Almost a month has passed since the U.S. District Court of the District of Columbia issued its opinion about IRS Circular 230 on Jan. 18, 2013, and I’m a little surprised by the lack of discussion about this opinion in ERISA circles because it may be a game-changer when it comes to the IRS permitting non-attorneys to practice before the IRS.
In Loving v. Internal Revenue Service, No. 12-385 (Jan. 18, 2013), the U.S. District Court of the District of Columbia granted summary judgment to three paid tax return preparers who complained that the 2011 addition of section 10.3(f) to IRS Circular 230, creating the category of Registered Tax Return Preparer, would force them to close their businesses if they were forced to comply with Circular 230. Specifically, the Court enumerated the new Circular 230 requirements imposed on those three paid tax return preparers as “annual fees, the entrance exam, and the hefty continuing-education requirement”.
To those of us who practice before the IRS on a daily basis, complying with IRS Circular 230 is nothing new. In my History of Circular 230 class, I was taught that the IRS promulgated Circular 230 in 1966. According to the Court’s 22-page opinion, Circular 230 actually has its origins in an 1884 statute, 31 U.S.C. section 330, which “allows the IRS to regulate “representatives” who “practice” before it.” (quotation marks around “representatives” and “practice” provided by the Court).
Section 10.2(a)(4) of Circular 230 defines practice before the IRS as:
“(4) Practice before the Internal Revenue Service comprehends all matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities under laws or regulations administered by the Internal Revenue Service. Such presentations include, but are not limited to, preparing documents; filing documents; corresponding and communicating with the Internal Revenue Service; rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and representing a client at conferences, hearings, and meetings.”
The Court stated the issue before it “turns on whether certain tax-return preparers are representatives who practice before the IRS, and thus are properly subject to the new IRS regulations.” (the new IRS regulations are the 2011 changes to Circular 230). Even though the three tax return preparers are in the business of preparing and filing IRS Form 1040s for unrelated taxpayers, the Court found that they are not representatives who practice before the IRS, and thus were not subject to the new IRS regulations.
According to the Court’s opinion, the IRS argued that “each agency has inherent authority to regulate those who practice before it.” Unlike most agencies, who permit only attorneys to represent the interests of unrelated parties, the IRS has always taken a more pragmatic approach, permitting non-attorneys to represent the interests of unrelated parties before the IRS based upon criteria stated in Circular 230. For example, many years ago, the IRS recognized that Enrolled Actuaries bring a unique understanding to the application of 22 different Internal Revenue Code sections as they pertain to pension and retirement plans, and thus added Section 10.3(d) to Circular 230. This pragmatic approach turned out to be cost-effective for everyone involved. Namely, the IRS could speak directly with the Enrolled Actuary for the plan instead of taking the more circuitous route of speaking to an attorney who could call the Enrolled Actuary for the plan, relay the IRS’ question about an actuarial calculation, obtain the Enrolled Actuary’s response to the question, and then relay the response to the IRS.
Several years after the IRS added Section 10.3(d) to Circular 230, it then added section 10.3(e), permitting Enrolled Retirement Plan Agents, or ERPAs, to practice before the IRS.
In determining whether the IRS can permit non-attorneys to practice before the IRS, the Court focused on the language of 31 U.S.C. section 330(a)(2), which “allows the Secretary to ‘require that the representative demonstrate…(D) competency to advise and assist persons in presenting their cases.” The Court says that it is this language, which “does not disclose who these covered ‘representatives’ are. But it does tell us what the representatives do – what their “practice” is, in the words of both subsections: representatives ‘advise and assist persons in presenting their cases.”
The Court then goes on to say that:
“This statutory equating of ‘practice’ with advising and assisting the presentation of a case provides the first strike against the IRS’ interpretation. Filing a tax return would never, in normal usage, be described as ‘presenting a case.’ At the time of filing, the taxpayer has no dispute with the IRS; there is no ‘case’ to present.”
If, as the Court says, filing a tax return was not included in the statutory framework of Circular 230 practice before the IRS, and if practice before the IRS only includes representing taxpayers who are involved in a dispute with the IRS, such as an appeal, then filing a determination letter application or an EPCRS VCP Application with IRS Employee Plans would also not be included.
After the opinion was issued by the Court, a representative of the IRS said the Service will be working with the Dept. of Justice to appeal this decision.