct for which a practitioner may be sanctioned.

It would be fair to say that the approach used by Milton Friedman, a Florida CPA, falls more toward the aggressive end of the spectrum. During a meeting with IRS employees in 2001, Friedman stated that he had reported an IRS group manager to Inspection, referred to her as “an asshole,” and said that that he was going to “turn her around 180 degrees.” He referred to another IRS employee as “stupid.”

In 2002 when an IRS manager called Friedman in response to information requested by the CPA, Friedman is reported to have stated: “You arrogant, sarcastic asshole” and hung up. In a subsequent letter to OPR defending his actions, Friedman observed that the manager was, in fact, arrogant and sarcastic, but offered no proof that he was an asshole.

In 2003, after receiving several additional complaints from IRS personnel that Friedman had used offensive, threatening, and insulting language with them, OPR contacted Friedman and suggested he consent to a public censure for his conduct.

During the negotiations with OPR Friedman suffered a heart attack. Presumably mellowed by that ordeal, Friedman consented to a public censure on December 30, 2003 in which he agreed, among other things, to avoid the “use of terminology or statements that could be construed as offensive, threatening, or insulting” for a period of three years.

While the heart attack may have mellowed Milton, it did not emasculate him. Seven months after he consented to the censure he once again became entangled in a less than civil relationship with a Revenue Officer.

After sending several complaints to the Revenue Officer and her manager regarding what Friedman considered to be unwarranted collection activity, he made a demand to meet with District Counsel regarding the matter. When the Revenue Officer failed to set up a meeting between Friedman and District Counsel, the CPA sent the Revenue Officer a

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certified letter demanding she withdraw a Notice of Levy and stating, “I am putting you on notice that any damages incurred, in the interim, will be the basis for a suit brought against you personally, as well as your employer.”

OPR found that this letter violated Friedman’s censure agreement. There is a significant difference, OPR felt, between filing a complaint about an IRS employee’s allegedly improper actions and telling the employee that, if he or she does not do what is requested, then a complaint will be made or a lawsuit will be commenced. The former is a statement of fact, according to OPR, while the latter could be construed as a threat. Friedman, of course, had agreed to refrain from making threats.

In the decision imposing a suspension on Friedman, the ALJ concluded that Friedman’s language constituted threats and attempts to interfere with and influence IRS employees in the exercise of their official duties. “The threat of being subjected to a lawsuit,” the ALJ observed, “no matter how frivolous, is a matter of concern to anyone.” Friedman was suspended for one year for violating his censure agreement.

Practice Tip: The Friedman case should not inhibit practitioners from zealously representing their clients or from raising legitimate concerns about the conduct of IRS employees. The proper response to such concerns, however, should be the lodging of a complaint or taking other appropriate actions. In Friedman it was the practitioner’s threatsto take action that were clearly being utilized in an effort to influence the IRS that caused the problem.

CONDUCT THAT DOES NOT VIOLATE CIRCULAR 230

INTRODUCTIONWhen OPR files a Complaint against a practitioner seeking sanctions, they almost always win. Not only does OPR almost always win the case in chief, the vast majority of ALJ decisions impose the specific sanction sought. As detailed above, an appeal might even result in an increased sanction. In a few rare instances, however, the practitioner has been vindicated in a disciplinary hearing.

VALID EXCUSES FOR NONPAYMENTNonpayment of federal income tax assessments is not a per se violation of Circular 230. As with nonfiling, it is only an action that is willful that results in sanctions. As seen in the cases discussed above, willfulness is not a difficult standard for OPR to meet when it comes to a practitioner’s failure to file. By definition, practitioners are well versed in filing requirements and absent some physical inability to do so, it is hard for a practitioner to construct a successful argument that his or her failure to meet a filing obligation was anything other than willful.

Payment, however, is another matter. It is not hard to imagine how financial circumstances could stand in the way of meeting a payment obligation, even by the most astute practitioner.

For example, CPA Edwin Davis was charged with failure to pay his tax liabilities in a timely manner over a multiple year period. During the period in question, Davis earned an annual average of only slightly more than $20,000 from his accounting practice. In fact, he had even considered abandoning his practice to pursue a career as a screenwriter. He had no savings and three minor children to support. His financial situation caused him to be delinquent in his child support obligations. While the ALJ did not see any of these facts as mitigating the charge of failure to pay, on appeal the Office of Chief Counsel determined that the facts indicated the payment failures were not “voluntary” and “willful” and thus did not constitute disreputable conduct.

DISCLOSURE IN COLLECTION CASESAs all practitioners involved in collection matters know, there is an inherent tension between candid disclosure of a client’s financial condition and client confidentiality. The tension was the root of a charge of disreputable conduct levied against California attorney Philip Panitz in 2006.

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When submitting offers-in-compromise to the IRS, Panitz’ practice is to have his client pay into his attorney trust account the amount of the offer in advance so the money will not be dissipated by the time the offer is “worked.” With regard to one particular offer submitted by Panitz, an associate failed to follow his usual practice of notifying the IRS in a cover letter that the offer funds were being held in the trust account. In a statement attached to the offer forms, however, it was noted that “the funds necessary to make this offer” remained as an asset of the taxpayers.

When the IRS requested a copy of his “retainer/fee agreement . . . establishing the terms of payment, an accounting of the payments made to date, and a statement of the current balance due,” the same associate replied that, “Money paid to an attorney has been held to be information between an Attorney and Client, and since the money has been spent it is somewhat irrelevant anyway to an offer in compromise calculation.” Subsequently, Panitz’s office did notify the IRS that the money to be used for the offer had been deposited into his attorney trust account.

It is clear that an attorney submitting an offer-in-compromise has an obligation to notify the IRS about client assets held in his or her attorney’s trust account. While the ALJ agreed with OPR that Panitz’s communication to the IRS in this regard was not “entirely forthcoming,” she also noted that nothing about the communication was false or misleading, and therefore no sanction could be imposed.

In another instance, Panitz had his clients pay into his trust account an amount designated to pay a state tax liability. This amount was not disclosed to the IRS when an offer-in-compromise related to the client’s federal tax liability was submitted. When the IRS later requested a complete disclosure of all funds the firm held on the client’s behalf, Panitz provided documentation of the entire amount deposited into his trust account, which included the amount designated to fund the state tax liability.

With regard to this instance the ALJ focused on the “willful” nature of the omission, observing that “the evidence further shows that the IRS often had to “flesh out” the information provided in taxpayers’ offers-in-compromise, from which it is reasonable to infer that it is not uncommon for taxpayers to omit or fail to disclose pertinent information in their offers without, presumably, incurring the penalties described in Circular 230.” On this basis the ALJ determined that “It follows, and I find, that willfulness cannot be established by mere omission or failure to disclose information but must be evidenced by conduct from which an intent to deceive or mislead may be inferred. Thus, nondisclosure alone cannot prove a “knowing” submission of false or misleading information.”

BEING WRONG IN A WRITTEN OPINION

BEING WRONG IN A WRITTEN OPINIONIn another 2006 case, OPR alleged that attorney John Sykes failed to exercise due diligence and willfully engaged in disreputable conduct in connection with certain opinions he issued to an investment firm.

The opinions in question dealt with a series of leasing transactions. Specifically, they addressed the basis, for tax purposes, of certain preferred stock held by an offshore entity as a result of an exchange transaction. Some of that stock was acquired by the investment firm which requested tax opinions as to the basis of the stock in order to claim substantial losses on its partnership tax returns when the stock was sold and to insulate it from penalties that might be asserted by the IRS.

The opinions authored by Sykes opined that (a) the exchange transactions met the requirements for a tax-free exchange under Section 351 of the Code, (b) the stock received by the offshore entity would have a basis equal to the amount specified therein, and (c) if the offshore entity were to sell that stock for cash in a bona fide arms-length transaction with economic substance, its gain or loss from that sale would be determined by reference to the basis specified in the opinion.

Subsequently the investment firm sold the stock and claimed a loss on its tax returns based on the Sykes opinion. Upon examination that loss was disallowed by the IRS on the basis that the transactions were sham transactions lacking any non-tax business purpose and that there was no reasonable expectation of profit apart from the benefits

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26 Being Wrong in a Written Opinion

accruing to the investment firm from the purported losses for tax purposes. Substantial tax penalties were also imposed on the investment firm. The investment firm challenged the IRS ruling in federal court and lost.

In filing its Complaint against Sykes, OPR asserted that Sykes’ use of short form opinions, which contained “facts, assumptions and conclusions without setting forth any analysis,” put the investment firm at risk because they did not show that all relevant information had been taken into account and they did not provide adequate documentation to justify the tax position or provide it with penalty protection.

The ALJ, however, found that it was accepted practice to issue short form opinions that did not contain the full legal analysis of the practitioner issuing the opinion. Sykes did perform that analysis, according to the ALJ, and the fact that it was not detailed in the opinion letter did not equate to a lack of due diligence. More importantly, implicit in the decision is that having been determined to be incorrect in the analysis of a complex tax matter does not constitute disreputable conduct. As long as they are careful, tax practitioners can be wrong without having to suffer a sanction.

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