Circular 230 outlines the duties and restrictions relating to practice before the IRS and the rules regarding disciplinary proceedings for violations. Final regulations issued in 2007 made many changes to Circular 230.
A practitioner charged by the Office of Professional Responsibility with a violation of Circular 230 is entitled to a hearing before an administrative law judge; if the practitioner or the OPR is not satisfied with the decision, it can be appealed to the Secretary of the Treasury and subsequently to the federal courts.
A practitioner who has been found guilty of violating Circular 230 may be censured, suspended, or disbarred from practice before the IRS. Monetary penalties can be assessed in addition to or instead of these sanctions.
A disbarred practitioner may petition for reinstatement to practice before the IRS five years after the date of his or her disbarment.
Tax practice in the United States and internationally by CPAs has become one of the most complicated and ambiguous areas of accounting in the past 25 years. CPA tax practitioners have had to confront numerous tax law changes ranging from the estate and gift area to complex new provisions regulating tax evasion and avoidance transactions. Tax practitioners have also seen major revisions in tax penalty legislation and increases in other enforcement efforts due to a tax gap of approximately $345 billion annually.1
Of note are recent changes to regulations found in Circular 230,2 which regulates tax practice before the IRS for attorneys, CPAs, and enrolled agents. Circular 230 outlines the duties and restrictions relating to practice before the IRS and the rules regarding disciplinary proceedings for Circular 230 violations. In the American Jobs Creation Act of 2004, P.L. 108-357 (AJCA), Congress granted the IRS’s Office of Professional Responsibility (OPR) the authority to impose monetary penalties on tax practitioners, their employers, or entities for which they act.3
Further complexity in tax practice responsibilities occurred throughout 2007. Final Circular 230 regulations became effective September 27, 2007 (TD 9359). (Proposed regulations had been released in February 2006.)4 These final regulations, discussed below, contain not only revisions to the procedural and penalty sections of Circular 230 but also revisions to the duties section, including new provisions on contingency fees and conflict-of-interest requirements.
Other major changes occurred in federal law that also will affect tax practitioners. Under the Small Business and Work Opportunity Tax Act of 2007, P.L. 110-28 (SBWOTA), enacted on May 25, 2007, a new level of return preparer penalties under Sec. 6694(a) was established for tax returns prepared after that date. The new penalties cover both signing and nonsigning preparers (under Sec. 7701(a)(36)) of all tax returns (including claims for refunds and amended returns) such as gift and estate tax returns, employment and excise tax returns, and generation-skipping transfer tax returns. Sec. 6694(a), as amended, increases the penalty from $250 to the greater of $1,000 or 50% of the income that the preparer would derive (or to be derived) from the claim or tax return for which the penalty was imposed.
In addition, the tax return preparation standard for nondisclosed tax return positions was increased from the “realistic possibility of being sustained on the merits” under prior Sec. 6694(a) to “more likely than not to be sustained on its merits.” Further, disclosed tax return positions under Sec. 6694(a) will now have to meet a “reasonable basis” standard for the position rather than the “non-frivolous” standard under prior Sec. 6694(a). In Notice 2007-54 the Service has issued some transitional relief from the new provisions.
Caution: Practitioners should check Notice 2007-54, which contains details on income tax returns, claims for refunds, and amended returns, as well as rules on the expanded list of returns (e.g., gift and estate tax returns) that are now covered.5
Treasury and the IRS issued Notice 2008-13 on December 31, 2007, providing guidance on the implementation of the revised provisions of Sec. 6694 as well as the related definitional provisions of Sec. 7701(a)(36). The notice announces the intent of Treasury and the Service to revise the “regulatory scheme governing tax return preparer penalties, which has remained substantially unchanged since the late 1970’s.” This notice contains excellent discussion of the Service’s current position on Sec. 6694, along with a series of examples that are useful for illustrating the notice’s provisions. A deadline for completion of the announced regulatory project is set for the end of 2008.
One early commentary provides an excellent review of the notice as well as a pithy discussion of the relationship between substantial authority under Sec. 6662 of the accuracy-related penalties for taxpayers and revised Sec. 6694 for preparers.6 Notice 2008-12 provides further guidance regarding the tax return preparer signature requirements, and Notice 2008-11 clarifies the transitional relief outlined in Notice 2007-54, discussed above. Practitioners are encouraged to review these notices and to watch for further developments in this critical area of practice.
In addition to the passage of SBWOTA, proposed regulations under Circular 230 §10.34, establishing the more-likely-than-not standard, were released on September 26, 2007.7 The proposed regulations followed the revised language in new Sec. 6694(a), enacted in May 2007. Two commentators have already expressed concern that the changes to Sec. 6694(a) and the proposed changes to Circular 230 §10.34 will affect practitioners’ ability to serve as advocates for their clients.8 The AICPA also has organized a task force that is working with Treasury and the Service to develop further guidance on these new regulations.
This article briefly reviews the changes to Circular 230 and presents a roadmap of the disciplinary process under §§10.50–10.89. These sections cover the procedural rights and practices that exist once the OPR contacts a practitioner. The discussions are based on Circular 230 and the amendments found in the preamble to the regulations (TD 9359).
Regulations, published as Circular 230 (31 CFR Part 10), govern practice before the IRS. Section 10.2(d) states that practice before the IRS encompasses all matters connected with a presentation to the Service, its employees, or officers that relate “to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service.” The presentations include (but are not limited to) preparing and filing documents, communicating and corresponding with the IRS, and representing a client at hearings, conferences, and meetings. In addition, written tax advice is considered practice under §10.2(a)(4).
Relevant required duties of practitioners governed by Circular 230 relate to knowledge of a client’s omission of information, diligence as to accuracy, and adherence to standards and requirements covering tax return positions, covered opinions, and other written tax advice. Other aspects, such as contingency fees, advertising, and conflicts of interest, although not directly related to the technical areas of tax compliance and planning, may lead to sanctions under Circular 230 if practitioners violate them.9
A variety of professional standards guides the conduct of tax practitioners.10 Along with Treasury’s standards of professional conduct found in Circular 230, the AICPA Code of Professional Conduct and Statements on Responsibilities in Tax Practice provide standards for CPAs. Attorneys follow professional standards of conduct found in the Model Code of Professional Responsibility and the Model Rules of Professional Conduct.
Typically, state licensing boards enforce these standards at the state level. CPAs and attorneys who fail to adhere to the standards could face disciplinary action, which includes loss of their state licenses to practice. Federal courts also have the power to discipline members of their bar separately from the disciplinary procedures of state courts11 and to prescribe rules for professional conduct.12
The OPR’s Enforcement Unit is responsible for disciplining tax practitioners under Circular 230. Violation of Circular 230 regulations can lead to disciplinary actions or sanctions that include censuring, suspending, or disbarring CPAs from practice before the IRS13 along with imposing monetary penalties against both CPAs and their firms.
The past effectiveness of Circular 230’s disciplinary rules has been questioned. Lack of enforcement, partly due to lack of staffing in the OPR, which resulted in a decrease of referrals, is one factor identified as undermining its effectiveness.14 Increased OPR staffing and changes in disciplinary processes aim to make Circular 230 more responsive. In addition, monetary penalties are viewed as giving the OPR a “new level of effectiveness.”15 During the government’s fiscal year 2006 (which ended on September 30, 2006), the OPR suspended or disbarred 79 practitioners, gave reprimands to 7 others, used expedited suspension of 193 practitioners under the provisions of Circular 230, and closed 456 cases without sanctions.16
Overview of the Disciplinary Process
The final regulations modifying Circular 230 changed aspects of the disciplinary process for tax practitioners. While the structure is largely intact—involving an agency investigation, a hearing, and both administrative and judicial review, including the use of administrative law judges (ALJs)—the process underwent significant revisions.
Under the Circular 230 process, referrals come to the OPR from three sources: the IRS, the public, or a tax practitioner. Once the OPR receives a complaint (from whatever source), a staff lawyer is assigned the referred complaint to determine whether the office has jurisdiction and to make sure the allegations are not too old to pursue.17 (It is the OPR’s position that its actions are remedial, so there is no statute of limitation; however, an allegation’s age may determine whether it is relevant to current fitness to practice.) The enforcement attorney examines the facts to ascertain whether an actionable claim exists. At this point, many cases are closed with no further action.
Assuming that the enforcement attorney determines that a potential actionable claim exists, several actions may follow.
- An allegation letter may be sent to the practitioner summarizing both the facts and the allegations of Circular 230 violations, along with any other relevant data gathered by the enforcement attorney. Generally, the practitioner is asked to respond within 30 days of the date of the letter and to provide a response that may, if relevant and convincing, result in the case being closed. If the evidence provided by the initial investigation and discussions with the practitioner seem to support the allegations, further action by the OPR may result.
- A §10.20 letter compels the practitioner to furnish information to the OPR. Based upon a proper and lawful request from the Service, §10.20(a)(1) mandates that practitioners must promptly submit to the IRS any information or records “unless the practitioner believes in good faith and on reasonable grounds that the records or information are privileged.” If the records or information are not under the control of the practitioner (or the practitioner’s client) or are not in the practitioner’s possession (or under the client’s control), the practitioner must promptly notify the IRS. The practitioner must provide any information about an individual who has control or possession of the requested information or records and must ask the client about the identity of any persons who may have such control or possession.
- An expedited suspension letter under §10.82 is used when a practitioner’s license has been suspended or revoked for cause (but not for failure to pay a professional licensing fee) or if the practitioner has been convicted of a crime under the Internal Revenue Code, any crime involving breach of trust or dishonesty, or any felony that would render the practitioner unfit to practice before the Service.18 An expedited suspension letter may also be sent for violating conditions of compliance in a prior settlement or for being sanctioned by a court for delay, frivolous arguments, or failure to pursue administrative remedies. The letter outlines the allegations and indicates that a response must be received within 30 days after receipt of the complaint.
Caution: All of the above complaints are serious. It is essential that a CPA contacted by the OPR, under any of the above conditions, respond within the required time and/or request a conference if provided by Circular 230. A practitioner should contact an experienced tax attorney with expertise in such matters who can assist the practitioner in preparing a truthful and adequate response. Every effort should be made to provide all necessary information to ensure that the initial contact letter (e.g., the allegation letter) does not develop into a formal complaint. The practitioner should ask the representing attorney about any legal rights and practices that must be followed to guarantee that all statutory and constitutional rights are protected.
A referral can have several outcomes. Where there is no violation, the OPR dismisses the case. If the practitioner does not contest the case, the outcome generally results in some type of sanction agreement between the OPR and the practitioner. When the practitioner contests the case, the OPR files a complaint with an ALJ from another agency that has been assigned to the case.
If the practitioner does not answer the complaint, the ALJ enters a default judgment against the practitioner. If the practitioner answers the complaint, a hearing takes place, each side presents its case, and the ALJ renders a decision. If neither side appeals the decision within 30 days, the decision becomes final. If an appeal is made, a Treasury delegate reviews the entire record of the proceeding and either affirms, reverses, or modifies the ALJ’s decision. Thereafter, appeals are to federal district court, then to federal appeals court, and then to the U.S. Supreme Court.
In all proceedings, the burden of proof is on the OPR. The standard of proof varies depending on the severity of the sanction indicated in the complaint. A more detailed description of the various standards of proof is found in the discussion of §10.76, below.
Section 10.50: Sanctions
Under §10.50, after notice and an opportunity to be heard, a practitioner may be censured (publicly reprimanded), suspended, or disbarred from practice before the IRS for incompetence, disreputable conduct (see the discussion of §10.51 below), failure to comply with Circular 230 regulations (§10.52), or intent to defraud or knowingly mislead or threaten a client or prospective client.
Section 10.50 authorizes the imposition of monetary penalties in addition to, or in lieu of, other sanctions in accordance with §822(a) of the AJCA. Under §10.50(c)(1)(i), after both issuing a notice and providing an opportunity for a proceeding, the Treasury secretary or his or her delegate may impose a monetary penalty on any practitioner engaging in conduct subject to sanction under §10.50(a). Further, §10.50(c)(1)(ii) stresses that if the practitioner was acting on behalf of any firm, employer, or other entity connected with the conduct subject to the penalty under §10.50(c), a monetary penalty also may be imposed on that firm, employer, or entity if it knew, or reasonably should have known, about such conduct. The monetary penalty is limited to the gross income derived (or to be derived) from the sanctioned conduct.
Section 10.50(c)(3)(i) provides that the monetary penalty may be in addition to, or in lieu of, any censure, suspension, or disbarment to which a practitioner is subject and may be in addition to any monetary penalty imposed on a firm, employer, or entity subject to §10.50(c)(1)(ii). Section 10.50(c) applies to prohibited conduct occurring after October 22, 2004.
In April 2007, the IRS issued Notice 2007-39, providing additional guidance. According to this notice, the monetary penalty may be imposed either for a pattern of conduct that violates Circular 230 or for a single act. The monetary penalty can be imposed on the practitioner, and there also can be a separate penalty against the firm, employer, or other entity that either knew or reasonably should have known about the prohibited conduct. The notice stresses that the secretary has the discretion to impose a monetary penalty in an amount that is less than the amount permitted in AJCA §822 (i.e, the gross income derived (or to be derived) from the conduct giving rise to the penalty).
Notice 2007-39 further states that the determination of the amount of the penalty (or penalties) will also involve the Service’s consideration of mitigating factors, which will include the culpability level of the practitioner, entity, or firm, the potential or actual injury resulting from the prohibited conduct, and whether the firm, entity, or practitioner owed a duty to an actual or prospective client. The IRS in addition will consider whether prompt action was taken to correct the noncompliance with Circular 230 after the discovery of the prohibited conduct, whether the noncompliant actions ceased promptly, and whether there were attempts “to rectify any harm caused by the prohibited conduct and whether steps were taken to ensure that the prohibited conduct did not occur in the future.”
In addition, the notice stressed that the Service will not impose monetary penalties in cases involving “minor technical violations” where there is little or no chance of injury to a client, tax administration, or the public and where there is little likelihood that similar conduct will be repeated.
Practice tip: Practitioners are en-couraged to examine Notice 2007-39 and its two examples and to conduct continuing education with any of the firm’s personnel who might be covered by its provisions.
The American Bar Association, in a letter to the Service dated October 5, 2007, stressed that the substance of Notice 2007-39 should be incorporated in Circular 230 itself, that the monetary penalties in the rules relate only to Circular 230 violations, and that the penalties apply only to firms, employers, or other entities that provide tax advice or services to others. The letter also asked for further clarification on how and when the listed mitigating factors in Notice 2007-39 should or must be taken into account and how the mitigating factors will influence the final determination in a case.19
Section 10.51: Incompetence and Disreputable Conduct
Section 10.51 defines the conduct for which a practitioner may be sanctioned. The specific forms of disreputable conduct outlined in this section are not meant to be an exclusive listing but merely common violations. These violations include:
- Giving false or misleading information to Treasury;
- Giving a false opinion;
- Contemptuous conduct in practice before the IRS;
- Knowingly aiding and abetting an ineligible person to practice before the IRS;
- Disbarment or suspension;
- Misappropriation of client funds;
- Willful failure to make a tax return or evade payment of tax; and
- Improper solicitation of employment.
The final regulations add three more forms of disreputable conduct, each addressing willful conduct:
- Willfully assisting, counseling, and encouraging a client in violating or evading a federal tax law (§10.51(a)(7));
- Willfully failing to sign a tax return unless due to reasonable cause and not to willful neglect (§10.51(a)(14)); and
- Willfully disclosing or using a tax return in a manner inconsistent with the Code contrary to an ALJ or court order in a proceeding instituted under §10.60 (§10.51(a)(15)).
Willful conduct has been defined as requiring “a conscious act or omission made in the knowledge that a duty is therefore not being met.”20 It does not require fraudulent intent or evil motive. In Pickering,21 a tax return preparer ignored information provided by a bookkeeper that a corporation paid many of the shareholder’s personal expenses. The preparer instead relied on the corporate books. The court found that the preparer’s conduct in failing to investigate the bookkeeper’s statements was willful.
Various appellate courts have ruled that willfulness occurs if the responsible person “acts with reckless disregard of a known or obvious risk” or is involved in “intentional, knowing, and voluntary acts,” has “a reckless disregard for obvious known risks,” or performs “a voluntary, conscious, and intentional act to prefer other creditors over the United States.”22
Section 10.52: Violations Subject to Sanctions
Under §10.52, a practitioner may be subject to §10.50 sanctions for willfully violating any regulations (other than §10.33, Best Practices) or for recklessly or through gross incompetence violating §§10.34–10.37.
Section 10.53: Receipt of Information Concerning Practitioner
Essentially, §10.53 covers making referrals to the OPR director about violations of Circular 230 provisions. If an officer or employee of the Service “has reason to believe that a practitioner has violated any provision of this part,” §10.53(a) stresses that that employee or officer will make a written report to the director about the suspected violation. The report will explicate the reasons and facts on which the officer’s or employee’s beliefs about the suspected violation rely.
Internal Revenue Manual (IRM) Section 184.108.40.206.2.2 states in part: “In matters involving non-willful conduct, a referral should only be made when it can be established that the preparer has a pattern of failing to meet the required standards of Circular 230.” Therefore, penalties under Sec. 6694(a) or Secs. 6695(a)–(e) would not automatically result in referral to the OPR unless willful conduct was involved. IRM Section 220.127.116.11.2.2.1 lists the sanctions that should lead to a mandatory referral.
Any other person having information regarding a violation of any Circular 230 provision may (but is not required to) make either a written or an oral report to an IRS employee or officer who in turn will make a written report to the OPR director. Alternatively, the person may make the oral or written report directly to the OPR director (§10.53(b)).
No report made to the OPR under §§10.53(a) or (b) will be maintained by the director unless the record’s retention is allowed “under the applicable records control schedule” approved by the National Archives and Records Administration as designated in the IRM. The OPR director must destroy such reports on practitioners as soon as the records control schedule permits. “While the destruction of a report will not bar any disciplinary proceeding under Circ. No. 230, under §10.53(d) of Circ. No. 230, it does preclude the Director of Practice from using a copy of the report in such a disciplinary proceeding.”23
Section 10.60: Institution of Proceeding
When the OPR director determines that a practitioner, employer, firm, or other entity, if applicable, violates any provision regarding practice before the IRS, the director may do one of two things. Section 10.60 authorizes the director to reprimand the practitioner or institute a proceeding for a sanction (described in §10.50). The director will not under any circumstances issue a reprimand without first apprising the practitioner of the suspected misconduct and affording him or her an opportunity to make a defense.
The reprimand is the only private (and the least severe) sanction available to a practitioner. It involves a private letter from the director to the practitioner stating that the director has found that the practitioner committed misconduct under Circular 230. Although the reprimand remains private, it does appear on the practitioner’s record, so it may establish a pattern of misconduct.24 State bar associations or boards of accountancy may require disclosure of such a reprimand.
Under §10.60, for actions other than a reprimand, a proceeding is instituted by a complaint against the practitioner signed by the director and filed with an ALJ. The practitioner then becomes a respondent in an administrative hearing and may be more comfortable hiring an attorney. However, all practitioners may represent themselves before the ALJ. The Office of Chief Counsel represents the director.
Section 10.61: Conferences
Section 10.61 provides for the OPR director to confer with a practitioner concerning allegations of misconduct regardless of whether the OPR has instituted a proceeding against the practitioner. The OPR will not deny a first request for a conference made by a practitioner, employer, firm, or other entity. The conference may be by telephone or in person. If the conference is part of an ongoing proceeding, either party may enter any stipulation or agreement the parties make into the record.
Following a conference at which the violation is not contested, a practitioner may offer a consent to the issuance of a censure, suspension, or disbarment. The director then has the opportunity to accept or decline the offer. In doing so, the director has discretion to state that he or she would accept the offer if it contained different terms. The director may also consider revised offers or may make a counteroffer and act on any accepted counteroffer.
Section 10.62: Contents of Complaint
If the matter is contested, a complaint is issued. According to §10.62, a complaint must name the respondent practitioner, provide a concise and clear description of the law and the facts that constitute the basis for the proceeding, and be signed by the OPR director or his or her representative. A complaint is sufficient “if it fairly informs the respondent of the charges brought so that the respondent is able to prepare a defense.” In addition, the complaint must specify the sanction sought against the practitioner or, if suspension is sought, the length of the suspension.
Section 10.62(c) requires the OPR to notify the practitioner of the time frame for answering the complaint, which cannot be less than 30 days. The OPR is required to take into account the amount of the evidence in support of the complaint and the complexity of the charges to allow the practitioner time to prepare an adequate answer in defense. In the event that an answer is not filed as required, a decision by default may be sought.
Section 10.63: Service of Complaint; Service of Other Papers; Service of Evidence in Support of Complaint; Filing of Papers
Section 10.63 outlines the rules for service of a complaint on a respondent, including a practitioner, em-ployer, firm or other entity, or appraiser named in the complaint, or any other person having the authority to accept mail on behalf of the practitioner, employer, firm or other entity, or appraiser. Service of the complaint may be made either by first class or certified mail, in person, by a private delivery service (e.g., Federal Express), or by any other means agreed to by the respondent.
Section 10.63 requires the director to give the respondent documentation used in support of a complaint filed with the ALJ. Referred to as the OPR administrative file, the file contains material that the OPR considered in the course of deciding whether to issue a formal complaint. The OPR must provide the file within 10 days of serving the complaint. While the OPR does not currently have IRM provisions detailing what constitutes the administrative file and guaranteeing that the OPR will provide it on request, these provisions likely will be documented in the near future.
Section 10.64: Answer; Default
Section 10.64(a) requires that the respondent file an answer to the complaint with the ALJ and serve it on the OPR director within the time period specified in the complaint unless, on request or application of the respondent, the ALJ extends the time. Section 10.64(b) specifies that the answer to the complaint be in writing and include a statement of facts that will act as the basis for the respondent’s defense.
Respondents must admit to or deny each allegation unless they state that they are “without sufficient information to admit or deny a specific allegation” and may not make a general denial of the allegations. Respondents also may not deny a material allegation that they know is true or state that they have insufficient information to form a belief about the allegation when they have the required information. In addition, respondents must affirmatively state any special defense they will rely on.
Section 10.64(c) provides that every allegation in the complaint that is not denied in the answer shall be deemed admitted and may be considered as proved. In addition, no further evidence in respect of such allegation need be offered as proof at a hearing. Section 10.64(d) states that a failure to file an answer within the time prescribed constitutes an admission of the complaint’s allegations and a waiver of hearing. It may also result in a default judgment by the ALJ without a hearing or further procedure.
Section 10.65: Supplemental Charges
In answering the allegations of a complaint, the respondent must answer the allegations in good faith. Section 10.65 provides several situations in which the OPR director may file, with the permission of the ALJ, supplemental charges against the respondent by amending the complaint. There are limited instances specified in which supplemental charges are warranted—for example, if the re-spondent answered the charges falsely and in bad faith, denied a material allegation of fact, stated that he or she had insufficient information to form a belief (when the respondent possessed such information), or knowingly introduced false testimony into the proceeding brought against him or her. Under §10.65(b), supplemental charges may be heard with the other charges in the case as long as the respondent is given notice and is afforded an opportunity to prepare a defense.
Section 10.66: Reply to Answer
Section 10.66 provides that the OPR may file a reply to the respondent’s answer to a complaint, but unless the ALJ requires an answer, no reply is required. If the OPR does not file a reply, any new matter contained in the answer is considered denied.
Section 10.67: Proof; Variance; Amendment of Pleadings
If there is a variance between the allegations contained in the pleading and the evidence offered that supports the pleadings, the ALJ may either order or authorize amendments to the pleadings to conform to the evidence. The party that is prejudiced by the amendments to the pleadings “must be given a reasonable opportunity to address the allegations of the pleadings as amended.” Furthermore, the ALJ must make findings on any issue presented by the amended pleadings. The situations that might arise under §10.67 require that the practitioner’s representative be careful about forcefully representing the practitioner and providing good explanations regarding any existing evidence that may harm the practitioner.
Section 10.68: Motions and Requests
Section 10.68 addresses procedures for filing a motion or request with the presiding ALJ. Section 10.68(a)(1) provides that, in general, at any time after the filing of a complaint, any party may file a motion with the ALJ. Unless the ALJ orders otherwise, motions must be in writing and must be served on the opposing party as outlined in §10.63(b). The motion must specify both the grounds for the motion and the relief sought. If appropriate, the motion must also contain a memorandum of facts and law in support of the motion.
Section 10.68(a)(2) states that “either party may move for a summary adjudication upon all or any part of the legal issues in controversy.” However, if the nonmoving party opposes the summary judgment in favor of the moving party, that party must file a written response within 30 days unless the ALJ orders otherwise. According to §10.68(a)(3), a party that files a motion for extension of time, a motion for postponement of a hearing, or any other non-dispositive or procedural motion must first contact the other party to determine whether there is any objection to the motion. If there is an objection, the motion must indicate that fact.
Unless otherwise ordered by the ALJ, §10.68(b) states that the nonmoving party is not required to file a response to a motion. The nonmoving party is deemed to oppose the motion if the ALJ does not order the nonmoving party to file a response and the nonmoving party files no response. However, the nonmoving party is deemed not to oppose a motion for decision by default for failure to file a timely answer or for failure to prosecute if the nonmoving party does not respond within 30 days of the filing of the motion.
Section 10.69: Representation; Ex Parte Communication
Section 10.69(a) identifies who may act as representatives in the proceedings. An attorney or other employee of the IRS may represent the OPR director and sign the complaint or any document the director is required to file in the proceeding. Respondents may represent themselves, be represented by an attorney who has not filed a declaration under §10.3, or be represented by a practitioner. An attorney or practitioner representing either a proposed respondent or an actual respondent may sign the answer or any document the respondent is required to file in a proceeding on his or her behalf.
Section 10.69(b) states that the OPR director, the respondent, or any representatives of either party may not attempt to initiate or participate in ex parte discussions (i.e., discussions involving only one of the parties) with the ALJ either during or before the pendency of the proceeding. Any communication, including letters or memorandums, concerning the merits of the proceeding addressed to the ALJ by or on behalf of any party shall be regarded as an argument in the proceeding and shall be served on the other party.
Section 10.70: Administrative Law Judge
Under the new regulations, §10.70 remains essentially the same, requiring proceedings on complaints for the sanction of a practitioner, employer, firm or other entity, or appraiser to be heard by an appointed ALJ. The section lists all the ALJ’s powers in the proceeding, including the power to “take or authorize the taking of depositions or answers to requests for admission” (§10.70(b)(6)).
Section 10.71: Discovery
Section 10.71 addresses the discovery methods available to the parties in preparation for a disciplinary hearing. It grants the ALJ the authority to permit discovery only upon written motion by the parties. Under this section, the party has the burden of showing the relevance, materiality, and reasonableness of the requested discovery. The ALJ should consider factors such as the ultimate relevancy and anticipated costs in determining the least burdensome method in ordering discovery.
The ALJ will notify the parties of their right to request discovery within 10 days of receiving the respondent’s answer to the director’s complaint. The notification will include the time frames for filing a request. The ALJ may order only two types of discovery: (1) depositions upon oral examinations or (2) answers to requests for admission. Common discovery tools used in other forums such as written interrogatories and a request for production of documents are not permitted.
Section 10.71(d) identifies when discovery will not be authorized. Discovery will not be permitted if the information is privileged or relates to mental impressions, conclusions, or legal theories of any attorney, party, or other representative of a party prepared in anticipation of a proceeding. To address the practitioner’s due process rights without creating a formal court proceeding, the final regulations require the OPR director to provide the documentation used in support of a complaint filed with the ALJ pursuant to §10.63. In addition, the final regulations, in §10.71(f), do not allow for discovery methods other than those specifically provided for in the section.
Section 10.72: Hearings
Section 10.72 addresses the procedures for an administrative hearing. An ALJ will preside at the hearing, scheduled to occur no later than 180 days after the time for filing the answer, unless extenuating circumstances are established. Generally, pre-hearing memoranda are expected, and parties are permitted to question a witness in the presence of the ALJ. The hearings are recorded and transcribed with witness testimony taken under oath or affirmation.
Section 10.72(a)(3)(iv) requires the holding of an evidentiary hearing in all proceedings prior to the ALJ’s issuing a decision, with several exceptions. These include:
- The director withdraws the complaint;
- A decision is entered by default (a party failed to respond within time limits);
- A decision is issued under §10.82(e);
- The respondent requests a decision on the written word without a hearing;
- A decision is made under §10.68(d); or
- The case is disposed of by another motion.
Section 10.72(b) allows for the presentation of oral or documentary evidence and cross-examination before the ALJ. Unless otherwise ordered by the ALJ, §10.72(c) requires the parties to submit a prehearing memorandum containing a list of all proposed exhibits, a list of proposed witnesses, identification of any proposed expert witnesses, and a list of undis-puted facts.
The final regulations provide that all reports and decisions of the secretary and the ALJ will be available for public inspection within 30 days after the decision becomes final, subject to procedures to protect the identities of any third-party taxpayers (§10.72(d)). Under §10.72(d)(3), the returns and return information will be disclosed to a practitioner or appraiser whose rights may be affected only to the extent the secretary determines that such returns are “relevant and material” to the action or proceeding. The returns and return information may be disclosed to the extent necessary to protect the interests of the United States. Section 10.72(d) provides further safeguards for use of the returns through coding, a letter stating the restrictions on use, redaction of third-party names and addresses, or protective orders limiting disclosure to certain matters.
Section 10.73: Evidence
Section 10.73 provides for depositions to be used at hearings with written approval from the ALJ. Section 10.73(b) provides for the admittance of any witness’s deposition into evidence. Further, §10.73(c) conclusively establishes any matter admitted in response to a request for admission unless the ALJ on motion permits the withdrawal or modification of the admission. Finally, §10.73(d) provides that official documents, records, and papers of the IRS and the OPR are admissible without the need for additional authentication. Furthermore, copies of these documents will likewise be admissible if attested to or identified by an IRS or Treasury officer or employee.
Section 10.74: Transcript
Section 10.74 provides for a fee to be charged for copies of transcripts. In addition, copies of exhibits introduced at the hearing or the deposition will be supplied to the parties after payment of a reasonable charge.
Section 10.75: Proposed Findings and Conclusions
Section 10.75 provides an opportunity after the hearing for parties to submit proposed findings and conclusions and their supporting reasons to the ALJ. Parties who fail to answer the complaint or appear at the hearing will not have this opportunity.
Section 10.76: Decision of Administrative Law Judge
Under §10.76, the ALJ should render a decision in the case within 180 days after the conclusion of the hearing and receipt of any proposed findings and conclusions submitted by the parties. The decision must include a statement of findings and conclusions, along with supporting reasons, and an order of censure, suspension, disbarment, monetary penalty, disqualification, or dismissal of the complaint. If a motion for summary adjudication is filed, the ALJ should rule on the motion within 60 days after the opposing party files a written response or within 90 days if no written response is filed.
The OPR’s standard of proof in the proceeding varies depending on the severity of the sanction indicated in the complaint. Under §10.76(b), if the sanction is censure or a suspension of less than six months, the standard of proof is a “preponderance of the evidence.” Under this standard the OPR will prevail if the court concludes that the OPR’s position is “more likely than not” true. If the sanction is a monetary penalty, disbarment, or suspension of six months or longer, the standard of proof is by “clear and convincing evidence.”
In civil cases, the normal standard of proof is by a “preponderance of the evidence.”25 In criminal cases the normal standard is “beyond a reasonable doubt.” “Clear and convincing” is an intermediate standard that is more stringent than “preponderance” but less stringent than “beyond a reasonable doubt.” Courts generally use the “clear and convincing” standard in civil cases involving allegations of fraud or some other quasi-criminal wrongdoing or when particularly important individual rights are involved.26 In the absence of an appeal to the secretary, the ALJ’s decision is final within 30 days and becomes the final agency decision.
Section 10.77: Appeal of Decision of Administrative Law Judge
Section 10.77 addresses the procedure for an appeal. Under this section, any party to the proceeding may file an appeal of the ALJ’s decision with the secretary. The appeal must include a brief that states exceptions to the decision and supporting reasons for the exceptions. The appeal must be filed, in duplicate, with the OPR director within 30 days of the date the decision is served on the parties. The petition must include a brief stating the exceptions to the ALJ’s decision and supporting reasons for such exceptions.
Section 10.78: Decision on Review
For a decision under review, the secretary may affirm, reverse, modify, set aside, or remand for further proceedings the ALJ’s decision. The secretary, or his or her delegate, should make the agency decision within 180 days after receipt of the appeal. Unless the decision is clearly erroneous in light of the evidence in the record and the applicable law, the decision will not be reversed. Issues that are exclusively matters of law will be reviewed de novo. If there are unresolved issues raised by the record, the case may be remanded to the ALJ to obtain additional testimony or evidence.
Section 10.79: Effect of Disbarment, Suspension, or Censure
Section 10.79 discusses the effect of disbarment, suspension, or censure. If the final decision is for disbarment (or the practitioner has consented and the OPR director has accepted the consent), the disbarred practitioner will not be allowed to practice before the Service until and unless the director authorizes practice under §10.81. If the final decision is for suspension, the practitioner will not be permitted to practice before the IRS during the suspension period.
Following a period of suspension, the practitioner’s representations may be subject to certain conditions. Any censured practitioner may still practice before the Service, but his or her future representations may be subject to these conditions as well. Section 10.79(d) provides that a suspended or censured practitioner’s future representations be subject to conditions prescribed by the OPR director to promote high standards of conduct. Based on the gravity of the practitioner’s violations, the conditions can be imposed for a reasonable period of time.
Section 10.80: Notice of Disbarment, Suspension, Censure, or Disqualification
On the issuance of a final order of disbarment, suspension, or censure of a practitioner, or the final order disqualifying an appraiser, §10.80 states that the OPR director may give notice of the sanction to appropriate IRS employees and officers as well as to interested agencies and departments of the federal government. In addition, the director may determine the manner of giving notice to the proper state authorities where the sanctioned practitioner was licensed to practice. Of note is the fact that the notification is not mandatory.
Section 10.81: Petition for Reinstatement
Under §10.81, a petition for reinstatement from any disbarred practitioner or disqualified appraiser may be entertained after five years from the date of disbarment or disqualification. Reinstatement may not be granted unless the OPR director is satisfied that the petitioner will not violate the regulations in this part and that granting such reinstatement would not be contrary to the public’s interest.
Section 10.82: Expedited Suspension
Section 10.82 authorizes the OPR director, under certain circumstances, to suspend a practitioner immediately. Sections 10.82(b)(1)–(4) apply to any practitioner who, within five years of the date a complaint instituting a proceeding is served, has had a license to practice suspended or revoked for cause, has been convicted of any crime, has violated conditions imposed under §10.79(d), or has been sanctioned by a court of competent jurisdiction. Treasury and the Service continue to believe that expedited suspension is appropriate and equitable in the limited set of circumstances identified. The OPR conducts an investigation before instituting an expedited proceeding, and the practitioner is entitled to a conference with the OPR on request.
Circular 230 outlines the duties and restrictions relating to practice before the IRS and the rules regarding disciplinary proceedings for Circular 230 violations. Violation of Circular 230 regulations can lead to disciplinary actions or sanctions that include censuring, suspending, or disbarring CPAs from practice before the IRS along with monetary penalties. Increased OPR staffing and changes in disciplinary processes aim to make Circular 230 more responsive.
The final regulations authorize the OPR director to act on applications for enrollment to practice before the IRS, to make inquiries with respect to matters under the OPR’s jurisdiction, to institute proceedings that could result in a monetary penalty or disciplinary actions, to institute proceedings to disqualify appraisers, and to perform other duties necessary to carry out these functions.
Relevant required duties of practitioners governed by Circular 230 relate to knowledge of a client’s omission of information, diligence as to accuracy, and adherence to standards and requirements covering tax return positions, covered opinions, and other written tax advice. Although not directly related to the technical areas of tax compliance and planning, other aspects, such as contingency fees, advertising, and conflicts of interest, may lead to sanctions under Circular 230 if practitioners violate them.
Of note are changes to the regulations regarding the imposition of monetary penalties on tax practitioners, their employers, or entities for which they act. These penalties are viewed as giving the OPR a “new level of effectiveness.” The monetary penalty may be imposed either for a pattern of conduct that violates Circular 230 or for a single act. It can be imposed on the practitioner and can also be a separate penalty against the firm, employer, or other entity that either knew or reasonably should have known about the prohibited conduct.
The final regulations modifying Circular 230 also changed aspects of the disciplinary process for tax practitioners. While the structure of the disciplinary process is largely intact, involving an agency investigation, a hearing, and both administrative and judicial review (including the uses of ALJs in the process), the process has undergone revisions. Practitioners governed by Circular 230 must understand the procedural rights and practices that exist once the OPR contacts a practitioner. If the OPR commences a disciplinary action, it is essential that a practitioner contacted by the OPR respond within the required time and/or request a conference. A practitioner should contact a tax attorney with experience in such matters who can help prepare a truthful and adequate response. The practitioner should make every effort to provide all necessary information to ensure that the initial contact letter does not develop into a formal complaint.
For more information about this article, contact Prof. Eide at email@example.com.
1 “IRS Updates Tax Gap Estimates,” IRS press release, IR-2006-28 (2/14/06).
2 Treasury Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers Before the Internal Revenue Service.
3 American Jobs Creation Act of 2004, P.L. 108-357, Section 822(a)(1)(A).
4 REG-122380-02 (2/8/06).
5 See Coder, “Back-to-Back Circular 230 Changes Reveal Winners, Losers,” 2007 TNT 187-1, Doc. 2007-21788(September 26, 2007); Simmens, DiIorio, and Hartford, “New Standards for Tax Return Preparer Penalties Are ‘More Likely Than Not’ Part of a Larger Trend,” 9 J. Tax Prac. and Proc. (October–November 2007): 39–40, 52; Lipton, “Preparer Penalties: The Service’s ‘Interim’ Response to the Section 6694 Amendments,” 108 J. Tax’n (February 2008): 79-94.
6 “IRS Issues Interim Relief on More-Likely-Than-Not Penalties,” AICPA Tax E-Alert (1/3/08).
7 REG-138637-07 (9/26/07).
8 Raby and Raby, “Taxpayer Advocates—A Threatened Species?” 117 Tax Notes 339 (October 22, 2007).
9 See OPR’s December 6, 2007, announcement of a settlement agreement. “IRS Announces Settlement of Spokane Bond Lawyers’ Alleged Practice Standards Violations,” IR-2007-197; Coder, “OPR Settlement Announcement Could Be First of Many,” 2007 TNT 236-4, Doc. 2007-26779 (December 7, 2007).
10 For a discussion of the standards, see Soled, “Third-Party Civil Tax Penalties and Professional Standards,” Wis. L. Rev. (2004): 1611.
11 In re Abrams, 521 F2d 1094 (3d Cir. 1975).
12 In re Landerman, 7 FSupp2d 1202 (CD Utah 1998).
13 Although loss of the privilege to practice before an administrative agency is not technically disbarment, Circular 230 uses the word “disbar” to refer to the loss of the privilege to practice before the IRS, and this article conforms to that usage.
14 Soled, “Third-Party Civil Tax Penalties and Professional Standards.”
15 Stamper, “‘Revisions to Nonshelter Circular 230 Amendments Coming Soon,’ IRS Official Says,” 2006 TNT 206-3, Doc. 2006-21785 (October 24, 2006).
16 Muller, “Determining the Disciplinary Sanction: What Factors the Office of Professional Responsibility Considers in Ethics Enforcement,” 8 J. Tax Prac. and Proc. (December 2006–January 2007): 15.
17 See the discussions in Muller, id., pp. 13–16, and Thorn, “A Rare Look Inside the IRS’s Office of Professional Responsibility,” 8 J.Tax Prac. and Proc. (April–May 2006): 27–32, 49–50, on referrals and the three types of OPR contact letters with practitioners.
18 For a discussion of federal tax crimes and tax practitioners, see Hibschweiler, “Tax Practice and the Federal Criminal Code,” 39 The Tax Adviser (April 2008): 216.
19 “ABA Members Comment on Guidance on Monetary Penalties Under Circular 230,” 2007 TNT 195-44, Doc. 2007-22537(October 9, 2007).
20 Pickering, 691 F2d 853 (8th Cir. 1982).
22 See Mazo, 591 F2d 1151 (5th Cir. 1999), cert. denied, 444 US 842 (1979); Mon day, 421 F2d 1210, 1215 (7th Cir. 1970), cert. denied, 400 US 821 (1970); Teel, 529 F2d 903 (9th Cir. 1976).
23 Cogdell, BNA Tax Management U.S. Income Portfolios 620-1st: Practice Before the IRS; Attorney’s Fees in Tax Proceedings, Detailed Analysis 1:XI (2008).
24 The authors were unable to determine the length of time that the reprimand remained on a practitioner’s record.
25 Carson, 560 F2d 693 (5th Cir. 1977).
26 Carter v. Campbell, 264 F2d 930 (5th Cir. 1959).