In Part I, we looked at recent cases that have eroded the scope of Circular 230 and asked whether or not this was the right result. In this part, we will look at the fundamental question that was presented in each of the three cases, should the act of preparing a tax return be considered practice before the IRS?
First, all three cases dealt with nuances of Circular 230 and the underlying statute. However, in each of the three, if you assume that preparing a tax return is practice before the IRS, then all else becomes moot. This was the central question in Loving and lead directly to the conclusion in Ridgley that contingent fees were allowed. And in Sexton, the plaintiff’s actual activity of return preparation and his written advice regarding issues on the return would have fallen into regulated activities. But without the ability to regulate the tax return preparation, the Service is only left with the ability to regulate those in adversarial proceedings.
The courts rejected the idea that return preparers are representatives of their clients. They cannot bind them to a decision and therefore aren’t agents. While the act of preparing a return could be considered a practice, the courts rejected that this practice is before the IRS. And while I mostly agree with the courts reasoning, and agree the IRS has overreached, I also believe that the courts are ignoring a return preparer’s role in the system.
Setting aside trivial returns prepared by big chain franchises, a return preparer does more than just suggest a position. Most individuals and companies do not understand more than a basic level of tax theory. And, as a result, they cannot challenge the position taken by their preparer, so by default, any position becomes binding on the taxpayer.
Additionally, anything that goes on a return goes before the IRS. A tax
return is not prepared in a vacuum to never be seen again. It is a
position that is put forward before the IRS. Whether the IRS challenges
the position is inconsequential. All positions can be reviewed and
rejected, and submitting that position is the first step in what can
become an adversarial process, at almost the sole discretion of the
I agree that the IRS has overreached, and is now rightfully paying for it. However, I don’t agree that the act of return preparation is done in isolation ignoring the realities of the consequences. The solution is probably somewhere in the middle. But with the current string of cases, the IRS has been blocked in. It can no longer regulate return preparers without continuing to ignore the growing consensus of the courts.