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Disbarred Attorney Isn't Subject to IRS Oversight With Respect to Tax Return Prep

(Parker Tax Publishing April 2017)

A district court held that the IRS Office of Professional Responsibility (OPR) did not have jurisdiction over a tax preparer and disbarred attorney who offered to write a written memorandum to a taxpayer about the manner in which she may want to file her taxes. He was not a representative of persons before the IRS. Sexton v. Hawkins, 2017 PTC 134 (D. Nev. 2017).

James Sexton Jr. is a former attorney who was disbarred from practice in South Carolina after pleading guilty in 2005 to four counts of mail fraud and one count of money laundering. In 2008, he was also suspended by the IRS Office of Professional Responsibility (OPR) from practicing before the IRS. Prior to and during his suspension, Sexton provided tax return preparation services for individual clients.

In 2012, Sexton was the subject of an OPR complaint by a former client whose individual tax returns he prepared for 2010 and 2011. He had also offered to send a written memorandum analyzing the client's options regarding her business's tax obligations but, upon learning of Sexton's disbarment, the client fired him and filed the OPR complaint. OPR then initiated an investigation of whether Sexton was violating his suspension from practicing before the IRS. OPR sent requests for disclosures regarding Sexton's background and detailed information on his business, as well as requests for documents provided by Sexton to clients relating to the preparation of tax returns.

Sexton sued for declaratory and injunctive relief, arguing that the IRS's authority does not extend to individuals who are not representatives before the IRS and, therefore, the IRS lacked jurisdiction over him.

The IRS is authorized under 31 U.S. C. Section 330, also known as Circular 230, to regulate the practice of representatives of persons before the IRS. The IRS argued that its authority and jurisdiction extend to tax professionals who are not authorized to practice before the IRS because they are suspended from practice before the IRS. Further, it asserted that it has jurisdiction under 31 U.S.C. Section 330 over tax professionals who provide written tax advice, regardless of whether they represent clients in a typical tax controversy before the IRS.

Sexton argued that, consistent with the analysis of the D.C. Circuit in Loving v. I.R.S., 2014 PTC 73 (D.C. Cir. 2014), the authority of the IRS does not extend to individuals who are not representatives of persons before the IRS, and that therefore the IRS lacks jurisdiction over Sexton. In Loving, the D.C. Circuit addressed the question of whether the IRS's authority to regulate the practice of representatives of persons before the Department of the Treasury encompasses authority to regulate tax-return preparers like Sexton. The D.C. Circuit answered in the negative, finding that tax preparers are not representatives under Circular 230 and that preparing and signing tax returns are not considered as practice before the Treasury Department. The term "practice before" an agency, the court said, ordinarily refers to practice during an investigation, adversarial hearing or other adjudicative proceeding, and merely preparing and signing a tax return does not meet this standard.

Following Loving, the district court found that Sexton was not subject to the IRS's regulatory authority under 31 U.S.C. Section 330. First, the court found no support for the IRS's argument that the statute creates an inherent jurisdiction or authority over former practitioners who are not authorized to practice before the IRS because of a suspension from practice for misconduct. Second, the court rejected the IRS's argument that 31 U.S.C. Section 330 extends to tax professionals who offer written tax advice regardless of whether they represent clients in a tax controversy. The court did not find persuasive or controlling the pre-Loving decisions cited by the IRS. Nor did the court agree with the IRS's attempt to distinguish Loving on the basis that the taxpayers in that case were tax return preparers who were not in the business of authoring written tax opinions; rather, the court found that Loving supported a narrow reading of 31 U.S.C. Section 330. The court further read the statute to authorize the IRS to impose standards on the rendering of written tax advice, but not to sanction such advice or the offering of it. Having already determined under Loving that practice before the IRS means practice during an investigation, adversarial hearing, or adjudicative proceeding, the district court found the work of tax preparers is not covered by this definition and that the plain language of the statute did not support the IRS's more expansive reading.

Finally, because Congress had created a separate regulatory scheme directly related to tax preparers under Code Secs. 6694, 6695, and 6713, the court found that Congress did not intend for 31 U.S.C. Section 330 to authorize the IRS to separately regulate tax preparers. There was no authority to support the IRS's argument that written advice need not be given in the context of an actual proceeding or investigation by the IRS. Finally, the court noted that Sexton only offered to provide written advice, but did not actually do so.

For a discussion of the Loving case as it relates to the regulation of tax practice by the IRS, see Parker Tax ¶270,101.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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