they’ve changed circular 230…again william r. cousins iii, cpa, j.d., l.l.m. copyright ©...

They’ve Changed Circular 230…Again They’ve Changed Circular 230…Again

William R. Cousins III, CPA, J.D., L.L.M.

Copyright © Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P. All rights reserved.

901 Main Street, Suite 3700Dallas, TX 75202

214.744.3700 800.451.0093fax 214.747.3732

[email protected]

TSCPA CPE ExpoTuesday, December 9, 2014

San AntonioFriday, December 5, 2014

HoustonFriday, December 12, 2014

Arlington

Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP

Office of Responsibility is Shifting EmphasisOffice of Responsibility is Shifting Emphasis

• They are shifting from tax compliance cases to those dealing with Practitioner’s tax conduct.

• As part of this process, they are streamlining the system by making egregious tax compliance issues punishable by expedited suspensions. Previously that sanction only came into play in cases of felony convictions or loss of professional license.

• Newly emerging case law is filling in the blanks on how the OPR will view Practitioner conduct.

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Expedited Procedures – Section 10.82Expedited Procedures – Section 10.82

• The new changes expand this to filing problems.

• The result will be a significant acceleration of the process.

– The first step is the mailing of a complaint to the Practitioner; giving him 30 days to respond.

– If that deadline is not met, the OPR issues a default decision and disbars the Practitioner.

– If that deadline is met, the Practitioner can request a conference; if he fails to convince the OPR he is then disbarred.

– The Practitioner then can request a hearing AFTER disbarment before an ALJ.

Traditionally, this was used in very serious situations involving little ambiguity: conviction of the Practitioner of a felony, suspension of their professional license, etc.

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Circular 230 Section 10.36(b)Circular 230 Section 10.36(b)

• Example:

– A firm nets $500,000.00 a year from its tax work. An OPR compliant is filed and the IRS questions the procedures the firm has in place to insure compliance with Circular 230. The firm responds with it pays for typical professional development courses on ethics, and the IRS contends that it is inadequate.

• The IRS can try to impose a $2,500,000.00 fine against the firm or the person primarily responsible for compliance.

The IRS can use this section to sanction a person with principle authority over a firms’ tax practice and its compliance with Circular 230:

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Initiating an OPR CaseInitiating an OPR Case

• Internal Referrals. These are more common and come from inside the IRS.

• External Referrals. These occur where a Taxpayer feels abused by a Practitioner. Normally, these complaints are run through the Return Preparer Office before making it to the OPR.

Traditionally, cases have originated in two ways:

More recently, the OPR has been initiating its own referrals. These come through public information, Better Business records, YouTube videos, webpages, and online review cites.

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Processing a ReferralProcessing a Referral

• Initial screening is done by an Intake Analyst, who does a quick review and write up of the case. It is possible the Analyst will close the case, otherwise it is referred to either an Attorney-Advisor or a Paralegal Specialist.

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JurisdictionJurisdiction

• Legacy Practitioners – the classic group involves CPA’s, Attorneys, Enrolled Agents and Enrolled Actuaries. Any such professional doing tax work falls under Circular 230.

• Non-Legacy Practitioners are more vaguely defined – any person who prepares a document that relates to a Taxpayer’s liability, for compensation, and which is submitted to the IRS is also under Circular 230. Section 10.8.

• Is the Statute of Limitations open:

– For tax compliance issues, the statute of limitations is 5 years.

– For tax practitioner conduct cases, the OPR’s view is that there is NO STATUTE OF LIMITATIONS.

The first issue the Intake Analyst will consider is whether the OPR has jurisdiction.

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Tax Compliance CheckTax Compliance Check

• Once jurisdiction is confirmed, the OPR makes sure the Practitioner and all his related entities are up to date on tax filings. If he is delinquent, then they will seek additional charges under Section 10.51(a)(6).

• During this process, discrepancies may be detected that result in referral of the return for audit, perhaps holding the OPR case up to determine if there are more serious problems.

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Case InvestigationCase Investigation

• After the compliance check, the attorney or paralegal assigned to the case will initiate their investigation. OPR will contact everyone, except the Practitioner, the Complainant, IRS personnel, IRS internal systems (like transcripts), the Practitioner’s webpage. It is possible that the investigation will come back negative and the case will be dropped without the Practitioner ever knowing about it.

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10.20 Letter10.20 Letter

• The letter will be the first indication that a Circular 230 matter is being considered.

• The letter will plainly state it is issued under the authority of Section 10.20 of Circular 230.

• It will contain a listing of the information being requested.• Unless privileged, failure to provide the information will result in

additional sanctions.

If the IRS needs additional information from the Practitioner to proceed with its investigation, it will issue a 10.20 Letter.

Meadows, Collier, Reed, Cousins, Crouch & Ungerman, LLP 10


Pre-Allegation LetterPre-Allegation Letter

• That letter details the facts, as OPR understands them, lists the possible Circular 230 violations. It gives the Practitioner the chance to meet and provide exculpatory or mitigating documentation. As a practical matter the Practitioner should take this opportunity to respond; the OPR has not yet decided that a violation has occurred, just that investigation is warranted.

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Allegation LetterAllegation Letter

• This initial, formal document lists all possible Circular 230 violations that OPR thinks it can prove.

• The Practitioner can either request a conference to discuss the case or begin negotiating his sanction. Most conferences are relatively informal, often conducted by phone. If the Practitioner is unsuccessful in killing the case, he can make a settlement offer to close the case. Settlement possibilities include:

– Deferred Disciplinary Agreement

– Reprimand

– Censure

– Suspension

– Disbarment

– Monetary Sanction (this cannot be a stand alone sanction, it must be offered in conjunction with another punishment)

Now the OPR has determined a violation occurred.

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What If You Don’t Settle?What If You Don’t Settle?

• The resulting proceeding will be public and appear on the IRS webpage, even if the Practitioner ultimately wins the case.

• Venue for the hearings is controlled by the Practitioner.• The ALJ may come from a variety of agencies (2013 examples

include the Coast Guard and Department of Interior) and are not tax experts.

• After the hearing, the parties submit closing briefs.• Appeal must be made within 30 days of the Decision. Further

appeals are to the Circuit court on an “arbitrary or capricious” standard.

The OPR prepares the trial before an Administrative Law Judge (ALJ). Several considerations are relevant:

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Calendar Year 2013 Discipline ResultsCalendar Year 2013 Discipline Results

Activity Attorney CPA EA Other Totals

Total Receipts 784

Disbarments (FAD/Consent) 1 4 4 2 11

Suspensions (FAD/Consent) 1 1 1 - 3

Expedited Suspensions 16 24 4 4 48

DDA 2 4 6 1 13

Censure - 2 - 1 3

Reprimand/Soft Letter 128

Cease & Desist 25

CWOS, CWOA, Referred, Other 509

Reinstatement Request 26

Total Dispositions 20 35 15 8 766

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Trouble with the IRS: Overlooked Circular 230 Issues


• Representation of one Client will be directly adverse to another Client; or

• There is a significant risk that representation will be materially limited by the Representative’s responsibilities to:

– Another client;

– A former client;

– A third person; or

– A personal interest of the representative.

Conflicting interests are considered by Section 10.29. Conflicts exists where:

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• The Representative reasonably believes that competent and diligent representation can be given to each affected Client;

• There is no legal prohibition; and

• Each affected Client must give written, informed consent:

– Written consent must be provided within a reasonable time, not later than 30 days; and

– Copies of the written consent must be retained for at least 36 months after the conclusion of the representation of the affected Clients.

A Representative can continue in a conflict situation if:

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What Does the IRS Think?What Does the IRS Think?

• Conflicting Interests Case Scenario:

– Practitioner, uses a tax software program and questionnaire and reviews the information with clients, H&W.

– H&W answer “no” to the home buyer credit question regarding purchase of a principal residence within the past three years.

– Practitioner included a First Time Homebuyer Credit on their return based on the answer given by the couple.

– IRS denies the credit and proposes to assess interest and a negligence penalty because a second Form 1098 was issued to W.

In the same presentation earlier this year, the IRS posed this scenario:

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– H&W demand the Practitioner fix their tax problem or reimburse them for the loss of the tax credit and for the interest and penalties assessed because W inherited the home for which the second 1098 was issued.

– Practitioner agrees to resolve the couple’s tax dispute and begins to prepare a protest of the proposed assessment.

– Several days later, Practitioner receives a letter advising him that IRS proposes to assess a preparer penalty for his preparation of H&W’s Form 5405.

continued….

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Comments on the IRS ExampleComments on the IRS Example

• How much difference does it make that the Taxpayers’ appear to have a solid factual defense to the adjustment?

• What if the CPA discovers overstated income or unclaimed deductions that negate the proposed adjustment?

• IRS thinks there is a conflict under Circular 230.

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Reliance on Taxpayer InformationReliance on Taxpayer Information

• The return preparer “may not ignore the implications of information furnished…or actually known to the tax return preparer.”

• The return preparer “must make reasonable inquiries if the information furnished appears to be incorrect or incomplete.”

• The Preparer’s obligation to make inquiries is heightened where the Code requires the Taxpayer to maintain specific documents to claim a deduction or credit.

See example: Schneider v. U.S., 257 F Supp. 2nd 1154 (S.D. Ind. 2003) requiring additional inquiry about a claimed charitable contribution involving art, based on Preparer’s knowledge of the fact pattern.

The stated rule is that normally a return preparer can rely in good faith, without verification, on information provided by the Taxpayer. See Reg. Section 1.6694-1(e)(1). However, the exceptions to that rule substantially reduce its protections:

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• Due Diligence Case Scenario:

– Practitioner, John, uses standard commercial software to prepare tax returns.

– He uses the program Questionnaire for clients to complete along with submitting their tax data.

– One question asked is: “Do you have a foreign bank account?”

– When clients answer “no”, John checks the appropriate box on Schedule B.

In a presentation earlier this year, the IRS used this example:

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Comments on the IRS ExampleComments on the IRS Example

• How does this change? If the software package defaulted to a “no” answer for a foreign account?

• If the Taxpayer says “yes” how much farther does the CPA have to go? Does the FBAR filing obligation need to be explored?

• What happens if the Taxpayer has an unused POA on a foreign account held in the name of an aged relative?

• My Questions:

– What if your Client simply lies to you; or

– How do you prove what was asked or answered?

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Recent Cases of NoteRecent Cases of Note

• OPR v. Bohn, Complaint No. 2012-02 (Jan. 7, 2013)

• OPR v. Christensen, Complaint No. 2012-05 (Aug. 23, 2013)

• OPR v. Gass, Complaint No. 2013-06 (Sept. 29, 2013)

• OPR v. Pezzo, Complaint No. 2013-02 (Sept. 16, 2013)

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William R. Cousins IIIPartner

William R. Cousins IIIPartner

Mr. Cousins is Board Certified in Tax Law by the Texas Board of Legal Specialization. His practice focuses on Income Tax Litigation, Estate and Gift Tax Litigation, and White Collar and Government Regulatory Litigation. He represents corporations and individuals in tax controversies, both administratively and in litigation. In addition, he has defended taxpayers in criminal tax matters.

In recent years much of his practice has involved Estate and Gift Tax litigation and he has tried numerous cases in that area, including: Estate of Knight v. Commissioner, Jones v. Commissioner, Estate of Foy Proctor v. Commissioner, Estate of Fleming v. Commissioner, Estate of Marmaduke v. Commissioner, Adams v. United States, Kimbell v. United States and Keller v. United States . He successfully argued the Fifth Circuit of Appeals in Adams, Kimball and Keller.

Trey has broad experience in the civil tax arena, trying excise tax cases (Moody v. Commissioner), bankruptcy cases (In Re: Hutton), refund cases (Advertisers Dynamic Services Co., Inc. v. United States), as well as substantive tax cases (70 Acre Recognition Partners v. Commissioner, Pediatric Surgeons v. Commissioner, etc.).

Trey is a Certified Public Accountant and an active speaker on substantive and procedural tax issues for numerous professional organizations nationally. He has been named a Texas Super Lawyer by Texas Monthly and Law and Politics Magazine from 2003 through 2013 as well as named to Best Business Lawyers in Tax by D Magazine in 2009, Best Lawyers in America, Tax Law in 2009 through 2013, and Best Go-To Lawyer, by Texas Lawyer Magazine.

He resides in Dalworthington Gardens, the smallest municipality in the Metroplex, is married to Carol, and has two sons and two grandchildren. Mr. Cousins was admitted to practice in Texas in 1980.

phone (214) 744-3700toll-free (800) 451-0093

fax (214) 747-3732 [email protected]


DISCLAIMERDISCLAIMER

The information included in these slides is for discussion purposes only and should not be relied on without seeking individual legal advice.

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