Tax Services Firm Files Complaint Challenging Circular 230 Contingent Fee Restrictions

2. On September 26, 2007, Circular 230 was revised to generally prohibit practitioners (attorneys, CPAs and others authorized to practice before the IRS) from entering into contingent fee arrangements after March 26, 2008, for services rendered in connection with any matter before the IRS. Although there are certain limited exceptions to the general prohibition, after March 26, 2008, Circular 230 prohibits practitioners from entering into contingent fee arrangements for services rendered in connection with the preparation and filing of claims for refund with the IRS in the typical situation where the claim is filed after a taxpayer has filed its original tax return, but before the IRS has initiated an audit of the return ("Ordinary Refund Claim," or "Ordinary Refund Claims"). A practitioner may be sanctioned for willfully violating the contingent fee restriction. Those sanctions include monetary penalties in addition to censure, suspension, or disbarment from practice before the IRS. Monetary penalties may be imposed on the practitioner, and the practitioner's employer or firm.

3. Before the 2007 revision, Circular 230 prohibited contingent fee arrangements for preparing original returns, but permitted the use of contingent fee arrangements for services rendered in connection with the preparation and filing of Ordinary Refund Claims, if the practitioner reasonably anticipated at the time the fee arrangement was entered into that the claim would receive substantive review by the IRS. 31 C.F.R. § 10.28 (1994).

4. Prior to the effective date of the 2007 revisions to Circular 230, Ryan, LLC regularly entered into contingent fee arrangements with clients for the preparation and filing of Ordinary Refund Claims. As a result of the 2007 revisions to Circular 230, however, Ryan, LLC is no longer permitted to enter into contingent fee arrangements for the preparation and filing of Ordinary Refund Claims without subjecting itself to sanctions. Ryan, LLC has lost clients and substantial revenue as a result of this prohibition.

5. As a result of the 2007 revisions to Circular 230, Mr. Ryan is unable to retain a practitioner on a contingent fee basis to prepare and file an Ordinary Refund Claim on his behalf.

6. As a result of the 2007 revisions to Circular 230, Mr. Ridgely has not been permitted to enter into contingent fee arrangements with clients for the preparation and filing of Ordinary Refund Claims without subjecting himself to sanctions and therefore, Mr. Ridgely's ability to practice before the IRS has been significantly restricted.

7. This complaint seeks: (i) a Declaratory Judgment that the Circular 230 provisions prohibiting the use of contingent fee arrangements in the preparation and filing of Ordinary Refund Claims are unconstitutional and exceed the scope of the authorizing statute; and (ii) a permanent injunction against the prohibition in Circular 230 on the use of contingent fee arrangements for the preparation and filing of Ordinary Refund Claims.

9. Plaintiff Mr. Ryan is a United States citizen who pays federal income tax. Mr. Ryan is entitled, by statute, to obtain a refund for overpayments of tax. Due to the Circular 230 prohibition on the use of contingent fee arrangements, Mr. Ryan is unable to retain a practitioner on a contingent fee basis to prepare and file an Ordinary Refund Claim on his behalf.

10. Plaintiff Mr. Ridgely is a practicing CPA, licensed in Texas, who is in good standing and authorized to practice before the IRS. Under Circular 230, Mr. Ridgely is subject to sanctions if he enters into contingent fee arrangements with clients for the preparation and filing of Ordinary Refund Claims.

11. Defendant Timothy F. Geithner, in his official capacity as the Secretary of the Treasury, is jointly responsible for promulgating, administering, and enforcing Circular 230.

12. Defendant Douglas H. Shulman, in his official capacity as the Commissioner of the IRS, is jointly responsible for promulgating, administering, and enforcing Circular 230.

14. The Court is authorized to enter a Declaratory Judgment pursuant to 28 U.S.C. § 2201 et seq. and Rule 57 of the Federal Rules of Civil Procedure.

15. The Court has jurisdiction and is authorized to enter a Declaratory Judgment and a permanent injunction pursuant to 5 U.S.C. § 701 et. seq. because this action arises from an agency action.

16. Venue is proper under 28 U.S.C. § 1391(e)(1) because defendants are officers of the United States, or agencies thereof, acting in their official capacities, and reside in the District of Columbia.

17. Ryan, LLC is a leading global tax services firm and the seventh largest corporate tax practice in the United States. Ryan, LLC is headquartered in Dallas, Texas, and has offices in Arizona, California, Colorado, the District of Columbia, Florida, Georgia, Idaho, Illinois, Kansas, Louisiana, Massachusetts, Michigan, Minnesota, Missouri, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Utah, Washington, Canada, and the United Kingdom.

18. Ryan, LLC began as Collis & Ryan, P.C. ("Collis & Ryan") in 1991 as a CPA firm. It was founded to provide tax audit defense and recovery services for clients seeking assistance with state and local tax audits. In 1993, Collis & Ryan became Ryan & Company, P.C, and in 1998, Ryan & Company, P.C. surrendered its license to practice as a CPA firm and became Ryan & Company, Inc. ("Ryan & Co."), a tax services firm. Eventually, the firm's professionals grew to include attorneys, CPAs, appraisers, engineers, and statisticians, and Ryan & Co. became Ryan, LLC.

19. Ryan, LLC provides a comprehensive range of state, local, federal, and international tax advisory and consulting services on a multijurisdictional basis, including audit defense, tax recovery, credits and incentives, tax process improvement and automation, tax appeals, tax compliance, and strategic planning.

20. An integral part of Ryan, LLC's business has historically been the representation of clients on a contingent fee basis in the preparation and filing of Ordinary Refund Claims.

21. As part of the preparation of an Ordinary Refund Claim, Ryan, LLC reviews a client's tax return that has been filed with the IRS for errors, missed deductions, credits, and exemptions.

22. The Ordinary Refund Claims in which Ryan, LLC has represented its clients on a contingent fee basis typically have not involved complex legal issues, or in many cases, any legal dispute at all. Instead, these refund claims have usually been extremely fact intensive inquiries that required an enormous outlay of time, energy, and resources. Compiling, organizing, preparing, and analyzing the volumes of data necessary to establish the validity of such claims results in substantial expenses being incurred upfront, in the preparation of the claim. As a result, Ryan, LLC's clients have preferred the use of contingent fee arrangements when pursuing Ordinary Refund Claims.

23. Prior to March 26, 2008, the effective date of the 2007 Circular 230 revisions, Ryan, LLC represented numerous taxpayers on a contingent fee basis in the preparation and filing of Ordinary Refund Claims. These arrangements generated substantial revenue for Ryan, LLC. However, since March 26, 2008, pursuant to the current Circular 230 provisions prohibiting the use of contingent fee arrangements, Ryan, LLC has been unable to represent taxpayers on a contingent fee basis in the preparation and filing of Ordinary Refund Claims and, as a result, has lost a significant number of clients and several million dollars in revenue.

B. Mr. Ryan

24. Mr. Ryan is a United States citizen and a resident of Texas who pays federal income taxes. Because of the prohibition in Circular 230 on the use of contingent fee arrangements, Mr. Ryan is unable to retain a practitioner on a contingent fee basis to prepare and file an Ordinary Refund Claim on his behalf.

25. Mr. Ryan has filed an Ordinary Refund Claim since the effective date of the 2007 revisions to Circular 230 and was unable to obtain representation for such Ordinary Refund Claim on a contingent fee basis because of the prohibition on the use of contingent fee arrangements in the preparation and filing of Ordinary Refund Claims.

C. Mr. Ridgely

26. Mr. Ridgely is a United States citizen and a resident of Texas. Mr. Ridgely is a CPA in good standing, licensed in Texas, who is authorized to practice before the IRS. Mr. Ridgely specializes in managing and providing tax services to clients across all industries, including the preparation and filing of Ordinary Refund Claims. Because of the prohibition in Circular 230 on the use of contingent fee arrangements, Mr. Ridgely is unable to represent taxpayers on a contingent fee basis in the preparation and filing of Ordinary Refund Claims. As a result of this prohibition, Mr. Ridgely's ability to represent clients and practice before the IRS has been severely restricted.

D. IRS Refund Procedure

27. The IRS is authorized to refund overpayments of tax. I.R.C. § 6402(a).

28. Under Internal Revenue Code ("I.R.C.") Section 7422(a), a taxpayer must file a refund claim with the IRS before filing suit for the refund.

29. Generally, a refund claim must be filed within three years from the time the return was filed or two years from the time the tax was paid. I.R.C. § 6511(a).

30. The refund claim must set forth in detail each ground upon which the refund is claimed, along with sufficient facts to notify the Commissioner of the exact basis for the refund claim. Treas. Reg. § 301.6402-2(b)(1). The grounds supporting the refund claim must be listed in the explanation section and each ground supporting the refund must be set forth in detail. Treas. Reg. § 301.6402-2(b)(1). The IRS can summarily reject improperly completed refund claims even if the claims are otherwise meritorious.

31. Typically, an IRS revenue agent will review the refund claim and inform the taxpayer, by letter, whether the IRS will accept the claim or disallow the claim in full or in part. Internal Revenue Manual ("I.R.M.") 34.5.2.2(5). If the claim is disallowed in full or in part, the taxpayer can request a conference with the IRS Appeals Office. I.R.M. 34.5.2.2(5). If the taxpayer does not request a conference, or the Appeals Officer agrees with the revenue agent's determination, the IRS will generally issue a statutory notice of claim disallowance pursuant to I.R.C. Section 6532(a). I.R.M. 34.5.2.2(5). Under I.R.C. Section 6532(a)(1), the taxpayer has two years from the date of the mailing of the notice of disallowance to begin a refund suit. If no notice is issued, the taxpayer may bring a refund suit six months after the refund claim was filed. I.R.C. § 6532(a)(1).

32. The refund suit must be filed in the United States district court where the individual taxpayer resides or where the corporate taxpayer has its principal place of business, or in the United States Court of Federal Claims. I.R.M. 34.5.2.2(6).

E. Penalties Applicable to Refund Claims

33. The I.R.C. contains several penalties that may be imposed on taxpayers and preparers for filing improper refund claims:

34. Circular 230 provides rules governing the practice of attorneys, CPAs, enrolled agents, enrolled actuaries, and appraisers before the IRS.

35. Circular 230 was promulgated by defendants under the authority granted to them pursuant to statute. See, e.g., 31 U.S.C. § 330.

36. Circular 230 is divided into five subparts that establish: (i) rules governing the authority to practice before the IRS; (ii) duties and restrictions relating to practice before the IRS; (iii) rules applicable to disciplinary proceedings; (iv) rules applicable to disqualification of appraisers; and (v) general miscellaneous provisions.

37. These subparts generally establish who may practice before the IRS, the standards and restrictions such persons must follow, and the sanctions imposed for violating these standards and restrictions.

B. History of Circular 230's Restrictions on Contingent Fee Arrangements

38. Beginning in 1994, Circular 230 prohibited the use of contingent fee arrangements for preparing original income tax returns, but permitted the use of such arrangements for preparing and filing amended returns or a claim for refund if the practitioner reasonably anticipated at the time the fee arrangement was entered into that the amended return or claim for refund would receive substantive review by the IRS. 31 C.F.R. § 10.28 (1994); 59 F.R. 31527 (June 20, 1994). In support of these restrictions, the IRS explained that "Treasury continues to believe that a rule restricting contingent fees for preparing tax returns supports voluntary compliance with the tax laws by discouraging return positions that exploit the audit selection process." Id.

39. In 2002, the IRS solicited comments regarding whether the restrictions on the use of contingent fee arrangements should be expanded. 67 F.R. 77724 (December 19, 2002). In response to public comments, the IRS explained that:

40. The IRS then issued proposed rules that eliminated the "substantive review" standard and added a general prohibition against the use of contingent fee arrangements in any matter before the IRS, except:

41. The IRS explained that, under the proposed rules, "a practitioner generally is precluded from charging a contingent fee for services rendered in connection with any matter before the Service, including the preparation or filing of a . . . claim for refund . . ." 71 F.R. 6421 (February 8, 2006) (emphasis added).

42. In 2007, the IRS issued final rules setting forth the general prohibition on the use of contingent fee arrangements. A true and correct copy of the current version of Circular 230 is attached as Exhibit A.

C. Restrictions on Contingent Fees

43. The final Circular 230 rules provide that, except in certain specific situations, "a practitioner may not charge a contingent fee for services rendered in connection with any matter before the [IRS]." 31 C.F.R. § 10.27(b)(1).

44. The final Circular 230 rules provide that a contingent fee may only be charged in the following circumstances:

45. The term "contingent fee" is defined as "any fee that is based, in whole or in part, on whether or not a position taken on a tax return or other filing avoids challenge by the [IRS] or is sustained either by the [IRS] or in litigation." The term also includes a "fee that is based on a percentage of the refund reported on a return, that is based on a percentage of the taxes saved or that otherwise depends on the specific result obtained." 31 C.F.R. § 10.27(c)(1).

46. "Matter before the Internal Revenue Service" is defined to include:

47. The final Circular 230 rules thus prohibit contingent fee arrangements for services rendered in connection with the preparation and filing of Ordinary Refund Claims.

D. Penalties for Non-Compliance with Circular 230

48. After notice and an opportunity for a hearing, a practitioner who willfully violates Circular 230, including the contingent fee restrictions, may be censured, suspended, or disbarred from practice before the IRS, and a monetary penalty may be imposed on the practitioner and on the practitioner's employer, firm, or entity, if such employer, firm, or entity knew or reasonably should have known of the practitioner's conduct. 31 C.F.R. §§ 10.50(a), (c) and 10.52(a).

E. Impact of the Circular 230 Prohibition on the Use of Contingent Fee Arrangements

49. The preparation and filing of Ordinary Refund Claims have historically been an integral part of Ryan, LLC's business.

50. As a result of the prohibition on the use of contingent fee arrangements for the preparation and filing of Ordinary Refund Claims, Ryan, LLC is unable to enter into contingent fee arrangements for the preparation and filing of Ordinary Refund Claims.

51. As a result of the prohibition on the use of contingent fee arrangements for the preparation and filing of Ordinary Refund Claims, Ryan, LLC has lost clients and several million dollars in revenue.

52. As a result of the prohibition on the use of contingent fee arrangements for the preparation and filing of Ordinary Refund Claims, Mr. Ryan is unable to retain a practitioner on a contingent fee basis to prepare and file an Ordinary Refund Claim on his behalf.

53. As a result of the prohibition on the use of contingent fee arrangements, Mr. Ridgely is unable to represent taxpayers before the IRS in the preparation and filing of Ordinary Refund Claims.

55. The First Amendment of the United States Constitution establishes that "Congress shall make no law . . . abridging . . . the right of the people . . . to petition the Government for a redress of grievances" (the "Petition Clause").

56. Ryan, LLC represents taxpayers in the preparation and filing of Ordinary Refund Claims and is therefore subject to the restrictions on the use of contingent fee arrangements set forth in Circular 230.

57. Mr. Ryan is a taxpayer who is unable to retain a practitioner on a contingent fee basis to prepare and file an Ordinary Refund Claim on his behalf and therefore, he is affected by the prohibition on the use of contingent fee arrangements set forth in Circular 230.

58. The provisions of Circular 230 restricting the use of contingent fee arrangements for the preparation and filing of Ordinary Refund Claims arbitrarily and irrationally impair the ability of taxpayers with valid refund claims to obtain representation to pursue those claims with the IRS.

59. Thus, the provisions of Circular 230 prohibiting the use of contingent fee arrangements in the preparation and filing of Ordinary Refund Claims are facially unconstitutional under the Petition Clause of the First Amendment of the United States Constitution.

60. Pursuant to 28 U.S.C. §§ 2201(a), 2202, and 5 U.S.C. § 703, Ryan, LLC and Mr. Ryan are entitled to a judgment declaring that the provisions of Circular 230 prohibiting the use of contingent fee arrangements for the preparation and filing of Ordinary Refund Claims violate the Petition Clause of the First Amendment.

62. Mr. Ryan is a taxpayer who is unable to retain a practitioner on a contingent fee basis to prepare and file an Ordinary Refund Claim on his behalf and therefore, he is affected by the prohibition on the use of contingent fee arrangements set forth in Circular 230.

63. Mr. Ryan, as well as other federal taxpayers, have a statutory right to obtain a refund for an overpayment of tax pursuant to I.R.C. §§ 6402(a) and 6511(a).

64. The provisions of Circular 230 prohibiting the use of contingent fee arrangements for the preparation and filing of Ordinary Refund Claims arbitrarily and irrationally impair the ability of taxpayers with bona fide refund claims to obtain representation to pursue their statutory right to a refund of tax overpayments.

65. Thus, the provisions of Circular 230 prohibiting the use of contingent fee arrangements for the preparation and filing of Ordinary Refund Claims are facially unconstitutional under the Due Process Clause of the First Amendment of the United States Constitution.

66. Pursuant to 28 U.S.C. §§ 2201(a), 2202, and 5 U.S.C. § 703, Mr. Ryan is entitled to a judgment declaring that the provisions of Circular 230 prohibiting the use of contingent fee arrangements in the preparation and filing of Ordinary Refund Claims violate the Due Process Clause of the United States Constitution.

68. Mr. Ridgely, as a CPA, represents taxpayers in the preparation and filing of Ordinary Refund Claims and is therefore subject to the restrictions on the use of contingent fee arrangements and the corresponding sanctions set forth in Circular 230.

69. Section 500 of Title 5 of the United States Code ("Section 500") sets forth general provisions regarding practice before the IRS and provides that:

70. Section 500 expressly provides that it does not:

71. Thus, pursuant to Section 500, CPAs, who are duly qualified, are granted statutory authority to practice before the IRS.

72. Mr. Ridgely, a CPA, is duly qualified to practice before the IRS.

73. Among other provisions not applicable to this matter, Circular 230 was promulgated pursuant to Section 330 of Title 31 of the United States Code ("Section 330"), which provides that:

74. The prohibition on the use of contingent fee arrangements in the preparation and filing of Ordinary Refund Claims set forth in Circular 230 severely restricts the ability of qualified CPAs, such as Mr. Ridgely, to practice before the IRS.

75. Thus, the prohibition on the use of contingent fee arrangements in the preparation and filing of Ordinary Refund Claims set forth in Circular 230 exceeds the scope of the IRS' statutory authority to regulate the practice of CPAs such as Mr. Ridgely.

76. Pursuant to 28 U.S.C. §§ 2201(a), 2202, and 5 U.S.C. § 703, Mr. Ridgely is entitled to a judgment declaring that the provisions of Circular 230 prohibiting the use of contingent fee arrangements for the preparation and filing of Ordinary Refund Claims exceed the scope of defendants' authority to regulate the practice of CPAs before the IRS.

1. A judgment declaring that the Circular 230 provisions prohibiting the use of contingent fee arrangements for the preparation and filing of Ordinary Refund Claims unconstitutionally restrict the ability of taxpayers to pursue Ordinary Refund Claims with the IRS in violation of the Petition Clause of the First Amendment of the United States Constitution.

2. A judgment declaring that the Circular 230 provisions prohibiting the use of contingent fee arrangements for the preparation and filing of Ordinary Refund Claims unconstitutionally restrict taxpayers' ability to obtain refunds for overpayments of tax in violation of the Due Process Clause of the First Amendment of the United States Constitution.

3. A judgment declaring that the Circular 230 provisions prohibiting the use of contingent fee arrangements for the preparation and filing of Ordinary Refund Claims exceed the scope of defendants' authority to regulate the practice of CPAs before the IRS.

4. A permanent injunction against the Circular 230 prohibition on contingent fee arrangements to represent taxpayers in the preparation and filing of Ordinary Refund Claims.

5. Plaintiffs' costs and disbursements herein.

6. Such other and further relief as the Court deems equitable and just.