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OPR’s Star Chamber: Felons and the IRS’s Opaque Sanctions Process

Posted on July 5, 2021
Daniel Q. Flesch
Daniel Q. Flesch
Megan L. Brackney
Megan L. Brackney

Megan L. Brackney is a partner at Kostelanetz & Fink LLP in New York, and Daniel Q. Flesch is a pre-law paralegal at the firm in New York and will attend Harvard Law School in the fall.

In this article, Brackney and Flesch examine the lack of transparency in the IRS Office of Professional Responsibility’s sanctions process and explore recently released administrative law judge and Treasury appellate authority decisions relevant to that process.

Decisions handed down by administrative law judges or by the Treasury appellate authority (AA) can provide valuable windows into the often opaque world of the IRS’s disciplinary proceedings. When the agency’s Office of Professional Responsibility charges a practitioner with a sanctionable offense, she has the right to request a hearing before an ALJ appointed according to 5 U.S.C. section 3105.1 If she disagrees with the result of the ALJ hearing, the practitioner can appeal to the Treasury secretary,2 who will review the decision, applying a clearly erroneous standard to findings of fact, while examining legal issues de novo.3 If the crusading practitioner objects to the AA’s decision, she can seek judicial review under the Administrative Procedure Act.4

These various levels of appeal do not end up making for a robust public record — the ALJ and AA proceedings aren’t always easy to investigate — and we were able to find only a handful of cases from the last 30 years in which a practitioner appealed the AA’s final decision to the federal courts.5 While OPR publishes regular bulletins of disciplinary actions, the tax practitioner interested in the nuances of ALJ hearings and AA appeals must rely on the final decisions published on its website.

Such a practitioner might have breathed a sigh of relief last October, when a long OPR blackout period finally ended. As a recent Tax Notes article6 noted, OPR removed all ALJ and AA decisions from its site in 2014. More than five years of informational drought followed the purge.

Two of the newly promulgated decisions on OPR’s site include interesting analyses of the role of felony convictions in Circular 230 proceedings. Investigating the questions raised by these opinions is a good exercise to test how much the public can learn about any topic by examining the resources that OPR has made available. To do so, it is worth tracing a little more carefully OPR’s recent history of removing and reposting ALJ and AA records.

From 2007 to 2014, OPR routinely published ALJ and AA final decisions on its website. In 2014 the IRS Office of Chief Counsel warned OPR that some of the opinions that it was posting might contain protected return information and taxpayer return information, as defined in IRC section 6103(b)(2) and (3), respectively. OPR promptly removed all decisions from its site in December 2014, presumably to redact and repost them. Karen Hawkins, the OPR director until July 2015, confirmed as much shortly after leaving that role.7

But instead of swiftly republishing the decisions, OPR seems to have quietly stowed them away in an unmarked box in the corner of a dusty room. Hawkins admitted that she was worried OPR would become a “black hole” or “star chamber,” sucking information in but never releasing it to the public. Although Circular 230 section 10.72(d)(1) requires OPR to make all decisions “public and open to inspection” within 30 days of their finalization, the office seems to have decided to interpret the rule as narrowly as possible.

Finally, after almost five years of OPR silence, Tax Analysts took matters into its own hands and, in March 2019, submitted a Freedom of Information Act request for the ALJ and AA final decisions. Tax Analysts’ letter invoked FOIA a(2) (5 U.S.C. section 552(a)(2)), under which public agencies are required to make final opinions “available for public inspection in an electronic format.” Tax Analysts asked that OPR simply return to its practice of posting ALJ and AA decisions on its website.

In July 2019 the IRS responded with a preliminary smattering of redacted documents. A few months later, in October, the IRS finally denied the request on the grounds that FOIA “does not provide a means to request the agency to post an item on the website under 5 U.S.C. section 552(a)(2).” The IRS also argued that 5 U.S.C. section 552(a)(4) “does not empower the courts to order agencies to publish items under 5 U.S.C. section 552(a)(1) or (a)(2).”8

On January 15, 2020, Tax Analysts submitted an administrative appeal of the FOIA denial. Sixteen days later, the IRS denied the appeal. According to the IRS, FOIA “only provides a right to access documents and doesn’t provide for a right of services to be performed by an agency in response to a request.” In other words, the public could formally request and access documents, but OPR had no intention of making things easy by redacting documents or by voluntarily publishing final decisions.

Not to be deterred, Tax Analysts sued the IRS in the U.S. District Court for the District of Columbia.9 That suit is pending, but Tax Analysts’ doggedness seems finally to have yielded some results: OPR posted a few redacted final decisions in October 2020. Since that initial batch of eight opinions (six ALJ and two AA), a slow but steady stream of nine more (six ALJ and three AA) has trickled out of the OPR’s hidden springs.

Now that the public has easy access to at least a few recent ALJ and AA decisions, it is worth making the most of Tax Analysts’ hard work by investigating the opinions to see if there is anything interesting to be gleaned from them. Two of the proceedings deal with the same issue. Does a practitioner’s felony conviction on its own provide a guaranteed basis for the OPR to disbar her? The answer, some might be surprised to learn, is no. Circular 230 section 10.51(a)(3) lists “conviction of any felony under Federal or State law for which the conduct involved renders the practitioner unfit to practice before the Internal Revenue Service” (emphasis added) as a reason for OPR to sanction a practitioner. An attorney or accountant who has been convicted of a felony might not have violated Circular 230 if the nature of the crime did not render her “unfit to practice.”

In case No. 2019-00004,10 the ALJ denied OPR’s motion for summary adjudication, even though the respondent (an accountant) had been convicted of felony theft for stealing from his firm. The AA agreed with the ALJ’s decision and wrote that “although theft may imply dishonesty or breach of trust, there was nevertheless a genuine issue as to the facts surrounding Respondent’s conduct and whether and how they affected his fitness to practice.”11

In case No. 2018-00001,12 the respondent stole $50,000 from his client and was convicted of grand larceny in New York court. This time the ALJ granted the motion for summary adjudication, and the AA upheld the judgment. But it was careful to note that “the issue in a disbarment proceeding such as this is the Respondent’s fitness to practice, not the criminality of his acts.”

In both cases, the practitioner was ultimately disbarred. But the procedural history revealed by the decisions raises an interesting question: Can a convicted felon escape disbarment if the ALJ or AA decides that her crime does not render her “unfit to practice” before the IRS? And has this ever actually happened?

Unfortunately, OPR still resembles a black hole in some ways, and it can be difficult to gather sound data. It is sometimes hard to learn even general information about the reasons for serious sanctions like disbarment. In most of the final decisions posted on OPR’s site, black masses of redactions — marked as “taxpayer return information” protected under 26 U.S.C. section 6103(b)(3) — obscure the names of the respondents and blot out large swaths of the factual backgrounds detailing their offenses. By drawing on other sources, such as updates from state accounting boards and local newspaper stories, it is possible to pick up crumbs of information about the sanctioned practitioners.13 The intrepid researcher can also comb through the disciplinary bulletins or the raw data in OPR’s comma-separated values file of disciplined tax professionals.14 We tried to find any interesting cases related to sanctions for convicted felons.

In one instance, a Vermont CPA was indefinitely suspended for a felony conviction under Circular 230 sections 10.51(a)(3) and 10.51(a)(10).15 According to OPR’s chart of disciplined tax professionals, the CPA was reinstated in March 2008. He was later disbarred for a second felony offense in 2010.16 His second offense was probably matricide.17

The strangeness of this case — a convicted felon walking away with a suspension of under 24 months, only to be reinstated, before finally being disbarred, possibly for an exceedingly grisly crime — demonstrates the difficulty of OPR’s position. Proceedings involving administrative sanctions often contain highly sensitive information. At the same time, the public deserves to know (or to be able to discover) the backgrounds of the practitioners whom it trusts to represent it before the IRS. For the past few years, OPR seems to have been hedging its bets by posting only the barest possible information on its site.

A closer search through the bulletins and through the chart of disciplined tax professionals reveals that the Vermont CPA is not alone. In April 2019 an enrolled agent in New Mexico was suspended after the U.S. attorney’s office for the District of New Mexico indicted him for money laundering in connection with marijuana trafficking.18 He was reinstated in December of the same year.19 In February 2019 a California CPA who pleaded guilty to federal charges connected to bid rigging and fraud at public real estate foreclosure auctions was suspended under Circular 230 sections 10.51(a)(2), 10.51(a)(3), and 10.51(a)(10).20 The CPA got his license back in August of the same year.21 In 2018 a CPA in Indiana also escaped disbarment, instead receiving an indefinite suspension after committing bank fraud.22

None of the felons from New Mexico, California, and Indiana challenged the OPR’s decision; in each case, the respondent consented to the sanction without the need for an administrative hearing. The Vermont CPA also consented to the punishment for his 2010 felony conviction. It is harder to determine with the aid of the bulletins alone whether he objected to the initial suspension in 2006, although it appears that he also agreed to that sanction.23

OPR seems to have changed the format of its disciplinary bulletins in 2008; No. 2008-22 and subsequent bulletins contain columns describing the disciplinary sanction for each punished practitioner, while the preceding bulletins only include information on the name, location, profession, and the start date of the punishment for each individual. The sanction column includes a line indicating whether the practitioner challenged OPR or agreed with it, and a list of the Circular 230 sections under which she was punished. In 2008 OPR seems to have decided to let the black hole become just a shade grayer.

All in all, OPR’s small set of public resources — a sparse group of redacted AA and ALJ decisions, a bare-bones, comma-separated values file, and a set of meager disciplinary bulletins — makes researching issues regarding its actions and policies difficult, but not impossible. In researching how the office deals with convicted felons, we were able to find interesting, but far from comprehensive, information. Practitioners who care about keeping the IRS’s sanctions process public should congratulate Tax Analysts on prying open a crack in the door to OPR’s star chamber and should support it as it attempts to open the hatch all the way.

FOOTNOTES

1 See Circular 230 section 10.70(a).

2 Id. at section 10.77.

3 Id. at section 10.78(b).

4 5 U.S.C. sections 701 et seq.

5 See Legel v. IRS Office of Professional Responsibility, No. 11-60914-CIV (S.D. Fla. Nov. 28, 2011); and Banister v. United States Department of the Treasury, No. C 10-02764 JW (N.D. Cal. Mar. 10, 2011), aff’d, 499 F. App’x 668 (9th Cir. 2012). The authors also tracked down one unusual case in which a pro se petitioner unsuccessfully tried to leap over the AA appeal and go straight to district court to challenge the ALJ’s decision (see Zhong v. United States, 2:17-cv-00498-JFW (C.D. Cal. Apr. 20, 2017)). The lack of suits seeking further judicial review of AA decisions might be due to the fact that only a few practitioners face serious sanctions. According to the panel on ethical issues in tax practice at the American Bar Association’s 2021 May meeting, only five practitioners were disbarred in 2020.

6 Kristen Parillo, “OPR Unveils More Practitioner Misconduct Decisions,” Tax Notes Federal, May 10, 2021, p. 963.

7 Nathan J. Richman, “Hawkins Calls for More Visible OPR Activity,” Tax Notes, Nov. 2, 2015, p. 634.

8 Complaint, Tax Analysts v. IRS, No. 1:20-cv-01268, para. 13 (Dist. D.C. filed May 13, 2020).

9 Id.

10 Director, OPR v. Wallick, Initial Decision and Order (2020); Director, OPR v. Wallick, Decision on Appeal (2021).

11 ALJs render summary adjudication only when “the pleadings, depositions, admissions, and any other admissible evidence show that there is no genuine issue of material fact and that a decision may be rendered as a matter of law” (see Circular 230 section 10.76(a)(2)).

12 Director, OPR v. McCoy, Order Granting Motion for Summary Adjudication (2018); and Director, OPR v. McCoy, Decision on Appeal (2019).

13 One California CPA, John H. Zhong, was disbarred by OPR after he lost his state license for a laundry list of offenses, including fraudulent advertisement, the use of contingency fees, and the obstruction of a state accounting board investigation (Director, OPR v. Zhong, 2017-00003, Initial Decision and Order (Dec. 26, 2017)); and see the California Board of Accountancy’s Fall 2014 Update. A North Carolina CPA recently lost her right to practice before the IRS for providing false information to the government and for helping her clients claim unsupported deductions (Director, OPR v. Sharp, 2018-00002, Initial Decision on Default Judgment (Sept. 7, 2018)).

14 IRS, “Search for Disciplined Tax Professionals” (updated May 7, 2021).

15 See OPR Disciplinary Bulletin 2007-16 (Apr. 16, 2007); “IRS Publishes List of Practitioners Subject to Disciplinary Action,Tax Notes Today Federal, Nov. 11, 2019; and the chart of disciplined tax professionals, supra note 14.

16 See OPR disciplinary bulletin 2010-15 (Apr. 12, 2010).

17 Robin Smith, “Canaan Man Accused of Killing Mother Faces [sic],” Caledonia Record, Sept. 25, 2008.

18 Release, U.S. attorney for the District of New Mexico, “Ringleader of Drug Trafficking Organization That Distributed High-Grade Marijuana Throughout New Mexico Sentenced for Marijuana Trafficking and Money Laundering Conviction,” May 10, 2018.

19 See OPR disciplinary bulletin 2019-32 (Aug. 5, 2019); the chart of disciplined tax professionals, supra note 14; and the Becerra Group LLC, “Meet Our Team” (undated).

20 Release, U.S. Department of Justice, “Northern California Real Estate Investor Agrees to Plead Guilty to Bid Rigging at Public Foreclosure Auctions,” May 4, 2015; and In the Matter of the Accusation Against Lippman, AC-2018-69, First Amended Accusation (Jan. 9, 2019).

21 See OPR disciplinary bulletin 2019-46 (Nov. 12, 2019); “IRS Publishes List of Practitioners Subject to Disciplinary Action,” Tax Notes Today Federal, Nov. 12, 2019; and the chart of disciplined tax professionals, supra note 14.

22 See Jim Masters, “Dyer Accountant, Others Plead Guilty to Fraud Charges,” Chicago Tribune, Nov. 1, 2016; OPR disciplinary bulletin 2019-22 (May 28, 2019); and the chart of disciplined tax professionals, supra note 14.

23 “IRS Publishes List of Practitioners Subject to Disciplinary Action,” Tax Notes Today Federal, Apr. 12, 2010.

END FOOTNOTES

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