D.C. District Court Invalidates Regulation That Bans Contingent Fees for Preparing Refund Claims

By Michael Wu, CPA, CGMA, MBA, Silicon Valley, Calif.

Editor: Mark G. Cook, CPA, MBA

Practice & Procedures

The case of Ridgely v. Lew , No. 1:12-cv-00565 (CRC) (D.D.C. 7/16/14), concerns the breadth of the IRS's authority to regulate CPAs, which is found in 31 U.S.C. Section 330. Under Section 330, the Treasury secretary has authority to regulate "persons" who practice before the Treasury Department. In relevant part, Section 330 states:

(a) Subject to Sec. 500 of title 5, the Secretary of the Treasury may—

    (1) regulate the practice of representatives of persons before the Department of the Treasury; and

    (2) before admitting a representative to practice, require that the representative demonstrate—

        (A) good character;

        (B) good reputation;

        (C) necessary qualifications to enable the representative to provide to persons valuable service; and

        (D) competency to advise and assist persons in presenting their cases.

(b) After notice and opportunity for a proceeding, the Secretary may suspend or disbar from practice before the Department, or censure, a representative who—

    (1) is incompetent; 

    (2) is disreputable; 

    (3) violates regulations prescribed under this section; or 

    (4) with intent to defraud, willfully and knowingly misleads or threatens the person being represented or a prospective person to be represented ...

(d) Nothing in this section or in any other provision of law shall be construed to limit the authority of the Secretary of the Treasury to impose standards applicable to the rendering of written advice with respect to any entity, transaction plan or arrangement, or other plan or arrangement, which is of a type which the Secretary determines as having a potential for tax avoidance or evasion.

Under this statutory authority, the secretary of the Treasury publishes regulations governing "practice" before the IRS. These regulations are commonly known as Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10). Most of Circular 230 outlines duties and restrictions concerning "practice" before the IRS as they relate to practitioner character, reputation, and competency.

In 2007, after a period of notice and comment, the IRS promulgated regulations prohibiting the charging of contingent fees except in limited circumstances. Specifically, Sections10.27(a)-(b) of Circular 230 provide:

(a) In general. A practitioner may not charge an unconscionable fee in connection with any matter before the Internal Revenue Service.

(b) Contingent fees—

    (1) Except as provided in paragraphs (b)(2), (3), and (4) of this section, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service. 

    (2) A practitioner may charge a contingent fee for services rendered in connection with the Service's examination of, or challenge to—

        (i) An original tax return; or 

        (ii) An amended return or claim for refund or credit where the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to the original tax return. 

    (3) A practitioner may charge a contingent fee for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service. 

    (4) A practitioner may charge a contingent fee for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.

 

Circular 230, Section 10.27, defines "matters before the Internal Revenue Service" to include "tax planning and advice, preparing or filing or assisting in preparing or filing returns or claims for refund or credit, and all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer's rights, privileges, or liabilities." The provision therefore encompasses preparers of refund claims who "appear" before the IRS only when they prepare and/or file refund claims.

The Ridgely Decision

The district court found Section 10.27(b) of Circular 230 invalid as it pertains to refund claims and permanently enjoined the IRS from enforcing the regulation with respect to fees for preparing refund claims.

The court began by discussing the nature of preparing and filing a refund claim. A CPA or other person may assist a taxpayer in preparing and filing a refund claim and, in doing so, would not be legally representing the taxpayer until the IRS responded to the claim and the CPA submitted a power-of-attorney form to the IRS. Thus, what the plaintiff, Gerald Ridgely, challenged was the IRS's claimed authority to regulate fee arrangements entered into by CPAs for preparing and filing refund claims before the commencement of any adversarial proceedings with the IRS or any formal legal representation by the CPA.

The court said that, as to the meaning of the term "representative," the definition in Loving, 742 F.3d 1013 (D.C. Cir. 2/11/14),is clear: A "representative" is traditionally one "with authority to bind others." Tax return preparers neither "possess legal authority to act on the taxpayer's behalf" nor can they "legally bind the taxpayer by acting on the taxpayer's behalf." The Loving court defined "tax return preparers" to expressly include those preparing refund claims, but even if Loving's holding fails to directly cover CPAs preparing and filing refund claims, Loving'sreasoning applies straightforwardly. CPAs preparing and filing those claims before possessing any power of attorney possess no "legal authority to act on behalf of taxpayers." Thus, 31 U.S.C. Section 330's use of the term "representative" excludes refund claim preparers, just as it did tax return preparers in Loving.

The process of filing a refund claim—before any back-and-forth with the IRS—is similar to the process of filing a tax return in that both take place before any type of adversarial assessment of the taxpayer's liability. If a tax return preparer does not practice before the IRS when he or she simply assists in preparing someone else's tax return (as Loving held), then a CPA hardly "practices" before the IRS when he or she simply prepares and files a taxpayer's refund claim, before being designated as the taxpayer's representative and before the commencement of an audit or appeal.

EditorNotes

Mark Cook is a partner with SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Mr. Cook at 949-422-7244 or mcook@singerlewak.com.

Unless otherwise noted, contributors are members of or associated with SingerLewak LLP.

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