The power of the Internal Revenue Service (IRS) Office of Professional Responsibility (OPR) seems to be draining away in the aftermath of Loving v IRS and Ridgely v Lew.(1) What appears to be the latest drop comes in Sexton v Hawkins.(2)
James Sexton used to be a practitioner representing taxpayers before the IRS. The words 'used to be' are applicable for two reasons. First, Sexton apparently once represented taxpayers before the IRS, since he is a lawyer licensed in South Carolina who also has an LLM in taxation. However, in 2005 he pled guilty in federal court to four counts of mail fraud and one count of money laundering. As a result, in 2008 the OPR suspended him from practice before the IRS for an indefinite period. Since then, he has made a living providing tax advice and return preparation services to taxpayers in Las Vegas.
Second, according to Loving, a person who does not actively represent taxpayers in proceedings with the IRS but merely prepares returns is not engaged in 'practice before the IRS' as that term is used in the applicable statute, 31 USC § 330(a). Therefore, Sexton contends that since his suspension by the OPR he has not been a practitioner before the IRS; and the rationale of Loving supports that claim. He has acknowledged that he prepares returns for clients; but again, he relies on Loving to contend that he is not thereby subject to regulation under Section 330.(3)
The OPR apparently received a complaint that Sexton was engaged in practice before the IRS and in February 2013 it sent him an inquiry letter. It asked a number of questions about his practice and requested many documents related to his clients, such as copies of returns he had prepared, any documents he used or relied upon in preparing returns and any explanations of the tax law he had provided to clients. The OPR specifically relied on Circular 230 in its request letter, citing Section 10.20 as authority for its request and for his purported obligation to comply, and Sections 10.50 and 10.52 for sanctions that might apply. In May 2013 Sexton sued under the Administrative Procedure Act, seeking declaratory relief that he was not subject to OPR regulation and asking the court to enjoin the OPR request for information. The Justice Department moved to dismiss.
This dispute involves a number of paradoxes. First, Sexton (and perhaps the court) might have considered it strange that the OPR was threatening sanctions against someone whom it had already sanctioned once with an open-ended, indefinite suspension. Perhaps the only things left that the OPR could seek to do to Sexton now would be to disbar him permanently or impose some kind of monetary penalty on him.(4) Further, while the OPR was arguing that Sexton was not authorised to practise before the IRS, it was relying on provisions of Circular 230 that apply only to practitioners before the IRS. Under the Loving rationale, return preparation is not practice; so perhaps the OPR was investigating to see whether Sexton was engaged in other activities that might constitute practice. But what is its authority to ask a return preparer (who, post-Loving, is by definition a non-practitioner) about that issue?
On the other hand, the OPR would presumably contend that it was merely investigating to see whether Sexton was in compliance with his previous sanction. Or it might argue that Sexton was still at least potentially an authorised practitioner by virtue of being a lawyer; that he was merely suspended, not disbarred; and that its inquiry was necessary to see whether an additional sanction was necessary. Either of these contentions would be consistent with the OPR's position, repeated in various forms at every opportunity, which can be paraphrased as: "Once you're in the system, you're in for all purposes and the OPR has continuing jurisdiction over you."
The above intriguing questions – which may eventually be resolved by the Sexton court – are not addressed in the opinion just issued. However, the opinion is interesting in its own right for other reasons. First, over the government's motion to dismiss, the court held that it had jurisdiction under Section 702 of the Administrative Procedure Act, because the OPR investigation constituted a "final agency action for which there is no other adequate remedy in a court". It may seem strange (especially to the OPR) to characterise a mere inquiry letter as a final agency action. But to that, the court essentially responded that the OPR was hoist by its own petard. It found that the OPR's assertion of jurisdiction over Sexton and his business was itself a final agency action that had consequences, among which was application of the very provisions that the OPR cited – that is, the obligation under Section 10.20 to respond to its inquiry and the possibility of additional sanctions under Section 10.50. Other consequences might also ensue: Sexton claimed that the OPR threatened to withdraw his ability to e-file returns if he failed to respond to the inquiry letter, and the opinion points out that the letter required him immediately to turn over otherwise confidential client records and returns. The OPR's position, the court stated, "elides the important distinction between a mere investigation, which is likely not final, and the instant demand for documents under color of law and threat of consequences, which is". The court found that there was no adequate remedy to prevent the harm that could flow from that action, pointedly noting the Justice Department's concession at oral argument that there was "no possible administrative remedy or process for contesting the production of the material".
In a second holding, and largely for the same reasons, the court found that Sexton had adequately asserted a claim for relief. The issues it described include whether Sexton was a 'practitioner', whether OPR jurisdiction extends to a 'former practitioner' and his business and, most interestingly, "whether the giving of tax advice is beyond the scope of the regulatory authority" of the OPR. That the court even appears intent on deciding that third issue, which has been the subject of much speculation since Loving, should give the government some pause.
Third and finally, the court entered a preliminary injunction, again based mainly on the lack of any other adequate remedy. It noted that once the requested documents are produced, they cannot be 'unproduced' (its word), and specifically found that the production itself could constitute irreparable injury, whereas there would be no hardship to the IRS or adverse impact on the public from waiting. The court thus specifically enjoined the production of documents – but not the entire investigation – and prohibited the IRS from suspending Sexton's ability to e-file for failing to produce those documents.
There are many other thought-provoking asides and comments in the opinion, which warrants careful review by interested parties. While the final outcome of the case remains to be seen, it seems to be at least another temporary setback for the OPR. The government has now suffered three consecutive losses in its effort to reach return preparation activities, whether conducted by non-practitioners (Loving), former practitioners (Sexton) or even current certified public accountants (Ridgely). Given the court's comments and holdings in this initial opinion, a final loss in Sexton could further seriously undercut the OPR's authority.
Moreover, the court's conclusion that there is no potential harm to the public from letting a convicted felon and suspended practitioner continue to prepare returns seems questionable. It is certainly inconsistent with the findings of the IRS's return preparation study, the regulations overturned in Loving and the views of the organised tax bar and accounting profession. Many believe that additional legislative authority is required and urge a thorough rewriting of Section 330; although it is hard to believe a Republican-controlled Congress will be inclined give the IRS new and expansive regulatory powers.
So the most likely result may just be continued fights over – and possibly further erosion of – the OPR's authority.
An earlier version of this update first appeared in Procedurally Taxing, available at www.procedurallytaxing.com/irs-power-to-regulate-tax-practitioners-slipping-away/.
Christopher S Rizek
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