TIGTA beats up on tax return preparers
The following TIGTA Reports represent an ogoing push to put return preparers out of business if they are involved in tax shelter. I have had return preprar clients under civil and criminal examination on tax shelter issues. What I learned is that most return preparers cannot recognize a tax shelter or a transaction that can be perceived to be a tax shelter. The IRS and the courts apply "substance over form" principles in evaluating tax shelters. In short, what looks like a valid series of transactions could be viewed substantively as a tax avoidance scheme. If you even "smell" that your client is involved with a tax shelter (i.e., it it is "too good to be true"), have your client contact an experienced tax attorney. Read the TIGTA reports below. TIGTA wants return preparers who prepare returns based on any tax shelter to be put out of business. If you have any concerns about this year or prior year matters, contact ab@irstaxattorney.com.
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The Treasury Inspector General for Tax Administration (TIGTA) concluded in a report released on February 26 ("The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers Is Ineffective and Causes Unnecessary Taxpayer Burden," Reference No. 2009-40-032) that IRS procedures for filing and processing complaints against tax preparers are confusing and inconsistent.
In a second report released on the same day ("Tax Practitioners Promoting Abusive Tax Shelters Are Still Able to Represent Taxpayers Before the Internal Revenue Service," Reference No. 2009-10-039), TIGTA determined that IRS divisions are not consistently referring to the Office of Professional Responsibility (OPR) the names of licensed practitioners who have been assessed penalties, sentenced in a criminal proceeding or enjoined for tax shelter violations.
Several offices are involved in resolving complaints against tax preparers, including Criminal Investigation, Small Business/Self-Employed and Wage and Investment Divisions, OPR and TIGTA. Because of the confusion in handling preparer complaints, the same complaint may be mailed to multiple offices and reviewed multiple times. The IRS thus spends unnecessary time sorting and redirecting complaints.
Furthermore, many complaints are not controlled or tracked. As a result, the IRS does not know the volume of complaints received, their status and resolution or whether multiple complaints have been filed against the same firm or return preparer. The IRS also fails to acknowledge many complaints, creating distrust with the system as taxpayers believe their complaints are being ignored.
"The tax return preparer community provides a unique opportunity to affect taxpayer behavior and compliance with the tax laws," TIGTA said in the report. "Taxpayer complaints about tax return preparers can provide valuable information about understanding the root causes of taxpayer problems [and] identify areas of noncompliance."
TIGTA noted that taxpayers can file complaints by calling the IRS, visiting a Taxpayer Assistance Center, sending a letter, e-mail or fax, or contacting TIGTA. However, IRS guidelines for submitting a complaint require the taxpayer to identify whether the preparer is an unenrolled preparer and a "practitioner" (lawyer, accountant or enrolled agent) and whether the complaint involves fraud or a tax code violation. Complaints against practitioners must be sent to the OPR.
The form for submitting complaints against unenrolled preparers does not solicit adequate information for working on the complaint. Out of 50 complaints sampled, 15 (30 percent) did not provide enough information to identify the preparer or the grounds for the complaint, or they involved allegations about tax-avoidance schemes that did not point to return-preparation misconduct.
TIGTA recommended that the IRS clarify guidance on its website regarding the preparer complaint process and develop a form specifically for return preparer complaints that goes to the correct office and provides sufficient information for the IRS to review the complaint. The IRS should also establish a database or tracking system to efficiently control the complaints. The IRS agreed to update the guidance on its website and to take action to address the other problems.
The second report identified 160 penalized practitioners who were still eligible to represent over 9,700 taxpayers before the IRS. TIGTA recommended that the OPR inform other IRS offices of the need to make referrals to the OPR about practitioners penalized for tax shelter activities. The report noted that taxpayers who use a practitioner who was guilty of tax shelter violations could themselves face additional taxes, penalties and interest.
Treasury Inspector General for Tax Administration (TIGTA) Press Release: TIGTA Releases Reports on the IRS's Oversight of Tax Preparers
February 27, 2009
Treasury Inspector General for Tax Administration (TIGTA) press release : TIGTA reports : Internal Revenue Service : Tax return preparers : IRS oversight .
TIGTA Releases Reports on the IRS's Oversight of Tax Preparers
The Treasury Inspector General for Tax Administration (TIGTA) today publicly released two reports regarding the Internal Revenue Service's (IRS) oversight of paid tax preparers.
The reports assessed whether: the IRS's Office of Professional Responsibility (OPR) is taking action against licensed tax practitioners who have employed abusive tax shelters; and whether the process used by taxpayers to report complaints against paid tax preparers is effective.
There are no national standards that a tax return preparer is required to satisfy before selling tax preparation services to taxpayers. Paid preparers wishing to represent taxpayers before the IRS must be licensed as a certified public accountant, attorney, or enrolled agent. These preparers, known as practitioners, are regulated by OPR, which sets and enforces standards of competency, integrity and conduct. The OPR may impose disciplinary actions through private or public reprimand, suspension or debarment.
TIGTA found that IRS divisions are not consistently referring to OPR licensed practitioners who have been assessed penalties, sentenced in a criminal proceeding, or enjoined for tax shelter violations. As a result, these tax practitioners were still eligible to represent taxpayers before the IRS. Taxpayers who use a licensed tax practitioner who has been identified by the IRS for tax shelter violations could face additional taxes, penalties and interest.
"Abusive tax shelters continue to present formidable challenges to the IRS," commented J. Russell George, the Treasury Inspector General for Tax Administration. "The IRS agreed with TIGTA's recommendations to improve its procedures for referring to OPR licensed tax practitioners who have been identified by the IRS for tax shelter violations for appropriate disciplinary action."
In the second report, TIGTA concluded that the IRS cannot determine how many complaints against paid preparers it receives, how many complaints it works, and the total number of multiple complaints against a specific firm or preparer. According to the report, the IRS's guidelines on how to file a complaint are difficult to understand and IRS employees do not consistently provide taxpayers with sufficient information or what information to include in a complaint. As a result, many complaints cannot be investigated.
The IRS does track some complaints filed by taxpayers against tax practitioners (CPA's, attorneys and enrolled agents). Complaints against unlicensed and uncertified preparers are not tracked.
"Paid preparers are a critical component and stakeholder in tax administration, but there are occasions when the need arises for a taxpayer to file a complaint against preparers," George commented. "The IRS's processes for receiving and processing complaints about tax preparers need to be improved."
TIGTA recommended that the IRS improve the guidance provided to taxpayers about the complaint filing process and develop a form, both web-based and paper, for use by taxpayers in filing preparer complaints. The IRS said it would clarify the preparer complaint information posted on its website ( www.irs.gov ) and agreed to review the complaint process.
To view the reports, including the scope, methodology and IRS response:
The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers Is Ineffective and Causes Unnecessary Taxpayer Burden http://www.treas.gov/tigta/auditreports/2009reports/200940032fr.html
Tax Practitioners Promoting Abusive Tax Shelters Are Still Able to Represent Taxpayers Before the Internal Revenue Service http://www.treas.gov/tigta/auditreports/2009reports/200910039fr.html
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Treasury Inspector General for Tax Administration (TIGTA) Report: The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers Is Ineffective and Causes Unnecessary Taxpayer Burden (Reference Number: 2009-40-032)
February 27, 2009
Treasury Inspector General for Tax Administration (TIGTA) report : Tax return preparers : Complaints against preparers : Unnecessary taxpayer burden .
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers Is Ineffective and Causes Unnecessary Taxpayer Burden
February 24, 2009
Reference Number: 2009-40-032
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Phone Number | 202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site | http://www.tigta.gov
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
February 24, 2009
MEMORANDUM FOR DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT
FROM: Michael R. Phillips Deputy Inspector General for Audit
SUBJECT: Final Audit Report - The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers Is Ineffective and Causes Unnecessary Taxpayer Burden (Audit # 200840015)
This report presents the results of our review to determine whether the process for taxpayers to report complaints against tax return preparers to the Internal Revenue Service (IRS) is effective. This audit was part of our Fiscal Year 2008 Annual Audit Plan.
Impact on the Taxpayer
In Calendar Year 2007, the IRS processed approximately 83 million individual Federal income tax returns prepared by paid tax return preparers. With its current processes, the IRS cannot determine how many complaints against tax return preparers it receives, how many complaints are worked, and the total number of multiple complaints against a specific firm or preparer. Taxpayer complaints about tax return preparers can provide valuable information about understanding the root causes of taxpayer problems, identify areas of noncompliance, and help the IRS address core processes that need improvement.
Synopsis
Paid tax return preparers are a critical component and stakeholder in tax administration and represent an important intermediary between taxpayers and the IRS. The tax return preparer community provides a unique opportunity to affect taxpayer behavior and compliance with the tax laws. Taxpayers can file complaints against preparers by calling the IRS, visiting one of the IRS' 401 local offices, sending a letter or fax, or contacting the Treasury Inspector General for Tax Administration.
Guidelines provided to taxpayers and employees about filing a tax return preparer complaint are confusing and inconsistent. Taxpayers must first be able to determine whether the preparer is an unenrolled agent or a practitioner 1 and then determine if the complaint involves fraud and/or a violation of the tax code. Many taxpayers do not know their tax return preparer's designation to ensure that their complaints are sent to the correct IRS office and do not know what constitutes fraud or a violation of the tax code. Finally, the form used to submit complaints against unenrolled preparers is not designed to provide adequate information with which complaints can be worked.
We selected a judgmental sample of 50 complaints to determine the types of complaints submitted and whether sufficient details were present to allow the IRS to identify the tax return preparer and the issue and to determine its merits. Of the 50 complaints reviewed, 35 (70 percent) identified a preparer and provided allegations about a violation of tax law or a fraud issue. The other 15 (30 percent) complaints either did not provide enough information to identify the tax return preparer, did not contain information related to a tax return preparer, or involved allegations about tax avoidance schemes being used by individuals or investment companies.
The IRS' current process for handling taxpayer complaints against preparers does not identify potential problem preparers so that the IRS can determine the extent of noncompliance, if any, or how the noncompliance should be addressed. Complaints are generally not controlled and tracked. Therefore, neither the volume of complaints received from taxpayers and worked nor their resolutions are known. Moreover, complaints are reviewed multiple times and mailed to multiple offices before most are ultimately destroyed.
The current complaint process does not identify potential problem preparers so that the IRS can determine the extent of the problem, if any, or how the problem should be addressed.
Several offices, including the Criminal Investigation, Small Business/Self-Employed and Wage and Investment Divisions, the Office of Professional Responsibility, and the Treasury Inspector General for Tax Administration, are involved in the process of resolving taxpayer complaints. Complaints are not centrally recorded to identify duplicates, and many complaints are redirected to another function. Because of this, the IRS spends unnecessary time sorting and redirecting complaints. In addition, the IRS does not acknowledge all taxpayer complaints. An ineffective complaint system erodes public trust as taxpayers become frustrated with the IRS' apparent non-response.
Recommendations
We recommended that the Deputy Commissioner for Services and Enforcement 1) clarify guidance to taxpayers on the public IRS web site (IRS.gov) regarding the preparer complaint process, and 2) develop a form, both web-based and paper, specifically for tax return preparer complaints that routes to the correct function based on type of tax return preparer and includes the items necessary for the IRS to appropriately evaluate the legitimacy of the complaint. Once a form is developed to ensure that sufficient information is captured about the complaint, a database(s) or tracking system should be developed to efficiently control the complaints.
Response
The Deputy Commissioner for Services and Enforcement agreed to update guidance on IRS.gov and create a cross-functional team to develop recommended action items to identify opportunities for improvement that may include changes to forms and creation of an automated tracking system. Management's complete response to the draft report is included as Appendix V.
Copies of this report are also being sent to the IRS managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Michael E. McKenney, Assistant Inspector General for Audit (Returns Processing and Account Services), at (202) 622-5916.
Table of Contents
Background
Results of Review
Guidance Provided to Taxpayers to Report Complaints Against Tax Return Preparers Creates Taxpayer Burden
Recommendation 1 :
The Process Used to Control and Track Complaints Against Tax Return Preparers Is Not Efficient or Effective
Recommendation 2 :
Appendices
Appendix I - Detailed Objective, Scope, and Methodology
Appendix II - Major Contributors to This Report
Appendix III - Report Distribution List
Appendix IV - How Do You Report Suspected Tax Fraud Activity?
Appendix V - Management's Response to the Draft Report
Abbreviations
IRS Internal Revenue Service
TAC Taxpayer Assistance Center
Background
Paid tax return preparers are a critical component and stakeholder in tax administration and represent an important intermediary between taxpayers and the Internal Revenue Service (IRS). The tax return preparer community provides a unique opportunity to affect taxpayer behavior and compliance with the tax laws. In Calendar Year 2007, the IRS processed approximately 83 million individual Federal income tax returns prepared by paid tax return preparers.
Paid preparers can be self-employed or work for accounting firms, large tax preparation services, or law firms and include the following:
Licensed professionals, such as attorneys and certified public accountants. These licensed professionals are regulated by the State licensing authority and the related associations such as the American Bar Association and the American Institute of Certified Public Accountants.
Enrolled agents. These professionals pass an IRS examination or present evidence of qualifying experience as a former IRS employee and have been issued an enrollment card. Enrolled agents are the only taxpayer representatives who receive their right to practice from the Federal Government.
Unenrolled or unlicensed preparers. These individuals range from those who might receive extensive training to those with little or no training. Currently, only three States, California, Maryland, and Oregon, have requirements for unenrolled paid preparers. In these States, unenrolled paid preparers must register with State agencies and meet continuing education requirements.
Currently, there are no national standards that a tax return preparer is required to satisfy before selling tax preparation services to the public. Anyone --regardless of training, experience, skill, or knowledge --is allowed to prepare Federal income tax returns for others for a fee.
All paid tax return preparers are subject to Internal Revenue Code penalties --both civil and criminal. For example, civil penalties apply if paid tax return preparers do not sign the tax returns they prepare, do not provide the taxpayers with copies of the tax returns, or deliberately understate a taxpayer's tax liability. Criminal penalties apply when a paid tax return preparer willfully prepares or makes a false statement regarding a false or fraudulent tax return or knowingly provides fraudulent tax returns to the IRS.
However, application of other regulations depends on whether the tax return preparer is an attorney, a certified public accountant, an enrolled agent (referred to by the IRS as a practitioner), or an unenrolled preparer. For example:
Attorneys, certified public accountants, enrolled agents, and enrolled actuaries are governed by the Internal Revenue Code, Treasury Department Circular 230, 1 and the individual States in which they practice. These authorities have established requirements, penalties, and disciplinary actions for noncompliance and/or issue licenses and require continuing education to maintain them.
Unenrolled preparers are governed by the Internal Revenue Code. However, neither the Circular 230 nor individual State requirements, with the exception of the States of California, Maryland, and Oregon, 2 apply to them.
The IRS Office of Professional Responsibility regulates attorneys, certified public accountants, and enrolled agents who practice before the IRS. Practice is defined broadly in Treasury Department Circular 230 as comprehending all matters connected with a presentation to the IRS relating to a taxpayer's rights, privileges, or liabilities under laws or regulations administered by the IRS.
The IRS has additional regulations for any paid tax return preparers who are authorized to file tax returns electronically. Applicants to the Electronic Filing Program must pass certain IRS checks, including background and credit history checks. Participants are also monitored.
Taxpayers can file complaints against preparers using the following methods:
Calling the IRS toll-free telephone number (1-800-829-1040). An assistor should advise the caller/taxpayer to complete an Information Referral (Form 3949 A) or to submit information via a letter and mail it to the IRS, Fresno, California, 93888. Form 3949 A can be obtained from the public IRS web site (IRS.gov) or can be mailed to the taxpayer.
Calling the Tax Fraud Referral Line (1-800-829-0433). This is an automated line that provides instructions for filing a complaint.
Visiting 1 of the IRS' 401 local walk-in offices called Taxpayer Assistance Centers (TAC). 3 An assistor should provide the taxpayer with Form 3949 A and either take the completed Form from the taxpayer or advise him or her to mail it to Fresno, California.
Sending a letter or fax directly to an IRS office.
Accessing the public Treasury Inspector General for Tax Administration web site (TIGTA.gov) and completing an online form, emailing the complaint, or calling the toll-free Hotline (1-800-366-4484).
This review was performed in the Wage and Investment Division Accounts Management function in Fresno, California; the Office of Professional Responsibility in Washington, D.C.; the Small Business/Self-Employed Division Exam Planning and Delivery function in Austin, Texas; and the Gulf States Area Planning and Special Programs function in Austin and Houston, Texas, and Atlanta, Georgia, during the period May through October 2008. Discussions were also held with personnel in the Criminal Investigation Division and South Atlantic Area Planning and Special Programs function. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Results of Review
Guidance Provided to Taxpayers to Report Complaints Against Tax Return Preparers Creates Taxpayer Burden
Tax preparer complaint reporting guidelines provided to taxpayers and employees are confusing and inconsistent. Taxpayers must first be able to determine whether the tax return preparer is an unenrolled agent or a practitioner and then determine if the complaint involves fraud and/or a violation of the tax code. Many taxpayers do not know their tax return preparer's designation, to ensure that their complaints are sent to the correct IRS office, and do not know what constitutes fraud or a violation of the tax code. Finally, the IRS Form used to submit complaints against unenrolled preparers is generic and does not instruct taxpayers to include adequate information with which complaints can be worked.
Guidelines for taxpayers to use to report complaints against tax return preparers are confusing and inconsistent
Taxpayers obtain information about filing a complaint from a variety of IRS sources: 1) IRS.gov; 2) the toll-free telephone service; and 3) the TACs. Only IRS.gov provides written instructions to taxpayers on how to file, what form to use, and where to submit a complaint.
1) If a taxpayer visits IRS.gov, he or she will not find a direct link on the main page to file a complaint. The taxpayer must search to obtain information on how to file a complaint. The taxpayer can click on "Contact IRS," then click on: 4
How Do You Report Suspected Tax Fraud Activity?
If you have information about an individual or company you suspect is not complying with the tax law, report this activity.
At the top of the resulting webpage, the IRS advises the taxpayer to complete Form 3949 A or to draft a letter and mail either to the IRS Fresno office.
At the bottom of the webpage, the IRS explains that if the preparer is an attorney, certified public accountant, or an enrolled agent, the taxpayer should instead report the suspicious actions to the email address of the IRS Office of Professional Responsibility.
Alternatively, if a taxpayer searches on "taxpayer complaints" or "preparer complaints," one of the results includes How to File a Complaint Against a Tax Professional . Clicking on this link directs the taxpayer to a webpage that explains how to submit complaints against attorneys, certified public accountants, enrolled agents, and enrolled actuaries. The webpage explains:
A complaint should be written in a letter format. The letter should include the tax practitioner's name, address, telephone number, designation (i.e., attorney, certified public accountant, enrolled agent, enrolled actuary, etc.), a detailed description of the allegations, and any documents that support those allegations. Please direct all questions and referrals to:
Internal Revenue Service
Office of Professional Responsibility
SE:OPR, Room 7238/IR
1111 Constitution Avenue NW
Washington, DC 20224
However, the definition of an enrolled agent is not provided. The taxpayer must complete a search for the term "enrolled agent" to understand how this might affect where to send a complaint. Once the taxpayer finds the definition of an enrolled agent, there is no database or list of enrolled agents on the webpage to let the taxpayer identify whether his or her tax return preparer is an enrolled agent.
2) If the taxpayer calls the IRS, a toll-free telephone service assistor should advise the taxpayer to mail a complaint via Form 3949 A or a letter to the IRS in Fresno, California. The assistor will not take the complaint information from the taxpayer but should offer to help the taxpayer obtain the Form by directing the taxpayer to IRS.gov or by having the Form mailed to the taxpayer.
3) If the taxpayer visits a TAC, an assistor should advise the taxpayer to correspond directly with the Office of Professional Responsibility and to refer to the written guidelines located on IRS.gov by searching the keyword "complaint" for complaints concerning practitioners (i.e., attorneys, certified public accountants, enrolled agents). A taxpayer with a complaint against an unenrolled agent is provided a copy of Form 3949 A. The assistor will not complete the Form for the taxpayer but will forward the completed Form to Fresno, California, if the taxpayer requests.
We placed 10 calls to the IRS main toll-free telephone number (1-800-829-1040). For:
6 (60 percent) calls, assistors attempted to determine the type of practitioner or if the complaint was related to fraud. In the other 4 calls, the assistors did not make this attempt which could later hinder the processing and evaluation of the complaints.
7 (70 percent) calls, assistors provided instructions on how to obtain Form 3949 A or what should be included if the caller opted to submit the complaint via letter. For the remaining 3 calls (30 percent), the assistors provided information related to sending a letter to the Office of Professional Responsibility: 2 provided an incorrect name, address, or fax number; 1 provided correct information.
We visited five TACs to determine what assistance is given to a taxpayer with a complaint against a tax return preparer. Figure 1 presents the results of the TAC visits.
Figure 1: Results of Visits to TACs
____________________________________________________________________________________
Number of TACs Information Provided by Assistor Asked if Tax
Assistor Return Preparer Was
Enrolled
____________________________________________________________________________________
3 Form 3949 A No
____________________________________________________________________________________
1 List of IRS telephone No
numbers
____________________________________________________________________________________
1 Address for the Director of No
Practice *
____________________________________________________________________________________
* = The Director of Practice was renamed the Office of Professional Responsibility
in Fiscal Year 2003.
Source: Our analysis of visits to five TACs.
None of the five TAC assistors provided a complete response, and one of the assistors referred us to another function in the IRS. Because the assistors did not ask whether the preparers in question were enrolled and whether the complaints were related to fraud for 11 (73 percent) of our 15 in-person and telephone contacts, these potential complaints might have been misrouted to the incorrect office. This creates additional processing for the IRS and delays actions, if any, on the taxpayer complaints.
The IRS Form taxpayers use to submit complaints against tax return preparers is not designed to provide adequate information with which to process the complaints
The IRS states that Form 3949 A is used to report alleged violations of tax law by individuals and businesses to the IRS. However, it is a general information referral form used by multiple IRS functions and is very generic --the word "preparer" is not referenced anywhere on the Form.
Form 3949 A also does not provide sufficient room for the taxpayer to report the complaint because it includes only eight lines on which the taxpayer is to provide a description of an "alleged violation." Users of the Form are instructed to attach another sheet, if needed.
Figure 2 presents an excerpt of the top of Form 3949 A.
In addition, the Form does not ask for specific information so that the IRS can adequately understand and/or consider the claim(s). We selected a judgmental sample of 50 complaints to determine the types of complaints submitted and whether sufficient details were present to allow the IRS to identify the tax return preparer and the issue and to determine its merits.
Of the 50 complaints reviewed, 35 (70 percent) identified a preparer and provided allegations about a violation of tax law or a fraud issue. The other 15 (30 percent) did not provide enough information with which to identify the tax return preparer, did not contain information related to a tax return preparer, or involved allegations about tax avoidance schemes being used by individuals or investment companies. Of the 35 complaints:
15 (30 percent) involved allegations of falsifying exemptions, credits, or deductions.
11 (22 percent) involved allegations of fraudulent activities or refund theft.
5 (10 percent) involved allegations of tax return preparers failing to file tax returns or to return records to the taxpayers.
2 (4 percent) involved allegations of tax return preparers representing taxpayers while disbarred or engaging in misconduct.
2 (4 percent) involved allegations of tax return preparers disclosing information to unauthorized individuals.
Many of the complaints received could have been avoided if the IRS better educated taxpayers and clarified instructions
Many of the complaints reviewed did not meet any criteria under which the IRS could or would be able to take action(s). In addition, because of the lack of specificity on Form 3949 A, taxpayers are not providing the IRS with information from which it could take action. IRS employees who evaluate the Forms for leads confirmed that the complaints received often do not provide enough information to identify the tax return preparer or the issue. Therefore, the complaints evaluated are generally not considered valuable enough to pursue additional actions.
The Government Accountability Office Standards for Internal Control in the Federal Government 5 requires that the agency assess the risks it faces from both external and internal sources. The agency must establish clear, consistent objectives and should consider all significant interactions between the entity and other parties to identify risks. Once risks have been identified, they should be analyzed for their possible effect.
Recommendation
Recommendation 1: The Deputy Commissioner for Services and Enforcement should clarify guidance on IRS.gov when the taxpayer searches for "preparer complaint" so that taxpayers can understand the differences in the types of tax return preparers, the jurisdiction the IRS has over enrolled and unenrolled tax return preparers, and to which function taxpayer complaints about tax return preparers should be sent and by what method.
Management's Response: The Deputy Commissioner for Services and Enforcement concurs with the recommendation and will ensure that the guidance on IRS.gov is updated to assist taxpayers in understanding the process to file complaints against tax return preparers.
The Process Used to Control and Track Complaints Against Tax Return Preparers Is Not Efficient or Effective
The IRS' current process for handling taxpayer complaints against preparers does not identify potential problem preparers so that the IRS can determine the extent of the problem, if any, or how the problem should be addressed. Complaints are generally not controlled and tracked. Therefore, neither the volume of complaints received from taxpayers and worked nor their resolutions are known. Moreover, complaints are reviewed multiple times and mailed to multiple offices, before most are ultimately destroyed.
Multiple offices handle taxpayer complaints against preparers, including:
Criminal Investigation Division.
Small Business/Self-Employed Division.
Wage and Investment Division.
Office of Professional Responsibility.
Treasury Inspector General for Tax Administration.
Several offices, including the Criminal Investigation, Small Business/Self-Employed and Wage and Investment Divisions, the Office of Professional Responsibility, and the Treasury Inspector General for Tax Administration, are involved in the process of resolving taxpayer complaints. Complaints are not centrally recorded to identify duplicates, and many complaints are redirected to another function. Because of this, the IRS spends unnecessary time sorting and redirecting complaints. In addition, the IRS does not acknowledge all taxpayer complaints. For an agency to run and control its operations, it must have relevant, reliable, and timely communications relating to internal as well as external events. Program managers need both operational and financial data to determine whether they are meeting their agencies' strategic and annual performance plans and meeting their goals of accountability for effective and efficient use of resources. An ineffective complaint system erodes public trust as taxpayers become frustrated with the IRS' apparent non-response.
Process for complaints against unenrolled preparers
Tax return preparer complaints are received in the Accounts Management function in Fresno, California. However, they are not worked or investigated from that office; the Accounts Management function is merely a conduit for the complaints. The Accounts Management function staff sort Forms 3949 A that refer to a tax return preparer and forward them to another IRS office. Accounts Management function staff do not determine whether the tax return preparer is enrolled (i.e., is a practitioner).
All complaints are mailed to the Small Business/Self-Employed Division Examination and Return Selection function in Austin, Texas. An analyst in Austin, Texas, reviews the Forms 3949 A and forwards them to the Planning and Special Programs function.
o Complaints about an attorney, a certified public accountant, or an enrolled preparer are not forwarded to the Office of Professional Responsibility.
Once shipped to the Planning and Special Programs function, the complaints are forwarded to the Return Preparer Coordinators (16 in total) located in 1 of the 7 Area Offices 6 throughout the IRS. The Return Preparer Coordinators review the Forms 3949 A to determine whether they meet the criteria for evaluation in the field (i.e., the preparer prepares a number of tax returns above a specific threshold, and there is evidence of a recurring theme that is harmful to taxpayers).
Incoming and outgoing inventory to these locations are not maintained except through use of the number of total documents received and forwarded on a Document Transmittal (Form 3210).
Figure 3 presents a flowchart of how Forms 3949 A are processed for tax return preparer complaints.
Until January 2006, taxpayers could submit complaints against tax return preparers to the IRS over the telephone. An IRS assistor would question the caller to gather information about the complaint. The assistor would record the information on an internal form and submit it to the responsible function for the appropriate action. The Criminal Investigation Division did not generally view these complaints as valuable because they generated few investigative cases. In an effort to cut costs, the IRS discontinued the process for submitting complaints via the telephone in Fiscal Year 2006. The IRS reported $3.5 million in cost savings with this change. This savings does not include cost projections for increased correspondence and for processing that correspondence. The IRS now accepts taxpayer complaints against tax return preparers through the mail and by fax.
Return Preparer Coordinators advised us that Forms 3949 A typically do not provide enough information to enable them to further investigate the complaint by using resources in the field to conduct an audit of returns prepared by the tax return preparer. Our tests of 50 complaints confirmed that taxpayer complaints against preparers either did not always contain enough information to identify the preparer and alleged tax law violations or did not involve preparer issues. For example, the IRS does not have any authority over the return preparation activities of unpaid preparers such as relatives who incorrectly prepare tax returns or investment groups that advertise tax savings for real estate agents.
Because there is no single database of all taxpayer complaints, we could not determine how many complaints the IRS receives against unenrolled preparers or how many yield productive cases. Our tests also identified the following:
The Accounts Management function does not log in complaints, cannot determine how many complaints the IRS receives, and does not track the complaints to determine their outcome or identify problem preparers. Only the volume of complaints being forwarded to other offices is documented on the Forms 3210.
The Accounts Management function does not forward complaints about practitioners (i.e., attorneys, certified public accountants, and enrolled agents) to the Office of Professional Responsibility because research is not performed to identify preparer designation. It forwards all tax return preparer complaints to a Small Business/Self-Employed Division analyst in the Examination and Return Selection function.
The Examination and Return Selection function does not forward complaints about practitioners to the Office of Professional Responsibility because research is not performed to identify preparer designation. However, this function does receive complaints against unenrolled preparers forwarded from the Office of Professional Responsibility.
Complaints are sorted and filed at each function to which they are sent. However, most of the functions file the complaints by receipt date, so it is not possible for employees to retrieve specific complaints without significant effort. Filed complaints are then destroyed based on the amount of time elapsed from the receipt date. Handling complaints in this manner does not afford the IRS the opportunity to gauge the magnitude of tax return preparer issues because complaints are not analyzed and cannot be retrieved. In addition, shipping complaints to functions where they will ultimately be destroyed wastes IRS resources.
Taxpayers are not sent acknowledgments that the IRS has received their complaints.
However, from March 29 to August 9, 2008, the IRS expended 2.2 Full-Time Equivalents 7 in the Accounts Management function alone, costing approximately $66,250 in salary without overhead, to sort the complaints sent to an analyst for further sorting and forwarding. Moreover, the Accounts Management function has used overtime hours to sort the Forms 3949 A. Additional costs are incurred in the Examination function when the analyst sorts the complaints by preparer location and forwards them to the appropriate Area Office. Return Preparer Coordinators in the Area Offices receive the complaints and review them to determine whether they meet the Examination function criteria for application of resources.
Process for complaints against practitioners
Taxpayers may also submit complaints against preparers to the Office of Professional Responsibility. Current procedures require taxpayers to submit complaints against practitioners via a letter, which should include the following elements: tax practitioner's name, address, telephone number, and designation (attorney, certified public accountant, enrolled agent, enrolled actuary, etc.); a detailed description of the allegations; and any documents that support those allegations. These letters can be mailed, faxed, or emailed directly to the Office of Professional Responsibility. The Office of Professional Responsibility also receives complaints from taxpayers via Forms 3949 A.
Complaints received in the mail are entered into a database upon receipt, regardless of practitioner designation, and then evaluated for Circular 230 designation and Office of Professional Responsibility jurisdiction. Complaints submitted via email and fax are first evaluated for Circular 230 designation and jurisdiction. Emails and faxes subject to Office of Professional Responsibility jurisdiction are then entered into the database. The types of allegations that warrant entry to the database include, but are not limited to, the following:
A practitioner who did not exercise due diligence in the preparation of, approving, and filing of tax returns, documents, affidavits, and other papers relating to IRS matters.
A practitioner who unreasonably delayed the prompt disposition of any matter before the IRS.
A practitioner who charged an unconscionable fee in connection with any matter before the IRS.
A practitioner who did not, at the request of a client, promptly return any and all records of the client that are necessary for the client to comply with Federal tax obligations.
Office of Professional Responsibility employees indicated they believe that taxpayers are submitting complaints to both their office and the Accounts Management function. One complaint in our sample of 50 complaints was sent to both the Accounts Management function and the Office of Professional Responsibility. However, because there is no database of all complaints received by the Office of Professional Responsibility or the Accounts Management function, neither we nor the IRS can determine how many duplicate complaints are received. The Office of Professional Responsibility can determine whether it has received more than one complaint against a practitioner for only those complaints subject to Circular 230 designation and jurisdiction.
Figure 4 presents a flowchart of how the Office of Professional Responsibility processes the receipt of taxpayer complaints against practitioners.
If the tax return preparer is a practitioner and the issue is under the Office of Professional Responsibility's jurisdiction (i.e., subject to Circular 230), an acknowledgement is sent to the taxpayer that the complaint was received. Evidence is gathered to determine whether the complaint can be supported; actions taken by the Office of Professional Responsibility resulting from supported complaints range from reprimands to disbarments. Case files for completed cases are retained by the Office of Professional Responsibility for at least 7 years before they are sent to a Federal Records Center. 8 Suspended and disbarred practitioners may continue to prepare returns but may not represent taxpayers before the IRS. If a complaint is not under its jurisdiction, the Office of Professional Responsibility forwards it to another office within the IRS, such as the Criminal Investigation or Small Business/Self-Employed Divisions, or to the Treasury Inspector General for Tax Administration.
The Office of Professional Responsibility receives complaints from a variety of sources, both internal and external to the IRS. Discussions with Office of Professional Responsibility staff indicated that many of the complaints are warranted and result in productive cases. However, a review of the Office of Professional Responsibility's database of complaints showed that most complaints submitted from taxpayers do not result in actions being taken against practitioners. Of the 621 cases closed from January 1 to September 3, 2008, that were coded with taxpayer as the original source, 467 (75 percent) were closed because the Office of Professional Responsibility lacked jurisdiction, 111 (18 percent) were closed with no sanctions, 27 (4 percent) were opened in error, and 10 (2 percent) were closed with various other codes. Only 6 (1 percent) resulted in action being taken against the practitioner. Of the 467 cases closed because of a lack of jurisdiction, 457 were for unenrolled preparers, while 10 were closed because the complaint was against a practitioner but was an issue that was not covered under Circular 230. The large number of complaints about unenrolled preparers indicates complaints from taxpayers are being routed to the incorrect function within the IRS.
Overall, the IRS cannot determine how many complaints against tax return preparers (unenrolled and practitioners) it receives, how many are productive, and the total number of multiple complaints against a specific firm, practitioner, or preparer. Although the Office of Professional Responsibility controls and tracks complaints received by mail against practitioners or unenrolled tax return preparers not subject to Circular 230, it does not do so for all complaints received by fax or email. In addition, the Accounts Management and the Examination and Return Selection functions control and track complaints by volume rather than by practitioners or unenrolled tax return preparers.
Taxpayer complaints against tax return preparers can provide valuable information about recurring problems. They can provide valuable information to understanding the root causes of taxpayer problems and identify noncompliance, as well as help the IRS address core processes that need improvement. The IRS needs to ensure that it has sufficient data with which to identify potential problem preparers. Developing a form to capture all the information necessary to analyze the situation and determine the best course of action to take, if any, is essential. Once a form is developed, the IRS needs to create a means to capture, monitor, and track the complaints.
Recommendation
Recommendation 2: The Deputy Commissioner for Services and Enforcement should develop a form, both web-based and paper, specifically for tax return preparer complaints that routes to the correct function based on type of tax return preparer and includes the items necessary for the IRS to appropriately evaluate the complaint. Once a form is developed to ensure that sufficient information is captured about the complaint, a database(s) or tracking system should be developed to efficiently control the complaints.
Management's Response: The Director, Examination, Small Business/Self-Employment Division, will ensure that the tax return preparer complaint process is reviewed by a cross-functional team to identify opportunities for improvement. The cross-functional team will develop recommended action items to modify the system to produce an appropriate level of efficiency, effectiveness, and accountability that may include changes to forms and creation of an automated tracking system.
Appendix I
Detailed Objective, Scope, and Methodology
Our overall objective was to determine whether the process for taxpayers to report complaints against tax return preparers to the IRS is effective. To accomplish our objective, we:
I. Determined whether the method taxpayers use to file complaints against tax return preparers with the IRS is effective and reduces taxpayer burden.
A. Determined whether guidance for taxpayers lodging a complaint and for IRS employees handling a complaint against a tax return preparer is clear.
B. Determined whether IRS employees provide consistent responses when guiding a taxpayer on reporting a complaint against a tax return preparer. We placed 10 calls to the IRS main toll-free telephone number (1-800-829-1040) between September 19 and September 23, 2008. We also visited five judgmentally selected TACs 1 in Atlanta, Georgia; Austin, Texas; Houston, Texas; San Diego, California; and Washington, D.C., between June 12 and September 4, 2008. To conserve audit resources, we selected TACs in cities where we were conducting other audit work.
C. Determined whether the decision to discontinue "live" services was effective.
II. Determined whether the process the IRS uses to handle, track, and control complaints is effective in stopping problematic tax return preparers from preparing tax returns.
A. Determined responsibilities of staff in the Wage and Investment Division, Small Business/Self-Employed Division, Criminal Investigation Division, and Office of Professional Responsibility for processing complaints.
B. Determined procedures used to process complaints received, retained, forwarded, and destroyed and actions to be taken to document the volumes.
C. Determined procedures used to evaluate complaints to determine next action (retain, forward, destroy).
D. Determined whether a numbering or tracking system exists for each complaint received to identify duplicate and multiple complaints received for processing and historical data.
E. Determined whether the IRS provides an acknowledgement to taxpayers who submit complaints.
F. Reviewed documentation maintained to determine the format of (Form or letter) and reasons for complaints. Because the IRS could not identify the total population of complaints, we could not select a statistical sample. We selected a judgmental sample of paper tax return preparer complaints currently in inventory in the following sites between August 18 and September 3, 2008 (total sample = 50 complaints):
1. Fresno, California - Wage and Investment Division; sample size = 16.
2. Austin, Texas - Small Business/Self-Employed Division, Examination and Return Selection function; sample size = 16.
3. Houston, Texas, and Atlanta, Georgia - Small Business/Self-Employed Division, Examination Gulf States Area Planning and Special Programs function/Return Preparer Program Coordinator; sample size = 7.
4. Washington, D.C. - Office of Professional Responsibility; sample size = 11.
G. Determined whether the IRS could identify the disposition of tax return preparer complaints received from January 1 through December 31, 2007. The IRS could not provide us information on complaints received during this time period. However, we obtained an extract of the database used by the Office of Professional Responsibility to track cases under its jurisdiction. The extract included information for cases closed between January 1 and September 3, 2008, that were based on taxpayer complaints. We did not assess the reliability of the extract because we were only determining whether the closed cases resulted in actions being taken against practitioners.
Appendix II
Major Contributors to This Report
Michael E. McKenney, Assistant Inspector General for Audit (Returns Processing and Account Services)
Augusta R. Cook, Director
Paula W. Johnson, Audit Manager
Lynn Faulkner, Lead Auditor
Robert Howes, Senior Auditor
Jerome Antoine, Auditor
Appendix III
Report Distribution List
Commissioner C
Office of the Commissioner - Attn: Chief of Staff C
Assistant Deputy Commissioner for Services and Enforcement SE
Commissioner, Small Business/Self-Employed Division SE:S
Commissioner, Wage and Investment Division SE:W
Director, Office of Research, Analysis and Statistics RAS
Chief, Criminal Investigation Division SE:CI
Director, Office of Professional Responsibility SE:OPR
Director, Office of Program Evaluation and Risk Analysis RAS:O
Director, Communications and Liaison, Wage and Investment Division SE:W:C
Director, Communications, Liaison, and Disclosure, Small Business/Self-Employed Division SE:S:CLD
Director, Customer Account Services, Wage and Investment Division SE:W:CAS
Director, Customer Assistance, Relationships, and Education, Wage and Investment Division SE:W:CAR
Director, Examination, Small Business/Self-Employed Division SE:S:E
Director, Refund Crimes, Criminal Investigation Division SE:CI:RC
Director, Strategy and Finance, Wage and Investment Division SE:W:S
Chief, Performance Improvement, Wage and Investment Division SE:W:S:PI
Director, Accounts Management, Wage and Investment Division SE:W:CAS:AM
Director, Exam Planning and Delivery, Small Business/Self-Employed Division SE:S:E:EPD
Director, Exam Policy, Small Business/Self-Employed Division SE:S:E:EP
Director, Field Assistance, Wage and Investment Division SE:W:CAR:FA
Field Director, Accounts Management (Fresno), Wage and Investment Division SE:W:CAS:AM:F
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaisons:
Deputy Commissioner for Services and Enforcement SE
Commissioner, Small Business/Self-Employed Division SE:S
Commissioner, Wage and Investment Division SE:W
Chief, Criminal Investigation Division SE:CI
Director, Office of Professional Responsibility SE:OPR
Senior Operations Advisor, Wage and Investment Division SE:W:S
Appendix IV
Appendix V
Management's Response to the Draft Report
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON. D.C. 20224
DEPUTY COMMISSIONER
February 5, 2009
MEMORANDUM FOR MICHAEL R. PHILLIPS DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Linda E. Stiff Deputy Commissioner Services and Enforcement
SUBJECT: Draft Audit Report - The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers is Ineffective and Causes Unnecessary Taxpayer Burden (Audit No. 200840015)
We have reviewed the draft report titled "The Process Taxpayers Must Use to Report Complaints Against Tax Return Preparers is Ineffective and Causes Unnecessary Taxpayer Burden".
We are committed to improving our overall program actions in regards to paid tax return preparers. We will expand our current efforts to include a cross-functional team assigned to review and revise our tax return preparer complaint process. This updated process will assist our efforts to reduce taxpayer burden and to enhance compliance by tax professionals and unenrolled return preparers.
Attached is a detailed response outlining our corrective actions. If you have questions, please call me at (202) 622-6860 or Monica Baker. Director. Examination at (202) 283-2659.
Attachment
Attachment
RECOMMENDATION 1:
The Deputy Commissioner for Services and Enforcement should clarify guidance on IRS.gov when the taxpayer searches for "preparer complaint" so that taxpayers can understand the differences in the types of tax return preparers, the Jurisdiction the IRS has over enrolled and unenrolled tax return preparers, and to which function taxpayer complaints about tax return preparers should be sent and by what method.
CORRECTIVE ACTIONS:
We concur with this recommendation. The Director, Examination SB/SE Division will ensure the guidance on IRS.gov is updated to assist taxpayers in understanding the process to file complaints against tax return preparers.
IMPLEMENTATION DATE:
June 15, 2009
RESPONSIBLE OFFICIAL:
Director, Examination Policy SB/SE Division
CORRECTIVE ACTION(S) MONITORING PLAN:
The Director, Examination Policy SB/SE will advise the Director, Examination SB/SE of any delays in implementing this corrective action.
RECOMMENDATION 2:
The Deputy Commissioner for Services and Enforcement should develop a form, both web-based and paper, specifically for tax return preparer complaints that routes to the correct function based on type of tax return preparer and includes the items necessary for the IRS to appropriately evaluate the complaint. Once a form is developed to ensure that sufficient information is captured about the complaint, a database(s) should be developed to efficiently control the complaints.
CORRECTIVE ACTION :
The Director, Examination SB/SE Division will ensure the tax return preparer complaint process is reviewed by a cross-functional team to identify opportunities for improvement. The cross-functional team will develop recommended action items to modify the system to produce an appropriate level of efficiency, effectiveness, and accountability that may include changes to forms and creation of an automated tracking system.
IMPLEMENTATION DATE :
By June 15, 2010, the cross-functional team will develop recommended action items.
RESPONSIBLE OFFICIAL(S) :
Director, Examination Planning & Delivery SB/SE
CORRECTIVE ACTION MONITORING PLAN :
The Director, Examination Planning and Delivery SB/SE will advise the Director. Examination SB/SE of any delays in implementation of this corrective action.
1 The IRS refers to tax return preparers who are attorneys, certified public accountants, and enrolled agents as practitioners. Enrolled agents are preparers who have passed an IRS examination or presented evidence of qualifying experience as a former IRS employee and have been issued an enrollment card.
1 Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service (Treasury Department Circular No. 230 (revised 4-2008)).
2 California requires that paid preparers pass a 60-hour approved course and obtain a tax preparer bond to become registered. California also requires 20 hours of continuing education annually. Oregon requires that tax preparers be at least 18 years old, have a high school degree or equivalent, complete 80 hours of income tax law education, and pass a tax preparer examination. Oregon also requires 30 hours of continuing education annually. While Oregon requires enrolled agents to register, enrolled agents must meet far fewer registration requirements than unenrolled preparers. In May 2008, Maryland also enacted paid preparer legislation that will require tax preparers to pass an examination, pay a registration fee, and subsequently comply with continuing education requirements.
3 An IRS office with employees who answer questions, provide assistance, and resolve account-related issues for taxpayers face to face.
4 See Appendix IV for a replica of the webpage, How Do You Report Suspected Tax Fraud Activity?
5 Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, dated November 1999).
6 An Area Office is a geographic organizational level used by IRS business units and offices to help their specific types of taxpayers understand and comply with tax laws and issues.
7 A measure of labor hours in which 1 Full-Time Equivalent is equal to 8 hours multiplied by the number of compensable days in a particular fiscal year. For Fiscal Year 2008, 1 Full-Time Equivalent was equal to 2,096 staff hours.
8 The National Archives and Records Administration Federal Records Center system is a national network of 17 regional facilities that store and provide access to over 25 million cubic feet of records.
1 An IRS office with employees who answer questions, provide assistance, and resolve account-related issues for taxpayers face to face.
Treasury Inspector General for Tax Administration (TIGTA) Report: Tax Practitioners Promoting Abusive Tax Shelters Are Still Able to Represent Taxpayers Before the Internal Revenue Service (Number: 2009-10-039)
February 27, 2009
Treasury Inspector General for Tax Administration (TIGTA) report : Tax practitioners : Abusive tax shelters : Practice before the IRS .
TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION
Tax Practitioners Promoting Abusive Tax Shelters Are Still Able to Represent Taxpayers Before the Internal Revenue Service
February 20, 2009
Reference Number: 2009-10-039
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Redaction Legend :
1 = Tax Return/Return Information
Phone Number | 202-622-6500
Email Address | inquiries@tigta.treas.gov
Web Site | http://www.tigta.gov
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
February 20, 2009
MEMORANDUM FOR DIRECTOR, OFFICE OF PROFESSIONAL RESPONSIBILITY
FROM: Michael R. Phillips Deputy Inspector General for Audit
SUBJECT: Final Audit Report - Tax Practitioners Promoting Abusive Tax
Shelters Are Still Able to Represent Taxpayers Before the Internal
Revenue Service (Audit # 200710041)
This report presents the results of our review of the Office of Professional Responsibility's (OPR) actions on licensed tax practitioners that engaged in abusive tax shelter transactions. The overall objective of this review was to determine whether the OPR is effectively identifying and taking appropriate actions against those licensed tax practitioners who have employed or promoted abusive tax shelters. This audit was included as part of our Fiscal Year 2008 Annual Audit Plan under the major management challenges of Tax Compliance Initiatives and Taxpayer Protection and Rights.
Impact on the Taxpayer
The OPR plays an important role in regulating the conduct of licensed tax professionals who act as power of attorneys for taxpayers who might be involved in an audit, collection issues, or appeal of an Internal Revenue Service (IRS) determination. We found that the OPR was unaware of a significant number of licensed tax practitioners who were assessed penalties, sentenced in a criminal proceeding, or enjoined for tax shelter violations. As a result, these tax practitioners were still eligible to represent taxpayers before the IRS. Practitioner misconduct can serve to erode public confidence in the tax system and create unfortunate consequences for taxpayers relying on unscrupulous tax practitioners.
Synopsis
Abusive tax shelters are an area of concern to Congress and continue to present formidable challenges to the IRS. To address tax shelter violations and other misconduct issues, the IRS has developed a number of strategies to ensure attorneys, accountants, and other tax practitioners adhere to professional standards and follow the law. These strategies include outreach and education to tax practitioners and IRS operating divisions related to the standards of conduct, the IRS role in enforcing the standards, and the use of disciplinary actions when appropriate.
The OPR works closely with the other IRS operating divisions to identify improper practitioner behaviors that have an impact on tax administration but generally relies on IRS employees to refer any potential practitioner misconduct. While the IRS has established a referral system for employees to report this information to the OPR, we determined the referral process was not working effectively. We found that the OPR was unaware of a significant number of licensed tax practitioners who engaged in tax shelter violations. As a result, the OPR did not initiate an investigation to determine whether any sanctions were necessary to prevent disreputable practitioners from continuing to be allowed to represent taxpayers. Specifically, the OPR was not aware of 160 practitioners assessed tax penalties, permanently enjoined by a Federal Court, or criminally sentenced for abusive tax shelter activities that caused loss to the Federal Government of approximately $34.9 million. 1 These practitioners are still eligible to represent 9,766 taxpayers before the IRS.
During our audit, we obtained IRS data readily available outside of the OPR to identify potentially disreputable tax practitioners engaged in abusive tax shelters that had not been referred to the OPR as required. We discussed with OPR management the feasibility of OPR personnel performing similar proactive analyses to identify tax practitioners who have been assessed penalties, received a criminal sentence, or enjoined for potentially disreputable behavior. OPR management agreed that obtaining some available information from IRS systems is a sound approach; however, management stated that this would generally require extensive additional information gathering and case building that is not supported by their current resources.
Recommendations
We recommended that the Director, OPR, take the following actions: 1) determine whether additional disciplinary actions are warranted for the tax practitioners penalized for abusive tax shelter violations; 2) establish written procedures for controlling and reviewing case referrals on the inventory system; 3) determine whether additional disciplinary actions are warranted for the tax practitioners who were permanently enjoined for abusive tax shelter violations; 4) determine whether additional disciplinary actions are warranted for those tax practitioners sentenced for abusive tax shelter violations; 5) undertake additional outreach efforts with other IRS functions to increase awareness of the requirement to refer to the OPR licensed tax practitioners involved in disreputable behavior; and 6) develop a methodology when resources become available to proactively identify licensed tax practitioners who might have engaged in disreputable activity.
Response
IRS management agreed with all of our recommendations. The OPR will review the identified 143 tax practitioners penalized for abusive tax shelter actions and take appropriate action. To the extent these practitioners are not within the OPR's jurisdiction, the Director, OPR, will refer the individuals to the appropriate IRS function. In addition, the OPR is in the process of revising its Internal Revenue Manual guidelines governing the control and processing of each complaint, referral, license application, and/or renewal that is input to their information management system. Further, the OPR will also ensure that each of the nine cases involving abusive tax shelters injunctions and the eight cases involving practitioners subject to criminal prosecution are reviewed for appropriate action. If these individuals do not fall within the OPR's jurisdiction, the Director, OPR, will refer the individuals to the appropriate IRS function. The OPR will also continue to provide awareness training to both internal and external stakeholders to ensure that licensed tax practitioners involved in potentially disreputable behavior are brought to the attention of the OPR and are appropriately sanctioned. Finally, the OPR will look to develop and sustain a more proactive model of case identification and development, as resources permit. Management's complete response to the draft report is included as Appendix VI.
Copies of this report are also being sent to the IRS managers affected by the report recommendations. Please contact me at (202) 622-6510 if you have questions or Nancy A. Nakamura, Assistant Inspector General for Audit (Management Services and Exempt Organizations), at (202) 622-8500.
Table of Contents
Background
Results of Review
Tax Practitioners Engaged in Abusive Tax Shelter Actions Are Still Able to Practice Before the Internal Revenue Service
Recommendation 1 :
Recommendation 2 :
Recommendation 3 :
Recommendations 4 through 6 :
Appendices
Appendix I - Detailed Objective, Scope, and Methodology
Appendix II - Major Contributors to This Report
Appendix III - Report Distribution List
Appendix IV - Outcome Measures
Appendix V - Internal Revenue Code Practitioner Penalties
Appendix VI - Management's Response to the Draft Report
Abbreviations
CAF Centralized Authorization File
DOJ Department of Justice
IRS Internal Revenue Service
OPR Office of Professional Responsibility
Background
An abusive tax shelter is a tax transaction or scheme that shelters income from normal taxation by taking an unrealistic position. A 2006 Senate report 1 included an estimate that Americans now have more than $1 trillion in assets offshore and illegally evade between $40 and $70 billion in United States taxes each year through the use of offshore tax schemes alone. Abusive tax shelters are an area of concern to Congress and continue to present formidable challenges to the Internal Revenue Service (IRS).
In the IRS' 2005-2009 Strategic Plan, the IRS stated that it would vigorously enforce the law to stop willful noncompliance through tax shelters. One area in which the IRS has focused its enforcement is on tax practitioners who promote abusive tax avoidance transactions such as abusive tax shelters. The IRS has developed a number of strategies to ensure attorneys, accountants, and other tax practitioners adhere to professional standards and follow the law. These strategies include outreach and education to tax practitioners and IRS operating divisions related to the standards of conduct, the IRS role in enforcing the standards, and the use of disciplinary actions when appropriate. As a means of deterrence, the IRS has tools at its disposal including injunctions, 2 criminal sanctions, and monetary penalties against persons who participate in or promote abusive tax shelters.
When the IRS determines that a licensed tax practitioner has participated in or promoted an abusive tax shelter, the IRS' Office of Professional Responsibility (OPR) should be advised so it can take appropriate action. 3 The OPR is responsible for regulating licensed tax practitioners who represent taxpayers before the IRS by setting and enforcing standards of competency, integrity, and conduct. The OPR provides oversight of licensed tax practitioners based on the regulations in Treasury Department Circular No. 230 (Circular 230). 4 Circular 230 is the legal authorization for the OPR to institute proceedings against tax practitioners who violate these regulations. The OPR may impose disciplinary actions through private reprimand, censure (a public reprimand), suspension, or disbarment.
In September 2007, the IRS updated Circular 230 after Congress passed legislation targeting promoters and investors of abusive tax shelters. 5 The law was designed to impose penalties for misconduct by tax shelter promoters, advisors, and investors. The current law also enables the OPR to impose monetary penalties against licensed practitioners who fail to comply with Circular 230 rules.
Over the past few years, the IRS has substantially increased the OPR's budget and staffing to help ensure that it has adequate oversight over licensed tax practitioners. In Fiscal Year 2002, the OPR had a budget of $1.8 million and a staff of 15. By Fiscal Year 2007, the OPR had a budget for oversight of approximately $5.4 million and was authorized a staff of 58, although staffing difficulties have not allowed it to reach this maximum level.
In performing its oversight role, the OPR relies internally on IRS employees to refer to the OPR any potential practitioner misconduct identified during an examination. Referrals should be made to the OPR as soon as it appears that a practitioner might be in violation of Circular 230 regulations. The referral process is discussed in the various operating division's policy manuals 6 and highlighted on the OPR's web site. The OPR informed us that when a referral is received from an IRS employee, it is evaluated to ensure that the tax practitioner is within the OPR's jurisdiction, the referral is actionable under Circular 230, and the practitioner is representing taxpayers before the IRS. If so, the OPR opens an enforcement case and controls the case on its inventory system.
The OPR works closely with the other IRS operating divisions to identify improper practitioner behaviors that have an impact on tax administration. Both the IRS and OPR plan to use referral information to develop IRS-wide coordinated strategies to deter, detect, and address such practitioner misconduct. In Fiscal Year 2007, the OPR appointed a new Director to oversee the enforcement function. One of the Director's first acts was to help organize an internal IRS conference to improve the level of communication of referral information.
This review was performed at the OPR in Washington, D.C., during the period October 2007 through August 2008. However, certain information needed to evaluate the OPR's referral process was not available. Specifically, the OPR does not maintain complete information related to the number and source of referrals received. These issues are discussed in further detail in the Results of Review section. With the exception of these impairments, we conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
Results of Review
The OPR plays an important role in regulating the conduct of licensed tax professionals who act as power of attorneys for taxpayers who might be involved in an audit, collection issues, or appeal of an IRS determination, especially if these licensed professionals engage in tax abuses. We determined that the OPR was unaware of a significant number of licensed tax practitioners who were assessed penalties, sentenced in a criminal proceeding, or enjoined for tax shelter violations because this misconduct may not have been referred by IRS employees as required. As a result, the OPR did not initiate an investigation to determine whether any sanctions were necessary to prevent disreputable practitioners from continuing to be allowed to represent taxpayers.
During our audit, we obtained IRS data readily available outside of the OPR to identify potentially disreputable tax practitioners engaged in abusive tax shelters that had not been referred to the OPR as required. We discussed with OPR management the feasibility of OPR personnel performing similar proactive analyses to identify tax practitioners who have been assessed penalties, received a criminal sentence, or enjoined for potentially disreputable behavior. OPR management agreed that obtaining some available information from IRS systems is a sound approach; however, management stated that this would generally require extensive additional information gathering and case building that is not supported by their current resources.
The practitioner misconduct identified constitutes only a portion of the total number of individuals assessed penalties, enjoined by Federal courts, or with criminal convictions that might be representing taxpayers. Our scope included only tax shelter abuses reported during a 3-year period. In addition, we did not review State convictions or other types of Federal Government convictions, such as those involving dishonesty, breach of trust, or a felony, that could warrant sanction by the OPR. Practitioner misconduct can serve to erode public confidence in the tax system and create unfortunate consequences for taxpayers relying on unscrupulous tax practitioners. To effectively address practitioner misconduct, we believe the OPR should reemphasize with IRS operating divisions the importance of the referral process in identifying disreputable practitioners. In addition, we believe OPR management should consider more proactive analyses, as resources become available, to minimize its reliance on referrals to identify and investigate disreputable tax practitioners. Collectively, these actions will ensure that OPR resources continue to be focused on practitioner misconduct most threatening to tax administration and reduce the risk that disreputable tax practitioners are allowed to represent taxpayers before the IRS.
Tax Practitioners Engaged in Abusive Tax Shelter Actions Are Still Able to Practice Before the Internal Revenue Service
Depending on the severity of the tax shelter offense, the IRS may assess civil penalties, pursue criminal sanctions, or request that the District Courts impose injunctions against persons involved. We found that the OPR was not aware of a significant number of licensed tax practitioners who perpetrated tax shelter abuses. The tax practitioners we identified had been penalized, enjoined, and/or convicted of promoting or practicing significant tax shelter abuses and were still able to represent taxpayers before the IRS. At the time of our audit, no disciplinary action had been taken against these practitioners, thereby allowing them to continue to represent taxpayers before the IRS.
Some practitioners assessed tax penalties for abusive tax shelter transactions are still authorized to practice before the IRS
The IRS uses penalties as a means of encouraging voluntary compliance and deterring taxpayers and tax practitioners from engaging in abusive tax shelters. IRS procedures require that an information referral be sent to the OPR when specific tax shelter penalties are assessed on licensed tax practitioners. This referral should be prepared by the IRS enforcement employee who assessed the penalty against the licensed practitioner and enables the OPR to initiate a proceeding for sanction against a practitioner who might have engaged in disreputable conduct.
We obtained information maintained on the Individual Master File 7 which tracked specific tax shelter penalties assessed during Fiscal Years 2005 through 2007. During these 3 fiscal years, the IRS assessed penalties 8 totaling $82.3 million for specific tax shelter violations against 1,175 individuals. We then researched the IRS Centralized Authorization File (CAF) 9 to determine whether any of these individuals had represented taxpayers before the IRS. We also researched State licensing authorities to determine whether any of these persons were licensed tax practitioners.
Of the 1,175 individuals, we identified 280 that could potentially be licensed practitioners. Based on our analysis, the OPR identified and took action on 137 (49 percent) of the 280 individuals who received tax shelter penalties. For these individuals, the OPR controlled the case referral and applied sanctions for disreputable conduct where applicable.
However, we found that the OPR was not aware of a significant number of licensed tax practitioners the IRS penalized for tax shelter violations. The OPR's inventory system contained no information on 73 (26 percent) of the 280 licensed tax practitioners. OPR management believed that these cases were most likely not referred to them by the applicable IRS enforcement personnel. These 73 practitioners were assessed penalties totaling approximately $1.8 million for promoting abusive tax shelters. 10 Currently, these 73 penalized licensed tax practitioners are identified on the CAF as representing 3,867 taxpayers before the IRS. These taxpayers might be unaware that their licensed tax practitioners have been identified by the IRS for tax shelter violations. This might result in the IRS assessing these taxpayers additional taxes, penalties, and interest due to the incompetence or disreputable conduct of the tax practitioner.
In addition, the remaining 70 of the 280 tax practitioners are listed on the CAF as attorneys, certified public accountants, or enrolled agents. We could not verify if the information on the CAF was correct based on our review of information maintained by State licensing agencies or the IRS' Enrolled Agent computer system. 11 These 70 tax practitioners were assessed penalties totaling approximately $1.4 million for promoting abusive tax shelters and are currently eligible to interact with the IRS in some capacity for 4,920 taxpayers. If these 70 practitioners do not have verifiable licenses, they would not be under the jurisdiction of the OPR. Therefore, the applicable IRS function would be responsible for investigating the possible misrepresentations or potential misconduct on the part of these non-licensed practitioners. 12
Section 10.53(a) of Circular 230 requires IRS employees to make a written report to the OPR when there is reason to believe that a tax practitioner has violated the rules in Circular 230. In performing its oversight role, the OPR relies on employees within the compliance functions to refer cases when penalties are assessed as a result of an abusive tax shelter. OPR management agreed that individuals assessed penalties for abusive tax shelters were not always referred by IRS compliance employees and stated that the penalty referral process could be problematic if the OPR is not notified when these types of penalties are assessed.
In a previous Treasury Inspector General for Tax Administration review, 13 several IRS operating divisions were contacted to evaluate their procedures and processes to ensure that appropriate cases are referred to the OPR. Although the IRS operating divisions had procedures to send referrals to the OPR, they generally did not maintain a record or list of referrals sent to the OPR.
We previously reported that the OPR's guidance is not sufficient to ensure that referrals are consistently processed. At that time, management agreed with our recommendation to develop procedures to better define which cases will be recorded on the OPR case management system and how the source, nature, and outcome of referrals will be monitored to help target outreach efforts. However, OPR management informed us in this audit that not all referrals received are recorded on their inventory system, and they are in the process of evaluating procedures for controlling and reviewing referrals. We believe that written procedures will ensure consistent case processing and adherence to requirements and assist the OPR in operating more effectively.
OPR management informed us that prior to the second quarter of Fiscal Year 2008, they were not recording on their inventory system referrals involving non-licensed practitioners or referrals in which they did not plan to open an investigation against a licensed practitioner. In addition, their current inventory system is unable to provide critical data on the source of referrals. We believe referral source information would assist OPR management in potentially identifying which IRS operating divisions have a low number of referrals and could be in violation of the referral procedures. This information could be used by OPR management to target future outreach activities to reinforce the requirement for employees to prepare written referrals identifying potentially disreputable behavior by licensed practitioners. In addition, improvements in the referral process will also positively affect the referrals of tax practitioners involved with tax-related crimes other than tax shelter issues that warrant OPR involvement. OPR management informed us they are planning to replace their current inventory system with a new case management system in mid-2009, which should be able to provide information on the source of referrals.
Recommendations
The Director, OPR, should:
Recommendation 1 : Review the 143 identified tax practitioners penalized for abusive tax shelter actions to determine whether additional disciplinary actions are warranted. If the individuals do not fall under the jurisdiction of the OPR, then the Director should refer the cases to the appropriate IRS function for applicable action.
Management's Response : Management agreed with the recommendation. The OPR will review the 143 identified tax practitioners penalized for abusive tax shelter transactions and take appropriate action. To the extent these practitioners are not within the OPR's jurisdiction, the OPR will refer the individuals to the appropriate IRS function which will be responsible for investigating any potential misconduct on the part of these non-licensed practitioners.
Recommendation 2 : Establish written procedures for controlling and reviewing case referrals for the current inventory system, as well as for the new planned inventory system, to ensure consistent case tracking and processing.
Management's Response : Management agreed with the recommendation. The OPR is in the process of revising its Internal Revenue Manual guidelines governing the control and processing of each complaint, referral, license application, and/or renewal and all other OPR operations including mail processing and case referral receipt that is input to its information management system.
Some practitioners permanently enjoined by a Federal Court for abusive tax shelter transactions are not always reviewed by the OPR
The Department of Justice (DOJ) Tax Division uses its civil power to stop illegal tax schemes by seeking and obtaining injunctions in Federal Court. Injunctions prohibit practitioners and promoters from selling illegal tax schemes on the Internet, at seminars, or through other means. However, we identified some tax practitioners who have been enjoined by a Federal Court due to involvement in abusive tax shelter activities but still remain authorized to represent taxpayers before the IRS. Failure to identify these tax practitioners in a timely manner could have serious adverse consequences to both taxpayers and the IRS if practitioners continue to be allowed to promote, market, and sell abusive tax shelter schemes to unsuspecting taxpayers.
We obtained an IRS database extract of permanent injunctions and final judgments decreed by United States District Courts against individuals during Fiscal Years 2005 through 2007. 14 We found that the IRS was granted permanent relief or injunctions against 48 individuals for tax shelter issues and/or abusive tax schemes. We researched State licensing authorities to determine whether any of these individuals were licensed tax practitioners under the OPR's jurisdiction and researched the CAF to determine whether they had represented taxpayers before the IRS.
Of the 48 individuals, we identified 17 that could potentially be licensed tax practitioners. We found the OPR reviewed and applied sanctions, when applicable, for 8 of the 17 permanently enjoined licensed practitioners. However, the OPR was unaware of*****
Seven of the 17 tax practitioners we identified are listed on the CAF as attorneys, certified public accountants, or enrolled agents. We could not verify if the information on the CAF was correct based on our review of information maintained by State licensing agencies or IRS' Enrolled Agent computer system. These 7 tax practitioners caused an estimated harm to the Federal Government of $13.9 million dollars and are currently eligible to represent 517 taxpayers before the IRS. If these seven practitioners do not have verifiable licenses and are not under the jurisdiction of the OPR, then the applicable IRS function should further investigate them for possible misrepresentation or potential misconduct on the part of a non-licensed practitioner.
Recommendation
Recommendation 3 : The Director, OPR, should review the nine identified tax practitioners permanently enjoined for abusive tax shelter actions to determine whether additional disciplinary actions are warranted. If the individuals do not fall under the jurisdiction of the OPR, then the Director should refer the cases to the appropriate IRS function for applicable action.
Management's Response : Management agreed with the recommendation. The OPR will ensure that each of the nine cases involving abusive tax shelter injunctions are reviewed for appropriate action.
Some practitioners who have been convicted and sentenced for abusive tax shelter activities have not been restricted from practicing before the IRS
For those taxpayers who commit severe tax offenses, the IRS pursues criminal sanctions. Criminal Investigation Division special agents who investigate criminal offenses are required to send a referral to the OPR related to misconduct by licensed practitioners. According to Circular 230, the Director of the OPR may expedite suspension of any practitioner who, within 5 years, has been convicted of any tax-related crime, any crime involving dishonesty or breach of trust, or any felony for which the conduct involved renders the practitioner unfit to practice before the IRS. However, we identified some licensed tax practitioners criminally sentenced for tax shelter abuses who were still authorized to represent taxpayers before the IRS at the time of our audit.
Our review of the Criminal Investigation Division database for Fiscal Years 2005 through 2007 identified 40 individuals sentenced for tax shelter issues or abusive tax schemes. 15 Of the 40 individuals, we identified 30 that could potentially be licensed tax practitioners. We found that the OPR took action to review and apply sanctions for 22 of the 30 criminally sentenced practitioners. However, the OPR was unaware of and had not reviewed 5 (17 percent) of the 30 sentenced tax practitioners. These 5 tax practitioners were engaged in tax shelter schemes that caused an estimated harm or loss to the Federal Government of $4.4 million and are representing or still eligible to represent 249 taxpayers before the IRS.
Three of the 30 tax practitioners identified are listed on the CAF as attorneys, certified public accountants, or enrolled agents. However, we could not verify if the information on the CAF was correct based on our review of information maintained by State licensing agencies or IRS' Enrolled Agent computer system. These 3 tax practitioners caused an estimated harm to the Government of $10.9 million and are currently eligible to represent 261 taxpayers before the IRS. If these three practitioners do not have verifiable licenses and are not under the jurisdiction of the OPR, then the applicable IRS function should further investigate for possible misrepresentation or potential misconduct on the part of a non-licensed practitioner.
OPR management informed us that they might not always receive referrals from the Criminal Investigation Division at the point where they can initiate a proceeding for disreputable conduct against a practitioner. For example, the Criminal Investigation Division can complete an investigation involving a licensed practitioner and refer the case for prosecution to the DOJ and at the same time refer the information to the OPR. However, the OPR will generally not take action on a licensed practitioner until there is a final or decisive violation of Circular 230. Further, we determined that the OPR does not have a consistent process to follow up with the Criminal Investigation Division for referrals received once a final decision is made by the DOJ.
In our prior review, we recommended that the OPR work with other law enforcement agencies, including the DOJ, to improve the referral process by obtaining timely, relevant conviction information for tax crimes and State or Federal convictions involving dishonesty and breach of trust in a format that is useful to the OPR. OPR management agreed in principle with our recommendation, but believed they were doing all that could reasonably be done at that time. We discussed again with OPR management the feasibility of OPR personnel obtaining data readily available within the IRS to identify tax practitioners who have been assessed penalties, received a criminal sentence, or enjoined for potentially disreputable behavior. OPR management agreed that obtaining some available information from IRS systems was a sound approach; however, management stated that this would generally require extensive additional information gathering and case building that is not supported by their current resources. Given the extreme nature of the violations committed by some of the licensed tax practitioners, we believe the IRS needs to develop alternative approaches to protect tax administration and prevent further abuses.
Recommendations
The Director, OPR, should:
Recommendation 4 : Review the eight identified tax practitioners sentenced for abusive tax shelter actions to determine whether additional disciplinary actions are warranted. If the individuals do not fall under the jurisdiction of the OPR, then the Director should refer the cases to the appropriate IRS function for applicable action.
Management's Response : Management agreed with the recommendation. The OPR will review the eight identified tax practitioners subject to criminal prosecution and determine whether additional disciplinary actions are warranted. If the individuals do not fall within the jurisdiction of the OPR, appropriate jurisdictional and disciplinary decisions will be made.
Recommendation 5 : Initiate additional outreach efforts with other IRS functions to increase awareness of the requirement to refer to the OPR for appropriate action licensed tax practitioners involved in potentially disreputable behavior.
Management's Response : Management agreed with the recommendation. The OPR will continue to provide awareness training to both internal and external stakeholders to ensure that licensed tax practitioners involved in potentially disreputable behavior are brought to the attention of the OPR and are appropriately sanctioned.
Recommendation 6 : Develop a methodology, when resources become available, to perform proactive analyses of information available from other IRS functions, including the Modernization and Information Technology Services organization, the Criminal Investigation Division, and the Small Business/Self-Employed Division Lead Development Center, to identify and appropriately address licensed tax practitioners engaged in potentially disreputable activity.
Management's Response : Management agreed with the recommendation. The OPR will look to develop and sustain a more proactive model of case identification and development, as resources permit.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective was to determine whether the OPR is effectively identifying and taking appropriate actions against those licensed tax practitioners who have employed or promoted abusive tax shelters. To accomplish this objective, we:
I. Determined the procedures and guidance for the OPR and IRS employees regarding the identification, referral, discipline, and monitoring of abusive tax practitioners/preparers.
A. Reviewed Treasury Regulations [e.g., Treasury Department Circular No. 230 (Circular 230)], 1 Delegation Orders, and Revenue Procedures for tax practitioner/preparer requirements and IRS jurisdiction.
B. Reviewed the Internal Revenue Manual for the Large and Mid-Size Business Division, Small Business/Self-Employed Division, and Criminal Investigation Division for requirements to identify and refer abusive tax practitioners/preparers to the OPR. We discussed with IRS functional employees how referrals are developed and sent to the OPR.
C. Discussed with OPR management their current strategic priorities.
D. Obtained workload information for the OPR that included current Business Performance Reviews, staffing information, and budgets.
II. Determined whether the OPR is effectively able to identify or investigate those tax practitioners who have been penalized for tax shelter violations.
A. Obtained an Individual Business Master File 2 extract of all tax shelter and understatement of liability penalties (by IRS Master File penalty reference numbers) assessed during Fiscal Years 2005, 2006, and 2007. We determined the data were reliable by comparing and matching extracted data to online data listed on the IRS Integrated Data Retrieval System. 3
B. Identified licensed practitioners with assessed tax shelter or tax avoidance penalties during Fiscal Years 2005 through 2007 from the IRS Master File extract and discussed with OPR management those tax practitioners who were penalized but were not identified by the OPR and were listed on the CAF without restrictions.
III. Determined whether the OPR is effectively able to identify or investigate those tax practitioners who have been enjoined (Civil Injunction) or convicted for employing or promoting abusive tax shelters.
A. Obtained a database extract from the IRS Small Business/Self-Employed Division Lead Development Center inventory system of individuals who were permanently enjoined for abusive tax shelter promotions, schemes, or transactions during Fiscal Years 2005, 2006, and 2007. We determined the data were reliable by comparing and matching extracted data to online Small Business/Self-Employed Division internet web site data and DOJ internet web site data.
B. Identified licensed practitioners who were enjoined for abusive tax shelter actions during Fiscal Years 2005 through 2007 and discussed with OPR management those tax practitioners who were not identified by the OPR and were listed on the CAF without restrictions.
C. Obtained a database extract from the IRS Criminal Investigation Division inventory system of individuals who were sentenced for abusive tax shelter promotions, schemes, or transactions during Fiscal Years 2005, 2006, and 2007. We determined the data were reliable by comparing and matching extracted data to online Criminal Investigation Division internet web site data and DOJ internet web site data.
D. Identified licensed practitioners who were sentenced for abusive tax shelter actions during Fiscal Years 2005 through 2007 and discussed with OPR management those tax practitioners who were not identified by the OPR and were listed on the CAF without restrictions.
Internal controls methodology
Internal controls relate to management's plans, methods, and procedures used to meet their mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. We determined the following internal controls were relevant to our audit objective: the various IRS operating divisions' policies and procedures for referring to the OPR licensed tax practitioners who were assessed penalties, enjoined, and/or sentenced for abusive tax shelter actions. We evaluated these controls by interviewing management and reviewing applicable information and documents.
Appendix II
Major Contributors to This Report
Nancy A. Nakamura, Assistant Inspector General for Audit (Management Services and Exempt Organizations)
Jeffrey M. Jones, Director
Janice M. Pryor, Audit Manager
Joseph P. Smith, Acting Audit Manager
Mark A. Judson, Lead Auditor
John J. Chiappino, Senior Auditor
Stephanie K. Foster, Senior Auditor
Yasmin B. Ryan, Senior Auditor
Ahmed M. Tobaa, Senior Auditor
Arlene Feskanich, Information Technology Specialist
Martha Stewart, Information Technology Specialist
Appendix III
Report Distribution List
Commissioner C
Office of the Commissioner --Attn: Chief of Staff C
Deputy Commissioner for Operations Support OS
Deputy Commissioner for Services and Enforcement SE
Commissioner, Wage and Investment Division SE:W
Chief Technology OS:CTO
Director, Customer Account Services Consolidation, Wage and Investment Division SE:W
Director, Customer Account Services, Wage and Investment Division SE:W:CAS
Associate Chief Information Officer, Business Systems Development OS:CIO:I:B
Director, Compliance Services, Chief Information Officer OS:CIO:I:B:CS
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis RAS:O
Office of Internal Control OS:CFO:CPIC:IC
Audit Liaisons:
Deputy Commissioner for Operations Support OS
Deputy Commissioner for Services and Enforcement SE
Director, Office of Professional Responsibility SE:OPR
Appendix IV
Outcome Measures
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to Congress.
Type and Value of Outcome Measure :
Taxpayer Burden - Actual; 8,700 taxpayers are being represented by 143 licensed or potentially licensed tax practitioners who have been penalized by the IRS for abusive tax shelter actions (see page 5). 1
Methodology Used to Measure the Reported Benefit:
To evaluate the number of tax practitioners assessed a monetary penalty by the IRS for tax shelter violations, we obtained an IRS Individual Master File 2 database extract of specific tax shelter assessments made during Fiscal Years 2005 through 2007. We found the IRS assessed penalties totaling $82.3 million for tax shelter violations on 1,175 individuals. We then researched the IRS CAF to determine whether any of these individuals had represented taxpayers before the IRS. We also researched State licensing authorities to determine whether any of these individuals were licensed tax practitioners. Of the 1,175 individuals, we identified 280 that could be under the OPR's jurisdiction.
The OPR took action on 137 of the 280 individuals. However, we found that the OPR was not aware of a significant number of licensed tax practitioners the IRS penalized for tax shelter violations. The OPR's inventory system contained no information on 73 (26 percent) of the 280 licensed tax practitioners. These 73 practitioners were penalized a total of $1.8 million for abusive tax shelter actions and are representing 3,867 taxpayers before the IRS. The remaining 70 of the 280 tax practitioners are listed on the CAF as attorneys, certified public accountants, or enrolled agents. However, we could not verify if the information on the CAF was correct based on our review of information maintained by State licensing agencies or the IRS' Enrolled Agent computer system. These 70 tax practitioners were assessed penalties totaling approximately $1.4 million for promoting abusive tax shelters and are currently eligible to interact with the IRS in some capacity for 4,920 taxpayers.
Type and Value of Outcome Measure :
Taxpayer Burden - Actual; 595 taxpayers are being represented by 9 licensed or potentially licensed tax practitioners who have been enjoined for promotion of an abusive tax shelter scheme or strategy (see page 5).
Methodology Used to Measure the Reported Benefit :
To evaluate the number of tax practitioners permanently enjoined from preparing tax returns, representing taxpayers before the IRS, or from continuing a tax shelter scheme or abusive tax transaction, we obtained an IRS database extract of permanent injunctions and final judgments decreed by United States District Courts against individuals during Fiscal Years 2005 through 2007. 3 We found that the IRS was granted permanent relief or injunctions against 48 individuals for tax shelter issues and/or abusive tax schemes. We researched the State licensing authorities to determine whether any of these individuals were licensed tax practitioners under the OPR's jurisdiction and the CAF to determine whether they represented taxpayers before the IRS.
Of the 48 individuals, we identified 17 that could potentially be licensed tax practitioners. We found that the OPR reviewed and applied sanctions, when applicable, for 8 of the 17 permanently enjoined licensed practitioners. However, for of the 17 licensed tax practitioners, the OPR was unaware that ***** We also could not verify the licensing status for 7 of the 17 practitioners through the State licensing agencies maintained on internet web sites or the IRS' Enrolled Agent computer system. However, these representatives are listed on the CAF with designations as attorneys, certified public accountants, or enrolled agents. These 7 permanently enjoined, potentially licensed practitioners caused an estimated harm to the Government of $13.9 million and are eligible to represent 517 taxpayers before the IRS.
Type and Value of Outcome Measure :
Taxpayer Burden - Actual; 471 taxpayers are being represented by 8 licensed or potentially licensed tax practitioners who have been sentenced for an abusive tax shelter scheme, strategy, or transaction (see page 5). 4
Methodology Used to Measure the Reported Benefit :
To evaluate the number of sentenced tax practitioners, we obtained and reviewed a Criminal Investigation Division database of individuals who received a final conviction and sentence for a tax-related crime during Fiscal Years 2005 through 2007. We found that 40 individuals were sentenced for tax shelter issues or abusive tax schemes. Of the 40 individuals, we identified 30 that could potentially be licensed tax practitioners. We found that the OPR took action and applied sanctions to 22 of these sentenced tax practitioners.
However, the OPR was unaware of and ultimately had not reviewed five. These 5 licensed tax practitioners were engaged in tax shelter schemes that caused an estimated harm or loss to the Government of $4.4 million and are representing or still eligible to represent 249 taxpayers before the IRS. In addition, we could not verify the licensing status for three of the tax practitioners. However, these representatives are identified on the CAF with designations as attorneys, certified public accountants, or enrolled agents. These 3 individuals caused an estimated harm to the Government of $10.9 million and are still eligible to represent 261 taxpayers before the IRS.
Appendix V
Internal Revenue Code Practitioner Penalties
____________________________________________________________________________________
Code
Section Description Penalty
____________________________________________________________________________________
6700 Promoting abusive tax shelter Lesser of $1,000
or 100 percent
of gross income
derived from the
activity.
____________________________________________________________________________________
6701 Aiding and abetting understatement of tax liability $1,000 per
person per
period.
____________________________________________________________________________________
6707 Failure to furnish information regarding tax shelters Multiple
calculations.
____________________________________________________________________________________
6707A Failure to disclose reportable transaction $10,000/natural
person or
$50,000/other
taxpayer.
____________________________________________________________________________________
6708 Failure to maintain list relating to reportable $10,000 per day
transactions after failure to
provide list.
____________________________________________________________________________________
6694(a) Understatement of taxpayer's liability by Return Preparer $250 per return
or claim.
____________________________________________________________________________________
6694(b) Understatement of taxpayer's liability due to intentional $1,000 per
disregard of rules and regulations or to willful or return or claim.
reckless conduct
____________________________________________________________________________________
Source: Internal Revenue Code.
Appendix VI
Management's Response to the Draft Report
DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C. 20224
January 29, 2009
MEMORANDUM FOR MICHAEL R. PHILLIPS DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Carolyn Hinchman Gray Acting Director, Office of Professional Responsibility
SUBJECT: Draft Audit Report --Tax Practitioners Promoting Abusive Tax Shelters Are Still Able to Represent Taxpayers Before the Internal Revenue Service (Audit No. 200710041)
I have reviewed the draft report titled "Tax Practitioners Promoting Abusive Tax Shelters Are Still Able to Represent Taxpayers Before the Internal Revenue Service". I concur with your conclusions that abusive tax shelters are an area of concern to Congress and continue to present formidable challenges to the IRS.
The OPR works closely with the other IRS operating divisions to identify practitioner misconduct that has a negative impact on tax administration. In addition, the OPR works closely with the Department of Justice (DOJ) to ensure that Tax Professionals covered by Treasury Department Circular 230 and who engage in the promotion of abusive tax shelters are identified and appropriately sanctioned. As resources are available, we will explore additional methodologies to proactively identify licensed tax practitioners who may be engaged in disreputable activity
Attached is a detailed response outlining our corrective actions. If you have questions, please call me at (202) 622-9730 or Robert Johnson, Senior Management/Program Analyst at (202) 622-8320.
Attachment
Attachment
RECOMMENDATION 1:
Review the 143 identified tax practitioners penalized for abusive tax shelter actions to determine whether additional disciplinary actions are warranted. If the individuals do not fall under the jurisdiction of the OPR, then the Director should refer the cases to the appropriate IRS function for applicable action.
CORRECTIVE ACTIONS;
The Director, Office of Professional Responsibility, will review the 143 identified tax practitioners penalized for abusive tax shelter transactions and take appropriate action. To the extent these practitioners are not within OPR's jurisdiction. OPR will refer the individual to the appropriate IRS function which will be responsible for investigating any potential misconduct on the part of these non-licensed practitioners. OPR will also determine if any of these potentially non-licensed practitioners fall within the criminal jurisdiction of the TIGTA Office of Investigations for misrepresenting their professional status.
IMPLEMENTATION DATE:
By September 30, 2009
RESPONSIBLE OFFICIAL;
Director, Office of Professional Responsibility
RECOMMENDATION 2;
Establish written procedures for controlling and reviewing case referrals for the current inventory system, as well as for the new planned inventory system, to ensure consistent case tracking and processing.
CORRECTIVE ACTION;
The OPR recently completed Internal Revenue Manuals (IRMs) governing the control and processing of each complaint, referral, license application and/or renewal and all other OPR operations including mail processing and case referral receipt/input into OPR's information management system, including both I-Trak and E-Trak.. Specific IRMs were completed for Mail Processing, the Enrolled Practitioner Program, the Case Development & Licensure Branch and Enforcement Branches I and II. The IRMs are currently being reviewed by OPR's newly appointed Information Management Document (IMD) Coordinator and will be forwarded for approval and publishing.
IMPLEMENTATION DATE:
June 30, 2009
RESPONSIBLE OFFICIAL:
Director, Office of Professional Responsibility
RECOMMENDATION 3:
The Director, OPR, should review the nine identified tax practitioners permanently enjoined for abusive tax shelter actions to determine whether additional disciplinary actions are warranted. If the individuals do not fall under the jurisdiction of the OPR, then the Director should refer the cases to the appropriate IRS function for applicable action.
CORRECTIVE ACTION:
The Director, OPR, will ensure that each of the nine cases involving abusive tax shelter injunctions are reviewed for appropriate action. The OPR conducted extensive liaison with the Department of Justice (DOJ) which resulted in DOJ hosting a nationwide training session for its attorneys who handle IRS injunction cases. One of the purposes of the training was to ensure that when DOJ enjoins a practitioner from "promoting tax shelters" or "preparing tax returns", the injunction language also includes a prohibition against "practicing before the IRS". The Service's Lead Development Center (LDC) subsequently reviewed all previous injunctions against preparation to ensure that those involving practitioners also included the new injunction language. OPR will review each of these nine cases for appropriate action.
IMPLEMENTATION DATE;
September 30, 2009
RESPONSIBLE OFFICIAL:
Director, Office of Professional Responsibility
RECOMMENDATION 4:
Review the eight identified tax practitioners sentenced for abusive tax shelter actions to determine whether additional disciplinary actions are warranted. If the individuals do not fall under the jurisdiction of the OPR, then the Director should refer the cases to the appropriate IRS function for applicable action.
CORRECTIVE ACTION:
The Director, OPR, will review the eight identified tax practitioners subject to criminal prosecution and determine whether additional disciplinary actions are warranted. If these individuals do not fall within the jurisdiction of OPR, appropriate jurisdictional and disciplinary decisions will be made.
IMPLEMENTATION DATE:
September 30, 2009
RESPONSIBLE OFFICIAL:
Director, Office of Professional Responsibility
RECOMMENDATION 5:
Initiate additional outreach efforts with other IRS functions to increase awareness of the requirement to refer to the OPR for appropriate action licensed tax practitioners involved in potentially disreputable behavior.
CORRECTIVE ACTION:
The OPR continues to provide awareness training to both internal and external stakeholders to ensure licensed tax practitioners involved in potentially disreputable behavior are brought to the attention of the OPR and are appropriately sanctioned. OPR recently completed Area Reviews/Visitations of several Area PSP Offices and met with numerous Return Preparer Coordinators (RPCs) as part of a review/outreach process to evaluate and enhance the effectiveness and quality of OPR referrals. OPR personnel attend annual RPC Training events and training/liaison opportunities with LDC personnel. OPR continues to provide training involving disreputable conduct scenarios at the IRS' Nationwide Tax Forums on an annual basis. Feedback from these presentations has been overwhelmingly positive. OPR is currently exploring options associated with the dedication of an FTE to a specialized communications position.
IMPLEMENTATION DATE;
September 30, 2009
RESPONSIBLE OFFICIAL:
Director. Office of Professional Responsibility
RECOMMENDATION 6:
Develop a methodology, when resources become available, to perform proactive analyses of information available from other IRS functions, including the Modernization and Information Technology Services organization, the Criminal Investigation Division, and the Small Business/Self-Employed Division Lead Development Center, to identify and appropriately address licensed tax practitioners engaged in potentially disreputable activity.
CORRECTIVE ACTION:
As resources permit, OPR will increasingly look to develop and sustain a more proactive model of case identification and development.
IMPLEMENTATION DATE;
June 30, 2010
RESPONSIBLE OFFICIAL:
Director, Office of Professional Responsibility
1 See Appendix IV for more detailed information.
1 Tax Haven Abuses: The Enablers, the Tools, and Secrecy (United States Senate Permanent Subcommittee on Investigations, dated August 1, 2006).
2 An injunction is a writ or order from a court that enjoins or prohibits a person or group from carrying out a given action, or ordering a given action to be done. The IRS must initiate a proceeding for an injunction to be imposed against a taxpayer.
3 If an abusive tax shelter involves a non-licensed authorized representative such as an unenrolled paid preparer, then the IRS Small Business/Self-Employed Division is responsible for investigating and regulating the possible misconduct.
4 Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service.
5 The American Jobs Creation Act of 2004 (Pub. L. No. 108-357, 118 Stat. 1418) was signed into law on October 22, 2004.
6 The Internal Revenue Manual is the official source for IRS policies, directives, guidelines, procedures, and delegations of authority in the IRS.
7 The IRS database that maintains transactions or records of individual tax accounts.
8 See Appendix V for a list of penalties.
9 A computerized system of records that houses authorization information from powers of attorney, tax information authorizations, and estate tax returns.
10 The penalties included intentional disregard of rules and regulations, willful and reckless conduct, as well as aiding and abetting understatement of tax liability.
11 The Enrolled Practitioner Program System is used to record and monitor individuals granted enrolled agent status by the IRS.
12 The IRS OPR oversees the regulation of practice of attorneys, certified public accountants, enrolled agents, and other licensed professionals. If an abusive tax shelter involves a non-licensed authorized representative such as an unenrolled paid preparer, then the IRS Small Business/Self-Employed Division will investigate and/or regulate the possible misconduct.
13 The Office of Professional Responsibility Can Do More to Effectively Identify and Act Against Incompetent and Disreputable Tax Practitioners (Reference Number 2006-10-066, dated March 2006).
14 The IRS Small Business/Self-Employed Division has a Lead Development Center that maintains a database for abusive tax transactions worked and completed.
15 The Criminal Investigation Division database extract was pulled from its Criminal Investigation Management Information System.
1 Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service (Rev. April 2008).
2 The IRS database that stores various types of taxpayer account information. This database includes individual, business, and employee plans and exempt organizations data.
3 IRS computer system capable of retrieving or updating stored information; it works in conjunction with a taxpayer's account records.
1 ***** To avoid double counting, we adjusted the totals for taxpayers represented by penalized practitioners (8,787 - 87 = 8,700 taxpayers).
2 The IRS database that maintains transactions or records of individual tax accounts.
3 The IRS Small Business/Self-Employed Division has a Lead Development Center that maintains a database for abusive tax transactions worked and concluded.
4 ***** To avoid double counting. we adjusted the totals for taxpayers represented by sentenced practitioners (510 - 39 = 471 taxpayers).
Labels: TIGTA Report 2..26..2009
posted by Return Preparer Tax Law @ Friday, February 27, 2009
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