BY COURIER and e-mail to http://www.irs.gov/regs

April 28, 2006

Internal Revenue Service
Attn: CC:PA:LPD:RP (REG-122380-02), Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC  20044

Re:  Regulations Governing Practice Before the Internal Revenue Service  (REG 122380 02)

The National Association of Enrolled Agents (“NAEA”) appreciates the opportunity to comment on the Proposed Rule that would amend provisions of Circular 230 relating to various non-shelter items (31 CFR Part 10).  As the organization representing the interests of 46,000 enrolled agents (EAs), who are the only practitioners in whom IRS directly attests to their competency and ethical behavior, NAEA is committed to increasing the professionalism of our industry, increasing the integrity of the nation’s tax administration system, and protecting the representation rights of taxpayers.

Because our membership is comprised solely of enrolled agents, we believe that NAEA is well positioned to offer unique, informed perspective about the practical impact of the Proposed Rule on both Circular 230 practitioners and their clients.  In sum, the Proposed Rule attempts to continue clarification of the expectations of and evolving role of the Office of Professional Responsibility (OPR), and achieves a number of its goals.  For instance, proposed changes that harmonize nomenclature (eliminating the now nonexistent Director of Practice), further restrict limited practice, and expand due diligence requirements are all positive steps.  At the same time, we also believe that this iteration of rulemaking presents room for improvement with respect to due process in administrative procedures, treatment of practitioner noncompliance, and public disclosure of enrolled agents in good standing.  Further, while the proposed rule was intentionally silent with respect to standards for written tax advice issued in December of 2004, we believe that clarification in this area is still sorely needed.

We respectfully offer these comments on the Proposed Rule: 

• Director of the Office of Professional Responsibility.  The proposed regulations change references to the Office of the Director of Practice to the Office of Professional Responsibility.  NAEA advocates this ‘housekeeping’ change as it would create consistency between Circular 230 language and the IRS office (OPR) charged with providing oversight to the practitioners regulated therein.
  
• Who may Practice.  The TE/GE Advisory Committee proposed in June 2005 a new class of enrollee: the enrolled retirement plan agent (ERPA), which would specialize in the representation needs of a very limited taxpayer segment, the qualified retirement plan community.  Treasury and IRS do not include the ERPA in these proposed regulations, but seek comments on it.  Of note is that the TE/GE Advisory Committee anticipates:
  1. limited practice (filing requests for initial determination letters, plan termination, Forms 5500, employee plan audits, representing qualified retirement plans in IRS audits); and

  2. enrollment procedures consistent with those for enrolled agents (in §§10.4-10.6), specifically an initial examination to prove competency, continuing professional education requirements, and a renewal process. 

  NAEA sees no reason to oppose the new representation niche, particularly given that the TE/TG Advisory Committee proposes an IRS-managed examination rather than using an existing external credentialing program.  NAEA believes that in an effort to remain unbiased, IRS should avoid at all costs choosing winners (and, by extension, losers) among external credentialing bodies.

  NAEA also applauds the practical ‘enrolled’ nomenclature.  Use of the term can only further inform the public of the valuable services provided by Circular 230 (enrolled) practitioners.

• Roster/Records Requirements.  The proposed regulations at §10.90(a)(1)(i) state “The Director of the Office of Professional Responsibility will maintain, and may make available for public inspection in the time and manner prescribed by the Secretary, or his or her delegate, rosters of enrolled agents, including individuals, granted active enrollment to practice.”  (emphasis added)  NAEA believes that the public is better served when taxpayers can determine whether an individual representing himself or herself as an enrolled agent in good standing is indeed an EA in good standing.  NAEA notes that current efforts to make available this list to the public have been blocked by Chief Counsel concerns over privacy rules, notwithstanding that §10.90 of the current Circular 230 states, “The Director of Practice will make available for public inspection at the Office of Director Practice the roster of all persons enrolled to practice...” (emphasis added).  NAEA fears that the proposed regulations would in fact make it more difficult for taxpayers to determine which practitioners are indeed enrolled agents.  Encouraging taxpayers to seek competent preparers should be made easier, not more difficult.  We also find ourselves troubled by the juxtaposition of proposed changes that would make disciplinary action public (§10.72) while at the same time making it easier to hide those actually following the rules.

  NAEA also offers the practical observation that the reliability of OPR’s enrolled agent data is somewhat suspect and encourages the agency to use this opportunity to perfect its EA database.

• Limited Practice.  Under the proposed regulations, an unenrolled return preparer may not represent a taxpayer (unless authorized by the narrow exceptions in §10.7(c)(1)(i-vii)).  Unenrolled return preparers may no longer: negotiate with IRS on behalf of a taxpayer during an examination, bind a taxpayer to a position during an examination, or agree to any adjustment to a taxpayer’s reported liability.  NAEA strongly endorses this proposal and concurs that the current provision is inconsistent with the requirement that ALL individuals permitted to practice demonstrate their qualifications.
  
  Further, NAEA proposes that IRS clarify that this rule change prohibits unenrolled return preparers from binding a taxpayer to a contract when the taxpayer has a balance due to IRS (e.g., negotiating installment agreements, negotiating offers-in-compromise (Form 656), and demonstrating that an account is currently not collectible (aka, in Collection Status 53)).  NAEA believes negotiating such agreements constitutes practice before Collections.  This prohibition should include those with so-called “check box” authority from negotiating installment agreements.  Notwithstanding IRS’ assertion that a taxpayer issue is not in Collection prior to the issuance of Notice 504 (i.e., during Notices 14, 501, and 503), all such dialogue constitutes representation and should be treated accordingly.
  
  Finally, NAEA firmly agrees with the common sense conclusion that the current §10.7(c)(1)(vii) limited practice authorization is inconsistent with the requirement that ALL individuals permitted to practice before IRS demonstrate their qualifications to advise and assist persons in presenting their cases to the agency.  This proposed change takes a giant step in bringing consistency to limited practice rights.  With the withdrawal of §10.7(c)(1)(vii), only two classes outside of Circular 230 practitioners will be permitted to practice: those representing themselves and those outside of the country.  Those granted the limited practice rights in §10.7(c)(1)(ii-vi) are essentially pro se, and while as a Circular 230 organization we do not recommend that course of action, we certainly recognize it as a fundamental right.  Section 10.7(c)(1)(i) is an extension of pro se action as it permits parents to represent minors and children to represent elderly/infirm parents. 

• Practice by Former Government Employees.  The proposed regulations conform rules on former government employees to terms used in the Ethics in Government Act.  NAEA believes these §10.25 proposed changes to be reasonable.

• Contingent Fees.  Generally, the proposed regulations add amended tax returns and claims for refund or credit to the list of services a practitioner is precluded from charging a contingent fee.  While NAEA recognizes that some believe a reduction in contingent fee arrangements would help to address concerns raised with respect to attorney and auditor independence, we note that the enrolled agent license neither allows one to practice law nor to audit financial statements.  Even if the further reduction in contingent fees would enhance attorney and auditor independence, enrolled agents find themselves caught in the proverbial crossfire.
  
  NAEA is concerned that the new provision may become a disincentive for a taxpayer and Circular 230 practitioner to arrive at the correct tax.  The following circumstance is intended to be illustrative:
  
  

  Upon reviewing a return, an EA determines a taxpayer has reflected a position on her return that may not have been as taxpayer-favorable as possible. Upon researching the issue, the EA is convinced the taxpayer has more than a realistic possibility of success if challenged should the new position be advanced. The taxpayer, however, is reluctant to change her return if the professional fee comes without some form of guarantee. While the taxpayer may not want to attempt to correct a return that is in the government’s favor because of the professional fee involved, she would be willing to apply for what she was entitled to if she could assure the fees to obtain that correction would not exceed the potential benefit to be gained.

  We maintain that the proposed changes to the §10.29 rules regarding contingent fees would preclude their use in circumstances in which a contingent fee is beneficial to both the taxpayer and the Circular 230 professional.

• Conflicting Interests. The proposed regulations in §10.29 clarify that a client’s informed consent to a conflict of interest must be in writing or documented by the Circular 230 practitioner and signed by the client.  NAEA is somewhat concerned as to how IRS will define ‘informed’ consent.  We presume that this is fairly straightforward: a practitioner must provide something in writing that explains the nature of the conflict.  Our own rules of professional conduct state that members “will not represent conflicting interests without express written consent of all parties after full disclosure.”
  
  In any event, we suggest that the standards set for informed consent in Circular 230 should be in harmony with whatever standards are eventually set in the proposed §7216 rules currently under consideration by IRS and Treasury.
  
  As an aside, while the proposed rules do not change language in §10.29(c), we must interject that we are puzzled as to why the signed conflict consent must be provided upon request to any officer of the IRS.  Clearly, OPR should be provided with this information upon demand.  Particularly given possible disclosure concerns, it is much less clear why any IRS officer (a Revenue Agent or Revenue Officer, for instance) should be allowed access to the document.

• Standards with Respect to Tax Returns and Documents, Affidavits and Other Papers.  The proposed regulations extend standards with respect to tax returns to cover other documents, affidavits and papers.  NAEA believes that in concert with the proposed changes in §10.7, extending the due diligence standards to other documents (for instance Offers in Compromise and Installment Agreements (as well as Partial Pay Installment Agreements)) provides IRS with an opportunity to increase the quality of such submissions and underscores the importance of restricting practice of the unenrolled.

  More specifically, we suggest that the proposed language at §10.34(b)(2)(i) be clarified by including the word ‘solely’ (i.e., “The sole purpose of which is to delay...”).  In the course of exhausting a taxpayer’s administrative remedies, certain actions effectively cause a delay in order to assure the taxpayer’s fair treatment (e.g., use of Collection Due Process, Collection Appeal Process, or even the Taxpayer Advocate’s Form 911).

• Incompetence and Disreputable Conduct.  The proposed regulations expand the definition of disreputable conduct to include willful failure to sign a tax return when such signature is required by Federal tax laws and the willful unauthorized disclosure or use of a tax return or tax return information. 

  With respect to the proposed §10.51(a)(14), we find ourselves concerned that failure to sign an income tax return as a preparer conceivably becomes grounds for sanctions up to and including disbarment, when at the same time an unenrolled preparer merely faces a possible $50 fine (§6695(b)).  We concur that Circular 230 practitioners are obliged to sign any returns they prepare, but enrolled agents struggle with the chasm separating the inconsistent repercussions: trivial fine for perhaps a deliberate act on the one hand and risk of one’s license to practice for perhaps an inadvertent act on the other.

  As to the proposed §10.51(a)(15), NAEA suggests that IRS and Treasury harmonize any Circular 230 changes with decisions made in §7216 rule changes currently under consideration.  Those proposed rule changes have generated a significant amount of controversy, particularly with respect to the difference between “use” and “disclosure” and we urge that decision-makers create consistency between §7216 and §10.51, as well as §10.29.

• Administrative Proceedings.  The proposed regulations make a number of changes in administrative proceedings against Circular 230 practitioners, significantly: making the proceedings public.  We leave the finer points of the proposals to our attorney and CPA brethren and limit ourselves to the following points:
  

  • We have heard from enrolled agents that the current disciplinary process is completely opaque—there are no written standards that OPR must follow and those who believe themselves wrongly accused find themselves faced with a difficult decision: whether to consent to a voluntary sanction or whether to challenge OPR when the rules of engagement are, at best, unclear.
  • We understand that approximately 65% of all sanction referrals come from IRS field agents.  We question whether operating under fear that the entry level Revenue Officer or Revenue Agent or Practitioner Hotline assistant will falsely report a practitioner will create an environment in which taxpayer’s representatives will less vigorously advocate for their clients.
  • It appears that an appeal after a decision from an administrative law judge would no longer be a matter of right.  NAEA has serious concerns about the proposed changes to the appeals process.  Under the proposed regulations an appeal (a key component of due process) would no longer be a matter of right.  Rather, following the decision of an Administrative Law Judge, the Circular 230 practitioner may petition for a review—which may or may not be granted.  We have considerable uneasiness with the harshness of this revised process as it appears to eliminate a previously guaranteed protection in the administrative proceedings process.

• Expedited Suspensions.  The proposed regulations extend expedited proceedings to cases of egregious tax noncompliance and to cases of advancing frivolous or dilatory arguments.  NAEA agrees that advancing classically frivolous arguments (e.g, filing tax returns is voluntary, claiming slavery reparations, etc.) on one’s own return or on the returns of one’s client should be grounds for swift and certain discipline. 
  
  Additionally, we believe that Circular 230 practitioners cannot in good faith browbeat taxpayers into complying with their filing obligations while at the same time failing to meet their own.  While we applaud IRS and Treasury for reaching this conclusion, we have a suggestion to offer, namely that filing and payment compliance requirements be included in §10.51 as conduct for which a practitioner may be sanctioned.
  
  Why the suggestion?  It appears that the proposed regulation places OPR in the position of being both not harsh enough and at too harsh.  More specifically, we are hard-pressed to believe that failing to either file or pay 40% of one’s returns (e.g., two of the past five years) sets the gold standard for compliance and therefore have difficulty seeing how this proposed regulation leaves the average taxpayer with the impression that their EA, CPA, or attorney is held to highest standard of compliance.  At the same time, we have represented untold number of taxpayers who have failed to file or pay and we suggest that extraordinary circumstances do exist.  In those cases, the expedited procedures would be the rough equivalent of chopping off one’s head only to later determine to reattach it. 
  
  Perhaps in lieu of a hard-and-fast numerical standard (three of five years or four of seven quarters), a more flexible (and conceivably more exacting) standard would be appropriate?  NAEA reasonably expects all Circular 230 practitioners to be in compliance with all appropriate filing and payment requirements and if they are not compliant, we expect a reasonable cause for that state of affairs.  If filing and payment compliance requirements were included in §10.51 as conduct for which a practitioner may be sanctioned, OPR could correctly calibrate this sanction.

NAEA appreciates the opportunity to respond in writing to the Circular 230 Notice of Proposed Rulemaking and looks forward to the June 21st hearings at which we hope to further explain our positions.

Sincerely,

Francis X. Degen, EA
President