Unofficial Transcript of IRS Hearing on Circular 230 Proposals Is Available

Internal Revenue Service

I am going to start off by introducing the panel. At the far end of the table is Mathew Cooper. He is an attorney in Procedure and Administration in the Office of Chief Counsel, and Matt has been reassigned to the Circular 230 project, and will be the principal drafter of the final regulations.

Next to Matt is Anita Soucy. Anita is an attorney advisor in the Office of Tax Policy at the Department of Treasury, and Anita will be working on the final regulations for the Department of Treasury along with us here at the service, and along with OPR and other interested parties.

Next to me is Brinton Warren. Brinton is a special counsel in the Office of Procedure and Administration, Administrative Provisions and Judicial Practice Division. And Brinton has been on the Circular 230 project during the proposed regulations and will be a part of the final working on that -- for the final regulations.

Myself, I am Richard Goldstein, a special counsel in the Office of Procedure and Administration in the Office of Chief Counsel, and I have been working on the Circular 230 project both in the proposed stage and in the final stage.

With that in mind, I am going to, kind of, give you some ground rules as to how the hearing works. A few -- very simple few rules and then we'll get on with our speakers. Each speaker is entitled to ten minutes. We have a little monitor up on your podium to let you know where you are going on your ten minutes. The ten minutes is -- you are free to say -- that's what you will have. Any questions that we have will be in addition to what you use in the ten minutes. So if we have questions, we'll save them to the end and ask you the questions at the end so as not to interrupt your ten-minute speaking.

We have received comments on these regulations from each of our -- each of the organizations that have sent the speaker to speak today and we have received comments from several other organizations that elected not to be -- to speak today, they may be present, but they elected not to speak today.

I can assure you that the Treasury Department and the Internal Revenue Service is considering all those comments, and all those comments will be considered, and for -- in anticipation of our drafting of the final regulations. At this point in time, I guess I will start with our first speaker who is Frank Degen from the National Association of Enrolled Agents and as I go to the speakers, I just would like to say that if I make a mistake on any of your names, I do apologize and please feel free to correct me. Thank you.

MR. DEGEN: Good morning to everybody, to the audience, good morning, and to the panel, good morning. My name is Frank Degen. I am an enrolled agent and I am the immediate past president of the National Association of Enrolled Agents. I thank you for the opportunity to speak today on behalf of the NAEA, which is the only organization that is solely dedicated to the interest of enrolled agents. NAEA submitted more complete written comments on April 28th. But due to time constraints I will primarily focus on three areas.

The first area deals with the roster and record requirements in Section 10.90. NAEA is concerned with the distinction of the old language, "will make available for public inspection" with the new language in Section 10.90, "may make available for public inspection," why the backslide? Encouraging taxpayers to seek qualified representatives should be made easy and not more difficult. To illustrate this point, let's assume that a taxpayer is told by a practitioner that he or she is an enrolled agent.

The public is better served if the taxpayer could then easily determine whether in fact that practitioner is an EA. Here is something where technology should help us. Let me give you an example, in my home state of New York, the Board of Accountants -- the Board of Education there has a website where you can check license of professionals, CPAs, registered nurses, and the like. All you need to do is put in the name and the license verification or lack thereof will come back to you.

OPR should develop a similar process that provides an online resource to check the federal license of enrolled agents. This would benefit both the public and the IRS personnel. We are troubled by the juxtaposition of the proposed changes in Section 10.72 that would make disciplinary action public while at the same time this change in wording in 10.90 would make it easier to hide those actually following the rules. We urge you to continue the use of the word "will."

The second area is in the limit to practice, in the Section 10.7, in the bucket C, in the bucket 1, in the bucket VIII. This proposed change takes a great step in bringing consistency to limited practice rights, where you plot the common sense approach. Some of the written comments submitted for this hearing suggest the continuation of the rules that allow a Quasi Circular 230 practice for those who prepare tax returns.

Is there anyone among us who would say that a paralegal who prepared a client's legal briefs would, by virtue of that preparation, be qualified to represent the client in court? Of course not, the notion is preposterous. Why then should an un-enrolled preparer, simply by virtue of preparing a tax return, be deemed qualified to represent the client before the IRS.

The idea of limited practice by the un-enrolled has always struck us as completely counterintuitive. Enrolled agents have always been puzzled by the current limited practice provision because it is clearly inconsistent with the requirements that all individuals permitted to practice demonstrate their qualifications. While there are competent tax preparers who are not Circular 230 practitioners, the service has no ability, absent to criteria, required to be a Circular 230 practitioner, to determine if a given preparer has the qualifications to advise and assist taxpayers in presenting their cases to the IRS.

We wish to maintain the integrity of the system. NAEA has long asserted that its members have a due responsibility, a responsibility to their clients, and a responsibility to the system. Even though some taxpayers may not be able to use their return prepares to represent them in order, a greater good is achieved to protect -- excuse me, the protection of the taxpayer, and the protection of the system. The whole point of having a requirement to practice is that the person representing the taxpayer has the requisite knowledge to adequately advocate for that client.

As an example, how can we determine if a non-Circular 230 practitioner has the knowledge and expertise to understand the strict substantiation rules enacted by Congress in Code Section 274(d) or the new answers in determining ordinary and necessary business expenses in Section 162, with the use of the Cohan Rule to advocate for a client.

The simple answer is, we cannot. If we cannot make that determination, is the taxpayer truly being served? So I have submitted written comments that a small set of taxpayers may be inconvenienced by the need to have a Circular 230 practitioner represent them.

NAEA does not take this inconvenience lightly, but at the same time we suggest that convenience is not the paramount issue here. If a citizen is arrested and their best friend is an experienced paralegal with a wealth of knowledge and 20 years experience, the paralegal can still not represent them in the courtroom. The citizen must secure a member of the bar, or represent him or herself pro se. The courts have demanded qualified representatives.

So a court -- excuse me, in a similar vein, inconvenience may be a necessary price to assure a taxpayer that the person representing them is indeed qualified to do so. We strongly support the notice of proposed rule making language and urge you to include the change in the final rule.

The third area is the administrative proceedings. We have some concern here. The current disciplinary process is opaque and certainly in need of improvement. At the same time, approximately 65 percent of all sanction referrals come from within the IRS. We are concerned that if practitioners are vigorous in the defense of their clients, which in fact they should be, that this could now be perceived as inappropriate by some in the service.

Disreputable conduct is never appropriate, but it must be understood that a strong effort on the part of a practitioner, ipso facto, is not disreputable conduct, this was all the more important, given the contemplated changes in hearing procedures. NAEA has serious concerns that appeal after the decision from an administrative law judge would no longer be a matter of right.

We urge you to clarify the entire administrative appeal process with Circular 230 practitioners and to retain language that would allow for a post-administrative Law Judge appeal -- excuse me -- allow for you to appeal as a matter of right. I would like to close and say a few more comments that on behalf of the 40,000 enrolled agents I once again express my appreciation for this opportunity to testify today. The proposed change that protects taxpayers by further restricting limited practice is a very positive step.

On the other hand, this iteration of rulemaking presents room for improvement with respect to public disclosure of EAs in good standing, that's in Section 10.90, and a due process in administrative proceedings. So to summarize or reiterate, we urge you -- number 1, to continue the use of the word 'will' in Section 10.90.

Number 2, we urge you to remove Section 10.7, in the bucket C, in the bucket 1, in the bucket VIII, and thirdly, we urge you to clarify the entire administrative appeal process, and to retain language, allowing for an appeal as a matter of right. Once again I thank you. As always, NAEA stands ready to assist the service in any way that we possibly can. And if there are any questions now -- I will glad to --

MR. GOLDSTEIN: I guess I have one question for you, Mr. Degen. With respect to the appeals of the ALJ positions, the proposed rule as it would read, would provide for an appeal of the ALJ's decision. It would just grant a summary affirmation of the appeal -- of the ALJ's decision if the Appellate authority had not taken any action to say that they wanted to take a further look at this.

This would seem to be somewhat consistent, say, with an Appellate Court that decided not to have an oral argument in the case, but decide the -- the appeal on a decision at the lower court based upon the documents initially filed appealing the decision.

So I guess my question to you is why is it that you believe that the Appellate Authority has to have a full hearing, or a fuller documentation than the appeal come in for the practitioner and the service to have a more effective due process right there?

MR. DEGEN: Well, perhaps I misread, so please correct me if I am wrong. In the current system, it seems that a -- an appeal is automatic. If I read correctly, the proposed rules, it was left -- and I am not saying the secretary would ever be arbitrary and capricious, but I believe the word said that the secretary may allow the appeal. You know, I stand to be corrected if I've misspoken. But I think that was the crux of what we were concerned about. The secretary may, as opposed to now, I think it is fair to say that we assume that it will happen. Does that answer to your question?

MR. GOLDSTEIN: I think I understand what you are saying.

MR. DEGEN: That's where I come -- that's what we are commenting on.

MR. GOLDSTEIN: Okay -- okay.

MR. DEGEN: On that language that the secretary may allow -- allow the appeal.

MR. GOLDSTEIN: Okay. Thank you very much.

MR. DEGEN: Okay.

MR. GOLDSTEIN: There is no other questions, I think, well, thank you very much for your testimony.

MR. DEGEN: And thank you very much for the time.

MR. GOLDSTEIN: Our second speakers are Brian Graff and Robert Kaplan from the American Society of Pension Professionals and Actuaries.

MR. GRAFF: Thank you. I appreciate the opportunity to be here today. My name is Brian Graff. I am speaking on behalf of the American Society of Pension Professionals and Actuaries as well as I'm being joined today with Robert Kaplan who is here on behalf of the National Institute of Pension Administrators.

And you're probably wondering why the pension folks are here, and the reason we are is, because as part of the preamble there was mention of a proposed new enrollment category, called the Enrolled Retirement Plan Agent. And so we're specifically here to comment on that. ASPA and NIPPA are professional societies who provide technical education to thousands of retirement plan professionals nationwide.

On behalf of both ASPA and NIPPA, we appreciate this opportunity to comment on the proposed modifications -- again specifically, on the proposed Enrolled Retirement Plan Agent category.

Until recently, retirement plan professionals nationwide, including Third Party Administrators, and Benefit Consultants, not otherwise authorized to practice before the Service, could be designated on Form 2848; the Power of Attorney form, as a representative for their clients before the Service in limited means. Pursuant to the IRS Restructuring And Reform Act of 1998, Form 2848 was recently revised to prohibit its use by any individual, not otherwise authorized to practice.

As you know, the currently four main categories of practitioners, now currently authorized to practice for the IRS are attorneys and accountants, enrolled actuaries, and enrolled agents. These changes now prevent many highly competent retirement plan professionals, many of whom are third-party administrators and benefit consultants, who draft and administer qualified retirement plans for plan sponsors, from being able to represent their clients before the IRS on qualified retirement plan matters.

The inability of these professionals who often have the most familiarity with the specific operations of the qualified retirement plan, to represent their clients before the IRS, is a loss to all parties including the plan sponsors, the participants and the Internal Revenue Service. This inherently results in an increase of time and resources spent on these reviews -- on the review of these plan documents, which as you may know, all qualified retirement plans are submitted to the IRS for a determination letter.

It's particularly of concern to small business retirement plan sponsors whose costs may increase as a result of these changes. Ultimately, involving an additional party not necessarily familiar with the plan's operations, will add to the administrative costs of these retirement plans. These costs will ultimately be borne by plan participants, and therefore, will reduce their retirement savings.

As proposed by -- as recently proposed by the IRS' advisory committee on Tax Exempt and Governmental Entities, TEAC, the Enrolled Retirement Plan Agent designation or enrollment category would address the needs of a significant number of third-party administrators, and benefit consultants, and other retirement plan professionals who are currently not qualified under Form 2848 to practice before the IRS.

Such third-party administrators and other retirement plan professionals generally have a great deal of knowledge on retirement plan issues, are certainly familiar with the plan's operations, and would be in the best position to serve, in these cases, as the primary point of contact between the plan sponsor and the IRS.

Among other things, these professionals prepare IRS tax forms and submissions, assist with IRS audits, update plan documents and implement changes in plan procedures, reflect changes to IRS regulations. The establishment of an IRPA designation will allow those who are qualified to represent their clients -- their plan sponsors, interest before the IRS and inevitably expedite problem resolution, and importantly, continue to keep retirement plan administrative cost as low as possible.

Pursuant to the act recommendation ASPA and NIPPA agree that the IRPA examinations, as proposed, and the enrollment category should be limited to sections of the Internal Revenue Code that are intrinsic to the establishment and the maintenance of qualified retirement plans. Importantly, we want to note and emphasize that the enrollment -- the IRPA enrollment category will not and should not interfere with the practice rights of any of the current IRS enrollment categories that presently exist.

MR. KAPLAN: Okay. Thank you, Brian. The IRPA designation process should resolve in a broad base of knowledge necessary for every third-party administrator or Pension Consultant to establish an expertise in retirement plan terminology and the concepts of pension administration. Consistent with the current enrolled agent and enrolled actuary processes, IRPA candidates should be subject to examination, enrollment, and renewal process.

In accordance with the IRS strategic plan objectives we agree that IRPA should be consistent with the requirements of other professional groups that are currently permitted to practice before the IRS. In fact, many ASPA and NIPPA retirement plan professionals already hold professional designations that include a renewal and continuing education program similar to what IRPA would require.

We fully support the creation of a new IRPA credentialing program sponsored by the IRS that would require certain courses of study and the completion of one or more examinations. We also agree that the IRPA examination should include all types of qualified retirement plans including defined contribution plans, defined benefit plans and ESOPS.

Similar to existing credentialing programs and the current enrolled agent and enrolled actuary processes, candidates who have satisfied the IRPA designation should also be subject to continuing education requirements. The requirement will ensure a continued expertise and increased compliance within the retirement plan practitioner community. The continuing education requirements are also essential to the maintenance of professional standards of practice.

In addition, we would expect and support individuals with the IRPA designation, would be subject to all the professional requirements under Circular 230 that are applicable to other enrollment categories. ASPA and NIPPA currently maintain credentialing programs for many professionals that would likely obtain the IRPA credential. If necessary, we could clearly expand these existing programs to provide conference materials necessary for practitioners to meet their continuing education needs.

In conclusion, ASPA and NIPPA applaud the efforts of the IRS and fully support and encourage the creation of the IRPA designation for qualified retirement plan practitioners under Circular 230. It will encourage practitioners proficient in compliance of qualified retirement plans to become subject to the jurisdiction of the IRS and enhance the IRS' ability to monitor the performances of these retirement plan professionals. The entire retirement plan community will be better served by this oversight with potential for sanctions against those involved in misconduct. And -- we'll be happy to take any questions if you have them.

MR. GOLDSTEIN: I've got two questions actually. They -- as you might be aware anytime you have a credentialing program of course, there are administrative costs to that programming, and that of course, unfortunately, is one of the things we have to consider in anything we do. So I guess the first question in that regard is, right now, we currently have about 40,000 enrolled agents that we credential and monitor. If we were to extend a credentialing program to the plan participants -- not participants, but the plan administrators, et cetera, approximately what would you think would be the number of individuals that would be looking for licenses?

MR. GRAFF: We've actually responded to request for information that I think the Office of Professional Responsibility put out. We estimated that it'd be comparable in size to the number of enrolled actuaries, so somewhere in the order of 46,000.

MR. GOLDSTEIN: Okay. And similarly, along those lines when we talk about credentialing, you had mentioned that you have your own credentialing process. Is there a way that you can provide us with further details as to how your credentialing process works, and so that we can examine that to see if it's something that works for us?

MR. GRAFF: Yeah. Absolutely, in fact, when we responded to the RFI we made it very clear we'd be more than happy to provide that information.

MR. GOLDSTEIN: Okay.

MR. GRAFF: So anytime that you would just like to see that we would be more than happy to give it to you.

MR. GOLDSTEIN: We appreciate that.

MR. GRAFF: Okay. Thank you.

MR. KAPLAN: Thank you.

MR. GOLDSTEIN: Thank you very much. Our third speaker this morning is Joan Le Valley from the National Society of Accountants.

MS. LE VALLEY: Good morning. The National Accounting -- Society of Accountants, NSA, appreciates the opportunity to address the Department of Treasury's proposed new rules for Circular 230 practitioners. I am Joan Le Valley, an enrolled agent. I'm a three- year member of IRSAC and a sole proprietor, accountant, and tax preparer, from Park Ridge, Illinois, a Chicago suburb. I am Chair of the NSA's Federal Tax Committee, representing thousands of NSA members who prepare tens of thousands of tax returns yearly.

The following proposals are our concerns. Number one -- limited practice before the IRS. Competent, and NSA stresses competent, un- enrolled tax preparers need to defend the returns they prepare for the year in question at the exam level. By competent, NSA means the following: they have passed rigorous state exams or they have passed rigorous accreditation exams. They have minimum training standards and they are continuing in their professional education.

The Taxpayer Bill of Rights allows all preparers due process of law to defend and advise their clients their taxpayer rights. Not -- we are not asking that they represent the taxpayer in court, but only to explain their tax preparation for that return, in exam. Congressional rights -- Congress has established laws for taxpayer's fair representation. NSA welcomes all tax practitioners to join. However, all un-enrolled and accredited, they must become -- but they have to have -- for the first 5 years they have to upgrade their status, number one, to become a Circular 230 practitioner.

Number two, to become accredited through NSA's ACAP program. That is an accredited tax preparer and an accredited tax advisor by passing rigorous exams. In addition to my EA I hold both of those credentials. Number three, to become a state licensed practitioner through a rigorous exam. Examples are the States of Iowa and Ohio who licensed their practitioners.

Number four, to prove continued education for NSA's required hours. NSA requires a minimum of 16 hours per year, 72 hours in a three-year period. NSA also requires that we adhere to NSA's strict code of ethics. NSA would like to suggest that IRS invoke a penalty upon all taxpayers who accept their paid preparer's tax returns, unsigned and who prepares -- these preparers are unavailable for audit or return problem resolution. We feel taxpayers will be more alert and careful of their preparer when they are liable.

I said I come from the Chicago area. We've seen all the sleazebags available. Believe me. They work out of their cars, their trucks, off the kitchen tables, whatever manner they can do. They prepare a Schedule A, photocopy it, and use it on everybody's return, whether or not the taxpayer owns a home for mortgage interest and real estate taxes. How do I know? I've seen them, time and again. It's the way to stop these preparers is to stop the people from going to them. That's the fastest way, penalize them, and they will now wake up as a taxpayer.

Form 2848, we would like to suggest that you use a 2848-N for noncircular 230 practitioners. Everyone except the three -- attorneys, CPAs, and EAs -- would sign the 2848-N, thus alerting IRS to that practitioner's status. I have more than 30 years of practice in the Chicago area. I've seen all of these types of people. And when they come in, I ask them, "Why did you choose someone to prepare your return who asks for cash and who will not be there to represent you? And their answer is always the same, "Well, for cash it's a small fee and we get a nice refund." That's why they do it.

NSA's second concern is contingent fees. NSA agrees with the proposed regulation under Section 10.27, because NSA's code of ethics does not allow contingent fees for any form of tax preparation or IRS representation of any matter. We believe a contingent fee rules out the performing of an independent law-abiding contract. However, practitioners do need to have the flexibility of charging fees for their work performed, be it hourly or work-product rate.

NSA's third concern, standards with respect to tax returns, and documents, affidavits, and other papers. NSA requests the use of words "frivolous" and "groundless" be deleted from these two sections. NSA agrees practitioners must adhere to the law. However, we do recognize situations can and do occur. In an audit or collection situation that is new information or a documentation that is now required. For Sections 10.34 and 10.22, to ironclad the constitutionality of practitioners is a direct contradiction of any taxpayer's Bill of Rights to due process. Please remember, practitioners are taxpayers also.

NSA's number four concern, -- expedited sanctions and suspensions. NSA believes the word "egregious" is uncalled for and denies legal pursuits to practitioners. Therefore we request the word "egregious" be deleted from 10.82, regarding practitioners who are in non-compliance. To determine a Circular 230 practitioner flagrantly disregards their own personal tax obligations, is a very rare occasion. We know situations beyond control do happen, such as accidents, illnesses, et cetera.

In Chicago, a CPA lost his battle of over two years fighting cancer last August. Unfortunately, a couple of years of tax returns were not prepared. His wife, grieving as she is, is having a terrible time trying to get those taken care of with the IRS. For the secretary to narrow their focus to disallowing a practitioner the opportunity to explain his case is denying all the rights given to criminals. NSA stands ready to assist you in any manner.

And in summary, competent, un-enrolled practitioners who have passed rigorous exams need to represent their taxpayers only at the exam level, not the court level for the tax return they prepared. Contingency fees are not acceptable and we ask that you delete "frivolous," "groundless," and "egregious." Thank you for this opportunity.

MR. GOLDSTEIN: Questions? I just have one Ms. Le Valley.

MS. LE VALLEY: Yes.

MR. GOLDSTEIN: At one point you have used the term -- in discussing the practice rules, you've used the term "defend at the examination level," you've also used the word, "explain," are the words in a -- are you using those words interchangeably?

MS. LE VALLEY: Yes. It is a matter -- for they should be able to explain to say why they have the tax returns prepared as it is, in a way to defend what they've put on the return to let every -- the examiner know this is where it came from or this is the documents we have to prove it.

MR. GOLDSTEIN: And I guess, the question is -- following up on that is why would the -- why would not he check the box for the 8821 disclosure authorization rules, not permit you to explain why a return was prepared the way it was without necessarily providing the representation that a Form 2848 provides? And if it does do that, why is it necessary to grant an un-enrolled return preparer the right to practice if they can do what you're suggesting that they ought to be able to do simply by using the check the box, or the 8821?

MS. LE VALLEY: I'm glad you asked that question. Monday of this week, I called through to the IRS to let the Collection Division know that the -- my taxpayer that I was representing had lost his job and could not keep -- and could not do the payment schedule. And the lady refused to talk to me even with a Power of Attorney, for all the years, which is on record with the IRS.

She and her supervisor refused to talk to me, to even let me explain anything, because I had not prepared his 1996 and 1997 returns and signed them. I had to call back and then she hung up on me. Then I had to call back and go through the entire process again, and finally got someone who said "Oh, yes, Ms. Le Valley, you do have a Power of Attorney on file and it covers all the years in question."

MR. GOLDSTEIN: Thank you. Our next speaker is Mark Ely from the TAARP Group, LLP.

MR. ELY: Thank you. My name is Mark Ely. I'm representing our firm, the TAARP Group, LLP, which performs comprehensive IRS tax account review services to determine the correctness of IRS interest and penalty determinations. Our firm would like to thank you for the opportunity to testify today, and we'll be limiting our comments to proposed section 10.27, dealing with contingent fees for tax services.

The Service and Treasury have proposed to restrict or limit contingent fees, and there has been a number of rationales, reasons set forth in both the preamble and in other forums. Basically, there is concern as to return positions that exploit the Audit Lottery, exam completion or currency and resource issues, and then there is an articulated reason in the preamble dealing with audit independent issues.

Interest in penalty reviews, which we as well as the other submissions have described in detail, so I'm not going to take the time to do that now -- I'll just simply say that they are very complex work, intensive. They can take a long time. But those reviews do not frustrate any policy objective and would be -- and would not be contrary to any of the articulated rationales set forth supporting the limitation of contingent fees. In fact, we would argue that getting rid of contingent fees would have an adverse and negative impact on tax administration, which I will explain shortly.

Firstly, the claims that we file, the work that we do is solely as a result of IRS determinations. The IRS either undertakes an action to assert a penalty, assess interest, and so we -- that finding is transmitted to the taxpayer. We review that and then we come forward with if there is an opportunity for a claim for refund. So it is always the IRS that transmits their conclusions. It's the -- it's very similar to an IRS determination at the examination stage, which the Service and Treasury has allowed.

Now, where there is -- we don't see any difference between the Service raising a depreciation issue and raising an interest issue. It's the Service's assertion, and now, the taxpayer goes back and wants to challenge that assertion. And what's of paramount importance here is we're not dealing with return positions. Our claims are based on again, an action of the Service, not a return position that the law would -- that our law would allow or the law would not allow.

Secondly, there is absolutely no audit lottery or audit exploitation issues. All claims and submissions are closely scrutinized. And not only are they closely scrutinized by a general IRS personnel, they're closely scrutinized by IRS interest specialists in special units and in some instances a special place in Ogden, Utah. And recently, in fact, the Service has implemented a review process. So not only do you have one interest specialist looking at every single claim, this is per the IRM and per the Services/Administrative Practice, but there is a second review also that's being undertaken now.

There is no delay in the exam closing or examination resource issues. All of our claims are after the exam takes place. Again, after the exam takes place there is always an interest element, and the Service is transmitting their conclusions and findings to us, which we review in detail and see whether there is an opportunity for a refund.

Fourth, the taxpayers want contingent fee arrangements. We've been doing this for over 15 years, and given the complexity, given the timing, which if you have a technical advisee, if you have a court case, even a plain-vanilla global interest netting claim, could take years.

The Global entered the services running about 12 to 15 months, and so given that the taxpayers don't have in-house personnel that's capable to do this, given that the taxpayers want a matching of revenue and expenses, i.e., the fees to pay us versus the refund claim, if there is one, ultimately determine, given the taxpayers want us to bear the risk, given the budget approval process of many taxpayers; in our experience, I would tell you probably 99 percent of the companies we've done, and we've 100s over the 15 years, mostly Fortune 1000 companies have preferred the contingent fee model.

Fifth, the taxpayer has the right to the correct interest as provided by law, and the Service and Treasury also have this objective as a result for proper tax administration. We have seen many instances where the Service may disagree as a -- as to a substantive issue, technical issue on the correct interest law.

However we have never seen a case where the taxpayer will point out an error, something that the Service would agree with, and the Service is upset to pay it. They try to do their best, so it is in the Service's interest and tax administration, also to allow contingent fees, given the fact that without contingent fees, given all these other factors, these reviews in fact would not be done.

I'll give you a quick example. Last week one of my partners and I were in New York, we had been working with the firm before, on an hourly basis. The firm just put -- a new vice-president of taxes came forward. She said, "What you guys have been doing is great, however I have budgetary issues here, and I need to match up your work," given that you know, whatever we do before they get the cash, minimum is going to be a year. She said, "We need to switch to a contingency fee model. I don't have in my budget $75,000 for your review. I'd rather even pay you a little more at the end of the day, if there is in fact a recovery that I could match up my expenses."

"Because if I do have a recovery of, lets say, you know, $500,000, and you know, your fee is, lets say, $100,000, I'd rather pay you the $100,000 then, because then I have a net refund of $400,000 as opposed to paying you your fees which will, let's say, be $75,000 over the period of time where there is no matching of the revenue expenses."

So even large taxpayers do not have these unlimited budgets, so the bottom line is, if we could not do it on a contingency fee that company would not have their review done, and they may not get the interest that they are entitled to as a matter of law. And we think that the Service has an interest in getting the interest right.

We believe that it would be harsh to preclude companies from obtaining benefits that they are entitled to by law -- all based on IRS actions and determinations, and that's a key factor here, under fee arrangements that they prefer. We set forth in our submission, I am not going through in detail here, but suggested language and we asked for two things.

The first thing is in one little "I" of the regs where we asked for a clarification, that interest review is done prior to a payment by the taxpayer -- the interest due be clarified that that does constitute a service into then to the exam -- in connection with an examination. Interest flows right from the exam, and I think that the Service and Treasury should set forth a clarification that in that case, where you don't have a refund claim that doing their review would fall under one little "I" and therefore contingent fees would be allowed.

Secondly, for two little "I" we would propose a clear small specific carve out for interest in penalty reviews. We, kind of, racked our brain, and we really can't think of another area, but if we -- so therefore we suggested solely for interest, assessments of interest, assertions of interest, that there'll be a carve-out for that.

It doesn't deal with the position on their return and that's what we set for -- proposed language to you to consider a carve-out for these interest reviews. If the Service finds that there is another area that doesn't have -- that doesn't violate any of the articulated objectives, then maybe that would subject to another, you know, exception also.

We couldn't think of one, and therefore we're proposing an exception for interest assessments and penalty reviews, post exam.

Finally -- a Transition rule. In the interest of being comprehensive, if there is an alternate decision to restrict this area at all, we think a transition rule is essential. So the taxpayers and their providers don't have to re-negotiate their contracts, engagement letters, which would create many legal, economic, contractual difficulties and issues resulting in inequitable burdens for both the taxpayers and their practitioners.

And the transition rule that we would suggest is that engagements are subject to a binding executed engagement letter on the date the final regulations are published, are grandfathered. And I think it is important to remember that if this happens in a previous fee -- the previous fee arrangement that existed was completely consistent with existing professional standards.

And so it is important it's not changing, you know, they are doing something right, and now the Service is changing, there is no clarification issues involved here. My time is up.

MR. GOLDSTEIN: Thank you, do you have a question?

MR. WARREN: Just to -- I think you've made good comments in terms of explaining what you do. One of the, you know, scenarios we've been dealing with in the area of contingent fees is affordability, and listening to your comments and reading your submissions it seems that a updated dynamic, rather than affordability is controlling cost and controlling risk. Is that a fair way to look at what you've presented?

MR. ELY: Those are two factors controlling costs and risks. Taxpayers have wanted, again for 15 years, our experience going through 100s, have wanted us to assume the risks, we could spend years. I can give you an example where we reviewed a company, you know, took a couple of -- a comprehensive review itself takes a long time, and then when you file claims for the Service it takes a long time, especially when you are dealing with litigation.

We worked on a claim for three years. We won in the federal circuit, then finally the Service won -- I mean, we won in the claims court, the Service won in the federal circuit. We were on a contingent fee. If the taxpayer was paying us all of this time, yes, it would be cost prohibitive.

So they want to have, you know, assurance. This way if they get the fee at the end of the day, I mean if they get the refund at the end of the day, basically it's looked at in most companies, they pull of a piece and they have a net refund. But there is budgetary, there is approval processes, there is the risk and taxpayers are -- that is their preferred method.

We do right now, close to 300 of the Fortune 1000, and that's their, you know, I would tell you 99 percent.

MR. GOLDSTEIN: In 1994, when we promulgated the current regulation under 10.27 one of the comments that -- well, one of the primary concerns of commentators at the time was that they wanted the option of the contingent fees to assist small taxpayers who might not otherwise be able to file their claims for refunds without having the contingent fee.

When we promulgated those regulations in our preamble we stated that one of the objectives of granting the ability to have contingent fees for claims for refunds was in fact that to give the ability of the small taxpayer the opportunity to file a claim that they otherwise know to be correct, but just wouldn't be able to afford otherwise.

I guess my question for you is, your business seems to be almost exclusively with Fortune 1000 companies, how do you reconcile your request for this exception to the current proposed rule with our stated objective in 1994, when we put in the current rule as it stands now?

MR. ELY: Yeah, I guess I would argue that I think large taxpayers are also entitled to have the interest determined as provided by law. I think it's in the Service's interest also to have the taxpayer pay the -- only pay the amount, not pay more than their, you know, their fair share that they are due in owing.

And given the complexity of the area and given even taxpayers, some of them do have personnel reasonably conversant in this area. But because they only deal with the area every couple of years, the fact is that they cannot do it in-house, and so this is an area for tax administration that should be gotten right for large taxpayers also.

I mean that's what I would argue. That I don't think the rule should be limited to small taxpayers, because in realty whether you can afford it -- if taxpayers are not going to do it, then there's going to be a gap in the law. That's a fact. Our business is based on larger taxpayers. We spend hundreds of hours on reviews, for larger taxpayers.

For smaller taxpayers it is not as complicated, they could still have the same issues. So I would say that although that rationale may have been articulated in a preamble I think good tax administration would require that all taxpayers be treated equally, and that they have -- and that they are entitled to correct interest determinations.

MR. GOLDSTEIN: Okay, any other questions from anyone. Thank you. Our next speaker will be Larry Gray from the National Association of Tax Professionals.

MR. GRAY: Good morning. I first want to thank you for the invitation to speak today. My name is Larry Gray. I am a CPA with the firm of Alfermann Gray and Company. I am a partner -- the managing partner of that firm. Prior experience is here in Washington -- I am currently on the electronic administration advisory counsel. I am a past member of the Commissioners Advisory Group, and I served 14 years on the State Board of Accountancy, in Missouri.

I am here representing the National Association of Tax Professionals, or NATP today. We have over 17,500 members. They are made up of CPAs, attorneys, EAs, and practitioners. Because of limited time, I am going to spend most of my time dealing with section 10.7, the elimination of the practitioner's, or the preparer's access to limited practice.

Speaking specifically to paragraph 10.7 C1 VIII, which provides for individuals to prepare and sign returns to represent taxpayers before the Internal Revenue Service during an exam. This paragraph has been removed. The explanation for the paragraph says that it's been removed because of its consistency with requirements that everyone permitted to practice must demonstrate their qualifications.

My question there is what about an employee or a corporate officer, are they credentialed, are they the best source sometimes to have knowledge to complete the audit cycle in a more timely fashion. Limited practice has been around for over 50 years. As a matter of fact REV PROC 8138 goes all the way back to 1950.

I guess the concern is what recent event has generated the need for this removal of a long-standing successful relationship between the IRS, the practitioner community, and the taxpayers. The commissioner of Office of Professional Responsibility acknowledges that practitioners in general, they are good.

And I guess the concern here is that out of the 1.2 million practitioners, this could directly affect negatively about 800,000 of that population. They would not be allowed to represent in an examination of a return they prepared. Please remember that a title like a CPA, which I am, is -- actually, only is a minimum threshold of entry into competency.

Competency of a profession stands on three legs. The three E's its examination, its experience, and its education. What happens, I have many clients that are attorneys, I have CPAs for clients; I even have a couple of EAs for clients. Remember the examination is only one of the measurements, the other two are also very important. And sometimes that experience either of knowledge of the tax law, or the experience with the client, may be the best to represent both in the best interest of the IRS, and of the tax system, and the taxpayer in general.

Many practitioners both 230, and non-230 want to do tax returns. They don't want to do representation. I would say that of the representation I do, 95 percent of it is referrals from other 230 practitioners. I get a lot of referrals from other CPAs. The point of it is, they can handle the return, they can check the box, and maybe I need to go there is what is the definition of practice or representation.

Because we started out, we prepare to return, and somewhere over the time, and also the exposure, we end up with practice. We prepare the return, we check the box, that check the box is good for one year. If you go beyond that then with this removal of limited practice, if you are a non-230 person then you've lost any ability to represent that return. What happens if we get a CP-2000 notice, as an example -- that says there may be a W-2 missing or an interest item missing.

Why do we need to go from 0 to 100, and say, "Okay, we need to have a 230 person to represent this item." Really that's a -- I think if you look at that and the fact of all the notices that come out, is that still completion of the return, or is that actual practice before the IRS?

So I think we have to look to the taxpayer's eyes here; I mean, we are all here with our interests, but I think probably what we come to the table with, we also represent the taxpayer. So I think as you look at this gambit, then you have examination.

I see a lot of the referrals I get, about half of them I pick up in the appeal level, the other half comes from straight referral from a practitioner. The point of it is, is that I think there needs to be a clarification of definition here. I think that could help us all. And another point is, is when do you practice and when do you not, from a real world perceptive.

Revocation of this section, again I think at a time when Congress is putting pressure on the IRS to open the gate for free- file, at the time when Congress wants the IRS to provide more services, less cost, does this removal really assist the tax system, does it increase or decrease the audit cycle?

I think it will increase taxpayer burden. I think it will increase the audit cycle, and I think it hurts the tax system as a whole. And please remember, I am a CPA. And if somebody walks through that door that taxpayer needs to qualify my education, and my experience.

With that I will, I am going to move on to a couple of other brief items, again trying to keep my comments brief, and that is in the area of 10.27 contingent fees. NATP believes that there is a place for contingent fees, for example, on the OIC area. But I think that there needs to be further clarity and definition of the kinds of advice that, say, matter before the IRS.

In the area of conflict of interest I speak to several hundreds or thousands of practitioners around the country each year in the tax area. And I can tell you there is a lot of concern it's not that the practitioner community doesn't want to comply, they would just like to have better clarification, better examples, so that they can practice what we call a best practice.

Sanctions again, I think there is a couple of areas that need clarification there. One, what standards in due process will be available in determining what should have been known of the conduct of an associate practitioner. Secondly, will the standards be based on one act or upon a systemic experience?

Again referring back, there's a Safe Harbor, based on office practice and procedures, again best practice. And finally, sections 1060 through 1081 -- rules applicable to the disciplinary procedures. Just one comment, we do believe in a due process, innocent until proven guilty, and that public disclosure should come at the end of the process.

I hope these comments help you in assisting, writing the final regulations, and at this point of time I would take more questions.

MR. GOLDSTEIN: Any questions? I don't think we have any questions for you, Mr. Gray.

MR. GRAY: Thank you.

MR. GOLDSTEIN: Thank you, very much. Our next speaker is Patrick Malayter from BKD, LLP.

MR. MALAYTER: Good morning, my name is Patrick Malayter, and I am a tax partner with the accounting firm of BKD. BKD is amongst the ten largest accounting firms within the United States, having 27 offices in 11 states. We largely serve small and mid-size privately held companies. My focus of the discussion here this morning will largely be on Section 10.27 B1 dealing with contingency fees.

As part of the proposal of these new Circular 230 rules, certainly there were a number of items laid out as part of the rationale for the change. One of which was to marry up, so to speak, tax rules with financial accounting provisions. However, under existing financial guidelines, there is really only one instance where a contingent fee is precluded on a refund claim where the practitioner believes there would be substantive review. And that involves, the so-called SEC registrants, where the attest company themselves would be attempting to go ahead and file the refund claim.

There is absolutely no prohibition on the financial accounting rules currently for any other service provider within the country to provide performance-based services, nor under AIC payroll 302 is there any prohibition even from the tax provider for a non-public company charging a contingent fee for their services. One of the items at our firm and perhaps a lot of other firms such as us have substantially all of our fees really relate to project based fees or RLE fees, clearly under one percent our firm's revenues relate to performance- based fees. At our organization and perhaps others like us, there is really three primary areas where performance-based fees are charged, in the state local tax arena, which of course is not subject to Circular 230.

In instances where we are challenging a law, for example, such as the federal telephone excise tax, and then in the research and experimentation credit area, where I'm going to have most of my comments here forthcoming. Our personal attitude when we are dealing with refund claims in the research credit area is at 100 percent of these claims are going to get examined.

Consequently, we spend a tremendous amount of time showing up documentation, having project files up to speed and so forth. And our audit history is a pretty good story, over half the instances where we've been examined there has been no changed audits. And even in instances where we have had refunds claims challenged, some of the reports that come back from us, from agents and engineers has been outstanding. In fact, recently a case at Detroit, the agent said it was probably one of the best-documented claims that he had ever seen. There is no gamesmanship that he had seen with other organizations, et cetera.

Recently Commissioner Everson had made some comments to the Senate Finance Committee involving the extension of their research credit work. He believes that credit should be made permanent, but had certain level of discomfort involving contingency fee claims where there were unsupportable amounts, non-qualified expenditures, and so forth. Frankly, I concur with the commissioner in terms of certain things that I have seen, not necessarily involving accounting firms, but what I would call is boutique-related firms where some of the niche task consulting practices that I have seen in the country.

I've seen select instances personally, and being a good citizen of the tax community, I've contacted people within the IRS, appeals agents and so forth, to report some of these bad apples. Unfortunately, I see no action being taken by the government in these instances where clearly there are problematic instances. So certainly, this is an area as far as enforcement attention where we think, you know, the government needs to step-up to the plate, particularly where we have practitioners identifying problem children out there in the community. As current proposals under 10.027 -- 10.27 B1 our -- we've got several other items as we see with respect to our client base, or the types of clients that we serve.

In many complex areas of the tax code, as we were touching upon here earlier this morning, small and mid-size clients do not have the financial resources to get themselves bundle-up items from a record- keeping standpoint to claims under the tax benefits, such as research tax credit. Whereas larger companies often times may have those resources in-house internally to handle that or can pay fixed project fees.

In a survey of our clients, almost 99 percent of them said that this was a key factor for them being able to avail this particular credit. Secondly, as it pertains simply to the research credit, the National Association of Manufacturers have said on several instances that the research credit is an underutilized tax savings item and we think that taking away this contingent fee opportunity will exacerbate that problem. Thirdly, we think it can take away instances where taxpayers can validly challenge inappropriately administered provisions, such as the recent challenges to the federal telephone excise tax.

Fourth, we see that gamesmanship potential still existing under a fixed fee environment, so for example, you can have some of these boutique firms going out and promising a certain level of benefit for a fixed fee. And they can behave in the same manner that they are currently, at a fixed fee environment. Removing contingent fees won't necessarily make any modifications in that particular area.

Fifth, a contingent fee environment actually provides audit protection for a number of tax payers, particularly when you have a reputable firm doing that particular work, and that to the extent a client is challenged, they know that they are going to have the support of their service provider in that situation. Taking away that opportunity may lead to a number of taxpayers standing on their own or getting involved in litigation unnecessarily, to get the result that they want.

And then finally, there is a potential spillover, at least in my judgment, to the extent that we have changes in this particular area where it can spill into various state legislatures or within the AICPA itself, to let's say changed contingent fees involving state and local taxes, which again, ultimately will hamper or hurt the smaller mid-size taxpayer.

I offer a handful of conclusions for your consideration. One is that we clearly need to articulate, at least with respect to sanctions, that these non-accounting firm, non-law firm, service providers are subject to the sanctions of Circular 230. Many of these firms out in the market were actually taught the fact that they are not subject to circular 230, will avoid issues like the IRC section 2AC, requirements on reduced credits.

We'll have instances where early on when they change the laws as far as the tax shelter disclosure rules, where they were actually going out attempting to charge contingent fees on current returns. It must be clearly identified that these firms are subject to these provisions.

Secondly, as I mentioned, the government needs to step-up enforcement or at least investigation, particularly when people in the tax community are saying there is a problem here. It's something you need to address. With respect to 10.27 B1, an alternative for your consideration is to perhaps fix contingency levels so that it cannot exceed a certain dollar threshold, so for example, the fee amount wouldn't exceed $100,000 for a filing a year -- $75,000 for filing a year.

And again one of the benefits in those instances is that it would enable small and mid-size taxpayers to take advantage of these provisions where they wouldn't otherwise have the financial wherewithal to signup for a fixed fee engagement. In a final consideration, you can throw it as an and/or is it making -- make contingent fee projects subjected to reportable transaction or the tax shelter registration rules.

What the advantage that this could do is perhaps shift the owners also to the taxpayers as opposed to certain tax professionals. As you can tell, this is an area I feel passionately about, simply because I think it's the right thing for taxpayers to have access in this particular area. I really appreciate the opportunity to speak and submit comments to the government on this matter. I'd be delighted to entertain any questions you might have.

MR. GOLDSTEIN: I have a question.

MR. MALAYTER: Sure.

MR. GOLDSTEIN: In the AMPRM that we issued in 2002, that created these proposed regulations, we have made a suggestion as an alternative proposal on contingent fees, possibly suggesting a rule that would have limited the situations where you can charge a contingent fee based upon the gross income of the taxpayer, thus allowing small and midsize taxpayers to take advantage of this rule.

What do you see as the pros and cons of that suggestion versus the alternative suggestion that you made of limiting it by the amended return?

MR. MALAYTER: Well, first of all, it may depend on how you define small. So for example a section -- new section 199 rules, just define small as $100 million or less -- that would be a pretty fair standard if it was -- it were that type of level from a gross income perspective. I think, again, part of the challenge that you can run into is, it is conceivable that you could have companies that have income at a higher level of revenue to $300 million that are still in a financial circumstance where they cannot invest money in a fixed project fee.

That is certainly a possibility, you know, if we were going to set threshold levels at, you know, $5 million or less, I think again you're just cutting out a huge proportion of companies that really need to avail contingent fee services in order to properly take advantage of, you know, some of the tax benefits that are out there.

But the complexity of building a case to properly claim the benefit is beyond their scope of a fixed -- for a fixed fee project.

MR. GOLDSTEIN: And I guess, just to get some further clarification on your alternative suggestion about the -- about using a fixed amount on the return. What are you referring to when you say each amended return, for example, let's assume that -- let's assume that you have three different research credits available --

MR. MALAYTER: Yes.

MR. GOLDSTEIN: -- and you file three different amended returns -- is that three different $100,000 limitations that you're suggesting?

MR. MALAYTER: Pick your dollar threshold, but each year stands on its own. It's my vision of the world in that particular area, so --

MR. GOLDSTEIN: Okay. Any other question from anyone? Thank you, very much.

MR. MALAYTER: Thank you.

MR. GOLDSTEIN: Our next speaker is Tom Purcell from the AICPA.

MR. PURCELL: Good morning, my name is Tom Purcell. I'm a faculty member at Creighton University in Omaha, Nebraska. And I'm also -- great honored to be chair of the Tax Executive Committee of the AICPA. I'm here today representing the AICPA. In this testimony, I'm joined today be Eve Elgin who is the chair of our Tax Practice Responsibilities Committee, which was the principal author of our written statements.

We submitted those statements to you on May 9th, and what I'm going to do today is basically highlight some of the key points from those written statements. Our comments, as you know are predicated on our intention always to uphold the highest standards of tax practice. One of the major activities of our tax executive committee is to promulgate and to monitor the enforcement of our statements and standards in tax services.

And so we come from that perspective and we certainly are sympathetic to the attempt to try and make stronger standards for tax practice. But we do have some concerns, as we expressed more fully in the written statement, on these proposed amendments to Circular 230. My comments are going to fall in two basic areas, procedural concerns, and substantive concerns.

Procedural concerns, we are strongly in favor of encouraging the Service and the Treasury to give well-targeted guidance to IRS employees about when it's appropriate to make referrals to the Office of Professional Responsibility. We also think it's incumbent on OPR to have a written policy, for effectively and consistently handling those referrals. So it's clear and transparent. We encourage the IRS and Treasury to continue to invite public comment wherever possible on this process to greatly enhance this transparency of the disciplinary process both in the rules and in the process of enforcement.

We are concerned about some fundamental fairness issues that seem to come out from the discovery process, while we are certainly grateful that there is enhanced role of discovery or concern as to the way the wording is placed in the proposals.

It's not clear that practitioners who might be subject to disclosure would have the right to information at the preliminary stage that both exculpates as well as accuses them. In addition, it's not clear that we would be able to get access to discovery information that is developed subsequent to the filing of a complaint.

As others have expressed, we're also concerned about the mandatory publication of a practitioner's name early in the proceedings. We think that merely making an allegation is insufficient to disclose the name of a practitioner that there ought to be final determination that that practitioner has been guilty of misconduct because there can be changes that happen, during the course of the proceeding, and therefore it could be premature and obviously dilatory to the practitioner's reputation if they have been accused, and there is no effective way to remove that from the practitioner's record.

We also think that there is a concern if the specter of potential disclosure might be used inappropriately in an examination process, perhaps either as a tool to encourage the practitioner to be more likely to react favorably to an agent's request for information request, or to perhaps have -- feel the pressure that they could be possibly accused of wrongdoing. We think the government's right to introduce supplemental charges is problematic because of the breadth of the language, it's -- any charge for any reason provided the practitioner is given due notice.

It may not be a related charge to what's under consideration, and so our concern is that the scope of this could be expanded without the opportunity for the practitioner to have a meaningful chance to respond. As others have mentioned, we are concerned about the appeal process, the proposed changes, to us, seem to indicate that the right of repeal while they're in substance is not in practicality going to be as effective.

We agree that there might be current problems with the appeal process, but we'd much rather work with trying to fix the current system, instead of trying to create a new system that would have the effect of perhaps taking away totally the practitioner's right for repeal -- for an appeal. In terms of expedited suspensions, we're concerned that the drafting would have an extension that's unfair because the OPR would have the sole discretion about whether a tax practitioner had demonstrated a pattern of egregious conduct by failing to file, while the current system would leave that with an independent review, and that independent review can include safeguards that would be beyond just the normal -- or just the process of the OPR itself.

Some substantive issues that we wanted to point out, the disreputable conduct definition, one of the expansions of this would be to include willful failure to file a sign --I'm sorry, willful failure to sign a tax return by a practitioner. We are not aware of problems here. We are not sure why it's being added, and so one of the concerns we have is that it may be not grounded in facts, as we understand them, the way practice is working today, and so we question whether that's appropriate at this time.

We also have a concern in that area because there is a conflict between practitioner duties, when you juxtapose 6695 and 6694, that a tax practitioner could be a preparer, but have a stronger duty not to disclose, not to sign a return, because of the client's failure to disclose information on the return.

And so you really put the practitioner in a dilemma here that's an unfair dilemma that possibly can't be reconciled. The second disreputable conduct concern that we have is the improper disclosure of tax return information. The 7216 regs are out of date.

They have done, you know, undergoing some much needed revision, and it seems to us counterproductive to try and expand this Circular 230 concern at this time, at the same time that the 7216 regs are being revised and not having been finished with that that it might be premature at this time to include that as a definition of disreputable conduct.

The third concern is the suggestion that -- suggesting to a client that they violate any tax law, it appears to be an overbroad and open-ended expansion of this, and so we would at least like some examples that would clarify what was meant by that.

Other substantive issues, the submissions for purpose of delay, we are not clear why this has to be expanded at this time. It would be helpful again if we could have some examples of where the Treasury and Service are seeing issue with regard to situations that warrant sanction in this area. We are also not sure why the language singles out submissions that demonstrate intentional disregard of rules or regulations. This seems to take precedent away from just the -- the full panoply of tax precedent and focuses on rule or regulation.

And it also seems to get at the permitting permission -- I'm sorry permitting positions contrary to rules or regulations, if they are not frivolous and are adequately disclosed, which is already a prepared penalty that's in the code. Our position on the contingent fees was indicated in full in the written submission and we also appended to that a much more expansive discussion of the AICPA position on contingent fees.

We are looking at this at the national level with regard to the ability of CPA's to charge contingent fees. With regard to the particular comments that are in Circular 230 proposals, we wonder why pre-filing services such as private letter rulings, advanced pricing agreements, request for change in accounting period or method that require a national office approval are not included in the permitted activities that could be subject to a contingent fee.

And we also agree that if you do make a change in this area, you need to have some kind of appropriate transitional relief with regard to existing contractual arrangements. Finally with regard to the conflicting interests we are not clear in our minds why the change to a rule-based approach is necessary.

We think that principal-based approach can work very well, and so we would appreciate some greater guidance on that. In conclusion, I'm grateful for this opportunity. We will answer questions and Eve will assist me if I need any assistance on answering questions.

MR. GOLDSTEIN: Any questions? I guess I have one question. We have noted in -- as part of the reason for the proposed plan, which allowing for transparency of the proceedings is a need by the practitioner public that they have espoused us for many years about knowing more about what types of cases OPR is pursuing, and what types of cases are -- we see decisions coming back favorably and also what types of decisions we see coming back unfavorably.

How do you propose, if we only publish those where there was a proceeding that disbarred or suspended, where the sanction was upheld a practitioner. How does the public, how do we convey to the public at that point, then, where an ALJ came to a determination that was different than the determination of OPR. In other words, you are only going to see if we publish at the end, those where somebody was found to or adjudicated to have been not guilty, for lack of a better term.

MR. PURCELL: Sure.

MR. GOLDSTEIN: The question that I have for you, is, you know, in our judicial process, currently the court systems both tell you when somebody was found to be guilty and not guilty, and their names, you know, there is a tarnishing of the reputation maybe initially, but the not guilty supposedly comes out of it, how do you address that?

MR. PURCELL: You know, well, that is, I mean, obviously a difficult situation I think that the record that you publish when you have the final adjudication -- the extent of information that you provide to the public and the nature of the practitioner violations that were upheld or were denied.

I mean I don't think -- if all you say is Joe Smith was accused and the ALJ said, "No, he's okay," and that's all you published, then obviously there's no guidance there for the public. But to publish someone's name and say Joe Smith is accused and then you find out later that there was no basis for that, his reputation has been significantly damaged.

And in a tax practitioner environment where reputation is a major part of what you have to sell with a client, it's very difficult to recapture that. So it is a difficult balance, and I understand the attempt to make it parallel to the judicial system. If you think of what's going on in North Carolina right now with regard to the -- lacrosse players as there is damage there to the reputations even if they're found to be not guilty. Of course there is.

But it's a much more -- it's a much narrower set of concerns that we have in this area rather than the broader Criminal Justice System. And there is historical safeguards in the Criminal Justice System that aren't necessarily present in the proposed OPR system.

And so I think that by -- on balance that if you only would publish the names of those who are found ultimately, at the end of the day to be in violation, that having a full record of what the violations were that then the word would get out to the public about what's acceptable and what's not acceptable.

And then people that might have been subject to an investigation, but where perhaps the investigation did not come to fruition as a complete disbarment, use that in a Q&A or in some kind of a guidance to practitioners on a regular basis that gives us information if these types of activities are suspicious, and you want to challenge them, but it doesn't rise to the full level of adjudicated disbarment. I don't know -- did you want to add anything, Eve?

MS. ELGIN: I think I would just add one thing.

MR. GOLDSTEIN: I think we need you to come up to the microphone, please.

MS. ELGIN: I think it's a very good question and I would -- and an important one, and I would just urge the Service and Treasury to consider seriously if it were possible to have some kind of middle ground here between publishing a practitioner's name at an early stage and essentially not publishing anything.

I would think it might be very helpful to the government and the practitioner community if you could publish some kind of statistical information on the types of situations that were referred to OPR, on those in which OPR decided to take action, and obviously on those where there ultimately was a conviction by an ALJ.

But it would be helpful I think, to the practitioner community to know, for example -- and I'm just making this up, 10 percent of the referrals involved situations in which practitioners didn't file tax returns, or 10 percent involved situations in which there was a perceived conflict of interest, or 5 percent where people improperly took client funds or whatever the allegations of misconduct are, so that they'll get a sense of not only the extent of the hard work that you're doing, but also of the types of issues that are most on the table at that given point in time.

I appreciate there's potentially some 6103 issues, but I just can't believe there isn't a way to get some of this information out that would be helpful both to the practitioners and the Service without violating 6103. I know many years ago, there were disciplinary scenarios that were published, and these were very detailed specific situations.

I believe this occurred twice perhaps or only once, where there were four scenarios. It was published in the Internal Revenue Bulletin. And frankly, I think that publication effort didn't go that well, perhaps because the analyses were very specific, and therefore people were more likely to criticize them. But what I'm thinking of is something that's more general and just gives you a better sense of the types of cases that are in OPR's desk and that are ultimately forwarded on.

MR. GOLDSTEIN: Thank you.

MS. SOUCY: I have an additional question. With respect to the expedited suspension rules, specifically your objection is with respect to the new grounds that were added or with respect to discretion to determine the egregiousness and the level of the conduct that would suggest that expedited suspensions would be appropriate in this case?

MR. PURCELL: I'm going to let her handle --

MS. ELGIN: Sure. I -- both I guess -- I mean, the additional ground, and in the case of egregious noncompliance, certainly, the intent is very understandable. No one's going to support people not filing their tax returns.

I personally, what I found difficult about the provision was the notion that if you didn't file a return or pay tax, and once you have the words "or pay tax" you run the risk of expedited suspension proceedings being used to sanction a practitioner where there's a disagreement as to the substantive merits of the return position. So if it were to say, "failed to file and pay tax," I would find that less troubling.

But on the larger issue as we said, the expedited suspension of proceedings are troubling in themselves, because of the very limited rights a practitioner has in that context to disagree with the government. Essentially, with an expedited suspension there is a complaint, a response, and a conflict. And that's pretty much it.

Then if you're -- if the government finds that you've done something bad, your license is suspended. So given the limited rights in that context, I think we're a little uncomfortable adding as an additional ground for expedited suspension, any grounds that does not involve an independent -- a determination by an independent body.

MS. SOUCY: Thank you.

MR. GOLDSTEIN: Thank you. Any other comments? That's it. Thank you.

MR. PURCELL: Thank you very much.

MR. GOLDSTEIN: You're welcome. Our next speaker is Beanna Whitlock from the National Society of Tax Professionals.

MS. WHITLOCK: Good morning. It's my pleasure, as Beanna Whitlock, Executive Director of the National Society of Tax Professionals, to bring the comments of our members to Treasury. They are expressing their gratitude to Treasury for the opportunity to work with Treasury on the rules and regulations governing the tax professional community.

NSTP has in its membership, certified public accountants, enrolled agents, attorneys, financial planners, and tax professionals. We are not as concerned about credentials as we are concerned about a tax professional community, individuals who have determined that their business is tax. Today I will not enumerate all of the items that we did in our written testimony to you, but we will just point out a few of the issues, some of which are -- have not been addressed before.

The first one has to do with indeed the clarifying of the opinion regarding written advice for practice, tax avoidance, or tax evasion. It's easy to understand the term "tax evasion." But using the term "tax avoidance" is very confusing and needs to be clarified. There are many opportunities for tax avoidance that are not abusive.

Our members reflect on the 1031 exchange, and even one member cited that he had a taxpayer who had avoided taxes by having 10 children. The issue of abusiveness was self-inflicted. But we do ask Treasury to clarify the issue of tax avoidance.

Second to that is the issue regarding the enrolment to practice requirements for enrolled agents. And the two hours of ethics and professional conduct training required each year, we would ask Treasury to direct the Office of Professional Responsibility to put some restrictions on those ethics and professional conduct courses.

There are many courses being taught around the country that are not in effect doing exactly what the Office of Professional Responsibility wanted accomplished with these two hours of training. And NSTP suggests that OPR develop a curriculum or approve those courses rather than just open it up for ethics and professional conduct training.

And thirdly, we asked regarding expedited suspensions, that Treasury also ask the Internal Revenue Service to include Electronic Return Originators. We feel that there is a great deal of abuse there, and we feel like with the direction of Treasury, IRS will continue to pursue those who are most egregious in this area.

Regarding incompetent and disreputable conduct, we specifically want to approach the failure to sign a tax return, where all tax professionals in signing that tax return indicate that they are proud of their work. We are concerned that, that disclosure that they were the paid preparer, has never been properly addressed by the Internal Revenue Service.

For example, there are opportunities when the return is signed as the paid preparer that indeed in eventuality the return was not paid for by the taxpayer. The preparer is still left with a signed return as the paid preparer.

And we believe that Treasury in its attempt to recognize the tax professional community as an effective partner for tax administration, should direct the Internal Revenue Service to devise a form and a procedure whereby a return preparer who previously signed the return as the paid preparer, should have their name removed if they indeed were not the paid preparer.

This is in respect of the tax professional community that partners with the Internal Revenue Service. Although we do agree with many of the provisions in the proposal, NSTP members have disagreed vehemently with three.

The first one is the elimination of the return preparer's right to represent that taxpayer at the initial examination. And I do use the word "represent." When I introduced myself, I failed to tell you I've been an enrolled agent for almost 30 years, representing taxpayers before all administrative levels of the Internal Revenue Service.

But as an enrolled agent, I'm fully aware that in that initial examination the revenue agent is to determine the correctness of the return that was filed. The only one who has that intimate knowledge besides the taxpayer, is the return preparer.

There are also opportunities for that revenue agent to determine in the preparation of that return, if there should be the appropriate penalties assessed to the return preparer rather than on the taxpayer, based upon that interview with the return preparer. There are restrictions. Beyond that initial examination, the restrictions are clear for that return preparer.

The return preparer must have prepared that return, and it not be another issue from a return year that they did not prepare. We believe the Internal Revenue Service Circular 230 certainly has addressed those issues. We do believe that Treasury should direct the Internal Revenue Service to only appropriately allow those individuals to represent taxpayers at the various levels that they have the authority to do so.

On the issue of contingent fees, the issue is simply this. It takes an ability of the small business, the midsize business taxpayer, it takes away the ability to get the services rendered if the only way to get that service rendered is through a contingent fee. And we would ask that the Treasury consider the small business taxpayer in taking away that right to determine how they will pay for the services rendered.

And finally, I would take a moment with the standards with respect to tax returns and the documents. Our members believe that the terminology that's existing in Circular 230 that we cannot consider incorrect, inconsistent, or incomplete information, is clear enough for the tax professional to further impose regulations that say we can't do less than a perfectly documented tax return, leaves far too much leniency for interpretation by the Internal Revenue Service.

It also will discourage taxpayers who have less than perfect records, particularly those taxpayers who are multiple year non- filers, from going to a Circular 230 practitioner, because they would have further requirements on not being able to prepare the return, unless the documents were perfect.

In closing with you I do want to thank you for your time today, thank you for the excellent comments that have been made by those who have preceded me, but mainly to tell the Treasury Department that this is a tax professional community, one that believes that it is very, very linked to the Internal Revenue Service and to Treasury, and we appreciate you allowing us to make these remarks on behalf of effective tax administration.

MR. GOLDSTEIN: Any questions? Thank you, Ms. Whitlock.

MS. WHITLOCK: Thank you.

MR. GOLDSTEIN: Our next speaker is Richard Hochman from McKay Hochman, please.

MR. HOCHMAN: Good morning. I would like to thank the Office of the Treasury Secretary as well as the Office of the Associate Chief Counsel for the opportunity to appear at this hearing and offer comments today. Well, many in the management positions of the IRS Tax Exempt Government Entities Group are very familiar with both myself and my company.

Please allow me to begin by introducing myself. My name is Richard Hochman -- for purposes of the record, of the agenda, it is spelt H-o-c-h and not H-o-c-k, usually it is spelt M-u-d around here anyway, so that was an improvement.

Since 1989, McKay Hochman has been a wholly owned subsidiary of Newkirk Products Inc. Newkirk is a large national provider of retirement plan and participant communications, including employee statements, and educational materials. In my earliest days with the firm, the bulk of our clients were financial institutions of all sizes.

Over the last few decades our client bases expanded to include law firms, accounting firms, actuarial firms, PPA third party administrator record keeping firms, and brokerages. That expansion notwithstanding the majority of our clients' response to pre-approved planned documents do not have on staff the attorneys, accountants, and enrolled agents or enrolled actuaries who are presently licensed to practice before the IRS with regard to retirement plan issues and concerns.

With the release of the updating form 2848, Power of Attorney on April 1, 2004, many of our clients became distant franchise with respect to their ability through appropriately represented employers with regard to the qualified retirement plans. While the IRS has suggested that these individuals can provide many of the same functions through the use of Form 8821, I will contend that these procedures are more cumbersome and time consuming and the practitioners are restricted in their ability to discuss possible alternative solutions to solve outstanding problem issues.

Probably, after the release of the new form, many clients contacted me about problems that they were encountering -- excuse me -- that they were encountering in their client representation that they had not previously encountered. I took those concerns to the determination layer unit in Cincinnati headed by Mr. Robert Bell as well as to Paul Schutz, the then -- Paul Schultz, excuse me, the then head of the IRS rulings unit and Carol Gold the director of TE/GE.

Shortly thereafter, I was one of the industry representatives that met with the advisory committee for the Tax Exempt/Government Entities the act, discussed the problem and what alternative solutions could be developed. I insisted then and continue to do so at this time that an appropriate solution be quickly developed, so the industry practitioners and professionals were not currently eligible to practice before the IRS can come to represent their clients, especially, with the actuary statement period then looming before us.

In fact, the first actuary statement cycle for individual design plans is open and will likely close before the remedial action is taken. In summary, these are the reasons for my appearance before you today. Following upon these discussions with industry representatives, the act in June of last year, June of 2005, issued project report on establishing the Enrolled Retirement Plan Agent program under Circular 230.

The most recent release of the proposed rulemaking did not include the proposals in the act report, but the Treasury and the IRS have nonetheless requested public comments on the proposal. We will only make limited comments about the proposed regulatory changes and their impact on the qualified plan industry. My intention is to primarily address the acts and role of retirement plan agent or proposal.

Before spelling out the reasons, therefore, I would like to express McKay Hochman's enthusiastic support for the ACH's proposal, and our commitment to assist in whatever way we can to bring the program to a quick beginning. We do this because it's in the best interests of our client base. They were adopting employers of the retirement plan industry as a whole.

Since the annual return report form 5500 is considered information return rather than tax return, the repeal of Section 10.7 C1 VIII, which currently authorizes un-enrolled preparer to represent a taxpayer with regard to the return that they prepared, should have little impact on the qualified plan industry.

Many of our clients have already lost their ability to use code H, un-enrolled return preparer in the representation of retirement planning clients addressing the act's specific proposals. Among the IRS's objectives, as described in its current strategic plan is to go off ensuring that tax professionals adhere to professional standards and follow the law. While the industry has many fine accrediting organizations, such as --

MR. GOLDSTEIN: Mr. Hochman, excuse me -- because they are recording, he is asking if you could just slow down a little bit.

MR. HOCHMAN: Okay.

MR. GOLDSTEIN: Thank you.

MR. HOCHMAN: It is nerves at issue.

Eventually IRPA designation couldn't in fact change that. This designation would create the ability to practice before the IRS. The program could also incorporate a system of sanctions for those who breach the established standards. Right now, only the professional actuarial societies have established disciplinary proceedings and forums.

However, with the creation of the IRPA designation, it would be possible to sanction those who prey upon employers by offering abusive tax avoidance schemes, such as the S Corporation ESOP in the 412I programs, that are now characterized -- categorized as list of transactions in the services ETOP program.

This would be a proverbial win-win for both the IRS and the vast majority of industry practitioners. We are not trying to cut corners or operate on the edge of the law and the regulations. It is fair to say that within each group of -- the four groups authorized currently under Circular 230, that are practicing for the IRS, there are a number of individuals who have an expertise in the qualified plan arena.

However, with the exception of the enrolled actuaries, who routinely work with the retirement plans on a day-to-day basis, the vast majority of attorneys, accountants, and enrolled agents, now authorized to practice have limited knowledge of the qualified plans, and therefore are not the best advisors to employers and participants regarding plan design options.

Over the years, with all the changes made to ARISA and the tax code, it's become almost impossible to remain competent in the qualified plan -- excuse me -- in the quality benefits field, while simultaneously maintaining expertise in other tax matters. This fact becomes very clear to the consultants in my firm when we approached each March 15th, to April 15th, and we field questions from accountants trying to determine the appropriate planning contribution for their client -- for their employer clients.

I for one no longer claim that expertise outside the qualifying planning field, there are too many tax clauses in law school. Of the many industry practitioners I know, only a handful are in fact enrolled agents. Provide the necessary training to stay abreast of the many qualified planning statutory regulatory provisions has sworn upon a small number of companies and professional trade associations.

ASPA and NIPPA, among other industry trade associations have begun to offer credentialing programs. However, there is no uniformity between these programs and no set of examination practice. And through a careful review of the ACH it's determined that it would be inappropriate through any of the existing certifications, and studies describe -- decide that any examination to obtain the IRPA designation should in fact be modeled after the program currently in effect for the Office of Professional Responsibilities enrolled agent designation.

Since IRPAs would limit their client representation to a few -- to a limited number of Internal Revenue Service as -- Internal Revenue code sections, excuse me, that specifically impacted qualified plans, any examination and continued education requirements should certainly be limited to those specific code sections.

The ACH took a significant amount of time to outline those specific sections in this report and their proposal should be giving proper deference. As the Service rules -- Service moved more towards enforcement to bring about compliance, their employer contacts will be increased.

At the recent Northeast Area Benefits Conference attendees were advised that the Service is expected to make 2000 soft contacts in addition to its full audit schedule. Many employers are not fully conversant about their plans and the terms within the operation, whether they have contracted the services of third party administrators. TPA is to properly operate their plans.

With Service agents not being better off by talking directly with those operating and maintaining the qualifying status of the plan, rather than the sponsoring player who knows all about the widgets they assemble, but very little about the company's plan. The TPA is also likely to be in a better position to answer operational questions leaving the plans attorney or accountant, and thus they perform a TPA function.

Few of -- any so-called individually designed plans are drafted from scratch. Most pre-approved plans or volume submitted plans with some amended section or sections, with the actuary determination letter program now open for individual design plans, it will be more beneficial to the determination of the process and the assigned agents, if they can speak directly to the TPA who drafted the plan amendment language rather than having to talk to the employer and playing the game "telephone" as we all remember from when we were kids, and getting some rather strange answers from the employers.

I personally am in favor of birthing a plan and letting it grow. Most industry and service providers get their fees on the amount of planning assets they hold, and they would rather work with takeover plans. Invariably, it many takeover cases come with an operational error or problem.

The IRS recently updates EPCRS, Employee Plans Compliance Resolution System to deal with the administrative errors to recover the qualified plans. Once again, it would be extremely helpful for plan compliance reasons that the party performing the plan administration function were able to take the plan through the process, that any negotiation is necessary only at this time.

An attorney, accountant or enrolled agent, or enrolled actuary would be able to sign off on any necessary negotiations. The TPA who will be responsible for actually cleaning up through the administrative errors, may be disconnected from the correction's determination.

This is not a winning situation for the IRS, and has to be -- which has to be assured that any problems corrections are actually made. The acting proposals felt that this program had to be implemented as soon as possible. They were concerned that if a temporary program were put into effect, any permanent program would be delayed and they did not want to see that delay.

Well currently, I'm suggesting the program be fast-tracked so final permanent program could be implemented as soon as administratively possible. Unfortunately, it will already be too late to implement the program in 2006. However, it is important to get it underway in 2007, so that when the defined contribution plans --

MR. GOLDSTEIN: Thank you, Mr. Hochman, but unfortunately the time is up.

MR. HOCHMAN: Okay.

MR. GOLDSTEIN: Just for everybody's information, Mr. Hochman did provide us with a copy of his comments and will be -- we will be making them available to the public, so anyone who missed that will be able to pick up a little bit in the reading of it. I don't know, I don't want to presume so. I will ask if panel has any questions before -- I guess my only question to you, Mr. Hochman, is -- you mentioned that some of the industry associations do now have started credentialing programs.

I guess, my question to you would be how successful has the industry associations, to your knowledge, been able to get, you know, individuals credentialed? Are you finding that most of the people who you know in the industry are becoming credentialed or how is that working?

MR. HOCHMAN: I think the answer to your question is actually varies. There are several organizations, by the way, as part of their report last June appendix C, the ACH did lay out the different programs and the different agencies and the way they are handled. It's hard to say -- I deal with the employer, and not employers -- with consultants at all different levels, including the management folks.

Some of them were attorneys, some of them were enrolled actuaries, a lot of them were created through ASPA and NIPPA, organizations on which I'm a member, and their credential I find a little bit superior to some others.

So many other organizations are out there, such as the International Foundation, is has the CEBS Program and actually recognized program, but they take it through all of retirement plans and qualified other social security benefits and everything that the Human Resources professional would take up.

The ASPA and NIPPA programs are more designed to, indeed, plan and administrate the record keeper function. So I think they are good programs. Obviously, the CPC in ASPA the final accreditation would you have to know define -- better define contribution. It's a lot more important than just somebody having so-called QKA who only works at 41K plan, so the answer to your question is, their accreditations vary based on skill type, but you can build up to a higher skill type and a higher recognition.

MR. GOLDSTEIN: Okay, I thank you very much.

MR. HOCHMAN: Okay, thank you.

MR. GOLDSTEIN: Our final speaker this morning is E. Martin Davidoff of the American Association of Attorney Certified Public Accountants.

MR. DAVIDOFF: Thank you very much, and first of all, thank you so much for having such an open dialogue here today and listening to us. We really very much appreciate it. I am here representing the AAA, CPA and no, we're not an auto club for CPAs. We are a group of people who are practices -- who are licensed as both CPAs and attorneys, and we are here to talk about Section 10.27 of Circular 230, with respect to contingent fees.

In addition to representing the AAA, CPA, I practice as a CPA and a tax attorney in my office in Dayton, New Jersey. Although, the use of contingent fees in my practice is limited, it is a critical tool in my practice, enabling those with limited resources to secure a top-notch representation before the IRS.

Now, when I talk though about limited resources, Mr. Goldstein bought up some comments from 1994, and I must say that affordability alone should not be the criteria, as the ABA, who is not here today, but submitted comments in advance, you know, we agree with their statement that (off mike) connection with the exploitation of the audit process, the regulation of contingent fees by the office of professional responsibility is wholly not appropriate.

There is no reason for example in penalties, and interest, and tax services where the IRS is clearly going to see the whole picture that that should be regulated, and we put on page 4 of our testimony, and my testimony is available outside for anybody who'd like to see it, we put other -- Mr. Ely, couldn't think of any others, but we put some others here, like, innocent spouse claims, like the AICPA, I mentioned pre-filing, letter rulings, advanced pricing agreement.

In connection with responding to IRS notices, there are a whole litany of tests that are not looking to the audit lottery, and I would mention to say it again to the conversation that you have been having. I would also mention to say if the concern is here about all of these refund claims coming in on research and development credits and potentially Section 199, if they are appropriate, they should be coming in, all right.

If there -- there is a legitimate question about tax. Now, if the IRS at some point says, "Listen, we're getting a lot of amended returns on contingent fees and we think they're a suspect," now, we don't see that. I don't see generally practitioners, you know, in large quantities doing this, and my testimony talks about that, but if you're seeing it a lot and you think it's appropriate, why don't you put a box on the 1040X or the 843.

The fee for this matter is, you know, based in part or whole on contingent fee arrangements. Right there you then have blinking lights. It's much like the home office, all right. You have blinking lights, you are now told that this is a contingent arrangement and you can focus your efforts more on it, if you would like to, but to prohibit contingent fees is inappropriate.

Now, even though I am orally suggesting this that this check box -- okay, there is the concern in true litigation of tax -- not tax benefits in the non-tax world, you know, true litigation, you know, what -- how the attorney is being paid, is not relevant, so I couch that even though I'm mentioning that certainly would be better than prohibiting contingent fees.

And I think if you prohibit contingent fees, you might have some equal protection in other matters and I -- but if your concern is how do we know somebody is doing contingent fees, maybe, the check box might be an alternative, but again, we don't think you should be regulating them.

Let me proceed. To give you an idea in my practice, basically, when I have a potential case for a contingent arrangement, I sit down with my client and I say, "Okay, how would you feel if I ran $3,500, and did not secure your refund or abatement?" and I'm talking the penalty abatement. I then ask the next question, "How would you feel if I got you a $30,000 refund abatement and earned my $10,000 fee," if I was on a third contingency "with a single phone call and a letter?" All right.

Invariably, I let the client make the choice, all right. This is free enterprise, this is having free business relationships and I think that's very, very important, and in making the choice invariably, the clients with the smallest cases elect a contingent fee arrangement.

They want no risk of additional out-of-pocket expenditures. With respect to larger places I get a mix of results. Someone to minimize the overall fee and figure my willingness to take on the case on a contingent fee means that there is great merit to it. Others want no further risk of incurring additional out-of-pocket expenditures. Professional fees can build up very quickly if the negotiations of the IRS become extended. That's the nice word for it.

Basically, contingent fees serve an important purpose to the public in balancing the scales between a formidable IRS and the average taxpayer. They encourage high quality work, they discourage frivolous claims, and my testimony provides all the details as to why I believe that's true. And after all, in light of best practices, don't we want higher quality work?

We believe basically that Section 10.27 of circular 30 should not be changed. The current standards are fair, and reasonable, and make sense. Also the prohibition against of -- contingent fee is very specific. You tell us when you don't want it. The assumption is that contingent fees will be permissible, if not specifically prohibited.

The proposed changes to 10.27 turned this approach on its head by generally prohibiting all contingent fee arrangements and then carving out specific exceptions. This approach is fraught with pitfalls and likely to have unintended results. Some of my questions -- in arriving at this change did Treasury conduct any significant research, to determine when contingent fees arrangements are used in tax practice? I haven't any seen any research studies.

I suspect you're concerned about larger arrangements as evidenced in the discussion in your preamble about the SCC in the public company oversight board. I personally represent no such public companies in tax matters. In fact, I represent no companies that are even as big as LMSB coverage.

Basically, you know, this is a matter -- the question was raised earlier about independence. I don't think it's about independence. I don't think -- I don't think I have to be independent, I think I have to be professional and I have to be ethical, but I can't be an advocate for my client, and I should be an advocate for my client.

The Counsel is an advocate for the IRS, the DOJ is an advocate for the IRS, when they are representing them, and I should be an advocate, when the terminology that's coming up we need independence, I don't think that's the right standard. The underlying presumption of the change is that there is -- there are a large number of disreputable Circular 230 practice -- practitioners that somehow are running amok preparing faulty amended returns on a contingent basis and bypassing IRS scrutiny.

I don't see this change, and I see this, you know, as a shock on approach. You guys have a problem with certain practitioners, get those practitioners. I encourage you to get the bad practitioners, but don't assume that we're all bad, and then change the ground rules, which you are doing dramatically here in this particular part and other areas.

Some of the areas -- I wanted to talk about one particular contingent fee arrangement, which is on my testimony on page 3. I have a woman in Nebraska. Well, basically the IRS is seizing all of her money. Taking it all, leaving her $2,400 a month to live on, and we asked the IRS office, "And where did you come up with $2,400?" "Well, I just thought it was the right amount." I said, "What happened to the IRM and the standards of you looking at, you know, her necessary expenses?" and he says, "Well, I don't have to follow that," all right.

Now, she could not afford representation. They were not even allowing her enough money to pay her current estimated taxes, all right. The lawyers who preceded me would write letters saying, "Will you designate some of this money you're seizing towards current estimate taxes?" I said, "I can't" all right. We ended up going to appeals and ultimately he found this is right.

Now, the -- her prior attorney couldn't represent her anymore. He moved to another firm and they wouldn't take a non-paying client. So the only way she correct hire me was on a contingent basis, which I laid out the details a little bit in my thing, and she's gotten $100,000 worth of services and paid me $12,000.

Now, in the next 20 years, I might catch up a little bit, but the basic thing is this woman would not have had -- had my services, and it -- if what you're putting out forth here, you know, could be devastating to that. I have put here many examples, as I said, innocent spouse, and all of the kinds of other things which I think, you know, should be, you know, my testimony is there.

I just wanted to talk about one other item that the AICPA was talking about and that is, you know, how do you deal with practitioners who are, you know, found to be not guilty and how do you -- Mr. Goldstein was saying, how do we get that out to the public. Well, give the whole summary, just omit their names, just like you do in a letter ruling.

You know, put it all out there, but just omit the names. There is no reason to -- for us to know what's happening, we don't need to know the names, so if your goal is to say, "We want the practitioner community to know what we're doing." Well, publish the rulings and put no names and no personal identification. You do it on letter rulings all the time; you know how to do it. I thank you, if you have any follow up questions, I would love to enter into a conversation?

MR. GOLDSTEIN: You have questions anyone?

MR. WARREN: Just a kind of a big picture question. In your view, is there such a thing as a duty of independent judgment owed to a client, and you know, with respect to that contingent fees or such that they won't threaten that duty or is it that, you know, this duty of independent judgment is, you know, a red herring or something like that and there is a unity of interest between the taxpayer and the -- I just --

MR. DAVIDOFF: That's a great question. All right, the first thing when I have a client come in is I make my independent judgment, whether or not this is an appropriate for them to be pursuing, okay. Once I make that determination, I'm their advocate, but I make that independent judgment, and I can make that independent judgment whether or not the fee is contingent, all right.

And I will tell you, in fact, the other day, you know, there is a little part in this testimony that says, you know, sometimes somebody might prepare, you know, a amended return that's on a fee basis rather than contingent. A little bit less robust because the client is so sensitive to fee, so then Amy said, "You never do that." I said "You know, you're right, I never do that," but some practitioners might be tempted to do that, and it wouldn't be wrong.

The judgment as to whether or not I pursue the claim for refund, the amended return, the -- whatever project, is always done with the following premise, "Am I going to get --" I have to two premises; one, "Is it legitimate, am I pursuing something that's legitimate?" Two, "Are the costs associated with that reasonable for the taxpayer?"

For example, you know, there are a lot of amended returns I could have done in New York State when they changed some rules a few years ago about -- I don't even remember. There was case or something like that. New York City tax was one of them, you know, there was some amended returns that could have been foul.

Well, if I could've gotten $300 back and it was going to cost me $600 in time, you know, I didn't do it. I didn't do it for myself, I didn't do it for my client, but where the cost benefits ratio for providing those services made sense, then I would do it. I always -- and I think all of my brethren, all right.

Attorneys, CPAs, enrolled agents, they make -- they're proud of their professionalism. They're not risking their license. They ought to be practitioners in all of these professions, but generally, you know, we're not risking our license to take a position that's inappropriate, and a contingent fee does not cloud or change my judgment on that.

MR. GOLDSTEIN: Let me ask you.

MR. DAVIDOFF: Sure.

MR. GOLDSTEIN: On the independent judgment, do you ever market your independent judgment or trade or sell your independent judgment in the sense that, do you ever say, "I made an independent judgment that this was worthwhile, and now, I'm going to go to --"

MR. DAVIDOFF: And I'm going to --

MR. GOLDSTEIN: "And I'm going to now go to whoever it is that I'm talking to whether it be the IRS, Department of Justice," whoever it is, and say, "Look, I'm telling you this is the best case I've ever heard, and you need to follow -- you need to take me on that, you know, trust me on this." Are you marketing what you have determined as your independent judgment to the service in trying to --

MR. DAVIDOFF: To the IRS?

MR. GOLDSTEIN: -- to advocate your taxpayers or client, or are you advocating based on the facts?

MR. DAVIDOFF: Okay, I don't quite understand your question, but I'm going to -- I will ask you to say it again.

MR. GOLDSTEIN: Okay, sure.

MR. DAVIDOFF: Well, let me see if I understand it. First of all, I do very little marketing personally, but I'll take Mr. Ely, for example, who probably markets the Fortune 100 companies the fact that he has an expertise in looking at tax accounts and does penalty, and abatement, and interest in all of that.

And I think -- I would love to be in his business. I think it's a great business, all right. And I think that him going to things and say, "Listen, we have an expertise and we have the success," I think that's appropriate. I don't know if that was what you are asking, but I think that's totally appropriate.

MR. GOLDSTEIN: But --

MR. DAVIDOFF: As far as a particular case that I go to the IRS, if I have a particular set of facts, I'm going to go on that set of facts. However, if I've had ten other cases -- let's say I have, left as success and right as failure, and I've had, you know, three cases to the right of my case succeed, all right, and I come on my case, I might go them and say, "Yeah, but you allowed it in these other cases without specific," because that would be a detriment to my client. Now, I don't know, if either of these answers your question.

MR. GOLDSTEIN: The lottery is what I was going --

MR. DAVIDOFF: Okay, I might argue that for consistency that the IRS should be doing that. In fact, I'm going to be speaking -- and again, and I wasn't marketing it, but I'm being an advocate for my client. I had -- I -- and my secretary was in the office one day and we were doing penalty abatements on two different clients, neither of which were in contingency, but on both of those days, on one client, okay, the IRS revenue -- IRS Appeals Office says, "Okay, we will give you 40 percent" -- tha, tha, tha, tha, boom, done.

On another client, who had a much greater factual case that was saying for penalty abatement, I couldn't get anywhere. I mean, it was like, one was a five, and one was a nine. The five I got a pretty good result, on the nine I got nothing. And that inconsistency we see in the IRS all the time.

It's very frustrating for us. It's like the telephone call somebody mentioned. They called one person, all right, I think it was Joanne, they called one person at the IRS and they wouldn't even talk. They said she didn't have a power of attorney. Finally, she just, you know, got to another one who helped her. Well, we just hang up the phones. Well, we know by the sound of their voice, they are not going to help anyway.

There is a lot of inconsistency in the IRS, and there is some inconsistency in practitioners. What you're doing is seeing some inconsistency in bad practitioners and trying to say, "Here is a shocker," well, who -- and then you're taking a shock, and that's going to have a lot of unintended results as we pointed out on our testimony. Okay.

MR. GOLDSTEIN: Okay. Any other questions? Thank you very much.

MR. DAVIDOFF: Okay, thank you very much.

MR. GOLDSTEIN: That concludes our list of speakers today. I'd like to thank all of our speakers today, and also thank the several groups that provided written comments prior to this hearing who were -- who made the decision not to provide oral testimony. As I indicated, we will be taking into consideration, all of the comments we heard today, plus all of those things that we've received in writing.

If there is anybody who would like to submit supplements, we always take comments. I always caution people that the -- the more consideration your comment gets, depends on the closer it is to when the final regulations actually go out. Obviously, if we have something now, it gets -- we have more time to look at it, than if we get it the day before the final regulations go out, but if you do wish to submit, please -- belated comments -- please use the information in the notice of proposed rulemaking to submit those comments.

I would ask that any groups that we may have asked today for further information, if they could provide that information in the same way, we would appreciate it. And at this time I would like to thank you and say this concludes the -- today's hearing.