This post is by Christopher S. Rizek and was originally published by PT on Forbes. Chris is a member of Caplin & Drysdale, Chtd. in Washington, D.C. Chris was formerly an Attorney-Advisor and Associate Tax Legislative Counsel with the U.S. Treasury Department, Office of Tax Legislative Counsel, as well as a trial attorney with the US Department of Justice. He is a nationally known tax controversy practitioner who frequently speaks and writes about major issues in tax procedure and tax administration. In today’s post, Chris discusses last week’s district court order in Sexton v. Hawkins, another case testing the limits of OPR’s authority.
The power of the IRS’s Office of Professional Responsibility seems to be draining away in the aftermath of Loving v. IRS, 742 F.3d 1013 (D.C. Cir. Feb. 11, 2014), and Ridgely v. Lew, 2014 WL 3506888 (D.D.C. July 16, 2014). What appears to be the latest drop comes in Sexton v. Hawkins, No. 2:13-cv-00893-RFB-VCF (D. Nev. Oct. 30, 2014).
James Sexton used to be a practitioner representing taxpayers before the IRS. I say “used to be” for two reasons. (Some of these facts are drawn from the complaint (and exhibits) in the case, not just the opinion, so at this point they are just allegations, but like the court I am assuming for now that they’re correct.) One, Mr. Sexton apparently at one time represented taxpayers before the IRS, since he is a lawyer licensed in South Carolina who also has an LL.M. in Taxation. But in 2005 he pled guilty in federal court to four counts of mail fraud and one count of money laundering. As a result, in 2008 OPR suspended him from practice before the IRS for an indefinite period. Since then he has made a living providing tax advice and return preparation services to taxpayers in Las Vegas.
Two, according to Loving, a person who does not actively represent taxpayers in proceedings with the IRS but merely prepares returns is not engaged in “practice before the IRS” as that term is used in the applicable statute, 31 U.S.C. § 330(a). Since his suspension by OPR, therefore, Mr. Sexton contends that he has not been a “practitioner” before the IRS; and the rationale of Loving supports that claim. He acknowledges that he prepares returns for clients, but again he relies on Loving to contend that he is not thereby subject to regulation under section 330.
Here’s where it gets interesting. OPR had apparently received a complaint that Mr. Sexton was engaged in practice before the IRS, and in February, 2013 it sent him an inquiry letter. It asked a number of questions about his practice, and requested many documents related to his clients, such as copies of returns he had prepared, any documents he used or relied upon in preparing returns, and any explanations of the tax law he had provided to clients. OPR specifically relied on provisions of Circular 230 in its request letter, citing section 10.20 as authority for its request and for his purported obligation to comply, and sections 10.50 and 10.52 for sanctions that might apply. In May, 2013 Mr. Sexton sued under the Administrative Procedure Act, seeking declaratory relief that he was not subject to OPR regulation and asking the court to enjoin the OPR request for information. The Justice Department moved to dismiss.
Before reviewing the opinion, let’s pause a moment to reflect on some of the seeming paradoxes in this dispute. First, Mr. Sexton (and perhaps the court) might consider it strange that OPR is threatening sanctions against someone whom it has already sanctioned once with an open-ended, indefinite suspension. Perhaps the only thing left that OPR could seek to do to Mr. Sexton now would be to disbar him permanently or impose some kind of monetary penalty on him. See Cir. 230 § 10.50. And at the same time it is arguing that he is not authorized to practice before the IRS, OPR is relying on provisions of Circular 230 that, well, apply only to practitioners before the IRS. Under the Loving rationale, return preparation is not practice, so perhaps OPR is investigating to see if Mr. Sexton is engaged in other activities that might constitute practice. But what is its authority to ask a return preparer (who post-Loving is by definition a non-practitioner) about that?
On the other hand, OPR would presumably contend that it is merely investigating to see if Mr. Sexton is in compliance with his previous sanction; or it might argue that Mr. Sexton is still at least potentially an authorized practitioner by virtue of being a lawyer, that he was merely suspended not disbarred, and that its present inquiry is necessary to see if an additional sanction is necessary. Either of these contentions would be consistent with OPR’s position, which OPR personnel repeat in various forms at every opportunity (and which I’m paraphrasing), that “once you’re in the system you’re in for all purposes” and OPR has continuing jurisdiction over you. (I have argued elsewhere that the authority for that ongoing jurisdiction over practitioners derives from section 330(b), not section 330(a), but that discussion is for another day.)
These are all intriguing questions, and they may eventually be resolved by the Sexton court. But they’re not in the opinion just issued, which is interesting in its own right for other reasons. First, over the Government’s motion to dismiss, the court held that it had jurisdiction under section 702 of the APA, because the OPR investigation constitutes a “final agency action for which there is no other adequate remedy in a court.” It may seem strange (and I’m sure OPR feels this way) to characterize a mere inquiry letter as a final agency action. But to that, the court essentially responds that OPR is hoist by its own petard. It finds that OPR’s assertion of jurisdiction over Mr. Sexton and his business is itself a final agency action that has consequences, among which would be application of the very provisions OPR cites, i.e. the obligation under section 10.20 to respond to its inquiry and the possibility of additional sanctions under 10.50. Other consequences might also ensue: Mr. Sexton claims that OPR has threatened to withdraw his ability to e-file returns if he fails to respond to the inquiry letter, and the opinion points out that the letter would require him immediately to turn over otherwise confidential client records and returns. OPR’s position, the court states, “elides the important distinction between a mere investigation, which is likely not final, and the instant demand for documents under color of law and threat of consequences, which is.” And the court finds that there is no adequate remedy to prevent the harm that could flow from that, pointedly noting the Justice Department’s concession at oral argument that there was “no possible administrative remedy or process for contesting the production of the material.”
In a second holding, and largely for the same reasons, the court finds that Mr. Sexton has adequately asserted a claim for relief. The issues it describes include whether Mr. Sexton is a “practitioner,” whether OPR jurisdiction extends to a “former practitioner” and his business, and most interestingly “whether the giving of tax advice is beyond the scope of the regulatory authority” of OPR. That the court even appears intent on deciding that third issue, which has been the subject of much speculation since Loving, should give the government some pause.
Third and finally, the court enters a preliminary injunction, again based mainly on the lack of any other adequate remedy. It notes that once the requested documents are produced they cannot be “unproduced” (its word), and it specifically finds that the production itself could constitute irreparable injury, whereas on the other hand there is no hardship to the IRS or adverse impact on the public from waiting. The court thus specifically enjoins the production of documents – but not the entire investigation – and prohibits the IRS from suspending Mr. Sexton’s ability to e-file because he has failed to produce those documents.
There are many other thought-provoking asides and comments in the opinion, which I urge readers to review carefully. And while I don’t want to speculate how this case will eventually turn out, it does seem, as I said at the start, to be at the very least another temporary setback for OPR. The government has now suffered three consecutive losses in its effort to reach return preparation activities, whether conducted by non-practitioners (Loving),former practitioners (Sexton), or even current CPAs (Ridgely). Given the court’s comments and holdings in this initial opinion, a final loss in Sexton could further seriously undercut OPR’s authority.
On the other hand, the court’s conclusion that there is no potential harm to the public from letting a convicted felon and suspended practitioner continue to prepare returns seems questionable. It is certainly inconsistent with the findings of the IRS’s return preparation study, the regulations overturned in Loving, and the views of the organized tax bar and accounting profession. Many of us believe additional legislative authority is required and urge a thorough re-writing of section 330, although it is hard to believe a Republican-controlled Congress will be inclined to give the IRS new and expansive regulatory powers.
So the most likely result may just be continued fights over – and possibly further erosion of – OPR’s authority.