In-house Tax Professionals Take Notice: The IRS’s Office of Professional Responsibility Can Impose Monetary Penalties

There are many misunderstandings among tax professionals in the private sector concerning their ethical responsibilities and how their conduct fits into the larger picture of corporate America.  First and foremost, tax professionals need to understand their ethical obligations to their clients as well as the consequences of their failure to comply.  This is especially true given the current enforcement-driven environment that exists in the United States.  With the passage of Sarbanes-Oxley, the American Jobs Creation Act of 2004 (“Jobs Act”), and now the Pension Protection Act of 2006, it is more important than ever for all tax professionals to stay involved in local bar associations and keep up-to-date on their evolving ethical responsibilities. 

Second, all tax practitioners need to be aware of the rise in cross-organizational investigations.  In the past, departments within one government agency were slow to share information with one another.  But these days, with the increased emphasis on enforcement and vastly improved technology, government departments and agencies have been efficiently sharing information and making substantial strides in their enforcement activities.  Much of this information sharing has been a direct result of IRS Commissioner Mark Everson’s plan to have the IRS run as a well-oiled machine in the enforcement arena.  It should come as no surprise, therefore, that OPR has been at the forefront of many of these investigations.

Over the past few years, professional conduct has been under intense scrutiny by many government agencies, and their investigations have specifically targeted the actions of accountants, lawyers, and officers in major corporations.  First there was Arthur Anderson, then Enron and, most recently, the deferred prosecution of KPMG along with the ongoing prosecution of several former KPMG partners and employees.  All of these infamous cases involve repeated allegations of professional misconduct.  Whether they were accountants, lawyers, or corporate officers, one thing is certain--at some point, these individuals lost their perspective and ignored their professional responsibility obligations. 

While these investigations raise several areas of tax enforcement that deserve substantial discussion, I will focus on the IRS Office of Professional Responsibility’s jurisdiction over tax professionals in corporations.  An area that needs particular attention is the misconception that exists among tax professionals in firms, corporations, and other similar entities that they are not subject to Circular 230.

Clearly, Circular 230 provided the OPR with jurisdiction over attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries.  In the past, however, OPR limited its interpretation of jurisdiction over practitioners to include only those individuals it could demonstrate had actually practiced before the IRS.  This created a misunderstanding that OPR does not have jurisdiction over in-house counsel, tax counsel, tax directors, and other corporate employees.  But the Jobs Act clarified that OPR’s jurisdiction includes all practitioners who write tax opinions.  Not only did the Jobs Act clarify the jurisdictional questions that once existed for OPR, it also helped define what exactly practice before the IRS encompassed.  This, along with the Jobs Act’s granting OPR the ability to issue monetary sanctions against a practitioner and the practitioner’s employer for misconduct, has encouraged the practitioner community to re-examine its ethical obligations and to become familiar with the new regulations that have been added to Circular 230 in the past few years. 

To be clear--the IRS’s Office of Professional Responsibility does have jurisdiction over tax counsel, tax directors, and other organizational employees.  OPR’s jurisdiction over these practitioners does not come from the Jobs Act but from section 10.7 of Circular 230, which specifically provides these tax professionals with “limited practice” and gives the OPR broad latitude with respect to the regulation of their conduct.  Under section 10.7(c), the following individuals may represent an entity before the IRS: a regular full-time employee of an individual employer may represent his or her employer; a general partner or a regular full-time employee of a partnership may represent the partnership; and a bona fide officer or a regular full-time employee of a corporation (including a parent, subsidiary, or other affiliated corporation), association, or organized group may represent the corporation, association, or organized group.  Further, under Circular 230 section 10.7(c) (2), OPR can deny any of the aforementioned individuals the ability to engage in practice before the IRS on behalf of his or her employer when he or she is under suspension or disbarment from practice before the IRS or when he or she has engaged in conduct that would justify censuring, suspending, or disbarring a practitioner from practice before the IRS.  Of course, such a denial would only come after the practitioner was given notice and the opportunity to be heard at a conference with OPR.   

The recent passage of tax legislation and the focus on enforcement should raise some serious concerns in businesses and corporate tax departments.  In the past, tax professionals in corporations and other business organizations were not necessarily concerned with the misconduct of other tax practitioners in the professional community, or with the OPR for that matter.  But with the passage of the Jobs Act and the introduction of monetary penalties and other sanctions that can be imposed not only on an individual but on an entity as well, many practitioners have rightfully begun to take notice.

For more information on this matter, see In-house Tax Professionals Take Notice: The IRS’s Office of Professional Responsibility Can Impose Monetary Penalties at www.thorntaxlaw.com or contact Kevin E. Thorn at 202-270-7273 or ket@thornlawgroup.com.

In-house Tax Professionals Take Notice: The IRS’s Office of Professional Responsibility Can Impose Monetary Penalties is provided as an education service and is not intended to be and should not be construed as legal advice.  Readers with particular needs on specific issues should retain the services of competent counsel.