The IRS’s Office of Professional Responsibility (OPR) confirmed that it has changed the process it uses when informing practitioners that they are under investigation for violations of Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10). The new process allows practitioners an opportunity to learn about the allegations against them, even if the OPR eventually takes no action. Under prior procedures, the practitioner had no way to learn about the issues raised in an investigation if the IRS chose not to take action.
The problem was highlighted in a recent decision from the District Court for the District of Columbia, which denied a practitioner’s request for information about allegations against him (Waterman, No. 16-1823 (RJL) (D.D.C. 1/24/18)). In that case, the practitioner had received a letter from the IRS (which the IRS calls a “soft letter”) informing him that an allegation had been made against him, but that the OPR had decided to take no action against him (and that the OPR would retain the file containing the allegation for 25 years). The practitioner asked the IRS for a copy of its report against him, but it denied that request.
Sec. 6103(l)(4)(A)(ii) allows the IRS to disclose “returns and return information” to anyone “whose rights are or may be affected by an administrative action or proceeding under section 330 of title 31, United States Code.” In this case, the IRS argued that it could not release the information because there was no “administrative action or proceeding” underway — the OPR investigation was over and the soft letter had informed the practitioner that it was taking no action against him, therefore there was no “administrative action” that would allow the release of information under Sec. 6103(l)(4)(A)(ii). This was the case even though the letter reserved the possibility that the OPR might take future action against the practitioner.
Recognizing that this result does not allow practitioners a fair opportunity to respond to issues and allegations that have been raised against them, the OPR in 2016 changed its soft letter practice to resolve the problem of there being no “administrative action” that would allow release of the information. Now, the OPR uses a two-letter process. First, the OPR sends a letter to the practitioner to tell him or her of the issues that have been presented in the matter under investigation and to give the practitioner an opportunity to comment. Then, if the OPR decides not to take action, it will send the soft letter, closing the case. Between the first and second letters, an administrative action is underway, allowing the IRS to disclose allegations to the practitioner, if the practitioner requests them.
— Alistair M. Nevius (Alistair.Nevius@aicpa-cima.com) is The Tax Adviser’s editor-in-chief.