SPECIAL REPORT

tax notes
Loving Return Preparer Regulation
By Bryan T. Camp
Bryan T. Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law. His articles explore the laws and policies of tax administration to help guide readers through the thickets of specific procedural problems while also giving them Bryan T. Camp a sense of the larger tax administration forest. This report explores why the district courts decision in Loving v. IRS was in error when it rejected the Services attempt to regulate return preparers. Camp gives his heartfelt thanks to professor Andy Grewal and the ever-reliable Anonymous for their noble attempts to help this report make sense. Whatever errors remain are all Camps fault, and he promises to do better next time. Camp dedicates this report to Matthew D. Lucey and Matthew S. Cooper, the two chief counsel docket attorneys who were the lead authors or as we used to say, the stuckees of the return preparer regulations that were published in final form on June 4, 2011. Copyright 2013 Bryan T. Camp. All rights reserved. Table of Contents Circular 230 Legal History . . . . . . . . . . . . . . . . 457 Dont Call It Self-Assessment . . . . . . . . . . . . . 462 Are Return Preparers Representatives? . . . . . . 466 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . 469

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applicable regulations and the IRS had, for an equally long time, interpreted that phrase to refer only to persons who helped taxpayers in disputes with the IRS, chiefly attorneys, CPAs, and enrolled agents. Moreover, I thought the IRS had traditionally regulated only the act of representing taxpayers before the agency. So it would literally take an act of Congress to fix the very real problem of unregulated tax return preparers. Judge James E. Boasberg, in Loving v. IRS,1 agreed with my view. So I should be happy, right? Ironically enough, reading the good judges opinion convinced me I had been wrong. Although Congress would be wise to fix the statute, the IRS does indeed have the legal authority to regulate return preparers. Loving is on appeal, and one purpose of this report is to flesh out some of the more skeletal arguments made to the D.C. Circuit by the government and its amici. More importantly, the report seeks to explain some fundamental points of tax law that all parties and amici goof up because they are prisoners of their contemporary tax administrative experience. A proper understanding of history frees us from that prison and enables us to better evaluate the meaning of the governing statute. This report examines the legal history of Circular 230, refutes the assertion that we have a selfassessment system, and takes a hard look at the plaintiffs strongest argument in Loving: that return preparers are not representatives of persons within the meaning of 31 U.S.C. section 330. Circular 230 Legal History The story here is one of ever-expanding regulation, not only of who is regulated but also of what activity is regulated. In sum, the latest expansion of Circular 230 to encompass the return preparation activity of unenrolled preparers is more a continuation of past practice than a sharp break. The history of Circular 230 is a story of expansion in three important ways. First, the class of regulated practitioners grew from only attorneys and CPAs who actually applied to practice before the IRS to all attorneys and CPAs, whether they knew it or not. Second, return preparers were authorized to represent taxpayers concerning a return signed by the

History frees us from the prison of our own experience. When I worked in the Office of Chief Counsel, I did not think the IRS could regulate the preparation of tax returns by unenrolled preparers. Although 31 U.S.C. section 330 has long empowered Treasury to regulate the practice of representatives of persons before the Department of the Treasury, both the
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preparer and were thus subject to the standards and discipline in Circular 230 (through Rev. Proc. 81-38, 1981-1 C.B. 386). And third, the type of behavior regulated was broadened by expanding the phrase practice . . . before the Department of Treasury (which I shall refer to as practice) from simply covering the representation of taxpayers in controversies before the agency to the rendering of written tax advice and preparation of returns when done by attorneys, CPAs, or enrolled agents. That last move changed Circular 230 from merely regulating the activity of representing taxpayers to regulating nonrepresentational activity of those who could potentially represent taxpayers. Thus, the latest expansion to regulate the return preparation activity of unenrolled preparers is not a radical move but merely a continuation of long-standing regulatory expansion. I do not present the history of Circular 230 as a strictly legal or doctrinal argument favoring regulation; I will make those types of arguments later in the report. My intention is to simply explain how the decision to regulate return preparers is more consistent than inconsistent with the past. Indeed, as discussed later, the legal history of Circular 230 sets up what I consider the strongest argument against regulation: Unenrolled return preparers are not representatives within the meaning of 31 U.S.C. section 330(a) when they prepare returns. Lets start with the statute. In 1884 Congress enacted what is now codified in 31 U.S.C. section 330(a). The original text authorized Treasury to prescribe rules and regulations governing the recognition of agents, attorneys, or other persons representing claimants before his Department.2 All parties and commentators agree that the purpose of the statute was to allow Treasury to regulate the business of those who helped their clients assert a claim against the Treasury, whether for back pay, damages to property, or other money allegedly owed by the federal government. In 1982 Congress modified the statutory language. Treasury was now authorized to regulate the practice of representatives of persons before the Department of the Treasury.3 The House report says that the change was not intended to affect the substantive scope of the statute but was just a change in style.4 Here is the most relevant part of the current statute: (a) Subject to section 500 of title 5, the Secretary of the Treasury may

(1) regulate the practice of representatives of persons before the Department of the Treasury; and (2) before admitting a representative to practice, require that the representative demonstrate (A) good character; (B) good reputation; (C) necessary qualifications to enable the representative to provide to persons valuable service; and (D) competency to advise and assist persons in presenting their cases. Although the text of 31 U.S.C. section 330(a) has stayed the same, Treasurys assertion of authority under the statute can be best described as everexpanding. Treasury started slowly. Between 1884 and 1921 the rules governing practice were few, and applicants were enrolled without special investigation as to their character and qualifications.5 However, the reinstitution of the income tax in 1913 and its dramatic expansion in 1918 created a need for comprehensive regulation, leading to the first issuance of Circular 230 in 1921.6 In a 1927 article in the Internal Revenue News, Mr. S. R. Jacobs, the Chairman of the Treasury Departments Committee on Enrollment and Disbarment explained that: The growth of tax practice, with the large interests involved and enormous fees obtainable, attracted many incompetent and dishonest practitioners, and it became imperative that as a protection to the Government and to the public there should be a more careful investigation as to the character and qualifications of applicants for enrollment and that practitioners already enrolled be held to a higher standard of conduct.7

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2 3 4

23 Stat. 258. 96 Stat. 877, 884. H.R. Rep. No. 97-651 (1982).

5 S.R. Jacobs, Practice Before the Treasury Department, Internal Revenue News, Sept. 1927, at 6. The Internal Revenue News (IRN) was started in July 1927 and ran for about five years for the stated purpose of bringing the Bureau of Internal Revenue employees into a closer relationship that will be of value not only to themselves but also to the public whom they serve. The IRN was available to the public at an annual subscription rate of 50 cents. 6 The three basic regulatory efforts before 1921 were: Circular 13 (Feb. 6, 1886) (concerning internal taxes), Circular 94, (Oct. 4, 1890) (same), and T.D. 32974 (Nov. 30, 1912) (concerning Customs). 7 Id. Remember, just because there was no income tax imposed on individuals between 1872 and 1913 does not mean there was no tax administration. There were plenty of excise tax returns for taxpayers to fill out and submit, and the collection and processing of those returns was very similar to the processing of income tax returns between 1862 and 1872 and after 1913.

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As one sees from this quote, the class of persons regulated was applicants. That is, they were only those attorneys or accountants who actually applied to Treasury to represent clients. By 1927, that amounted to some 20,000 representatives. But those were all folks who knew they were practitioners because they had filled out an application to represent taxpayers. As Jacobs noted: No person may represent another before the Treasury Department unless he is enrolled in accordance with the regulations. Each application for enrollment is referred to a field officer of the particular bureau before which the applicant desires to practice in order that the necessary inquiry as to his character and qualifications may be made.8 That is how matters remained, more or less, from 1921 to 1966.9 In November 1965 Congress amended title 5 of the U.S. Code to create a general rule that attorneys could represent people before any federal agency just by filing a written declaration. Similarly, the new title 5 rule allowed CPAs to represent others before the Internal Revenue Service by the same method: filing a written declaration.10 Although Congress made no change to the text of 31 U.S.C. section 330(a), the new statute in title 5 changed its meaning. There was now some tension between the command of what is now 5 U.S.C. section 500(b) and (c) and that of 31 U.S.C. section 330(a). As Justice Antonin Scalia has put it, the classic judicial task of reconciling many laws enacted over time, and getting them to make sense in combination, necessarily assumes that the implications of a statute may be altered by the implications of a later statute.11 So it was here. In June 1966 Treasury decided to conform Circular 230 to the 1965 legislation. It thus expanded Circular 230 to give automatic permission to engage in practice whenever a representative filed a written declaration that he was currently qualified as an attorney or CPA and was authorized to represent the particular party on whose behalf he was acting.12 That written declaration became part of Form 2848, Power of Attorney

and Declaration of Representative.13 Thus, the simple act of representing someone before the IRS was now enough to be admitted to practice and subject the attorney or CPA to the disciplinary rules of Circular 230. Those rules and requirements now applied to many more professionals than just those who had made a specific application to practice before Treasury. Importantly, the 1966 version of Circular 230 extended regulation to unenrolled return preparers. That is, it broadened the scope of persons brought within the ambit of Circular 230 by creating a category of limited practice for specified persons, including return preparers. Thus, section 10.7 of Circular 230 allowed return preparers a limited practice to appear without enrollment as the taxpayers representative . . . before revenue agents and examining officers of the Audit Division in the offices of District Directors (but not at the District Conference in a District Directors office). In that way, return preparers were also brought within the scope of the regulations, again, when they chose to act on behalf of taxpayers. But that limited practice did not include return preparation. In fact, the third sentence of the 1966 version of section 10.2(a) specifically excluded return preparation from the definition of practice: Neither preparation of a tax return nor the appearance of an individual as a witness for the taxpayer, nor the furnishing of information at the request of the Internal Revenue Service or its officers or employees is considered practice before the Service.14 So far, we see a regulatory expansion of who was covered by Circular 230 but no expansion on the nature of the activity being regulated. The applicability of Circular 230 still turned on the attorney, CPA, enrolled agent, or return preparer being engaged in practice or limited practice, which still meant representing persons during a dispute with the IRS. That changed in the early 1980s when Treasury broadened the definition of practice to cover nonrepresentational activity connected with return preparation. In the early 1980s Congress created new penalties on those who issued tax shelter opinions or helped

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Id. The Illinois Tax Training Institute gives a timeline history (http://www.iltti.com/history_ea.php) that claims Circular 230 allowed only attorneys and CPAs to represent taxpayers between 1936 and 1951. After 1951, anyone who could pass an exam devised by and for CPAs could practice. After 1959, Treasury created a special exam for enrolled agents. I have not independently verified this information. 10 79 Stat. 1281. 11 United States v. Fausto, 484 U.S. 439, 453 (1988) (Scalia, J.). 12 31 F.R. 10773, 10774 (Aug. 13, 1966).
9

13 All others still had to formally apply, take an exam, and obtain an enrollment card. The Form 2848 point is illustrated by the comments in the preamble to the 2007 regulatory changes, REG-138637-07 (Any practice before the IRS other than the rendering of written advice covered under section 10.35 or section 10.37 continues to require the attorney or CPA to file a Form 2848 with the IRS). 14 31 F.R. 10773, 10774 (Aug. 13, 1966).

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taxpayers engage in tax shelter activity.15 Again, Treasury expanded the regulation to match the statutory expansion by including specific aspects of practitioners return preparation activity in the definition of practice. Thus, in 1984 Treasury removed the third sentence in section 10.2(a), quoted above, that specifically excluded return preparation from the definition of practice.16 It then added a new standard of conduct in section 10.33, titled Tax Shelter Opinions, which provided standards for writing specified tax advice, and it modified section 10.51 to reflect that violation of the new standards would constitute disreputable conduct.17 This 1984 move was a huge expansion of regulatory authority. For the first time, Treasury claimed the ability to regulate the nonrepresentational behavior of attorneys and CPAs who were entitled to be representatives of persons, regardless of whether they actually represented anyone. If one reads the authorizing language in 31 U.S.C. section 330(a) narrowly, Treasury was overreaching, just as it is accused of overreaching now in trying to regulate return preparers. How do we know that the scope of the statute is broad enough to allow Treasury to regulate even the nonrepresentational practice of representatives of persons? Congress answered that question by adding 31 U.S.C. section 330(d) in 1984.18 It negates a narrow reading of 31 U.S.C. section 330(a), a reading that would confine Treasury to regulating only the representational behavior of those authorized to practice before the IRS. Section 330(d) reads: Nothing in this section . . . shall be construed to limit the authority of the Secretary of the Treasury to impose standards applicable to the rendering of written advice . . . which is of a type which the Secretary determines as having a potential for tax avoidance or evasion. While 31 U.S.C. section 330(d) is a different statute, Justice Scalia likes to remind us that it is well established that a court can, and

should, interpret the text of one statute in the light of text of surrounding statutes, even those subsequently enacted.19 And while 31 U.S.C. section 330(d) refers to tax shelter opinions, if it says that 31 U.S.C. section 330(a) should not be read narrowly to restrict Treasury from regulating one type of nonrepresentational activity (tax shelter opinions), there is no reason why that same language in section 330(a) should be read to limit Treasurys ability to regulate other nonrepresentational activity such as return preparation. And that is precisely what happened in 1994 when, culminating years of notice and comment, Treasury issued final rules that broadened the definition of practice even further, to return preparation, at least if done by attorneys, CPAs, enrolled agents, and enrolled actuaries (collectively, practitioners).20 There had been no explicit congressional statute; Treasury simply followed the legal logic of the prior Circular 230 expansions. Similar to the 1984 expansion, Treasury added a new standard of conduct in section 10.34 that regulated this nonrepresentational behavior by practitioners. The best explanation for those changes came in the 1992 notice of proposed rulemaking. Its a bit long (even with my edits) but worth reading: In 1985, the American Bar Association (ABA), in Formal Opinion 85-352, adopted a standard requiring that a return position be supported by a realistic possibility of success if litigated. This standard replaced, in the context of return preparation and advice, the less stringent reasonable basis standard of ABA Formal Opinion 314 (1965). In 1986 . . . Treasury issued a proposed amendment to Circular 230 that generally would have prohibited a practitioner from advising or preparing a return position unless the practitioner determined that the position would not subject the taxpayer to the substantial understatement penalty. See 51 F.R. 29113 (August 14, 1986). The proposed standard was criticized because of concern that imposition of a substantial understatement penalty would automatically lead to discipline under Circular 230 and because, under the law in effect at that time, the standard significantly restricted the types of authority on which a practitioner could rely in arriving at a return position. The 1986 proposed amendments to Circular 230 have not been finalized.

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15 See Economic Recovery Tax Act of 1981 (adding section 6661 penalty for substantial understatement of liability); 1982 Tax Equity and Fiscal Responsibility Act (adding section 6700 et seq.). Section 6661 was later repealed and recodified as section 6662 by the Improved Penalty Administration and Compliance Tax Act, which was part of the Omnibus Budget Reconciliation Act of 1989. I am ignoring section 6694 for now (Congress had added that back in 1976). 16 49 F.R. 6719 (Feb. 23, 1984). For a good history of this, see Dennis J. Ventry Jr., The Reaction to the 1980 Proposed Amendments to Circular 230, Tax Notes, June 5, 2006, p. 1141; Ventry, No Joke: Circular 230 Is Here to Stay, Tax Notes, June 19, 2006, p. 1409. 17 49 F.R. 6719. 18 I am indebted to professor Andy Grewal of the University of Iowa College of Law for the idea that 31 U.S.C. section 330(d) helps us understand the scope of 31 U.S.C. section 330(a).

19 Vermont Agency of Natural Resources v. United States ex rel. Stevens, 529 U.S. 765, 786, n.17 (2000). 20 59 F.R. 31523 (June 20, 1994).

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In 1987, the ABA and American Institute of Certified Public Accountants . . . recommend[ed] that a realistic possibility standard for return preparation be incorporated in Circular 230. In 1988, the AICPA amended its Statements on Responsibilities in Tax Practice to replace its reasonable support standard with a realistic possibility standard that is similar, but not identical, to the standard for lawyers under ABA Formal Opinion 85-352. In 1989, Congress revised the penalties for income tax return preparers in section 6694 of the Internal Revenue Code to generally reflect the revised ABA and AICPA return preparation standards. In light of these developments, Treasury is withdrawing the 1986 proposed amendments to Circular 230 and is proposing a standard of conduct under section 10.34(a) that more closely reflects the realistic possibility standards adopted by professional organizations and the preparer penalty provisions of section 6694 of the Code and the regulations thereunder. . . . Because Circular 230 is intended to apply to all practitioners, the one-preparerper-firm rule of section 1.6694-1(b)(1) of the preparer penalty regulations does not apply for purposes of 1034. Under the new return preparer standard of conduct in section 10.34(a)(1), a practitioner may not advise a client to take a position on a return, or prepare the portion of a return on which a position is taken, unless (i) the practitioner determines that there is a realistic possibility of the position being sustained on its merits (the realistic possibility standard), or (ii) the position is not frivolous and the practitioner advises the client to adequately disclose the position. In addition, a practitioner may not sign a return as a preparer if the practitioner determines that the return contains a position that does not satisfy the realistic possibility standard, unless the position is not frivolous and is adequately disclosed to the Service. Section 10.34(a)(4) defines realistic possibility and frivolous for purposes of this section.21 In 2004, again after extensive notice and comment, Treasury added more new standards of conduct in sections 10.35, 10.36, and 10.37.22 These also dealt with nonrepresentational behavior by practi-

tioners, creating minimum standards for the preparation of various flavors of written tax advice. During this entire period from 1984 to 2004 Treasurys regulation of nonrepresentational behavior of those who were representatives of persons went unchallenged in court, and for good reason. It easily fit within the expansive language of 31 U.S.C. section 330(a). At the same time, however, return preparers retained their status as non-practitioners engaged in a limited practice or an unenrolled practice, and unenrolled preparers were still allowed to represent taxpayers only during examination in connection with returns the preparers had signed. In 2006 Treasury proposed revoking the convention of limited practice: Section 10.7(c)(1)(viii) currently authorizes an individual, who is not otherwise a practitioner, to represent a taxpayer during an examination if that individual prepared the return for the taxable period under examination. The proposed regulations revoke this authorization because it is inconsistent with the requirement that all individuals permitted to practice before the IRS demonstrate their qualifications to advise and assist persons in presenting their cases to the IRS.23 After considerable blowback, the final regulations did not adopt this proposal.24 Return preparers liked being able to represent the very taxpayers whose returns they had prepared. As discussed below, it was especially helpful in straightening out problems encountered during return processing. In 2007 Treasury expanded the definition of practice in section 10.2 even further away from controversy work, to include rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion. A similar change was made in section 10.3 to enlarge the category of who may practice. Recall that in 1966 that section had been expanded to include any

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21 22

57 F.R. 46356 (Oct. 8, 1992). T.D. 9165.

REG-122380-02. T.D. 9359 (An unenrolled return preparer who prepared the taxpayers return for the year under examination, therefore, may continue to negotiate with the IRS on behalf of that taxpayer during an examination or bind that taxpayer to a position during an examination. The unenrolled return preparer, however, may still not represent a taxpayer before any other office of the IRS, including Collection or Appeals; execute closing agreements, claims for refund, or waivers; or otherwise represent taxpayers before the IRS unless authorized by section 10.7(c)(1)(i) through (vii)). For comments, see, e.g., Statement by the National Society of Accountants on Proposed Modifications to Regulations Governing Practice Before the IRS (Apr. 2006).
24

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attorney or CPA who merely took on a client in a controversy with the IRS. In 2007, consistent with the change in section 10.2, section 10.3 increased the universe of regulated practitioners by eliminating the need for any written declaration at all when rendering written advice covered under section 10.35 or section 10.37.25 That advice is itself practice before the IRS. Commentators objected that the rendition of tax advice is not itself an act constituting practice before the IRS. In response, the preamble to the final regulations noted, with seeming circularity, that the Treasury Department and IRS conclude that the rendering of written advice is practice before the IRS subject to Circular 230 when it is provided by a practitioner.26 Now every attorney and CPA was deemed to be a practitioner before the IRS just by engaging in the behavior described in the regulation. No application required. No declaration required. And consistent with every expansion since 1984, there was no actual representation required for a tax practitioner to be regulated by Circular 230; it sufficed to be a potential representative. What this history shows is not merely an everexpanding reach of regulation. Recall that the statute authorizes Treasury to regulate the practice of representatives of persons before the Department of the Treasury. What Treasury has done over time is expand the term practice beyond simply the representational behavior of representatives of persons. Congress has blessed this move by ensuring that 31 U.S.C. section 330(a) would not be read narrowly to prevent it. The term practice now includes nonrepresentational behavior such as preparing returns and rendering written tax advice as long as that behavior is engaged in by representatives of persons. The question in Loving is whether Treasurys attempt to regulate the nonrepresentational behavior of those who have long been allowed a limited practice comports with the statutory grant of authority. Why are unenrolled return preparers now representatives of persons when they have long been labeled non-practitioners? This turns on the meaning and relationship of the terms practice . . . before the Department and representatives of persons.

Dont Call It Self-Assessment The plaintiffs in Loving argue that preparing a tax return cannot be practice before the IRS. They note that 31 U.S.C. section 330(a)(2)(D) says a person can be admitted to practice only if he demonstrates competency to advise and assist persons in presenting their cases.27 Helping people present their cases cannot encompass return preparation because there is no case to present. Judge Boasberg agreed. Return preparation cannot be equated to presenting cases, he said, because our system is basically one of self-assessment in which each taxpayer must compute the tax due [and] file a return showing facts upon which tax liability may be determined and assessed. . . . After such a filing (or failure to file), the Government performs an assessment that is, the calculation or recording of a tax liability. Therefore the submission of tax returns cannot be likened to presenting a case because, in Boasbergs words, at the time of filing, the taxpayer has no dispute with the IRS; there is no case to present. This definition makes sense only in connection with those who assist taxpayers in the examination and appeals stages of the process.28 Thinking back to the original purpose of 31 U.S.C. section 330, which was to allow Treasury to regulate those who helped taxpayers present their cases or claims before Treasury, the first response to the judges reasoning is that refund returns can be, at the election of the taxpayer, a claim for a refund.29 Because not all returns are refund returns, that response does not fully address the more fundamental flaw in the plaintiffs argument that forms the basis for Boasbergs conclusion. Boasbergs reasoning reflects a misunderstanding of the law of tax administration, starting with the assertion that our system is basically one of self-assessment. That statement is not only wrong, it is pernicious. I will first explain why it is wrong, then explain why it can be a dangerous way to think about tax administration. Our system is not one of self-assessment. I dont care that Boasberg says so. I dont care that Nina Olson, the national taxpayer advocate, thinks so in her otherwise nicely written Tax Notes commentary this past May.30 I dont care that Bryon Christensen and David Foster say so in their otherwise wonderfully written brief on behalf of five former IRS

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25 That really means any and all written tax advice because the standards in section 10.37 apply to all written advice (including electronic communications) concerning one or more Federal tax issues. 26 T.D. 9359.

31 U.S.C. section 330(a)(2)(D). Supra note 1. 29 Reg. section 301.6402-3(a)(4). 30 Nina Olson, More Than a Mere Preparer: Loving and Return Preparation, Tax Notes, May 13, 2013, p. 767.
28

27

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commissioners.31 They are all wrong wrong as a matter of law and wrong as a matter of fact. As a matter of law, our system is not one of self-assessment. It is a system of self-reporting only. Section 6201 tells us who makes the assessment: the Secretary shall assess. It does not say the taxpayer shall assess or the taxpayer shall selfassess. Section 6203 explains that the assessment shall be made by recording the liability of the taxpayer in the office of the Secretary in accordance with rules or regulations prescribed by the Secretary. It does not say the assessment is made by the taxpayer in accordance with forms, rules, or regulations prescribed by the Secretary. The assessment authority lodged in the secretary is delegated to the commissioner and on down the chain to the good folks in the IRS service centers who sign each weeks summary records of assessment and sign the certificates of assessment and payments.32 If, somehow, the properly delegated official does not sign the proper document, there is no assessment for the IRS to collect, regardless of what the taxpayer may or may not have put on a document that may or may not be a return.33 Nor is our system one of self-assessment as a factual matter. In practice, it is a system of coerced self-reporting.34 It is true that the IRS accepts a high percentage of taxpayer returns as filed and records the tax liabilities reported on those returns. That might lead one to believe the system is one of self-assessment de facto if not de jure. To understand why that belief is wrong, one must first understand that assessments are not ministerial actions but are discretionary actions: They reflect a judgment of what taxes are owed.35 In fact, the IRS

does not have to make an assessment; it could choose to instead file suit in federal court. Go read section 6501(a), the statute of limitations on assessment. Did you ever stop to ask why it reads that the IRS must either assess or bring proceedings in court without assessment within three years after the return is filed? It is because an assessment is an administrative judgment of taxes owed, which triggers administrative collection powers. It is an alternative to the IRS filing a complaint in court and obtaining a court judgment.36 The judgment of the IRS is exercised during what is known as returns processing. That term, especially when put next to the terms audit and examination, is quite misleading because it suggests that the IRS does not review or scrutinize returns but just processes them to blindly record whatever the heck taxpayers see fit to report on the returns. However, the IRS has never merely accepted a return as filed without first examining that return carefully to make a judgment on whether that return is likely correct. Far from being automatically accepted as filed, all filed returns must make a prima facie case that they are correct. That has been true since the early days of tax administration. In the early 1920s, for example, returns were filed with the collectors in each district. The collectors sorted the returns into three groups: those that should be accepted as filed, those that required further investigation by a visit to the taxpayer, and those that required further investigation by asking the taxpayer to come to the IRS field office. Then, before any assessment could be made, the collectors sent the returns to the proving section in Washington, which reviewed the collectors decision: This process accomplishes two purposes. It at once creates a permanent and official record

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Brief Amici Curiae of Former Commissioners of Internal Revenue in Support of Defendants-Appellants, Loving v. IRS, No. 13-5061 (D.C. Cir. Apr. 5, 2013). 32 See, e.g., In re Alternative Publications, 186 B.R. 912 (Bankr. S.D. Ohio 1995). See reg. section 301.6201-1. Assessments are made by an assessment officer signing a summary record of assessment (either physically on a computer-generated paper or electronically). Reg. section 301.6203-1. The regulation requires the IRS to be able to link any particular taxpayers assessment to a specific summary record of assessment. That backup documentation is generally in the form of data recorded into one of the computer systems that feed into the master file account systems, rather than data recorded onto paper. 33 See, e.g., Gentry v. United States, 962 F.2d 555 (6th Cir. 1992); Brafman v. United States, 384 F.2d 863, 867 (5th Cir. 1967). 34 I support this point more fully in Bryan T. Camp, Tax Administration as Inquisitorial Process and the Partial Paradigm Shift in the IRS Restructuring and Reform Act of 1998, 56 Fla. L. Rev. 1, 5-16 (2004), available at http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=496239. 35 Cohen v. Mayer, 199 F. Supp. 331, 332 (D.N.J. 1961), affd sub nom. Cohen v. Gross, 316 F.2d 521 (3d Cir. 1963) (assessment is a prescribed procedure for officially recording the fact and the
(Footnote continued in next column.)

31

amount of a taxpayers administratively determined tax liability, with consequences somewhat similar to the reduction of a claim of judgment). 36 See, e.g., Macatee Inc. v. United States, 214 F.2d 717 (5th Cir. 1954) (governments failure to assess its taxes did not preclude it from exercising its common law right to sue for the taxes). Remember, an assessment does not create a tax liability; it just reflects a tax liability. Lewis v. Reynolds, 284 U.S. 281 (1932) (expiration of assessment limitations period without assessment being recorded does not bar the IRS from retaining payments already received if they do not exceed the amount that could have been but was not properly assessed within the limitations period); Ewing v. United States, 914 F.2d 499, 502-503 (4th Cir. 1990) (rejecting taxpayers argument that before assessment, there can be no tax liability and therefore no payment of taxes); Bauchner v. Commissioner, 109 T.C. 125 (1997), affd, 172 F.3d 859 (3d Cir. 1998) (taxpayers refund claim reduced by the amount of correct tax liability, including penalties, for that tax year, even though tax and penalties were not assessed within the limitations period).

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upon the return of the amount of tax for which the taxpayer is liable upon the basis of facts set up on the return, and it is the basis upon which the commissioner sets up the total amount of tax from all taxpayers for which the collector . . . is accountable to the Government.37 For example, 3 million tax returns for 1926 were filed with collectors by March 15, 1927, who recommended that 2.5 million be accepted as filed and 500,000 be investigated further: Within a period of less than nine months from the time the returns were filed, the 3,000,000 returns forwarded to Washington and the action of the field forces with respect to the 2,500,000 cases marked to be accepted will have been reviewed; and the 500,000 cases marked for filed attention, together with a negligible percentage of the 2,500,000 cases recommended to be accepted, where the Washington forces have disagreed with the field recommendations, will have been returned to the field officers for investigation.38 One sees the same proving process decades later, in 1967. Then, however, with wage withholding predominating, the IRS was under pressure to quickly issue refunds. Those changes, combined with the availability of computer processing, resulted in different proving processes for different types of returns. Small returns (Form 1040-A or the short-form 1040 then in use) were verified: almost entirely on the basis of mathematical verification and a comparison of the withholding statements and information returns with the copies filed. If any discrepancies are noted between these information forms and the return, the case is sent to the Audit Division for examination. . . . The Service attempts to clear all refunds and tax adjustment of small amounts, usually $200, within thirty days after the returns are filed. Cases involving a refund of more than $200 are given a closer check by office audit and are cleared, usually, by June 1st following the filing date. In all cases, the relatively new Data Processing Divisions with electronic computers are assuming an ever widening role.39 Long-forms 1040 continued to be scrutinized by humans:

The regular selection method is handled by Revenue Agents assigned for that purpose and each District Director is instructed to choose the most suitable and capable men in his office for this work. They must have had considerable experience in examination, must possess a clear understanding of all tax problems, and should have excellent judgment in order to do this work properly. Since these agents classify returns to determine whether they shall be accepted as filed or subjected to investigation, their work has a considerable bearing upon the production of revenue.40 This same proving process exists today, only the IRS uses a lot more automation to decide when the basis of facts set up on the return demonstrate the reported tax is correct. In her recent article, Olson does a great job describing the arduous journey every poor little refund return must take before the IRS accepts it.41 She takes a dim view of the process. But whether one views the current process as benign or malignant, the fact remains that the process does not simply accept returns as filed and blindly or mechanically assess what the taxpayer reports. During modern return processing, the IRS first processes a return through a series of databases and filters. For example, Olson says, the Error Resolution System provides for the correction of errors associated with input submissions, and it issues correspondence and math error notices.42 That is, IRS computers automatically look for errors on the return not only mechanical math errors but other errors as well and the system either rejects the return or else makes summary adjustments to the return, sending a notice to the taxpayer that it has done so. For the 2011 returns, the IRS issued more than 2 million of those notices for individual returns. During the current filing season, says Olson, 12.3 million returns had potential errors identified during processing meaning they were sent to error resolution, and some taxpayers may have to present additional information to get their returns processed.43 Often, tax return preparers represent taxpayers in these returns-processing conversations (which is why they did not want to lose their limited practice privileges). Refund returns are run through an electronic fraud detection system, and returns selected by the computers are held until the income and withholding can be verified or . . . adjusted to amounts

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W.T. Sherwood, Handling Income-Tax Returns in Washington, IRN, Sept. 1927, at 20. 38 Id. at 21. 39 Hugh C. Bickford, Successful Tax Practice 190 (1967).

37

40 41

Id. at 191. See Olson, supra note 31, at 773-775. 42 Id. 43 Id. at 774.

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the IRS can verify.44 Returns claiming specific types of credits are subjected to additional review. According to Olson, some 358,000 earned income tax credit returns and 90 percent of returns submitting claims for the adoption credit were given close review before being accepted as filed. That is hardly a self-assessment system, either as a matter of law or fact. All returns are reviewed, scrutinized, inspected, verified, analyzed, checked, checked out, checked over, investigated, looked over, probed, and otherwise studied before the tax is assessed. It is just that they are not necessarily examined within the meaning of section 7605. Tax returns do, in a very real sense, present a case before the IRS as to what should be assessed. They always have.45 What confuses people is that the IRS does not always exercise its judgment through the use of human employees looking at individual tax returns and making individualized judgments. The agency often exercises its judgment through the use of computer processing, which can be as unfair, abusive, and wrong as any judgment exercised by a fallible human being. But just because the IRS has incorporated into computer algorithms decisions about what returns to accept as filed and what returns to reject does not mean that the act of assessment is any less a judgment of a taxpayers liability. Until Loving, I had always thought the idea of self-assessment was irritating but otherwise benign political rhetoric. I never thought a court would use it as a basis for a holding. Now I see the rhetoric as a spreading malignancy, weakening the body of law. I have seen this pernicious effect in e-mail discussions with some including tenured tax professors who believe the literal truth of selfassessment. Section 6201 is the statute that provides the basic authority for assessment. Some have e-mailed me that the statutes plain language requires the IRS to enter an assessment on the basis of the amount stated on the return as owing. In other words, these folks say, assessment is just a ministerial function, not a discretionary function. If some academics believe this, is it any wonder that Boasberg might have believed it as well? Or that the D.C. Circuit not the most reliably thoughtful court on tax matters (think Murphy) might swallow this canard? Certainly, if selfassessment were true, the filing of returns would

hardly be the same as presenting a case or filing a claim within the scope of 31 U.S.C. section 330. So lets examine the claim that the IRS is required by statute to enter an assessment on the basis of the amount stated on the return. Section 6201 says that the Secretary shall assess all taxes determined by the taxpayer or by the Secretary as to which returns or lists are made under this title. Those who argue that the assessment function is ministerial and not discretionary suggest that the word shall makes the assessments mandatory in the sense the IRS is without discretion. That conclusion is possible only when supported by a literal belief in self-assessment. The word shall is certainly mandatory, but the fact that an act is mandatory does not make the act itself (here, the act of assessment) ministerial. The better textual reading is that the statute says who must make the assessment, and that is the Secretary. A stronger textualist argument still driven by an underlying belief in the literal truth of selfassessment would focus on the language determined by the taxpayer. However, the very next phrase says or by the Secretary. Its hardly ministerial if what must be assessed is taxes determined by the taxpayer or by the secretary. To read section 6201 as mandating that the IRS slavishly accept every return as determined by the taxpayer, without any independent judgment or discretion, would interpolate additional language into the statute. It would be as if the statute read the Secretary shall assess the taxes taxpayers report on their returns but if the taxpayer does not submit a return the secretary can use his own judgment. But the statute does not say all that. Further, if that were truly the meaning of section 6201, whats the point of section 6020, which specifically empowers the IRS to create returns on behalf of taxpayers who fail to file? As I demonstrate above, the IRS has never merely accepted whatever taxpayers see fit to put on their returns but has instead only accepted returns as filed after subjecting them to a fairly rigorous manual or automated verification process. In reviewing why the idea of self-assessment is wrong, I have tried to craft a legal argument on why a tax return presents a case or claim to the IRS within the meaning of 31 U.S.C. section 330, and why even in 1921, when Treasury first got serious about exercising its statutory authority to regulate practice, filing a tax return was akin to presenting a case.46 In her recent Tax Notes commentary, the

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Id. Remember, too, that every refund return can be, at the election of the taxpayer, a claim for a refund. Reg. section 301.6402-3(a)(4).
45

44

Boasberg appeared puzzled by the 1884 enactment date of section 301: Even a casual student of history knows that the Sixteenth Amendment was not ratified until 1913. But taxpayers certainly filed returns between 1884 and 1913, mostly
(Footnote continued on next page.)

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national taxpayer advocate suggests that filing a return in the modern day is qualitatively different than it was in 1921.47 Again, history frees us from the prison of our own experience. Preparing and filing returns today might be more complex although reading the hearings held by Congress in 1927 suggests they may not be but thats the policy argument for regulating return preparers now rather than previously. The legal argument for why Treasury has the authority to so regulate remains the same because the legal meaning of practice . . . before the Department of Treasury has not changed. Returns presented a case in 1921 as much as they do today. Remember the may in 31 U.S.C. section 330: Treasury may regulate the preparation of returns by representatives of persons. Just as Treasury waited 37 years after 1884 before it regu-

lated attorneys and CPAs, the fact that Treasury has taken its sweet time to regulate unenrolled return preparers is a policy choice. Nonetheless, simply because a return presents a case or claim to the IRS does not mean Treasury is authorized to regulate unenrolled return preparers. Recall that 31 U.S.C. section 301 addresses regulation of the practice of representatives of persons before the Department of Treasury. So while return filing may constitute practice before Treasury, we are left with the question whether return preparers are representatives of persons when they help taxpayers prepare and submit returns. Are Return Preparers Representatives? Treasury is not authorized to regulate just anyones practice before Treasury. It may only regulate the practice of representatives of persons before the Department of Treasury. If you are looking for ambiguity in the statute, it could be whether the prepositional phrase before the Department of Treasury modifies practice, representatives of persons, or both. Treasury has interpreted the phrase to modify practice, so I suppose it is stuck with that interpretation. The Loving plaintiffs argue that unenrolled return preparers are not representatives of persons. They make a dictionary argument, a statutory argument, and a regulatory argument. The dictionary argument is that a representative is an agent who stands for or acts on behalf of another.48 Return preparers dont do that. The statutory argument is that the section 7701 definition of tax return preparer specifically excludes those who might be viewed as agents, such as employees who prepare a return for their employer or those who prepare returns for another taxpayer in their fiduciary capacity. Therefore, the exclusion of those two categories of agency relationships denies that a person who otherwise is a tax return preparer within the meaning of the statute can have an agency relationship. The regulation argument reads reg. section 601.504(a) as requiring a power of attorney before anyone may represent the taxpayer. Because return preparers need not obtain a Form 2848 to prepare returns, they are not representing the taxpayer on the return. While the best argument for the Loving plaintiffs is indeed that return preparers are not representatives of persons, they do not make that argument well. Their regulation argument is particularly weak. First, the regulation makes no pretense to

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excise tax returns, but also income tax returns (corporate). And every return was scrutinized by employees of what was then called the Bureau of Internal Revenue. Only after assessment did taxpayers become obligated to pay a dime. As the volume of returns increased after 1913, that process became increasingly difficult to accomplish in a timely way. Congress changed the law to obligate payment with the filing of a return. Pay first, sort it out later was the new scheme. But, as I explained in my review of returns processing from the 1920s to today, that creation of a payment obligation simultaneous with the filing obligation did not mean that taxpayers self-assessed any more than they did before. It was still (and remains today) the judgment of the agency that determined the assessment. 47 See Olson, supra note 31. The national taxpayer advocate believes that as Congress has used the IRS to deliver social benefits through the tax code notably, refundable credits like the EITC and the adoption credit the function of returns has changed over time. It is not immediately apparent (at least to my dim brain) why these tax expenditures are qualitatively different from traditional tax expenditures such as the mortgage interest deduction or charitable contribution deduction or the various specialized business deductions and credits that together produce net operating losses taxpayers can carry back and forth through various tax years, thus functioning like refundable credits. The current EITC (i.e., since 1975) is very similar to the EITC Congress put in section 209 of the Revenue Act of 1924 and the Revenue Act of 1926 to reduce the tax on the labor income of lower-income taxpayers so it would not be taxed at a higher rate than equal amounts of income from capital. Even though the 1920s EITC was not refundable, it was still a tax expenditure to benefit lower-income taxpayers. It was also a terribly messy business back then to claim the credit, creating a great deal of confusion and uncertainty among taxpayers, according to one Mr. Pinkerton in testimony submitted on behalf of the Illinois Chamber of Commerce in hearings before the House Ways and Means Committee, October 31 to November 10, 1927, reprinted in Vol. 2 Fox Series. Another witness asserted, I was told by a Treasury official that somewhere in the neighborhood of 90 per cent of the returns filed during the first year this credit was in force were erroneous, and that the percentage of error is still very great. Id. at 475. Congress got rid of it in the 1928 Revenue Act and instead simply lowered rates applicable to the lower brackets of income so as to create about the same saving for taxpayers without the necessity for additional complicated computations. Id. at 157.

48 Brief of the Plaintiffs-Appellees, Loving, No. 13-5061 (D.C. Cir. May 17, 2013), at 37 (citing both the American Heritage Dictionary of the English Language and Blacks Law Dictionary).

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define the statutory terms in 31 U.S.C. section 330. It is written to explain when taxpayers must give a power of attorney to their representative. Second, courts have long treated IRS regulations like IRS revenue rulings and not like full-blown Treasury regulations.49 It is thus difficult to transform what is absent from a leaden administrative directive into a golden rule about the meaning of a statutory term. Allow me to make the plaintiffs best argument for them. Return preparers are not representatives of taxpayers when they prepare a return. Recall that to be a valid return, a document must be signed by the taxpayer under penalties of perjury.50 It is well settled that the signature of the return preparer is insufficient to turn an otherwise unsigned Form 1040 into a return for assessment limitation purposes. First, Treasury regulations provide that a Form 1040 becomes a valid return only when the taxpayer personally signs the return.51 Second, courts hold that a return signed by the attorney/ preparer but unsigned by the taxpayer does not satisfy the statutory requirements for a return.52 Accordingly, a return signed by the preparer but not the taxpayer is not sufficient to trigger the section 6501 limitations period for assessment.53 To put the matter in terms of the Restatement of Agency, a return preparer simply has no actual or apparent authority to speak or act on behalf of the taxpayer to assure the IRS of the taxpayers representation (under penalty of perjury) that the return is a true and accurate statement.54 Critically, the

See, e.g., Ellis v. Commissioner, T.C. Memo. 2007-207 (collecting cases). 50 Beard v. Commissioner, 82 T.C. 766 (1984). 51 Reg. section 1.6061-1(a). This provision also allows an agent who is duly authorized in accordance with paragraph (a)(5) or (b) of section 1.6012-1 to sign on the taxpayers behalf. Both of the referenced sections are narrowly drawn to deal with circumstances in which the taxpayer is unable to sign by reasons of physical or mental disability or being out of the country. Return preparers are quite explicitly not generally allowed to verify the correctness of the return on behalf (or as agents of) the taxpayer. See generally reg. section 1.6065-1. Instead, they must sign on their own line and make their own representations on their own behalf. Id. Heck, even the IRS regulation that the plaintiffs cite makes this point, but they ignore it. See reg. section 601.504(a)(6) (The filing of a power of attorney does not authorize the recognized representative to sign a tax return on behalf of the taxpayer unless two narrow conditions are met). 52 In re Lee, 186 B.R. 539, 541 (S.D. Fla. 1995) (the signature of the paid tax return preparer does not constitute the signature of an agent). 53 Overbeck v. Commissioner, T.C. Memo. 1955-243 (signature of taxpayers attorney alone did not make the filed document a return). 54 Restatement 3d of Agency, section 1.01 (2006) (Agency is the fiduciary relationship that arises when one person (a principal) manifests assent to another person (an agent) that the agent shall act on the principals behalf and subject to the
(Footnote continued in next column.)

49

signature of a paid tax return preparer does not constitute the signature of an agent.55 Again, note how we come back to the problem: A document is not a return unless it is signed by the taxpayer under penalties of perjury. The government ignores these arguments. In its initial brief for the appellants in Loving, the government gives only a throwaway footnote, saying, There can be no serious dispute that paid taxreturn preparers are representatives of persons. Yep. Thats it. Thats the governments entire thinking on the subject. The national taxpayer advocate gives more attention to the issue in her recent Tax Notes article.56 The thrust of her argument is that tax return preparers do not simply transcribe numbers onto forms. They advise the taxpayer and assist the taxpayer in deciding what numbers go where and what numbers to claim. Anyone who has prepared a return understands the level of assistance necessary to help taxpayers present their best case for the lowest tax burden. Decisions such as whether to claim dependents, whether to claim itemized deductions or standard deductions, or whether to put specific expenses under Schedule C, E, or A are examples of decisions return preparers help taxpayers make. Because return preparers are not mere scriveners, the national taxpayer advocate leaps to the conclusion that they must be representing the taxpayer because it is their judgment and their knowledge that enable them to make the entry on the return on behalf of the taxpayer. So there is the representation bit: The entries on the return are not actually made by the taxpayer but by someone else on behalf of the taxpayer. The national taxpayer advocates policy argument is strong, but her legal argument is weak. The whole practice . . . before the Department of Treasury argument has to be that the preparation of returns is the practice. So it is not what goes on

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principals control, and the agent manifests assent or otherwise consents so to act). The IRS has likewise recognized that return preparers lack the authority to act as agents for taxpayers when signing documents. For example, the IRS has recognized that an unenrolled return preparer holding a valid power of attorney from the taxpayer was nonetheless not the taxpayers agent for purposes of signing an appeal of a rejected offer in compromise. ILM 200034001. But see ILM 200526001, in which the IRS uses agency rationale to impose section 6702 frivolous return penalties on taxpayers who executed a Form 2848 power of attorney but did not sign the submitted composite return. 55 In re Lee, 186 B.R. 539. In a similar situation, the Federal Circuit decided that a patent attorney did not act as an agent for purposes of what was disclosed in a patent application although the attorney was an agent for other purposes. Glaxo v. Novopharm, 52 F.3d 1043, 1052 (Fed. Cir. 1995). 56 See Olson, supra note 31, at 770-772.

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the form that is important it is whether that form, once submitted, is a return. The legal question is not whether return preparers act on behalf of taxpayers in putting down numbers on a document that says, Form 1040. That document does not legally become a return until it is signed by the taxpayer and submitted to the IRS. Sure, the complexity of returns and taxpayer reliance on preparers is a terrific policy argument for why Congress should authorize Treasury to regulate return preparers. But current regulatory authority extends only to the practice of representatives of persons before Treasury. And if the practice is preparing returns, it is the practice of taxpayers, not their representatives, because (generally speaking) nobody submits a return on behalf of a taxpayer. The best response to the plaintiffs best argument is confession and avoidance. We can confess the general truth of the plaintiffs propositions but avoid the conclusion the plaintiffs draw. First, we can acknowledge freely that return preparers are not agents or representatives of their clients generally and cannot be so when preparing a return. But they are sometimes. For example, in Caulkins v. Commissioner,57 the taxpayers return preparer prepared a return that elected to depreciate assets in a specific way permitted by the regulations if a proper election was made on a proper form. But the preparer failed to attach that form to the return. The taxpayers argued that because it was their preparers fault, they should not be held responsible. The Tax Court responded that fundamental agency law provides that the actions of the tax preparer (agent) are imputed to the taxpayer (principal). Petitioners signed and thereby adopted the return. We cannot excuse them from compliance with the statute and regulations.58 Another example of how courts recognize an agency relationship between return preparers and taxpayers comes from Allen v. Commissioner,59 in which the Tax Court held that the section 6501(c)(1) fraud exception to the normal three-year assessment limitation period in section 6501(a) was triggered, as a matter of law, by the return preparers intent to create and submit a fraudulent return, even when the taxpayer had no intent to evade tax. True, the court did not base its holding directly on agency relationships (but instead on the ambiguity of the statutory language in section 6501(c)). I submit, however, that the case implicitly rests on agency concepts: Taxpayers should not be allowed to get the benefit of a fraudulent return prepared

on their behalf by a preparer.60 Implicit in the Allen holding is the idea that return preparers conferred a benefit on taxpayers by submitting a fraudulent return. The Tax Court apparently has a similar reading of Allen. In City Wide Transit Inc. v. Commissioner, the preparer created and filed false employment tax forms as part of a scheme to embezzle money from the taxpayer.61 The Tax Court observed, We cannot say that respondent has proved by clear and convincing evidence that [the preparers] filing of the Forms 941 and amended Forms 941 shows conduct intended to defeat or evade petitioners taxes and not an incidental consequence or secondary effect of his embezzlement scheme, against the petitioner (emphasis added). Although this decision was reversed on appeal, the important point is the courts recognition that normally, return preparers act on behalf of taxpayers when preparing and submitting returns, and so when they dont, their actions should not trigger the section 6501(c) open season for audit. Second, we can confess that return preparers are generally neither agents nor practitioners. But the statute authorizes Treasury to regulate representatives of persons and not agents of persons or practitioners. And it is undeniably true that every unenrolled return preparer is a potential representative. They have long been recognized as representatives of a person in disputes with the IRS concerning any return they prepare. That is why they fussed so much about the Treasury proposal to revoke that authority. And that is why so many return preparers secure the taxpayers permission to be his representative for that purpose when they prepare a return.62 Look back now at the history of Circular 230. In 1984 Treasury started to regulate nonrepresentational behavior of attorneys and CPAs, including return preparation, simply on the basis that all attorneys and CPAs are potential representatives.

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57 58 59

T.C. Memo. 1984-504. Id. at note 12. 128 T.C. 37 (2007).

60 Camp, Presumptions and Tax Return Preparer Fraud, Tax Notes, July 14, 2008, p. 167. 61 City Wide Transit Inc. v. Commissioner, T.C. Memo. 2011-279, revd, 709 F.3d 102 (2d Cir. 2013). The preparer in this case was an accountant. But that makes no difference to the analysis of the relationship between the return preparer and taxpayer when filing a return. 62 For an example of such an agreement, see 1040 Tools, Income Tax Return Preparation Agreement, available at http://1040tools.com/nonprint/inctaxretprep.htm. Because return preparers have limited practice rights under Circular 230 section 10.7, many routinely secure powers of attorney from their clients. See, e.g., Wright v. United States, No. 05-01253 (M.D. Fla. 2007), affd, 543 F.3d 649 (11th Cir. 2008) (unenrolled return preparer routinely secured a power of attorney from his clients, authorizing him to represent them before the IRS for specified tax matters).

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This move was blessed by congressional modification of various statutes that affect the meaning of 31 U.S.C. section 330(a). If Treasury can do that, it can do so here for return preparers, all of whom are also potential representatives of persons within the statutory meaning, even though they are not labeled as practitioners in the regulations. That, to me, is Treasurys best response to the plaintiffs best argument. Conclusion When the ancient writer wrote that there was nothing new under the sun, that was already an old idea.63 Bad behavior by return preparers is also nothing new, nor is the disbarment of practitioners for their return preparation behavior. I leave you with a short story about return preparers in 1927. By that year, more than half of the internal revenue employees hired and trained after the huge tax increases in 1918 had moved into private practice. The obvious downside was agency brain drain. But Deputy Commissioner C.B. Allen put a positive spin on it: There is of course a certain advantage to the Government in the services former employees have performed and will continue to perform to taxpayers in the filing of income tax returns for subsequent years. It may be said that following the war period the Government made available to taxpayers an army of tax specialists.64 Still, James Pearce, a special agent of what was then known as the Intelligence Unit (now called Criminal Investigation), warned taxpayers to be careful of charlatans with this story65:

63 Ecclesiastes 1:9 (What has been will be again, what has been done will be done again; there is nothing new under the sun). 64 C.B. Allen, War And the Job That Followed, IRN, Jan. 1928, at 5. 65 James Pearce, Fox and Smooth, Tax Experts, IRN, Dec. 1927, at 6.

There are tax experts and tax experts. To the latter class belonged Fox and Smooth, which are not their real names, but indicative of the character of their operations. The firm was one of many mushroom organizations which sprang into temporary existence following the enactment of the revenue act of 1918. Millions of persons for the first time were brought into direct contact with the Federal Governments tax collection agency, the Bureau of Internal Revenue. Forms upon which were rendered income-tax returns were more or less puzzling more then than now. ... Fox had some experience as an accountant, but Smooth was a salesman whose knowledge of income tax law and procedure amounted to zero. Smooths business was to get the clients and Foxs to secure from them a fee. ... In many instances refunds were made without service of any kind by the firm of Fox & Smooth other than filing a few papers in the office of a collector of internal revenue. In the case of one large concern the partnership was paid a fee of $70,000. ... The firms activities came to the attention of the Intelligence Unit. . . . Both men were indicted and given a jail sentence and fine. For the sake of the record, it may be added that the firm was barred from practice before the Treasury Department. I hope this report has helped free the reader from the prison of contemporary experience. History shows us that Treasury has always had the authority to regulate the non-representational behavior of those who hold themselves out to the public as tax experts, whether that expertise is in the form of writing tax advice, defending an audit, or preparing a return.

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