Written Comments of Leslie S. Shapiro, EA, JD
on behalf of
The National Association of Enrolled Agents
Proposed Modifications to Treasury Circular 230
February 19, 2004
Good morning, I am honored to present this statement on behalf of the National Association of Enrolled Agents (NAEA), the professional society of Enrolled Agents.
I am Les Shapiro, EA, JD, President of the Padgett Business Services Foundation and Chair of the NAEA Government Relations Committee.
Today, I am representing the National Association of Enrolled Agents whose members are tax professionals licensed by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service (IRS).
Enrolled Agents were established in legislation enacted in 1884 as part of an effort designed to help ensure ethical and professional representation of claims brought to the Treasury Department. Members of NAEA ascribe to a Code of Ethics and Rules of Professional Conduct and adhere to annual continuing professional education standards.
Like attorneys and Certified Public Accountants (CPAs), we are governed by the regulations in Treasury Department Circular Number 230 in our practice before the IRS. We are the only tax professionals who are tested by the IRS on our knowledge of tax law and procedure.
Each year, Enrolled Agents collectively work with millions of individual and small business taxpayers by providing tax preparation, tax planning, representation, and other financial services. Consequently, we are uniquely positioned to observe and comment on the average American taxpayer’s experience within our system of tax administration.
NAEA is dedicated to the integrity of our tax system and to the roles ethics and professional responsibility play in preserving that integrity. Consequently, we support efforts by the Department of the Treasury (Treasury) and the IRS to address noncompliance with the tax laws as it relates to taxpayers and practitioners. Our support of this has been included in testimony before Congressional committees and in other public pronouncements. We believe that Treasury’s efforts should include warranted modifications to the regulations in Treasury Department Circular Number 230 (Circular 230).
We have reviewed the proposed changes to Circular 230. NAEA respects the hard work that went into the proposal, and we are pleased that the rulemaking process enables interested parties and organizations the opportunity to offer comments.
The following are NAEA’s specific comments on the proposed regulations:
Section 10.33 sets forth “best practices for tax advisors.” It is comprised of a number of aspirations, ones that are axiomatic in nature, and are not defined. Further, they appear to be discretionary and apply both to providing tax advice and to preparing submissions to the IRS. Such submissions are assumed to include federal tax returns.
NAEA recommends that the discretionary principles in Section 10.33 not be enforceable rules. At best, they can be characterized as guidelines. Yet they are set forth as regulations, thereby evoking the only conclusion that can be reached, i.e., they are enforceable, particularly when placed in Subpart B of Circular 230. This seemingly is supported by proposed Section 10.36, which requires that measures must be taken by practitioners to ensure consistency (perhaps to assure compliance as suggested in the heading of Section 10.36) with the best practices described in Section 10.33.
We also wish to point out that there is not a stated nexus between Section 10.33 and the requirements in proposed Section 10.35. If there is no nexus and Section 10.33’s provisions are enforceable, Sections 10.33 and 10.35 may be found confusing since they would be construed to require adherence to both sections. While a fair inference may be that Section 10.33 subsumes Section 10.35, this should not be left to chance.
NAEA believes that proposed Section 10.33, especially when read in tandem with proposed Section 10.36, creates a burden that has a trickle-down effect on taxpayers. Many practitioners, be they Enrolled Agents, attorneys, or CPAs, are small businesses or self-employed individuals serving small business, self-employed, and individual taxpayers. If regulations add burdens to such practitioners, the costs of the burdens will pass down to their clients. NAEA believes there should be a concerted effort in the rulemaking process to accommodate burdens and the costs of those burdens with respect to small businesses that will be subject to the rules.
Bright-line guidance would be particularly helpful as well as consideration of the manner in which the burden can be reduced or alleviated. In addition, it seems obvious to us that, without explanation or definition, the proposal is intended to reverse best practices principles for return preparation that the government and practitioners have supported for countless years. The burden and cost factors involved for this alone are manifest, not to mention the cost for needed education in order to help ensure adherence. If they are not meant to be enforceable, a simple solution would be to delete them from the final rule and leave it to the practitioner organizations to continue advocating the principles of proposed Section 10.33. If there is a desire to retain them as guidelines, they should not be stand-alone provisions of Subpart B. There might be a place for them in Section 10.22 (due diligence) or in Section 10.34 (standards for advising with respect to tax return positions and for preparing or signing returns).
Also ignored are the non-Circular 230 preparers who comprise the largest segment of the return preparer community. Without consistency, proposed Section 10.33 could be found to be an exercise in futility.
NAEA supports modifications to Circular 230 addressing tax shelter opinions that deal with tax schemes and devices having the potential of being abusive. We are concerned that proposed Section 10.35 is so broad that clarification is needed in order to be a regulation that is clearly understood by both compliant practitioners and those who may be gaming the system. Our principal concerns are in connection with Section 10.35 (c), the definitions portion of the regulation.
Of particular note are the definitions of "tax shelter" and "tax shelter items." “Tax shelter is defined as any partnership or other entity, an investment plan or arrangement, or any other plan or arrangement, a significant purpose of which is the avoidance or evasion of any tax imposed by the Internal Revenue Code. A tax shelter may give rise to one or more tax shelter items. NAEA is uncertain what is meant by “other plan or arrangement” in the eyes of the drafters and what it will mean to the enforcers. This is particularly troublesome since it seems that all “tax shelter items,” as defined, contemplate positions on tax returns in connection with items of income, gains, losses, deductions, credits, the existence or absence of taxable transfers of property, or the value of property. Each of these has, as a significant purpose, the avoidance of any tax imposed by the Internal Revenue Code. Taxpayers constantly deal with the acknowledged complexity of the tax laws giving them that very opportunity.
This must be considered in relation to the definition of a “more likely than not” tax shelter opinion. In general, it provides that the opinion must reach a confidence level of at least more likely than not that one or more material federal tax issues would be resolved in the taxpayer’s favor.
Moving down the definitions chain, a “material federal tax issue” is any federal tax issue for which the IRS has a reasonable basis for a successful challenge and the resolution of which could have a significant impact, whether beneficial or adverse and under any reasonably foreseeable circumstance, on the federal tax treatment of a taxpayer’s tax shelter or items. “Reasonable basis” is not described, leaving practitioners in a quandary as to the expectations required of them. The same can be said for “significant impact.”
Tax advice is an integral part of services provided by practitioners. It obviously ranges from the simplest of positions to be taken on returns to those that are very complex. All such positions seemingly may fall within the scope of the proposal (and may even apply in post-filing situations, e.g., audits and claims for refund). If such advice is provided in writing (or by e-mail), the requirements of Section 10.35 must be met, regardless of the nature of the tax shelter item. A great number of Enrolled Agents and we suspect attorneys and CPAs find it efficient, particularly during the busy tax season, to give advice in written form. The time encumbrances of dealing with Section 10.35 would result in fewer returns being prepared. Those that are prepared would require higher fees. The equity of the requirements for tax shelter opinions for all tax shelter items seems lacking. The reality of the requirements would lead practitioners to compromise themselves with respect to issuing written advice, would lead taxpayers to seek the services of those who are not required to issue opinions, and would frustrate the efforts of the Office of Professional Responsibility to be responsive to the number of opinions referred to the office even with an army of staff members to consider them. Taxpayers, tax practitioners, and the government all would suffer under those circumstances.
It would seem that, at the very least, bright-line guidance and the use of examples will help narrow the broad nature of Section 10.35. Again, we support modifications to Circular 230 that may help win the war on tax schemes and devices that are abusive or potentially abusive. However, measures should be taken in the final rule that narrow the scope of the proposal in order to eliminate from the final rule advice with respect to positions on returns that reflect current practitioner/client interface standards in areas that in most instances are not the target of the proposal’s objectives.
Section 10.35(c)(4)(ii) excludes from the tax shelter opinion requirements advice provided during the course of an engagement pursuant to which the practitioner is expected subsequently to provide written advice that satisfies the tax shelter opinion requirements. NAEA believes this exclusion needs clarification. Does this mean that if there is an expectation of a subsequent tax shelter opinion and there is a change of mind by the taxpayer, the practitioner still must issue the opinion? We foresee situations in which a taxpayer may decide against a tax shelter opinion after reviewing the preliminary advice or who seeks preliminary advice only in order to make a more informed decision about pursuing a venture.
Section 10.37 of the proposal contemplates the establishment of advisory committees. NAEA has no problem with this concept. We recommend that the advisory committees' membership be comprised of a cross-section of the practitioner community.
There are concerns with respect to what appears to be a principal duty of the committee(s). We refer specifically to that relating to making recommendations as to whether or not a practitioner may have violated Sections 10.35 or 10.36 of the proposal.
One of those concerns is that of disclosure. This concern is manifest even if Treasury and the IRS have concluded the disclosure aspects of an advisory committee's duty can be accommodated. The privacy of individuals is overwhelmingly important in today's world. There already are problems with making disclosures of this nature within the IRS and to other government agencies. To now permit IRS disclosure to private citizens is outside the realm of privacy protection. This is so even if there is a good faith belief that an advisory committee setting provides a shield for this purpose. This is compounded by the disclosure of tax information. Knowledge by the advisory committee members of the practitioner, the taxpayer, and the tax return involved abuses the sanctity of privacy, whether or not such abuse is intended.
Another concern is that of recommending action on the violation of Sections 10.35 and 10.36. Circular 230 provides for administrative due process. The "crutch" of an advisory committee's involvement in individual cases raises a question of whether or not such due process is violated or if there is an appearance of violation of due process. It also may be considered to interfere with the independence of the Director, Office of Professional Responsibility, in reaching decisions on individual referrals.
NAEA hopes that these concerns will be considered and that corrective actions will be taken in promulgating the final rule.