This article explains the reciprocal nature of the ethical requirements governing all Tax Professionals. It also explains a taxpayer’s rights when confronted with unethical and inappropriate conduct. It then explains the tools available to Tax Professionals to report any ethical violations. Finally, it reminds all Tax Professionals that they are not disinterested “bystanders” in the voluntary compliance system.
Introduction
The Treasury Inspector General for Tax Administration ("TIGTA") recently reported that the Internal Revenue Service ("IRS") handed out $2.8 million in bonuses to employees with disciplinary issues -- including more than $1 million to employees who didn't pay their Federal taxes. A recent survey of small businesses, forty-two percent of low-compliant taxpayers believed that "[t]he IRS is more concerned with collecting as much as it can than with collecting the right amount of tax." On February 25, 2014, the House of Representatives passed another so-called "Taxpayer Bill of Rights." Congressman Peter Roskam (R-Ill.) sponsored the legislation, which consists of two bills aimed to prevent the Internal Revenue Service ("IRS") from overreaching, especially when it comes to processing and scrutinizing politically active nonprofit groups. Popular authors refer to the IRS as a cesspool of corruption, incompetence, and hubris. Experienced Tax Professionals believe that most allegations of IRS employee misconduct are unfounded. Most Tax Professionals agree, however, that these scandals do not only impact the IRS. Allegations of unprofessional behavior by Tax Professionals employed by the government impact on the public's perception of the integrity of all Tax Professionals. To the extent that the public believes that Tax Professionals are corrupt, Tax Professionals will be unable to perform their vital function - assisting the public with voluntary self-assessment. Specifically, the United States has chosen a system that relies on voluntary self assessment for reporting and collecting taxes. The voluntary self assessment system only works if the taxpaying public believes that all Tax Professionals, whether employed by the taxpayers directly or employed by the IRS, are honest, reasonable, efficient and practical. This article explains the reciprocal nature of the ethical requirements governing all Tax Professionals. It also explains a taxpayer's rights when confronted with unethical and inappropriate conduct. It then explains the tools available to Tax Professionals to report any ethical violations. Finally, it reminds all Tax Professionals that they are not disinterested "bystanders" in the voluntary compliance system. Our voluntary compliance self assessment system only works if Tax Professionals comply with their ethical and legal obligation to report unethical and unacceptable behavior by Tax Professionals, including but not limited to those Tax Professionals privileged enough to be employed by the IRS.
THE GOAL OF ALL ETHICAL REGULATION OF TAX PROFESSIONALS IS THE VOLUNTARY COMPLIANCE WITH THE TAX LAWS
Codes of conduct and ethical rules define what is "right" behavior and penalize "wrong" behavior. The ethical rules governing the conduct of Tax Professionals are intended to allow the IRS to enforce the Internal Revenue Code (the "Code" or "IRC") while, at the same time, maximizing the taxpaying public's trust of, and confidence in, the voluntary compliance system. After ensuring that Tax Professionals respect the rights granted to all Americans by the United States Constitution (discussion below), every serious discussion of the ethical regulation of Tax Professionals begins and ends with the IRS mission. IRS Policy Statement P-l-l defines the mission of the IRS as follows: The mission of the Service is to encourage and achieve the highest possible degree of voluntary compliance with the tax laws and regulations and to conduct itself so as to warrant the highest degree of public confidence in its integrity and efficiency. (Emphasis added) When evaluating the conduct of a Tax Professional, it is always useful to refer back to the IRS' overall mission and ask whether the conduct complained of would tend to encourage or discourage voluntary compliance by the taxpaying public.
ALL TAX PROFESSIONALS ARE REQUIRED TO APPLY AND ADMINISTER THE CODE IN A REASONABLE AND PRACTICAL MANNER
31 CFR Part 10 a/k/a "Circular 230" establishes the standards of professional conduct for those who engage in practice before the IRS. A full discussion of Circular 230 is beyond this article; however, like most codes of conduct Circular 230 regulates conduct by proscribing return position standards (i.e., the "substantial authority" or "realistic possibility of success" standards) and penalizing Tax Professionals that advocate reporting positions that do not meet the applicable standards. The IRS demands that its Tax Professionals be judged by similarly high standards. IRM 1.2.10.1.25 (07-24-1989) (Policy Statement 1-178) explains that: 1. All segments of [Internal Revenue] Service share responsibility for public attitudes. 2. The [Internal Revenue] Service recognizes that public attitudes toward our system of voluntary compliance with the tax laws derive, to a substantial extent, from contacts of all types that the public has with the Internal Revenue Service. Thus, the responsibility for creating and maintaining a constructive public attitude is shared by all officials and employees of the Service. Any interaction with the public must reflect high ethical standards and a commitment to serving the public with courtesy, efficiency and integrity. (Emphasis added) As explained above, the self assessment system is undermined by an IRS that is more concerned with collecting as much tax possible, as opposed to collecting the right amount of tax. Thus, the IRS directs each employee to be fair, reasonable and practical. Specifically, Revenue Procedure 64-22 provides that each IRS employee is charged with the duty to: 1. interpret the law, and to try to find its true meaning without using a strained construction under the guise of "protecting the revenue"; 2. determine the reasonable meaning of various Code provisions in light of the Congressional purpose in enacting them; 3. perform this work in a fair and impartial manner, with neither a government nor a taxpayer point of view; 4. apply and administer the law in a reasonable, practical manner (i.e., examining officers should only raise issues when they have merit, never arbitrarily or for trading purposes; and 5. conduct his or her work with as little delay as possible and with great "courtesy and considerateness" (i.e., the IRS should never try to overreach, and should be reasonable within the bounds of law and sound administration). In substance, Rev. Proc. 64-22, like Circular 230, instructs Tax Professionals (i.e., IRS employees) to avoid extreme interpretations of the Code and only pursue issues that reflect the "correct" interpretation of the Code and regulations. Although Rev. Proc. 64-22 does not specifically penalize "over zealousness" or "excessive aggressiveness", the IRS, in its Internal Revenue Manual ("IRM") includes "over zealousness" or "excessive aggressiveness" within its definition of sanctionable misconduct. IRM 13.1.15.2 (01-06-2009). Stated another way, the IRS views "over zealousness" and "excessive aggressiveness" by its employees as an ethical violation and has created procedures to receive and review taxpayer complaints. Although the Courts have been reluctant to impose fees and costs against the government, the government's ethical obligation to apply and administer the law in a reasonable and practical manner is memorialized in the fee shifting provisions of IRC ? 7430. IRC ? 7430 provides for the recovery of reasonable administrative costs and reasonable litigation costs for taxpayers where the IRS position was not substantially justified. IRC ? 7430(g) encourages efficiency by providing for limited fee shifting in those cases where the IRS rejects a reasonable settlement offer, (i.e., a "qualified offer"). Indeed, some practitioners recommend that Tax Professionals make a qualified offer in every case.
ALL TAX PROFESSIONALS HAVE A DUTY OF COMPETENCE
Standards of competence are intended to foster the highest degree of public confidence in the integrity and efficiency of the tax system. Tax Professionals that are not employed by the IRS have a duty to exercise a level of care, skill, and diligence commonly associated with that of other members of their profession under similar circumstances. Stated another way, Tax Professionals are subject to malpractice claims (i.e., personal liability) if they do not represent their clients competently. Circular 230 also sanctions negligence. Unlike private Tax Professionals, IRS employees, acting in the performance of their duties, whose actions are challenged under IRC ? 7433, will not be held personally liable in such an action. IRM 25.3.3.9.4 (07-20-2010). Taxpayers who have been damaged by the negligence of an IRS collector are not without recourse, however. IRC ? 7433 provides for the recovery of damages when, in connection with the collection of a tax, any officer or employee of the IRS recklessly, intentionally, or negligently disregards any provision of the Internal Revenue Code or the related Treasury Regulations.
ALL TAX PROFESSIONALS ARE REQUIRED TO KEEP TAXPAYERS' RETURN INFORMATION CONFIDENTIAL
The IRS Disclosure and Privacy Law Reference Guide explains: A distinguishing characteristic and, indeed, one of the strengths of American tax administration, is the self assessment feature of the system. Employees of the Office of Chief Counsel and the IRS must be constantly aware that in fostering this system, there must be public confidence with respect to the confidentiality of personal and financial information given to us for tax administration purposes. Tax Professionals have a legal and moral obligation to protect taxpayer confidences. IRC ?? 6103, 6104, 6105, 6110, 6713(a), 7213, 7213A, 7431 and 7602(c)(1) (collectively, the "Disclosure Laws") penalize the willful failure to protect confidential information. Indeed, IRC ? 7602(c) emphasizes the confidential nature of IRS audits by requiring that before IRS employees initiate contact with third parties for the determination or collection of a taxpayer's tax liability, the taxpayer must be given reasonable notice in advance that third parties may be contacted. IRC ? 7602(c) also requires the Service to make a record of persons contacted and provide that record to the taxpayer upon the taxpayer's request. IRC ? 7216 proscribes criminal penalties for private Tax Professionals that knowingly or recklessly disclose information furnished in connection with a tax return or using such information for any purpose other than preparing or assisting in the preparation of such return. IRC ? 6713(a) provides a civil penalty for unauthorized disclosure or use of information furnished in connection with the preparation of an income tax return. Similarly, IRC ? 7213 makes the willful unauthorized disclosure of a return or return information a felony punishable by a fine of up to $5,000, or imprisonment of not more than five years, or both, together with the costs of prosecution. Moreover, upon conviction, officers or employees of the United States will also be dismissed from office or discharged from employment. IRC ? 7213A makes unauthorized access to returns or return information a misdemeanor punishable by a fine of up to $1,000, or imprisonment of not more than one year, or both, together with the costs of prosecution. Upon conviction, officers or employees of the United States will also be dismissed from office or discharged from employment. IRC ? 7431 provides that where a federal officer or employee knowingly or negligently inspects or discloses a taxpayer's return or return information in violation of IRC? 6103 ("Confidentiality and disclosure of returns and return information"), the taxpayer may bring a civil action for damages against the United States. Taxpayers have a reasonable expectation of privacy in the personal information they turn over to the IRS. All Tax Professionals - government and private - that violate the ethical obligation to maintain the confidentiality of taxpayer return information are subject to civil and criminal sanctions.
THE CODE CRIMINALIZES SOME UNETHICAL BEHAVIOR BY ALL TAX PROFESSIONALS
Criminal prosecutions of Tax Professionals deter noncompliant conduct, enhance voluntary compliance and, when done even-handedly, promote the public's confidence in the IRS. For those Tax Professionals that do not maintain ethical standards or follow the law, IRC ? 7206(2) essentially criminalizes aiding or assisting with the preparation of a false return and IRC ? 7212(a) makes any act that either corruptly obstructs or impedes, or endeavors to obstruct or impede, the due administration of the Code, a crime. Stated simply, IRC ?? 7206(2) and 7212(a) criminalize any attempt to interfere with the administration of the Internal Revenue laws by a Tax Professional. Similarly, IRC ? 7214 imposes criminal sanctions on an IRS employee: (1) who is guilty of any extortion or willful oppression under color of law; or (2) who knowingly demands other or greater sums than are authorized by law, or receives any fee, compensation, or reward, except as by law prescribed, for the performance of any duty; or (3) who with intent to defeat the application of any provision of this title fails to perform any of the duties of his office or employment; or * * * (7) who makes or signs any fraudulent entry in any book, or makes or signs any fraudulent certificate, return, or statement; or (8) who, having knowledge or information of the violation of any revenue law by any person, or of fraud committed by any person against the United States under any revenue law, fails to report, in writing, such knowledge or information to the Secretary; . . . (Emphasis added) The penalties for non-compliant conduct also include dismissal from office or discharge from employment, and a fine of up to $10,000. The court may also render a judgment against the noncompliant IRS employee for the amount of damages sustained in favor of the taxpayer. TIGTA investigates allegations of misconduct by IRS employees and, when appropriate, IRS employees are terminated and incarcerated based on taxpayer allegations of misconduct.
THE CODE IMPOSES PERSONAL LIABILITY FOR NONCOMPLIANT TAX PROFESSIONALS
Beyond criminal sanctions, another accepted method of compelling compliance with the ethical rules governing Tax Professionals is through the imposition of personal liability for negligence and/or intentional misconduct. As stated above, Tax Professionals are subject to malpractice claims for negligent and/or unethical behavior. Tax Professionals not employed by the IRS are also subject to penalties pursuant to IRC ? 6694 ("Understatement of taxpayer's liability by tax return preparer"), IRC ? 6695 (a) through (g) ("Other assessable penalties with respect to the preparation of tax returns for other persons") and IRC ? 6701 ("Penalties for aiding and abetting understatement of tax liability"). IRC ?? 7213, 7213A and 7214 make IRS employees personally liable for damages sustained by an aggrieved taxpayer. Similarly IRC ? 7214 requires that the court enter judgment against an IRS employee for the amount of damages sustained by the aggrieved taxpayer. Finally, in certain limited instances, IRC ? 7804 also imposes personal liability on IRS employees in the absence of a criminal conviction. Specifically, IRC ? 7804 provides: If any officer or employee of the Treasury Department acting in connection with the internal revenue laws fails to account for and pay over any amount of money or property collected or received by him in connection with the internal revenue laws, the Secretary shall issue notice and demand to such officer or employee for payment of the amount which he failed to account for and pay over, and, upon failure to pay the amount demanded within the time specified in such notice, the amount so demanded shall be deemed imposed upon such officer or employee and assessed upon the date of such notice and demand, and the provisions of chapter 64 and all other provisions of law relating to the collection of assessed taxes shall be applicable in respect of such amount. (Emphasis added) IRM 3.0.167.5.4 (10-01-2011) authorizes TIGTA to investigate and determine if there was negligence on the part of the employee. If the employee was negligent, the supervisor must request that the employee make restitution. If the negligent employee does not make restitution or a court case against the employee is not pursued, the employee is assessed using IRC ? 7804(c) procedures. IRS Management is liable for losses where they fail to provide or enforce proper internal controls. IRM 3.0.167.5.4.4 (10-01-2011).
NONCOMPLIANT TAX PROFESSIONALS MAY BE REPRIMANDED, SUSPENDED OR TERMINATED
In addition to the criminal sanctions and civil penalties described above, Tax Professionals are subject to rules that regulate behavior and punish unethical conduct. For private Tax Professionals, the IRS Office of Professional Responsibility (OPR) is responsible for setting, communicating and enforcing standards of competence, integrity and conduct among Tax Professionals. In general, there are four broad categories of misconduct which may be subject to disciplinary action by OPR: 1) misconduct while representing a taxpayer; 2) misconduct related to the practitioner's own return; 3) giving a false opinion, recklessly, or through gross incompetence, or; 4) misconduct not directly involving IRS representation. OPR receives referrals regarding possible misconduct from IRS employees and through complaints from tax practitioners and other private citizens. Sanctions by OPR include disbarment, suspension, censure and reprimand. Disbarment is the permanent revocation of a Tax Professional's privilege to represent taxpayers before the IRS. By contrast, a violation by an IRS employee of a statute, regulation, or rule of ethics is reported to TIGTA. Existing procedures also provide that all complaints involving perceived intimidation, discrimination and aggressiveness can be reported to the agent's supervisor. The definition of misconduct in IRM 13.1.15.2 (01-06-2009) includes: (a) any violation of a law, regulation, or rule of conduct by an IRS employee, and (b) rudeness, over zealousness, excessive aggressiveness, discriminatory treatment, and intimidation. Although no specific form is required to file a complaint, IRS Form 12217 lists the basis for complaints against an IRS employee. TIGTA will accept complaints filed on the TIGTA website, by phone, by fax or mail. Also noteworthy is that Section 1203 of the Internal Revenue Service Restructuring and Reform Act of 1998 provides that certain ethical breaches by IRS employees in connection with the performance of their official duties require termination. The acts requiring termination include: (1) willful failure to obtain the required approval signatures on documents authorizing the seizure of a taxpayer's home, personal belongings, or business assets; (2) providing a false statement under oath with respect to a material matter involving a taxpayer or taxpayer representative; (3) with respect to a taxpayer, taxpayer representative, or other employee of the Internal Revenue Service, the violation of: (A) any right under the Constitution of the United States ; or (B) any civil right established under: (i) title VI or VII of the Civil Rights Act of 1964 [42 U.S.C. 2000d et seq., 2000e et seq.]; (ii) title IX of the Education Amendments of 1972 [20 U.S.C. 1681 et seq.]; (iii) the Age Discrimination in Employment Act of 1967 [29 U.S.C. 621 et seq.]; (iv) the Age Discrimination Act of 1975 [42 U.S.C. 6101 et seq.]; (v) section 501 or 504 of the Rehabilitation Act of 1973 [29 U.S.C. 791, 794]; or (vi) title I of the Americans with Disabilities Act of 1990 [42 U.S.C. 12111 et seq.]; (4) falsifying or destroying documents to conceal mistakes made by any employee with respect to a matter involving a taxpayer or taxpayer representative; (5) assault or battery on a taxpayer, taxpayer representative, or other employee of the Internal Revenue Service, but only if there is a criminal conviction, or a final judgment by a court in a civil case, with respect to the assault or battery; (6) violations of the Internal Revenue Code of 1986, Department of Treasury regulations, or policies of the Internal Revenue Service (including the Internal Revenue Manual) for the purpose of retaliating against, or harassing , a taxpayer, taxpayer representative, or other employee of the Internal Revenue Service; (7) willful misuse of the provisions of section 6103 of the Internal Revenue Code of 1986 for the purpose of concealing information from a congressional inquiry; (8) willful failure to file any return of tax required under the Internal Revenue Code of 1986 on or before the date prescribed therefor (including any extensions), unless such failure is due to reasonable cause and not to willful neglect; (9) willful understatement of Federal tax liability, unless such understatement is due to reasonable cause and not to willful neglect; and (10) threatening to audit a taxpayer for the purpose of extracting personal gain or benefit. There is no specific form to file a Section 1203(b) complaint. TIGTA will accept complaints filed on IRS Form 12217. TIGTA complaints can be filed "online," by phone, by fax or mail. It should be noted that filing a Section 1203(b) complaint is a serious matter. Section 10.51 of Circular 230 prohibits disreputable conduct for which a Tax Professional may be censured, suspended, or disbarred. Disreputable conduct includes the filing of a complaint against IRS employee under Section 1203 of the Internal Revenue Service Restructuring and Reform Act of 1998, if the practitioner knows that the complaint is false.
THE TAX PROFESSIONAL'S OBLIGATIONS TO REPORT MISCONDUCT INCLUDING, BUT NOT LIMITED TO, MISCONDUCT BY IRS EMPLOYEES
IRM 5.1.23.7.1 (10-30-2012) ("Referrals to the Office of Professional Responsibility") require IRS employees to report suspected practitioner misconduct to OPR under Section 10.53(a) of Circular 230. Similarly, IRC ? 7214(a)(8) and Treas. Reg.? 301.7214-1 require all IRS employees, who have knowledge or information of violations of the Internal Revenue laws, to report such violations in writing to the Commissioner. Each year, IRS employees are required to certify that they are aware of the IRS Rules of Conduct. IRS employees who have information that another employee has violated any of the Rules of Conduct must report that information to TIGTA. Likewise, absent a privileged relationship, private Tax Professional have a legal and moral obligation to report misconduct. The IRS demands that its Tax Professionals be judged by the same high standards that apply to private Tax Professionals. Congress has passed laws that provide for the mandatory termination of unethical IRS employees. Indeed, the failure to report a felony can be "misprision of a felony," which, in and of itself, is a federal crime under 18 U.S.C. ? 4. Stated another way, a person is guilty of misprision of felony if he or she has knowledge of the actual commission of a felony, conceals it, and does not make it known to a person in authority as soon as possible.
CONCLUSION
Taxes are the lifeblood of the nation. Our voluntary compliance-based system works based, in part, on the public's perception that all Tax Professionals, whether employed by the taxpayers directly or employed by the IRS are honest, reasonable, efficient, practical manner and fair. If taxpayers lose faith in their Tax Professionals, they will mistrust the tax system and be less likely to comply with law voluntarily. As explained above, the Internal Revenue Code includes provisions were designed to ensure a fair and just tax system. In light of the recent scandals involving the IRS, Tax Professionals cannot be "bystanders". The Tax Professionals' obligation to report professional misconduct, even when that misconduct involves an IRS employee, is an integral component of voluntary compliance. If we fail in our duty to report ethical violations by the very few bad actors among us, all Tax Professionals will lose the trust, confidence and respect of the public we have all worked so hard to earn and which the voluntary compliance self assessment system needs to survive.
