Source: https://procedurallytaxing.com/category/circular-230/
Timestamp: 2019-04-21 08:14:23+00:00

Document:
Taxpayers who have filed a petition in Tax Court often still rely on their tax return preparers to help try to resolve the matter. Most unlicensed tax return preparers are not admitted to practice before IRS Counsel attorneys. Despite that, in a 2014 Chief Counsel notice the IRS emphasized that Counsel attorneys should interact with a taxpayer’s representative if there is a valid POA on file authorizing the representative to act on the taxpayer’s behalf.
As we have discussed before, following the judicial rejection of the Service’s plan to require unlicensed preparers to pass a test and complete continuing education requirements, the Service launched a voluntary testing and education program called the Annual Filing Season Program (see for example Some More Updates on IRS Annual Filing Season Program and Refundable Credit Errors). Under that program, unlicensed preparers take 18 hours of continuing education and take a test on federal tax law. The return preparer seeking to obtain certification of compliance with the annal filing season program must also renew their preparer tax identification number (PTIN) and consent to adhere to and be subject to the obligations in Circular 230 addressing duties and restrictions to practice before the Service and Circular 230 § 10.51, which addresses sanctions and disreputable conduct. The benefits of opting in to the Annual Filing Season Program include becoming part of a searchable database of preparers and the right to represent taxpayers in examinations, though not before Appeals, Counsel or Collection.
That representation ability is a key perk for unenrolled preparers; it generally was available to all signing preparers before 2015 though by now limiting representation to the unenrolled preparers who comply with the Annual Filing Season Program, the Service has hoped to generate interest in and demand for what it required through its ill-fated mandatory testing and education regime.
In the Notice, Counsel thus takes a practical approach to the issue. Most cases in Tax Court involve pro se taxpayers, and many disputes in court revolve around facts. My experience is that in many instances the involvement of a third party can assist in the resolution of the case. The 2017 Chief Counsel Notice states that the preparer may assist the taxpayer in gathering information or in substantiation of items on the return, and that Counsel attorneys may permit the preparer to attend meetings.
The Notice does remind its attorneys to clarify with the taxpayer and the preparer that for the unenrolled return preparer there is no general authority to represent taxpayers in Tax Court cases, and that Counsel has no obligation to communicate with the preparer or even include the preparer in meetings if the preparer is abusive or if the interests of the preparer conflict with the interests of the taxpayer.
In sum, the Notice seems helpful for all parties. As taxpayers become more familiar with the limits associated with preparers who have not opted in to the Annual Filing Season Program, the Service encourages what it could not mandate; that is, the use of preparers who in fact have demonstrated some minimal level of competence and who demonstrate the additional accountability and visibility associated with the annual filing season program. I think that the approach of providing the incentive to use some preparers as compared to others, so long as that incentive is tied to furthering the goal of good tax administration rather than lining the pockets of some preparers over others, is a good model for IRS oversight over an industry that plays a key role in tax administration.
Before the roundup, a quick thank you to our guest posters from the week ending February 27th. Michael Desmond joined us once again, posting on the likelihood of legislative responses to the court’s stopping regulation of paid preparers. We also welcomed Marilyn Ames as a first time poster, writing about the binding effect of an OIC.
The Service issued Rev. Proc. 2015-16, which provides updated guidance on adequate disclosure for reducing accuracy related penalties and the tax return preparer penalties under Section 6694(a). The Revenue Procedure appears to be very similar to the prior guidance found in Rev. Proc. 2014-15, and reincorporates some examples from the guidance in 2013, which the Service decided it should not have removed.
The facts of a substantial valuation misstatement penalty case in Na v. Commissioner, which the taxpayer won, are fairly interesting. In Na, the Service used the bank deposit method to recreate a taxpayer’s income. Prior to the year in question, the taxpayer did not have much annual income and never gambled. The taxpayer also spoke little English. During the audited year, the taxpayer had income and deposits of over a $1M in gambling earnings, plus substantial distributions from her employer’s companies. She explained that her employer used her personal accounts to run distributions from his companies and his gambling activity through. The Court found her evidence and testimony credible, and greatly reduced her liability. The Court did not address the specifics of the substantial valuation penalty, and instead said that was for the parties to review and calculate following the order. Anyone want to give odds on the chances of seeing a TC case in the employer’s name in the near future?
The Service issued Rev. Proc. 2015-20, providing updated guidance for small businesses tying to comply with the final tangible personal property regulations issued in 2013 regarding capitalization of costs regarding TPP. The Service has also promulgated some FAQs on the topic. There has been a lot of consternation regarding whether or not these will require all businesses to request a change in accounting method and file Form 3115. For some small businesses, the Form will not be required.
From the legal gossip blog, Above the Law, comes a glowing recommendation for the TV show Better Call Saul, stating that it is a far more accurate representation of the practice of law than most other legal shows. I’ve watched the first few episodes, and am completely hooked. In full disclosure, I was a huge fan of Breaking Bad, and this is a spin off. Not particularly representative of my life though. I had far less anguish over hush money and the persuasive power of violence.
The Tax Court held that state law applied in determining what the successor in interest was for an entity that transferred assets to a related taxpayer. See TFT Galveston Port. LTD v. Comm’r.
IRS scams on the front page of CNN.
Last August, we touched on FDIC v. AmFin in SumOp, which was based on a dispute over ownership of a refund issued to the parent of a consolidated group. SCOTUS didn’t find the issue that interesting, and denied cert.
Do banks get title insurance before foreclosing on properties? The District Court for the Southern District of Indiana in First Financial Bank v. US Dept. of Treas. tossed an action for quiet title filed by the bank where a subsequent title search turned up a tax lien after a deed in lieu of foreclosure. The Court found that the Service met its burden under Section 7425 in that it had a valid lien, which was recorded at least thirty days prior to the sale, and the Service wasn’t given notice of the sale.
In the saga that is the Aloe Vera unlawful disclosure case, Aloe Vera won a significant (although not monetarily) victory last month. The District Court for the District of Arizona found the IRS wrongfully disclosed to the Japanese taxing authority confidential return information, which was actually found to be false and the Service knew the same at the time of disclosure. Unfortunately, for Aloe Vera, no actual damages were found, so the statutory damages were the extent of the recovery.
Today we welcome first time guest blogger G. Brint Ryan, Chairman and CEO of Ryan, LLC . This is the tax advisory firm in which Gerry Ridgely, Jr., is a Principal and Executive Vice President and Vice Chairman Emerging Businesses. Mr. Ridgely was the plaintiff in Ridgely v. Lew, which invalidated the regulations under 31 C.F.R. sec. 10.27 restricting contingency fees.
Looking back over 2014 there are no more important cases involving federal tax procedure to come out this year than the ones decided in Loving v. IRS, invalidating regulations under 31 C.F.R. secs. 10.3 to 10.6 as to return preparer regulation and Ridgely v. Lew. Because of their importance, we have blogged both cases extensively and expect to continue to blog on the issues raised by these cases for quite some time. See, e.g., Initial Reactions to the Government’s Loss in Loving (Feb. 11, 2014); DC District Court Following Loving Takes Down Part of Circular 230 Contingent Fee Rules (July 18). We have been fortunate to have outstanding guest bloggers from the perspective of a leading academic with Steve Johnson’s outstanding post that he wrote almost immediately after the decision in Ridgely v. Lew and from top practitioners Michael Desmond and Chris Rizek. Following the Loving decision, we were fortunate to have Dan Alban, counsel for plaintiffs, blog on his perspectives on that case. Today, we are glad to have Brint Ryan provide inside perspectives on the Ridgely case as we close out the year.
2014 wasn’t the best year for the IRS, which came under fire for wasteful spending, missing e-mails, and allegedly targeting conservative groups. While most of the attention is focused on the partisan nature of these claims, the business community is also waging critical battles against the IRS—and more importantly, winning. Business leaders are crying foul in an ongoing mission to overturn burdensome business regulatory overreach designed to create an unfair IRS advantage.
The most recent blow to IRS business regulatory overreach came through a favorable ruling this past July, which invalidates restrictions prohibiting attorneys, certified public accountants (CPAs), and other practitioners from entering into performance-based fee arrangements for services before the IRS (known as Circular 230 provisions). In the consulting industry, many clients prefer “performance-based” pay arrangements to an hourly rate. Any rule prohibiting performance-based fees would not only hinder companies from taking advantage of state incentive programs, for example, but also alienate smaller firms who might be interested in moving or expanding, but can’t afford to pay fees upfront. Yet this is precisely what the IRS attempted to do.
Thankfully, the resulting court order from the United States District Court in Ridgely vs. Lew invalidates and permanently enjoins the IRS from enforcing the restrictions under the Circular 230 provisions. This is a tremendous result in a long-fought battle to protect taxpayers and their representatives from the IRS’s efforts to limit their ability to pursue valid claims. Without question, the Court reached the correct result.
Now, taxpayers—not the IRS—will have the right to determine the fee arrangement between themselves and their representatives.
While this case is not as high-profile as IRS official Lois Lerner’s efforts to cripple conservative non-profits, it will have a profound impact on a company’s ability to drive economic growth, job creation, and innovation.
A perfect example of how this ruling frees companies to invest, grow and thrive lies in the Research & Development (R&D) tax credit. This program has wide bipartisan support and is backed by the Obama Administration. Eighty percent of the R&D tax credit benefits directly support jobs in the United States, creating $2 of economic benefit for every $1 spent.
Yet even the Court in the Ridgely case stated that these tax incentives can be complex. The IRS has thousands of employees and a seemingly unlimited budget. On the other hand, companies don’t have the vast financial resources afforded the IRS through the hard-working US taxpayer. The recently overturned Circular 230 regulations made life easier for the IRS but more difficult for businesses to hire professional services firms to navigate the stringent federal compliance requirements of programs like the R&D Tax Credit.
A level of fairness has been restored, and companies now have the ability to retain professional services on a performance-based agreement, mitigating the financial risk and unlocking their ability to take advantage of the many benefits these programs provide. It’s a victory for innovation, job creation, and economic growth.
However, Big Government continues to fight for the ability to control and overregulate. In August, the California Governor’s Office of Business and Economic Development (Go-Biz) exploited emergency rulemaking procedures by capriciously inserting a requirement to regulate the fee arrangements between taxpayers and their representatives when allocating the California Competes Tax Credit (“Tax Credit”)—essentially creating California’s version of Circular 230. These fee provisions limit the availability of the Tax Credit by allowing GO-Biz to deny the Tax Credit to taxpayers.
Despite the fact that the California Legislature has recently and repeatedly demonstrated that it does not intend to impose limits on fee arrangements between taxpayers and their consultants, Go-Biz passed. At a time when California is bleeding jobs, regulatory overreach by GO-Biz is impacting the ability of taxpayers to obtain representation to pursue their right to a tax credit for driving economic growth and job creation job.
Ryan is now leading the charge against Go-Biz, challenging the legality of the California rule restricting taxpayer contracts for professional services under the Tax Credit program. We will continue to aggressively defend the rights of taxpayers against burdensome regulations that inhibit job growth and economic development. A Government that so egregiously meddles in fair business practices cannot be tolerated.

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