OBSERVING STANDARDS FOR PRACTICE WHEN

REPRESENTING CLIENTS BEFORE THE IRS

Study of 2008

by
Fred Hepner

(Document originally published on June 13, 2008)

This document is provided for educational purposes only and should not to be construed as rendering legal advice.
Readers of this document should consult a qualified attorney to discuss the application of any personal legal issues
and how these issues pertain to their own facts and circumstances. Tax and financial matters should be discussed
with a qualified financial and tax advisor.

For decades, the IRS has consistently tried to move closer and closer to making taxpayer
representatives accept greater responsibility for policing the tax collections process for the IRS.
The IRS argues that tax laws would be easier to collect, if practitioners were forced to protect the
interests of the government against the interests of their clients. Forced verification of taxpayers’
tax documents, not allowing the preparer to seek accurate documents, and an effort to reduce
aggressive tax opinions is thrust of the position taken by the IRS. Most practitioners would prefer
not acting as an extension of the government’s enforcement arm, especially at the expense of their
clients.

In November of 2007, new sets of rules were issued to broaden the IRS’ power over practitioners.
The definition and scope of the term “practitioner” changed and now contains a broader meaning.
Circular 230 is the common reference given to Internal Revenue Code §6694 and the regulations
that provide interpretation with respect to practice before the IRS. The new rules place greater
burdens and responsibilities on representatives and tax preparers, including the ability to use new
sanctions, monetary penalties and even disbarment from practice before the IRS.

Suspension of Authorization to Practice Before the IRS

Suspension of practice before the IRS has been in place or many decades. Sec 330 of Title 31
gives the Secretary of the Treasury the authority to suspend a representation before the Treasury
Department. The Secretary delegates this authorization to the IRS Office of Professional
Responsibility (OPR). This office initiates investigation into complaints of violations of
professional responsibility.

This office also handles the initial intake of complaints by the employees of the IRS, clients and
other third parties about a practitioner. A practitioner often enters the disciplinary process in one
of two ways. An internal complaint by a Service employee, or a complaint filed by a disgruntled
client or third party. When a valid complaint is filed, as determined by the OPR, the practitioner
is entitled to receive notice of the complaint, where the practitioner faces:
1) censure
2) suspension
3) or disbarment from practice before the IRS
Do not ignore the notice. Unfortunately, many practitioners seem to assume that the complaint is
not worthy of their time to answer the notice. The Service is now permitted to post negative
outcomes on the internet, so decisions will essentially become a permanent record for public
review. The first decisions were posted in November of 2007 and both decisions involved
attorneys and the decisions are default decisions.

Who is Authorized to Practice Before the IRS?

Attorneys and Certified Public Accountants may practice before the IRS without any additional
licensing or examination requirements. A Form 2848, representative power of attorney, is required
by all representatives to actually communicate about clients’ tax issues. The only other
representative who may represent clients before the IRS is an enrolled agent. Enrolled agents must
successfully pass an exam given by the IRS. The person who prepared the taxpayers tax return
may discuss the tax return prepared by the preparer and represent a taxpayer at the examination of
the return. The new Circular 230 rules proposed further restricting and removing this provision,
but the end rules left the provision unchanged.

IRS & Conflicts of Interest

The IRS rules pertaining to representation apply conflict rules. A probate practitioner may
encounter these rules in the administration of a decedent’s estate. Circular 230 rules apply a
slightly different requirement involving conflicts of interest issues. The new rules expand the
definition of practice before the IRS. Essentially, the old rules applied primarily to tax preparation
of estate, income, gift and similar tax returns. Now, the preparation of opinions, communications
with the IRS and other tax documents fall under the rules.

Circular 230 now applies in a greater number of situations. Anytime Circular 230 applies, and a
conflict of interest arises, you must consider the effects of the conflict of interest on representation
before the IRS. An ethical attorney might say that as long as I am complying with the ethics rules
for attorneys, should I not be in compliance with the IRS conflict rules? The answer would be
probably not.

Under IRS rules, if an actual conflict of interest exists, or a potential conflict situation arises, the
practitioner is required to obtain consent to the representation from each affected client in writing
in order to represent the conflicting interests. This is essentially the same as the Texas ethics rules.
However, the IRS actually places a greater burden on the practitioner than the requirements of the
American Bar Association (ABA) model rules. The written consent may vary in form. The
practitioner may prepare a letter to the client outlining the conflict, as well as the possible
implications of the conflict, and submit the letter to the client for the client to countersign.

However, unlike the ABA model rule 1.7 (Texas counterpart is TDRPC 1.07), which permits
affected clients to provide informed consent verbally, if the consent is contemporaneously
documented by the practitioner in writing. Circular 230 does not allow verbal consent followed
by a confirmatory letter authored by the practitioner. This format does not satisfy the requirements,
because the attorney’s confirmatory letter must also be countersigned by the client. Note: the letter
is countersigned, so both the attorney and all affected clients must sign the document.

A number of commentators opposed the addition of the counter signature of the client on the basis
that the proposed rules were arguably broader than American Bar Association model rule 1.7. 1
The Treasury Department and the IRS, however, concluded that the language in the final
regulations is appropriate to protect taxpayer interests and to protect settlements from future
collateral attack. In order to provide greater flexibility to both the practitioner and client, the
Treasury Department and the IRS have revised the final regulations to allow the confirmation to
be made within a reasonable period after the informed consent, but in no event later than 30 days
after the verbal consent. The comments to the new rules say the intent of the Treasury Department
and the IRS is not to sanction minor technical violations, where there is little or no injury to a
client, the public, or tax administration. For example, if a client fails to return the confirmatory
writing to the practitioner, notwithstanding the practitioner's documented good faith effort to
obtain the client's signature, the practitioner would not be subject to a sanction or monetary penalty
provided the practitioner promptly withdrew from representation upon the failure to receive the
client's written confirmation within a reasonable period.

Sanctions

The Service is probably pleased to now be able to impose monetary sanctions of practitioners.
These sanctions will certainly be aimed at enforcement to control tax shelters. Sanctions may now
be imposed to recover the practitioner’s fee, plus any other penalties available under the Internal
Revenue Code.

Contingency Fees & the IRS

New regulations allow contingent fees in certain tax matters. Contingency fees are still not allowed
for tax preparation, claims for refunds or amended returns filed late in the examination process.
Contingency fees are permitted in the final regulations issued in December of 2007. A practitioner
may use contingency fee arrangements during the early stages of the examination process.
Contingency fees are permitted for an amended return or claim for refund or credit, where the
amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving a
written notice of the examination or a written challenge to the original tax return. During the
comment stages for the proposal of the regulations, questions were raised as to whether a
contingent fee arrangement was permissible before the taxpayer actually received the written
notice of examination or written challenge. The answer is yes. Thus, a practitioner may charge a
contingent fee for services rendered in connection with a claim for credit or refund filed in
connection with a determination of statutory interest or penalties assessed by the Internal Revenue
Service.2

Improved Whistleblower Rules

1
Comments on Proposed Regulations REG-122380-2, Regarding Regulations Governing Practice before the Internal
Revenue Service, May 9, 2006, p. 4-5
2
Regulations Governing Practice Before the Internal Revenue Service, 72 Fed. Reg. 54541 (2007)(to be codified at
31 C.F.R. Part 10).
The final regulations adopt the amendment in proposed Sec. 10.27 which allows a practitioner to
charge a contingent fee for services rendered in connection with any judicial proceeding arising
under the Internal Revenue Code.3 In Notice 2008-43, a new exception exists for “whistleblower”
claims under Section 10.27. The whistleblower provisions are found in IRC 7623. The new
regulations will apply to fee arrangements entered into after March 26, 2008.

Taxpayers may report tax fraud under 7623(b), if the tax penalties, interest, additions to tax, and
additional amounts in dispute must exceed $2,000,000, and if an individual is the taxpayer, then
the income of the taxpayer must exceed $200,000 for any tax year at issue in the claim. If these
thresholds do not apply to the claim, then the whistleblower may report the claim under 7623(a).
The difference is that under 7623(b) a taxpayer may appeal the case to the U.S. Tax Court, if the
IRS refuses to pay the reward. Under 7623(a), the taxpayer is not permitted to appeal to the U.S.
Tax Court, so perhaps business will be as usual, the whistleblower will not get paid.

This is essentially a reward system designed to get one taxpayer to turn-in delinquent taxpayers
and “tax cheats.” A reward system has been in place under prior law, but unfortunately it was
virtually impossible to get paid when the IRS did collect from the taxpayer. The reward if the
taxpayer follows the very specific rules for making a claim may range from 15 to 30 percent of the
collected proceeds in the case. The reward may not exceed 10 percent of the collected proceeds,
including penalties, interest, additions to tax, and additional amounts resulting from the action. If
the action principally derives from allegations resulting from judicial or administrative
proceedings, government reports, hearings, audits, or investigations, or the media. The award may
be of a lesser amount than determined by the IRS Whistleblower Office. This reduction will not
apply if the office determines that the claimant was the initial source of the information that
resulted in the judicial or administrative proceedings, government reports, hearings, audits, or
investigations, or the media allegations.

Aside from whistleblowers getting paid, this rule could create interesting issues for probate
attorneys. There can be considerable value in the estates of a decedent, even a small estate
containing a business interest, ranch or farm may ultimately top the two million asset amounts
quickly. An individual does not fall under the provisions of §7623(b), until the income threshold
of $200,000 is met. The question remains, is a deceased taxpayer still classified as an individual?
The income limit does not apply to entities. A probate attorney may need to ask about the
ramifications may the provisions of §7623(b) on probate administration. A disgruntled employee,
party or other third parties may blow the whistle. The addition of the right of appeal may give the
program sufficient teeth to peak the interest of some whistleblowers.

With this temptation to seek a reward, the disgruntled employee of the decedent, party to a probate,
a settlement agreement or other related issue, may find the reward and revenge an attractive option.
A probate attorney involved in cases that often involve litigation or similar disputes may want to
consider including provisions in agreements to counter this potential problem. Outright
prohibition might be construed as being against public policy by a court, but perhaps a resolution
procedure and inclusion of a clause that requires disclosure to the administrator or executor of any
known tax conditions at the time of settlement may be warranted.

3
Regulations Governing Practice Before the Internal Revenue Service, 31 C.F.R. Part 10(2005).
Another issue that comes to mind in the context of divorce and distribution of probate assets is the
unhappy ex-spouse, who is emotionally interested in inflicting damage to his or her ex-spouses’
estate. This vengeance could have ramifications for the attorney of either party. Texas has a
unique condition that affects tax filings. Taxpayers residing in Texas must observe the rules for
community income and essentially divide income between the spouses, absent an exception, a
partition agreement, or otherwise. The community income presumption affects the married filing
separate income tax returns.

This condition is unique to community property states and not applicable to common law based
separate property states. Each spouse essentially earns, or earned, one-half of the community
income, regardless of whether both spouses actually worked during the marriage, for each year in
question by the IRS. Spouses in the forty-three separate property states must allocate the wages
and other income earned by the individual spouse to that spouse’s own married filing separate
income tax return. Thus, ex-spouses blowing the whistle in a community property state like Texas
may also cause harm to their own estate. Married filing joint taxpayers will share equal
responsibility for the total amount of taxes, in either community or separate property states. Any
spouse who signs a joint tax return is fully responsible for the full amount of the tax liability. Thus,
in a community property state, the whistleblower may inadvertently blow the whistle on both
spouses, under either the married filing separately or the joint filed tax return.