IRS Office of Professional Responsibility Concedes That Case Law Holds It Lacks Authority to Regulate Tax Return Preparation

The IRS Office of Professional Responsibility has apparently “thrown in the towel” regarding the 2014 holding of the United States District Court for the District of Columbia in the case of Ridgely v. Lew, et al, USDC DC, No. 1:12-cv-00565, 2014 TNT 138-11 that the OPR does not have the authority to regulate tax return preparation under Circular 230.

In Fact Sheet FS-2015-19 the IRS provides information about online information provided by the agency about Circular 230.  But at the end of the second paragraph of the fact sheet the agency concedes that “[t]ax return preparation is not “practice” as currently defined by case law.”

In the Ridgely case the Court had concluded that Congress had only provided authority for the OPR to regulate practice before the agency as a representative, and that Congress had provided other mechanisms in the IRC (such as §6694) to deal with tax return preparation.

The Court also rejected the OPR’s long-standing view that a CPA voluntarily agrees to expand the scope of OPR’s regulation to tax return preparation when the CPA signs a Form 2848 to represent a taxpayer before the IRS.

As we noted when reporting on the Ridgely case back in 2014 the ruling does not mean a CPA will not be subject to rules much like what is found in Circular 230.  First, many of the provisions are similar to those found in the preparer penalty provisions of §6694.  The Court ruled not that the IRS had to be “hands off” with regard to preparation, just that the OPR’s specific authority wasn’t involved (rather, in this case, it goes back to exam).

Second, many of these provisions also have identical provisions in the AICPA Statements on Standards for Tax Services (SSTSs).  In many states adherence to these standards is either mandated by direct reference under State Board standards, or indirectly via a reference to compliance with the AICPA Code of Professional Conduct which requires following the SSTSs.  Even if there is no mandated compliance with the standards in a practitioner’s particular state, it is very likely that lack of compliance with those standards would prove to be a problem in civil litigation brought against the CPA alleging malpractice.