This article first appeared in the July 15, 2009 edition of Tax Notes Today.
Karen Hawkins, director of the IRS Office of Professional Responsibility, on July 14 again highlighted the role monetary sanctions will play in enforcing Circular 230 under her watch.
Speaking during an IRS Tax Talk Today webcast, Hawkins said that while the monetary sanction penalty in Circular 230 has yet to be used, she is working hard to raise "consciousness" of its availability within both the IRS and the practitioner community. The monetary penalty is the "only penalty that can apply to firms," she said. As such, "it is an area that needs to be looked at very carefully." Since taking the OPR helm, Hawkins said she has come across several missed opportunities to use monetary penalties. "I have my eye on firms at the moment," she said.
Lonnie Gary, an enrolled agent and director at RSM McGladrey, said the possibility of monetary sanctions is much on the minds of practitioners who want to know how OPR will deal with penalties on an individual level; he asked how monetary penalties fit within the hierarchy of sanctions at OPR's disposal. Hawkins acknowledged that OPR has the ability to impose monetary sanctions on individual practitioners but generally prefers to use sanctions such as suspension or disbarment against individuals, she said.
The program, entitled "OPR: A Balanced Approach," also provided Hawkins with an opportunity to discuss progress on the Service's review of return preparer performance standards. IRS Commissioner Douglas Shulman wants to gather input from all constituencies, she said, in order to bring a broad range of recommendations to the administration in final form by year-end. The project is open, with no preconceived notions about what the outcome should be, Hawkins said, reiterating that "everything is on the table." She noted that she has started attending the IRS's nationwide tax forums to interact with practitioners most likely to be affected by any recommendations the Service puts forth.
"Unenrolled preparers can't be ignored any longer," Hawkins said. Software developers and banks that participate in refund anticipation loan lending will also be scrutinized in the IRS's review, she said.
Hawkins summed up the role of Circular 230 and OPR as "overseeing the ethical conduct of tax professionals." She again emphasized that return preparation itself is not covered by Circular 230, and so does not automatically confer OPR with jurisdiction over those who prepare returns.
When questioned by Gary about how OPR's penalty grid factors into pursuing noncompliance cases, Hawkins replied that a single act of noncompliance will not necessarily warrant OPR's attention. Investigating each complaint takes an enormous amount of resources, she said, so the focus is on practitioners who show repeated noncompliance.
OPR's goal is to get practitioners compliant, Hawkins said, and toward that end it has come up with three new approaches. The office is sending out soft letters to practitioners who have self-corrected their noncompliance, she said, using the notice as a chance to gently warn them about remaining compliant. OPR is also issuing soft 60-day letters for practitioners who are current in their filing obligations but may have noncompliance issues for past years. This "no harm, no foul" reprimand gives them a short window to get clean with the IRS, she said. The final tactic OPR uses in some circumstances is entering into a deferred discipline agreement for suspension cases. If practitioners become compliant and remain so for five years, the disciplinary action is dropped and won't become public, she said.
Asked whether OPR is developing any disciplinary cases against practitioners related to opinion writing, Hawkins said that no cases under Circular 230 section 10.35 per se are in the pipeline, though complaints based on due diligence grounds are getting some traction.
OPR is taking some coordinated steps with other IRS divisions in order not to "double up" on penalties that practitioners might face if both an audit and disciplinary case are conducted. For example, if exams asserts a section 6694 penalty with regard to a transaction on which a practitioner gave advice, which can be as high as 50 percent of the collected fees, and OPR has a Circular 230 complaint arising from the same transaction that could result in a penalty up to 100 percent of the income generated, OPR will not assert a 100 percent sanction, she said. Rather, OPR's penalty would be up to 50 percent.
Hawkins said it would be inappropriate conduct for revenue agents to threaten practitioners with referral to OPR. It also would be inappropriate for agents to check the Form 2848 power of attorney file kept by the Service, and OPR will reject those cases, she said. Hawkins said she and other OPR personnel will be visiting upcoming IRS employee training programs to talk about the appropriate referral process.
OPR is now routinely checking the compliance records of enrolled agents, Hawkins said. Because that group is entirely regulated by OPR, it is "an easy way to keep people honest," she said.
OPR interacts with state licensing agencies on regular basis, Hawkins said. If OPR receives notice from a state about action taken against a practitioner, it will use an expedited process to pursue disciplinary measures, she said. If OPR is the first to take action, it will pass along the portion of case information that is public to the appropriate state licensing agency.
Mike Salyards, senior counsel (general legal services), IRS Office of Chief Counsel, noted that his office gets involved in a Circular 230 disciplinary case at the litigation stage. Once OPR has finished processing a case, it makes a referral to one of six regional general legal services (GLS) offices, he said, at which point GLS takes the OPR recommendation and contacts the practitioner under Circular 230 section 10.62. Before that, notice of an OPR investigation is invisible to a practitioner, he said. If the case isn't settled, it proceeds to a hearing before an administrative law judge.
Most OPR cases handled by GLS are for personal tax noncompliance, Salyards said, but he noted a recent emergence of other types of misconduct cases, such as engaging in abusive conduct toward the IRS, damage to the tax system, refusal to cooperate, and some complex cases involving a lack of due diligence. Litigation of Circular 230 cases does not reflect a zero tolerance attitude, he said, since OPR "does a good job of weeding out trivial violations." The cases that come to GLS can be characterized by willful noncompliance, he said. OPR and GLS will soon begin a pilot of jointly reviewing cases early on in the process so as to "help develop the best file" if a complaint proceeds to litigation, Hawkins said.
The biggest mistake practitioners make is failure to respond, Salyards said. The enforcement process moves quickly toward default judgment if practitioners do not reply to OPR or GLS attempts to acquire information, he said.
Christopher Rizek of Caplin & Drysdale noted that another slip-up practitioners often make in dealing with a Circular 230 complaint is not realizing how important it is to obtain legal representation at the earliest stages of the process.