Ethics in the Eye of the Beholder: What Conduct is Most Likely to Result in Discipline Under Circular 230?

Due diligence is a process by which one evaluates the decisions to be made, the risks being taken, and the costs versus the benefits of specific options.

INTRODUCTION

Two of the more common queries put to me by tax professionals around the country when I served as Director of the Office of Professional Responsibility (“OPR”) were: 1) What is most likely to get me in trouble with OPR; and, 2) How much due diligence is enough? For me, these are opposite ends of the same issue: If you are doing the appropriate amount of due diligence in all your dealings with your client and the IRS, you are unlikely to attract attention from OPR. If you are not, that’s when question #2 arises: what’s an “appropriate amount of due diligence. The ultimate answer: “It depends”, should not surprise anyone. Every provision in Circular 230 is dependent upon specific facts and circumstances for its ultimate applicability. Unlike the Internal Revenue Code which creates “rules” (intended to be of the black and white nature, even if not always the case), the statute governing practice before the Treasury Department² originally focused on principles intended to ensure integrity and professionalism in those who represented others before the Department³. Most of the regulations promulgated over the years⁴ have maintained this principles-based focus with a few exceptions beyond this article’s coverage.⁵

Depending on how one counts, there are no fewer than four regulatory paragraphs in Circular 230 that address some level or stage of the due diligence process.⁶ It is a statement in and of itself that over the years, Circular 230 has expanded from a single general due diligence provision⁷ to multiple regulations addressing specific aspects of due diligence as they arise in the tax practice context. As Director, I felt that the only provision that was needed to address 90% of the transgressions under Circular 230 was section 10.22, Diligence as to Accuracy. The remainder of the due diligence sections merely elaborate on the concept in greater detail for those less inclined to want to think too hard on their own about a tax professional’s integrity and responsibilities to client’s and to tax administration.

GENERAL DUE DILIGENCE

So what does section 10.22 say? It admonishes those subject to Circular 230⁸ to exercise “due diligence” throughout the course of their dealings with clients, and with Internal Revenue Service (IRS) personnel. Three types of activities are identified in the regulation: 1) when an individual is “preparing or assisting in the preparation of, approving, and filing tax returns⁹, documents, affidavits and other papers in connection with” tax matters; 2) when an individual is making oral or written representations to Treasury personnel; and, 3) when an individual is making oral or written representations to a client in connection with “any matter administered by the [IRS]”.¹⁰  Subject to the more specific due diligence provisions contained in sections 10.34 and 10.37, section 10.22(b) also articulates a “safe harbor” defense for those who might rely on the work product of others such as an employee, another tax professional, an appraiser etc. The safe harbor is available only if an individual can demonstrate that reasonable care was used in engaging, supervising, training and evaluating the person whose work product is being relied upon. If the safe harbor is successfully invoked, an individual will not be held accountable for any errors resulting from the reliance- due diligence will be “presumed”. The adage of the “buck stops here” can be circumvented by hiring/engaging competent staff/other professionals; by supervising and training employees sufficiently; and by evaluating the work product that comes from others with a reasonable level of scrutiny.

But just what is the “due diligence” expected in 10.22? The term is not specifically defined in the regulations. However, the term permeates the legal and business worlds. Lawyers and business people do their “due diligence” before finalizing a contract, a business deal or before engaging in any major transaction. Due diligence is a process by which one evaluates the decisions to be made, the risks being taken, and the costs versus the benefits of specific options. The purpose in conducting due diligence is to investigate facts, circumstances, and actors sufficiently to enable one’s self, or those being advised, to make informed decisions about actions to be taken. This means any due diligence should be conducted with an eye toward enhancing the amount and quality of information available to the decision-maker, and to ensure that the available information is used methodically in the decision-making deliberations, including an analysis of the cost-benefits and risks associated with alternative choices.

It seems the concept of due diligence entered legal lexicon as a term of art with its inclusion in the Securities Act of 1933. A “safe harbor” defense for broker-dealers accused of making inadequate disclosures to investors with respect to a purchase of securities required the broker-dealers to demonstrate they had exercised “due diligence” in the investigation of a particular security to be sold, and that they made full disclosure to any potential investor of what was uncovered during that investigation. Recognizing the value of such a defense to lawsuits by disgruntled investors, the concept was institutionalized by the securities industry relatively quickly and, as we see in Circular 230, migrated to other types of professional advising activities. In Circular 230, however, the “shield” was turned into a “sword”.  The exercise of due diligence became an expectation for tax professionals, first in the general sense described above in section 10.22, and then in more specific contexts to address specific behavioral areas where tax professionals were not getting it right as often as the tax agency thought they should.

In tax practice, due diligence first comes into play (or should) as the initial process in which the professional engages to get to know the client and the nature of the services sought. Thereafter, the professional engages in on-going due diligence to assure an up-to-date “picture” of the client and the facts. Initial due diligence should occur with every new client as the professional learns the facts necessary to perform the services for which s/he is being engaged. Obviously the factual inquiry will be different for the preparation of an income tax return ¹¹than for a merger transaction opinion.¹² Determining the degree and sufficiency of the due diligence “investigation” is part of the professional’s responsibility.¹³ This is the essence of section 10.22(a)(1). Professionals who fail to ask probing, detailed questions about a client’s facts, situation, goals, intentions, etc., is doing him/herself, and the client, a disservice. It is not “prying” to expect a client to respond to inquiries reasonably intended to provide the professional with sufficient information from which to make reasonable recommendations for the client’s informed consideration. It is also good practice, to make a written record of the relevant information identified and (as appropriate) discussed with the client. This is the essence of section 10.22(a)(3). Accepting all representations made by a client without question, will almost never be adequate due diligence

An element of due diligence that is unique to tax professionals appears in section 10.22(a)(2)- ensuring that oral and written representations made to the IRS are correct. It is a concept which results from the tax professional’s dual responsibilities to clients and to the system of tax administration. It is crucial to the process that “truths be told”. Failures to provide correct information to the Agency can result in disastrous results for the tax professional and/or the client.

SITUATIONAL DUE DILIGENCE

On-going due diligence implicates the other more specific provisions in Circular 230.

Tax Returns

Section 10.34(a) admonishes the professional not to give advice or to sign a tax return¹⁴ containing a position which lacks substantial authority, unless the position does have a reasonable basis and the client is advised of his/her penalty exposure¹⁵ unless the position is disclosed on the return. The professional also may not willfully attempt to understate the client’s tax liability, or recklessly disregard rules or regulations when signing or advising on tax return positions.¹⁶  This requires the tax professional to take reasonable steps to ensure relevant factual information has not changed from one year to the next (or maybe from one week to the next), or from one transaction to the next. So, a return preparer might not have to ask to see a child’s social security card every year, but inquiring as to the existence of a foreign bank account on an annual basis is appropriate due diligence. A client who uses “SALY”¹⁷ numbers, with the knowledge of the preparer, for a current year schedule C is causing a problem for him/herself and the tax professional. The professional will be participating in preparing a return that is misleading at best and fraudulent at worst. Due diligence requires the professional to educate the client on the importance of accuracy in the tax return and to “tease out” the correct facts/data to ensure that the professional (and the client) is signing an accurate return. In my opinion, it is never a defense to say the client is solely responsible for the entries on the tax return. If that were the case, both signing and non-signing return preparers would be irrelevant to the tax return preparation process. The tax professional is expected to make further inquiry with respect to information received from the client which appears to be incorrect, inconsistent with other known relevant facts, or incomplete. Nor can the professional ignore the implications of information received or already known.¹⁸ This on-going due diligence is a critical aspect of providing solid professional tax services.

Controversy

Section 10.34(b) of Circular 230 addresses conduct, most likely to arise in tax controversy practice, where documents are being submitted to the IRS. Under section 10.34(b)(1), a document or other paper submitted to the IRS¹⁹, whether by the practitioner or taxpayer on advice of the practitioner, may not contain any positions which are frivolous. This very low bar seems currently out of synch with many other provisions both in the Circular and in the Internal Revenue Code. Nevertheless, during my tenure at least a handful of practitioners submitted written arguments and work papers to the IRS containing purported support and arguments for what were clearly scams and shams.  Frivolous has sometimes been described as “a position that cannot be defended with a straight face,” but the evaluation of what constitutes a “frivolous position” is an objective one, not a subjective one. What would the general community of tax professionals think about the position.

Section 10.34(b)(2) addresses the act of making a submission. Practitioners may not advise a client to submit documents or other papers to the IRS when the submission is frivolous; when the submission is intended to delay or impede IRS actions; or when the submission contains or omits information suggesting an intentional disregard for the law, unless additional documentary evidence is submitted supporting a good-faith challenge to a statute or regulation.

Submissions of post-dated documents to support a transaction; omitting asset from a collection form; providing fabricated receipts to support non-existent income or expense items; submitting an offer in compromise proposal for the sole purpose of stopping a bank levy, are all examples of potential violations under section 10.34(b)(2).

If a practitioner advises a client with respect to a position taken on a tax return or prepares/signs the return containing the position and the practitioner knows (or should know) that the client could be subject to a penalty, the practitioner must advise the client accordingly and provide information on how the client may avoid the penalty through adequate disclosure on the return. This admonition applies equally to the submission of any document to the IRS. It was my position that the practitioner need not “force” the client to make the requisite disclosure. However, unless the return or submission meets the standards articulated in 10.34(a) and (b), the practitioner may not prepare/sign the return or make the submission without professional jeopardy.

Competence

While not technically a “due diligence” provision, section 10.35 of Circular 230, newly added to the regulations in 2014, requires a practitioner to be competent to practice before the IRS. Competence is a facts and circumstances test; but as a foundational matter, it requires the requisite knowledge, skill, preparation and thoroughness necessary for the matter for which the practitioner has been engaged. While a practitioner may not be competent in all things tax, the regulation expects the practitioner to be self-aware enough to know when to research or study a subject before giving advice or interacting with IRS personnel. It is also incumbent upon the practitioner to know when s/he is not competent, and cannot become competent in sufficient time, to provide the requested services. In these instances, the practitioner can meet the regulatory expectations by consulting or hiring someone who is competent. In this regard, section 10.35 interplays with section 10.22(b): when relying on someone else’s work product, a practitioner will only be deemed to have exercised adequate general due diligence if the practitioner “used reasonable care in engaging, supervising, training and evaluating the person, taking proper account of the nature of the relationship between the practitioner and the person” being relied upon.

Written Tax Advice

Section 10.37 of Circular 230 was substantially rewritten in 2014 in conjunction with the removal or former section 10.35 dealing with Covered Opinions. While purporting to address only written advice, the provisions in that section serve as a helpful synopsis for the due diligence required during all phases of tax practice: to ensure that all relevant and available information is obtained and used appropriately in the decision-making deliberations by both advisor and client. The section tells us that it’s all about behaving “reasonably”- again, an objective, not subjective exercise, with the final step consisting of applying the appropriate legal principles and concepts to all known relevant facts and all reasonably assumed future facts. The facts must fit the law- recrafting facts to fit the law after-the-fact will never sustain a challenge and is not adequate due diligence. I have seen this kind of “advising” in tax shelters when a “cookie-cutter” scheme is sold wholesale to clients without the facts to support the tax treatment being espoused in the opinion. This is tantamount to selling a recipe without knowing whether the cook has the proper ingredients.

Relying on someone who is known to be unreliable, or incompetent, is not reasonable conduct, nor is accepting information or an opinion from someone who has an unresolved conflict of interest in the matter. If written advice is being provided to someone for use in marketing a tax strategy, the advising practitioner will be subject to a more thorough due diligence assessment by OPR if the strategy is found to be a tax shelter.

DEFENDING YOURSELF BEFORE OPR²⁰

Early Stages

A practitioner always hopes to steer clear of an OPR investigation during his/her career, of course. However, OPR is a “receptacle” for third party complaints about practitioner behavior. In other words, OPR does not generate its own cases; it receives referrals and complaints from IRS personnel, other governmental agencies, other practitioners, and the general public. Therefore as an initial matter, a referral to OPR is going to be dependent on the “eye of the beholder” making the allegations of misconduct.

Once a complaint is received, OPR is required to take, at least a cursory look to determine on the first hand, whether it has jurisdiction over the person and the behavior complained about. During my tenure as Director, nearly 65% of the cases received were disposed of at this intake phase²¹. In these instances, no contact between the OPR staff and the practitioner occurs, and the record of the referral may not be used as a cumulative event if a subsequent complaint/referral is received.²²  If OPR determines that it has jurisdiction and the behavior is subject to Circular 230, two things occur. First, the practitioner’s tax compliance record is checked (i.e., personal, controlled entities, employment). If nonfiling is discovered, or there are unpaid tax liabilities which may suggest willful evasion of payment, those charges will be added to whatever else has been alleged about the practitioner’s conduct. Second, consideration will be given to the nature of the transgressions and the appropriateness of alternatives to discipline explored. In this instance, the practitioner will receive a preliminary Notice of Allegation from OPR which recites the allegations of misconduct and invites the practitioner to respond in writing.

TIP: THIS IS AN OPPORTUNITY A PRACTITIONER SHOULD NOT PASS UP

This represents your first opportunity to explain yourself, express remorse where appropriate, demonstrate you have learned from your mistake and convince OPR that no, or alternate discipline, is a better use of its resources in your case.

TIP: Too many practitioners opt to self-represent at their own peril. Having an objective representative to assist with your analysis of the situation and to present your case to OPR is an option every contacted practitioner should consider.

Alternatives to Discipline

In order to make the most efficient use of OPR’s resources several alternatives have been developed for use in appropriate cases; for instance, where the facts and circumstances are in dispute and any litigation would result in ”he said, she said” testimony; where the conduct alleged appears to be a onetime “hiccup” acknowledged by a chagrined practitioner with an otherwise unblemished record; or, where the practitioner has corrected the behavior. This happens most often where the practitioner’s own tax compliance has come to OPR’s attention²³. The discipline alternatives are designed to serve as “wake-up” calls to give practitioners an opportunity to get back into behavioral compliance without consequence to their livelihoods. They include:

1. Soft Letter regarding tax filing or payment obligations;
2. Soft letter regarding bad behavior in violation of one or more of the regulations
3. Private reprimand
4. Deferred disciplinary agreement.

The soft letters call the practitioner’s attention to the violating behavior and admonish the practitioner to become better acquainted with his/her obligations under Circular 230. Depending upon the facts, the soft letter may provide a deadline (e.g., for filing delinquent tax returns) or may just warn that a subsequent referral could result in disciplinary action being taken.

The private reprimand is issued at the discretion of the Director, OPR, and is the private equivalent of a censure (discussed below). It almost always advises that a future transgression could result in harsher disciplinary action being taken.

A deferred disciplinary agreement (DDA) is used most often in cases of tax noncompliance where the individual involved is not a “regular” practitioner before the IRS. The majority of DDAs are executed with attorneys whose practices touch on tax (family law, bankruptcy etc.) but who rarely represent a client before the IRS. Public discipline of these individuals can often result in a loss of state bar license, perceived by many to be a harsh result for tax non-compliance by someone who interacts very little with tax administration. The DDA contains negotiated terms for the future conduct of the practitioner with default provisions identifying a summary process for imposing public discipline. Unless the DDA is breached, the fact of the agreement is not published in the Internal Revenue Bulletin (see below for more on this).

Some of the staff in OPR negotiated DDAs which were “hybrids”, that is, they contained provisions for an immediate censure with provisions for future behavior and consequences for any default. I personally did not favor this approach, so very few such hybrid DDAs are in existence.

There is no current indication of how new management is addressing any of these alternative disciplinary approaches.

TIP: If you receive a notice of allegation with respect to your own tax compliance or specific behavior that you admit occurred, the most efficient approach is to acknowledge the transgression and pledge to correct the conduct, i.e., commit to filing delinquent returns in a reasonable period of time.

Investigation and Conference

If a practitioner has either failed to respond to OPR’s communications²⁴ or the case is not one which can be closed early or with an alternative, OPR will commence its investigation and documentation in anticipation of a disciplinary hearing. During this phase, OPR will contact the referral source, as needed, for additional documentation and will also conduct its own search of available databases to see what other information is available on the practitioner. This research can result in discovering tax-noncompliance with respect to the individual, a controlled entity, or employment taxes. It can also uncover the loss of a state license (attorney or CPA) which will result in an expedited procedure for indefinite suspension. Internal databases will also inform OPR as to whether the practitioner has ever had preparer penalties assessed, and at what level (i.e., negligence, willful).

Once the OPR staff has identified all possible violations, an Allegation Letter will be sent to the practitioner. The letter should contain a detailed and precise description of the alleged violating conduct, citations to the specific Circular 230 provisions violated, and notice of the opportunity to request a conference with OPR staff. The letter will sometimes contain requests for additional information if there are some missing facts which OPR believes are relevant to its final determination.

TIP: DO NOT IGNORE AN ALLEGATION LETTER. Request a conference. And, if you haven’t already done so, consider hiring someone to represent you.

Under the regulations, a practitioner has a right to a one conference with OPR. Don’t pass this up. The conference can be telephonic or in person, but, if in person, the conference will be held in Washington, DC where OPR resides. The practitioner is entitled to representation during this process. There will be at least two OPR staff in attendance at any conference: at least one lawyer, with the other being a paralegal, manager, or, on rare occasion, the Director. The person with whom you have been corresponding will take the lead in opening the conference with some ground rules but this is really the practitioner’s conference and should be conducted accordingly. The practitioner should come prepared with any supporting documentation to refute the allegations, or raise litigation hazards. If the practitioner realizes that violations have occurred, it is the wiser approach to acknowledge them and try to demonstrate mitigation, remorse, rehabilitation etc., to dissuade OPR from expending further resources pursuing the case. This is the time to be pragmatic and realistic. If the violations can be seen as causing harm to taxpayers or the system, it is the practitioner who must propose a level of discipline commensurate with the violations committed. It is unrealistic to think that a private reprimand or even a censure is appropriate in the context of an Allegation Letter.

Public Discipline

One misconception practitioners have is that OPR can “discipline” them at will. This is simply not the case. OPR has authority to receive complaints and referral, investigate alleged violations and negotiate a resolution with the practitioner. During that process, practitioners must be notified of the investigation and the allegations made against them. There is at least one opportunity for a conference to tell your side of the story and numerous opportunities for settlement.

OPR has four options available when pursuing discipline: censure, suspension; disbarment; monetary penalty. All disciplinary events are published in the Internal Revenue Bulletin (IRB) on a regular basis²⁵. The information published in the IRB includes: practitioner name; state where the practitioners is located; licensure status; provisions of Cir 230 violated and type and duration of the discipline. The published discipline is republished by some of the tax trade publications. In addition, the various states and the United States Tax Court review the OPR discipline events to identify individuals who may be subject to further inquiry and discipline in those fora, i.e., state boards of accountancy; state bars; Tax Court list of admitted litigators.

A censure is a one-time public reprimand. It carries with it no practice consequences, although its publication in the IRB may cause embarrassment with colleagues and clients. It is not considered “discipline” for most state licensing issues. OPR can require certain conditions for future conduct before agreeing to a censure.

A suspension may be for a period of one to fifty-nine months. Obviously, OPR is not going to waste resources on short-term suspensions. During my tenure, there were a handful of suspensions in the 6-9 month timeframe; most were in excess of one year. During the period of suspension, a practitioner may not represent, in any context, any other person before the IRS. This includes both direct and indirect representation of a taxpayer during a tax controversy, providing business appraisals, and the rendering of written tax advice. OPR requires suspended practitioners to petition for reinstatement (either near the end of the suspension period or at the end of five years whichever occurs first), which will be granted so long as there have been no intervening violations. Conditions for reinstatement may be imposed by OPR.

A disbarment is for a period of five years. During the five-year period and unless and until authorized to do so, a practitioner may not engage in any representation activities as described above with respect to suspensions. A petition for reinstatement must be submitted (near the end of the five year period) and OPR will grant reinstatement, with or without conditions, only if OPR is satisfied that the practitioner is not likely to engage in conduct contrary to Circular 230 and that granting reinstatement would not be contrary to the public interest.

Mounting a Defense

Practitioners are entitled to receive all evidence in OPR’s possession which is relevant to the allegations recited in the allegation letter. A request for that material does not require a Freedom of Information Act request (FOIA). In fact, making a FOIA request will delay the practitioner’s access to the relevant material. OPR has authority under IRC section 6103 to provide such information upon request so long as the practitioner, and any representative, execute an acknowledgment of their prohibition on disclosure under which both civil and criminal penalties may be imposed for any violation. OPR has provided guidance on making these “6103 requests” and a sample letter on its webpage²⁶.

TIP: Always send a 6103 letter as soon as first contact has been made by OPR. Waiting until the Allegation Letter arrives is too late.

DEFENDING AGAINST A COMPLAINT

General Legal Services

If the practitioner is unsuccessful in resolving the issues on a basis satisfactory to OPR, OPR staff will draft a formal complaint reciting all available causes of action and the facts which support each element of an offense under one or more of the regulations. The complaint will also contain OPR’s recommendation for a level of discipline which it believes the conduct requires. The draft, along with all factual evidence and a legal analysis is sent to Chief Counsel, General Legal Services branch (GLS). GLS litigates the disciplinary cases and OPR becomes the “client”. GLS and OPR work closely together in finalizing the complaint, in conducting any discovery, and in preparation for the administrative hearing. As a matter of policy, GLS will send a letter to the practitioner offering one final opportunity to propose a settlement of the case.

TIP: Do not pass on this opportunity to resolve the case through GLS but do not expect a better result than the last counterproposal from OPR .

A very important right arises for the practitioner once the complaint is filed. Because OPR disciplinary cases are no longer available to the public, a practitioner will not be able to defend unless s/he can access the case precedent which currently is a “secret” body of law. In order to do this, the practitioner must make a request, using the 6103 letter as a template, requesting the entire body of ALJ and TAA decisions, unredacted. OPR’s current policy is to provide a CD-Rom containing all decisions dating back to at least 2007 to the practitioner and any authorized representative provided each executes an acknowledgement that the CD contents are protected under IRC 6103 and may only be used in the context of defending in the disciplinary case. The letter also requires acknowledgement that any violation carries with it civil and criminal penalties.

Tip: Request the CD at the earliest possible moment to ensure access to potentially relevant case law with which to defend yourself.

If informal resolution cannot be reached with GLS, the complaint will be filed with an Administrative Law Judge (ALJ) and served on the practitioner. This is the “institution of a proceeding”. Read the complaint carefully to ensure the facts stated are accurate and that there are no allegations made about which you were not previously advised and/or to which you have not been granted an opportunity to respond. Once served, the practitioner’s answer must be filed within 30 days. FAILURE TO RESPOND WITHIN THE 30-DAY TIMEFRAME WILL RESULT IN A DEFAULT JUDGMENT against practitioner²⁷.

Once the answer is filed, the case is “at issue” and, in consultation with the parties and or their counsel, the ALJ will issue a scheduling order reflecting timeframes for discovery, pretrial briefing and a hearing date. It is important to realize that these proceedings are serious. And failing to treat them accordingly will bring disastrous results.

The Hearing

The administrative hearing will most often be held in the closest city that is convenient for the practitioner and which has a federal courthouse. There will be a court reporter recording the entire proceeding. Witnesses may be called only if previously identified in the pretrial brief. Documentary evidence will be admitted only if it has previously been provided to the opposing party. All testimony is under oath. The rules of evidence are followed although in somewhat relaxed fashion.

At the hearings, GLS will call IRS personnel who are either familiar with the facts of the case or who have expertise in a particular subject matter that needs to be explained to the court (e.g., reading IRS transcripts). One witness who always appears is a representative of OPR²⁸. The OPR representative is there to explain OPR’s position and the basis therefore as well as to explain why a specific level of discipline has been proposed. All witnesses are subject to cross examination.

At the termination of the hearing, the ALJ will set a briefing schedule. Most often the briefing is simultaneous (both parties submitting their opening and responsive briefs on the same dates), but the ALJ has discretion to order consecutive briefs with GLS making the first submission, followed by a responsive brief from the practitioner. The briefs are an opportunity to ask the ALJ to make findings of fact (as supported by the record) and reach conclusions of law (as appropriately applied based on the facts found). GLS must prove by clear and convincing evidence that practitioner’s violations were willful, reckless or grossly incompetent²⁹.

Once the briefing has concluded, the ALJ takes the matter under submission. The expectation is that the ALJ will issue a Preliminary Decision and Order within 180 days after briefing has concluded. In nearly all instances this timeframe is maintained. The ALJ serves both parties with his/her decision and order. In reaching a preliminary decision, the ALJ has three options: sustain OPR as to both the allegations of misconduct and the level of discipline recommended; reject OPR’s case against practitioner in its entirety; adjust the allegations found to conform to the facts found and modify the discipline accordingly³⁰.

Appeal

If either party does not agree with the ALJ’s decision, an appeal may be filed with the Treasury Appellate Authority (TAA) within 30 days of being served. An appeal requires a Notice of appeal and a brief that states precisely the exceptions being taken to the ALJ’s findings of fact or legal conclusions, along with supporting reasons for the exceptions. A failure to enumerate exceptions and a basis therefore, will be fatal to any appeal. The non-appealing party has 30 days to file a Response. No further hearing is held before the TAA. After briefing has concluded, the TAA takes the matter under consideration and, in a reasonable period of time (the regulations say should be within 180 days, but it is not mandatory), the TAA will issue the Final Agency Decision (FAD) and serve both parties. The TAA may adopt entirely the findings of fact and conclusions of law by the ALJ, or may modify any aspect of the opinion which is contradicted by facts in evidence or where the ALJ has misconstrued the law.  The TAA may also remand the case for further proceedings before the ALJ but this approach is very rare. Any discipline imposed in the FAD is effective immediately and the fact of the discipline will be published in a future IRB.

The FAD is the final word from Treasury on the case. OPR is obliged to follow whatever has been determined. The practitioner, however, may take a form of appeal by filing a complaint in federal district court (in practitioner’s domicile) which alleges the agency acted in an arbitrary or capricious fashion in bringing the case and/or imposing the discipline; acted contrary to law; or abused its discretion. During my tenure, a single complaint of this kind was filed against OPR. Ultimately, OPR (the ALJ, GLS, and the TAA) was found not to have abused its discretion in any manner and the practitioner’s discipline was sustained³¹.

CONCLUSION

As Director of the Office of Professional Responsibility, I observed myriad varieties of due diligence failures. Most could be distilled down to either a lack of communication with and/or a failure to manage the client; sloppy or lazy thinking; or, incompetence (not knowing what you don’t know). The standard for determining a due diligence failure is essentially what another competent tax professional would have done, thought, or said in similar circumstances.  This is a national standard and is based on the objectively reasonable tax professional, not the subjective beliefs of the individual professional.

So, whether it’s in connection with the preparation of a tax return or the crafting of a multi-national tax transaction, due diligence requires reasonable fact gathering; use of assumptions only if reasonable; further inquiry when facts are incomplete, inconsistent with other facts, or contradictory to other information known to the professional; no willful blindness; and reasoned application of all relevant law to all the relevant facts. Only then will the decision-making deliberations result in a defensible and sustainable choice.

When a practitioner finds him/herself the target of an OPR investigation for alleged violations under Circular 230, the watchwords should be: prompt response; complete cooperation; realistic evaluation of the circumstances; acceptance of responsibility (when appropriate); pursuit of all rights afforded by the process; don’t represent yourself.

Download complete footnotes.

Karen Hawkins will be presenting Ethics in the Eye of the Beholder: What Conduct is Most Likely to Result in Discipline under Circular 230? as a seminar at the National Society of Accountants Annual Meeting in Tampa on August 20th. Later that afternoon she will be facilitating a roundtable discussion on how to put this knowledge into practice.

For information, visit this page.

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