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Cleaning houseEarlier this year, rumors surfaced that the IRS plans to clean house and phase out all attorney positions from the Office of Professional Responsibility (“OPR”), an independent arm of the Service tasked with enforcing discipline relating to tax professionals practicing before the IRS. On August 7, 2019, the Taxation Section of the American Bar Association (the “Tax Section”) sent a letter to IRS Commissioner Charles P. Rettig urging him to reconsider this housekeeping plan.

The Tax Section is absolutely correct in its position. Attorney oversight within OPR is critical to ensure OPR’s independence, to ensure the proper interpretation of legal rules applicable to tax practitioners, and to ensure that legal doctrines such as due process and privilege are not undermined.

Weight ScalesOn May 11, 2015, after serving as Director of the Office of Professional Responsibility (“OPR”) for approximately six (6) years, Ms. Karen Hawkins announced her intention to step-down and retire, effective July 11, 2015.

The OPR is responsible for interpreting and applying the Treasury Regulations governing practice before the Internal Revenue Service (commonly known as “Circular 230”).  It has exclusive responsibility for overseeing practitioner conduct and implementing discipline.  For this purpose, practitioners include attorneys, certified public accountants, enrolled agents, enrolled actuaries, appraisers, and all other persons representing taxpayers before the Internal Revenue Service.

The vision of the OPR is “to be the standard-bearer for integrity in tax service.”  As stated on OPR’s website, its “vision, mission, strategic goals and objectives support effective tax administration by ensuring all tax practitioners, tax preparers, and other third parties in the tax system adhere to professional standards and follow the law.”  Its specific goals include:  increasing tax advisor awareness and understanding of Circular 230; applying the principals of due process in all investigations and proceedings; and building, training and motivating its administrative team.

Ms. Hawkins will undoubtedly be missed by her work government colleagues.  She will also be missed by the tax community.  During her tenure at the OPR, she not only cleared the decks of a large backlog of pending disciplinary cases, she increased tax practitioner awareness and understanding of Circular 230.  Ms. Hawkins consistently made herself available to the tax community, speaking at numerous tax institutes and forums (including the Oregon Tax Institute).  In a direct, clear and concise manner, she reminded practitioners of their obligations under Circular 230.  Ms. Hawkins did not shy away from tough questions raised by tax practitioner audiences.  Instead, she hit the questions head on and provided complete and earnest answers.  Ms. Hawkins was likely responsible, in whole or in part, for the amendments to Circular 230 that alleviated the need for tax advisors to insert the silly disclaimers on all written communications that may contain federal tax advice.

While I have to assume Ms. Hawkins was a tough adversary in any disciplinary proceeding, especially given her no-nonsense approach to matters, she gave good and well-needed guidance to the tax community following amendments to Circular 230.  The tax community should be thankful for all of Ms. Hawkins’ hard work and her strong dedication to the tax profession.  She will be greatly missed.

As of the writing of this blog post, the Commissioner of the Internal Revenue Service had not named a successor Director.  I assume that Lee Martin, the Deputy Director, will serve as acting Director until a successor is named.

When tax advisors fail to follow the rules, it tarnishes our profession.  The bad behavior may subject them to discipline by the body governing their practice, the Office of Professional Responsibility and/or the criminal justice system.

Discipline may come in many flavors, depending upon the severity of the misconduct.  Sanctions generally consist of censureship, suspension, disbarment, financial penalties and imprisonment.

The stakes are high.  Tax advisors and their firms need to know and follow the rules, and implement systems to ensure compliance by the members of their firms.

Background

Effective June 30, 2005, Treasury issued final regulations amending Circular 230 (“2005 Regulations”).  The 2005 Regulations were specifically aimed at two goals:

  • Deterring taxpayers from engaging in abusive transactions by limited or eliminating their ability to avoid penalties via inappropriate reliance on advice of tax advisors; and
  • Preventing unscrupulous tax advisors and promoters from marketing abusive transactions and tax products to taxpayers based upon opinions that failed to adequately consider the law and the facts.

After the 2005 Regulations were issued, Treasury continued tinkering with the regulations to refine its approach, keenly keeping focus on these two goals.  Accordingly, we have seen numerous refinements to Circular 230 in the past nine (9) years, including:

  • Amendments to the 2005 Regulations published on May 19, 2005;
  • Broadened authority granted by lawmakers to Treasury to expand standards relating to written advice on October 22, 2004, with the passage of the American Jobs Creation Act of 2004 (“AJCA”).  In addition, the AJCA gave Treasury authority to impose monetary penalties against tax advisors who violate Circular 230;
  • Amendments to Circular 230 published on February 6, 2006, in proposed form, adopting, among other things, monetary penalties for Circular 230 noncompliance.  These regulations were finalized, effective September 26, 2007; and
  • Amendments to the written advice provisions of Circular 230 published on October 1, 2012 in proposed form.  These amendments were finalized on June 14, 2014.

Until 2005, Circular 230 was untouched for almost two decades.  An enormous storm awoke Treasury from a deep sleep, causing a loud roar to permeate among lawmakers, the IRS, Treasury and the tax community.  The result was the adoption of rules aimed at achieving the two goals set forth above.

The ultimate cause of the storm was the broad sweeping allegations of fraud and deception in the accounting and law professions which we saw in the early part of this millennium, including scandals involving ENRON, Global Crossing, imClone, WorldCom, Qwest, Tyco, HealthSouth and Aldelphia.  Further feeding the storm were the black clouds created by the collapse of Arthur Andersen and the financial penalties assessed against and the practice limitations imposed upon KPMG.  Last, but certainly not least, the investigations and lawsuits against tax advisors (and their firms) for developing and marketing abusive tax shelters, including the investigations and lawsuits leading to the demise of the large law firm of Jenkens & Gilchrist (“Jenkens”), added to these dark times.

The Demise of a Law Firm

In the early 1990s, Jenkens was a midsize law firm based out of Dallas, Texas.  Like many law firms, it had grandiose expansion plans, including hiring lateral attorneys and opening offices beyond Texas.  As the plans were implemented, the firm’s increasing focus became raising the profits per partner.

In 1998, Jenkens successfully recruited Chicago tax attorney Paul Daugerdas (“Daugerdas”).  Daugerdas was not a rookie tax attorney.  He had been a partner with Arthur Andersen and later chaired the tax practice in the Chicago office of law firm Altheimer & Gray.  With Daugerdas’s help, the Jenkens tax department grew exponentially and the profits from his tax shelter practice soared to record heights.  The firm’s management appeared enthralled with its growth and new-found profit achievements, especially the huge revenues generated by Daugerdas and his practice.

Unfortunately, it was too late when the firm finally decided to put an end to the tax shelter business.  According to the government, it ran a 10-year scheme that created $8 billion in tax deductions and over $1 billion in losses, all of which it alleged were improper.  After being audited by the IRS and losing the significant deductions, clients eventually sued the firm, claiming the tax shelters were fraudulent.  At that time, the government began significant investigations into the firm and its practices.  Unable to withstand the stress and financial strain from the client claims and the government’s investigation which resulted in a penalty assessment exceeding $75 million, the firm eventually closed its doors.

On June 9, 2009, at least seven (7) individuals were indicted on criminal charges, including Daugerdas, some of his former colleagues from Jenkens and BDO Seidman’s former CEO.  The indictment is a detailed 78-page chronology of the alleged events.  The Jenkens firm, itself, avoided prosecution when it, in 2007, entered into a nonprosecution agreement.  It likely paid a good portion of the $76 million penalty assessment.

The Long and Tumultuous Saga of Paul Daugerdas

In the case against Daugerdas, the government asserted, among other things, that he participated in a scheme to defraud the IRS by designing, marketing, implementing and defending fraudulent tax shelters.  Through a variety of strategies, his firm issued written opinions to clients, concluding losses and deductions generated from the tax shelters would more likely than not survive IRS challenge.  In addition, Daugerdas and five (5) other defendants personally used the tax shelters to evade income taxes on substantial income.  John A. DiCicco, then-acting Assistant Attorney General for the Tax Division of the Department of Justice, said at the time of the indictments:  “Dishonest and fraudulent tax professionals, including accountants, attorneys, and bankers, should stand up and take note of today’s indictment.  Professionals who sell and promote fraudulent tax shelters that help wealthy clients illegally evade taxes face serious felony charges and substantial prison time.”

The case proceeded to trial.  Before trial commenced, however, two (2) of the defendants pleaded guilty and agreed to cooperate with the government.  Daugerdas and four (4) other defendants continued the case, eventually seeing the eyes of a judge and a jury in a Manhattan courtroom.  On May 24, 2011, Daugerdas, along with three (3) others, were found guilty of charges, including conspiracy and tax evasion.  One (1) of the defendants was found not guilty.

Following the initial trial, Judge William H. Pauley III, U.S. District Court for the Southern District of New York, dismissed the convictions of three (3) of the defendants found guilty when he discovered a juror had lied about her background in an effort to enhance her chances of being selected for jury duty.  It turns out the juror was a suspended attorney with a substance abuse problem.  One (1) of the defendants agreed to a plea after the verdict and before Judge Pauley overturned the convictions.  That defendant was not eligible for a new trial.

The case proceeded to a second trial.  Just before the second trial began, one (1) of the three (3) remaining defendants pleaded guilty.  She was sentenced to eight years in prison and ordered to pay $190 million in restitution.  This left Daugerdas and one (1) other defendant, Denis Field, the former CEO of BDO Seidman, to battle it out for a second time.

On November 4, 2013, the jury in the second trial found Mr. Field not guilty.  Daugerdas, however, did not attain such a positive outcome.  The jury found him guilty on seven (7) charges, including conspiracy and tax evasion.  On June 25, 2014, Judge Pauley finally sentenced Daugerdas to 15 years in prison.

Daugerdas and tax advisors like him are primarily responsible for causing Treasury to create the 2005 Regulations, especially the written advice provisions.  Fortunately for the tax community, as mentioned in my June 24, 2014 blog post, Treasury finally amended Circular 230, eliminating the crazy practitioner written advice disclaimers and easing up the written advice requirements.  Still, because of cases like the Daugerdas case, practitioners need to be cautious.  The government will not allow the creation, implementation and marketing of abusive tax shelters.  Daugerdas’s journey and the demise of Jenkens should be a lesson to the entire tax community.  Daugerdas’s journey was long and tumultuous, but in the end it should serve as a warning to tax advisors.  The stringent and complex Circular 230 written advice rules may have recently been relaxed, but tax advisors are still subject to a high standard of conduct.  A good working knowledge of Circular 230 is required of all tax advisors.  Compliance is paramount.

 

As of June 12, 2014, with the exception of what are commonly known as “Marketed Opinions,” tax advisors and their firms no longer need separate standards governing Written Advice.  Section 10.35 of Circular 230 (“C230”) has been eliminated.  Consequently, the crazy, overused C230 disclaimers can go in the trash bin.  No more emails to mom, dad, children or other family members, and/or friends with a federal tax disclaimer.  I bet that will be somewhat of a relief to these email recipients.  No longer will they find themselves looking for tax advice as a result of the prominent disclaimer in a message that has absolutely nothing to do with taxes.

Representatives of the IRS and the Office of Professional Responsibility (“OPR”) have vocalized glee about the elimination of C230 disclaimers.  Karen Hawkins, Director of the OPR, told participants at a tax conference in New York last week:  “I’m here to tell you that jurat, that disclaimer off your emails.  It’s no longer necessary.”  IRS Chief Counsel, William Wilkins, echoed the same sentiments last week when he said:  “The Circular 230 legend is not merely dead, it’s really most sincerely dead.”

Treasury estimates this amendment to C230 and the removal of the corresponding compliance burden on tax advisors “should save tax practitioners [and/or their clients] a minimum of $5,333,200.”

All Written Advice is now governed by Section 10.37 of C230.  This provision does not contain specific disclosure rules.  Consequently, unless Treasury further amends Section 10.37, the C230 disclaimers are no longer required on Written Advice.

Going forward, among other things specifically set forth in Section 10.37 of C230, tax advisors must:

  • Base the written advice on reasonable factual and legal assumptions (including   assumptions as to future events);
  • Reasonably consider all relevant facts and circumstances that the practitioner knows or reasonably should know;
  • Use reasonable efforts to identify and ascertain the facts relevant to written advice on each Federal tax matter;
  • Not rely upon representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) of the taxpayer or any other person if reliance on them would be unreasonable;
  • Relate applicable law and authorities to facts; and
  • Not, in evaluating a federal tax matter, take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.

C230 still provides that any tax advisor with principal authority and responsibility for overseeing the firm’s tax practice must take reasonable steps to ensure that it has adequate procedures in place to ensure C230 compliance.  Failure to take “reasonable” steps to ensure that the procedures are followed subjects the tax advisor and his or her firm to discipline.

As a result of the June 12, 2014 amendments to C230, tax advisors (with the exception of Marketed Opinions):

  • Are no longer required to use disclaimers; and
  • Are no longer required to describe in Written Advice all of the relevant facts, including assumptions and representations, the application of law to the facts, and any conclusions.

It is hard to dispute that specifically including in Written Advice all relevant facts, assumptions and representations, application of the law to the facts, and any legal conclusions, is a good and sound practice.  Nevertheless, Section 10.37 of C230 now only requires that tax advisors consider the:

  • Scope of the engagement;
  • The type and specificity of the advice sought; and
  • Appropriate facts and circumstances.

Based upon these factors, tax advisors are now required to determine the extent to which the relevant facts, application of the law to those facts, and the conclusions should be included in the Written Advice.  This amendment to C230, in a lengthy and verbose manner, tells tax advisors that they are not subject to specific and rigid information inclusion requirements in all Written Advice any longer.  Rather, they are required to look at all of the relevant facts and circumstances, giving due consideration to what they reasonably know or should know, to determine what should be included in Written Advice.  No rigid, one-size-fits-all, requirement exists any longer.  According to Karen Hawkins, the government amended this component of C230, purposely making it a broad principles-based rule.  It gives both the government and tax advisors lots of flexibility, allowing them to use common sense and sound practice standards when rendering Written Advice.

It should be noted, written presentations provided to an audience solely for educational purposes are not considered Written Advice for purposes of C230.  Be aware—if a presentation is made with any level of intent to market or promote transactions, more onerous requirements are required.  The IRS has not lost sight of history – it is keeping its eye on Marketed Opinions and will continue to closely scrutinize them.

Tax advisors and their firms need to have a good understanding of C230, as amended, and implement policies to ensure compliance therewith.  In light of the possibility of censorship, suspension or disbarment from practice before the IRS, the stakes are high.

The Service’s new arsenal is strong.  The 2014 amendments to C230 redirect the tax world back toward normalcy.  Nevertheless, given the sanctions for noncompliance, C230 is still something tax advisors and their firms need to take seriously and strive to comply therewith.

The takeaways are threefold:

1.  No longer may tax advisors place disclaimers on Written Advice that say things like “the IRS requires that we tell you…………………” or “we are required under Circular 230 to tell you” that you may not rely upon this advice to avoid federal tax penalties.  Those types of statements are no longer accurate and should be removed from Written Advice.  No longer does the IRS or C230 require such a statement.

2.  A good understanding of C230 is required by all tax advisors.  Firms should have a C230 Committee that adopts good practice standards and policies, and educates, monitors, and ensures C230 compliance by, members of the firm.

3.  Marketed Opinions are still being closely scrutinized by the IRS.  Compliance with Section 10.37 of C230 is required.

For C230 compliance issues, or to learn more about C230, feel free to contact me.

 

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Larry J. Brant
Editor

Larry J. Brant is a Shareholder in Foster Garvey, a law firm based out of the Pacific Northwest, with offices in Seattle, Washington; Portland, Oregon; Washington, D.C.; New York, New York, Spokane, Washington; and Beijing, China. Mr. Brant practices in the Portland office. His practice focuses on tax, tax controversy and transactions. Mr. Brant is a past Chair of the Oregon State Bar Taxation Section. He was the long-term Chair of the Oregon Tax Institute, and is currently a member of the Board of Directors of the Portland Tax Forum. Mr. Brant has served as an adjunct professor, teaching corporate taxation, at Northwestern School of Law, Lewis and Clark College. He is an Expert Contributor to Thomson Reuters Checkpoint Catalyst. Mr. Brant is a Fellow in the American College of Tax Counsel. He publishes articles on numerous income tax issues, including Taxation of S Corporations, Reasonable Compensation, Circular 230, Worker Classification, IRC § 1031 Exchanges, Choice of Entity, Entity Tax Classification, and State and Local Taxation. Mr. Brant is a frequent lecturer at local, regional and national tax and business conferences for CPAs and attorneys. He was the 2015 Recipient of the Oregon State Bar Tax Section Award of Merit.

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