In the past few years, there have been several challenges to the scope of Circular 230, and consequently, the Internal Revenue Service’s ability to regulate those that practice before it. As a consequence, what was a fairly sweeping scope of authority, has been whittled away a little at a time to now a pretty limited focus. That is if one follows the cases and treats them as precedential, which by all accounts, the IRS is not.
Circular 230 is authorized, primarily by 31 USC 330 which gives the Secretary of the Treasure the ability to regulate those that practice before the Department of Treasury. The Treasury first introduce the Circular in the 1920s, but it gained significant traction in 2005 with the focus on regulating written advice. The last revision (as of the time of this writing) was released on June 12, 2014. This date is of interest since two of the three recent cases reviewing the scope of Circular 230 were decided after that date, and the third was only months before. There has been enough time for the IRS to respond, but the deafening silence is response enough and should be noted by the courts.
In brief, the three cases of interest are Loving, Ridgley, and Sexton. The following provides just a bare-bones summary of each. Other commentators discuss each case if you are interested, but that is not the focus here.
In Loving, the courts rejected the IRS’s assertion that tax return preparers were practicing before the IRS. As a consequence, giving advice about a tax position that will go onto a tax return should no longer be considered practice before the IRS and subject to Circular 230.
In Ridgley, which followed just months after the Loving case, the courts again rejected the IRS’s viewpoint. Here the case focused on the prohibition on contingent fees for claims for a refund. Unlike the situation in Loving, the plaintiff was a CPA firm that unquestionably practiced before the IRS in some instances. However, following Loving, when the CPA prepared a tax return, or more specifically, identified a tax credit to go on the tax return, they are not engaged in practice before the IRS. Consequently, they should be able to charge a contingent fee for that work. The court agreed that the identification of the credit and inclusion on a return was not practicing before the IRS and not subject to the restrictions required by Circular 230. Today, the language prohibiting contingent fees remains in Circular 230.
Finally, in Sexton, the courts had to look at a former practitioner and whether the IRS could still regulate his activities. The plaintiff was a former lawyer, who had been disbarred and suspended from practicing before the IRS. He continued preparing returns, and even providing written advice until a client found out that he was suspended and filed a complaint with the IRS. Here the court held that since the advice was not related to an adversarial proceeding before the IRS, it could not be considered practice before the IRS.
The IRS has not appealed any of these cases and continues to act like they don’t exist. The question is, apart from the fact that there have been three different decision, across two separate circuits, reinforcing the idea that Circular 230 is overreaching, is the IRS wrong in ignoring them? Should the preparation of a tax return, be considered practice before the IRS? We will look at these questions more in Part 2.