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D.C. Circuit Shoots Down Preparer's Claim Relating to Suspension to Practice Before IRS
(Parker Tax Publishing March 2017)
The D.C. Circuit affirmed a lower court and held that a tax return preparer was not entitled to damages as a result of his suspension to practice before the IRS as an enrolled agent. The court concluded that since the return preparer had never obtained enrolled-agent status, the IRS could not have deprived him of his interest in that status, however careless their actions were. Bowman v. Iddon, 2017 PTC 81 (D.C. Cir. 2017).
Background
The IRS recognizes four primary groups of individuals who prepare tax returns: CPAs, lawyers, enrolled agents, and unenrolled preparers (i.e. tax preparers). CPAs, lawyers, and enrolled agents must be licensed, while tax preparers are subject to less stringent regulation. As of 2005, IRS regulations permitted the first three of these groups - all but tax preparers - to practice before the IRS.
Circular 230, which then governed practice before the IRS, defined these groups as "practitioners" and allowed them to act in all matters connected with a presentation to the IRS or any of its officers or employees relating to a taxpayer's rights, privileges, or liabilities, including through filing documents, corresponding with the IRS, and representing a client at conferences. Tax preparers, by contrast, could obtain only "limited practice" authorization, which allowed them to represent taxpayers before certain line officers of the IRS, excluding "appeals officers, revenue officers, Counsel or similar officers or employees."
In 2011, after an IRS review found problems in the tax-preparation industry, the IRS issued a new rule governing tax preparers. That rule created a new category of "registered tax preparers," who counted as "practitioners" obligated to register with the IRS by paying a fee and passing a qualifying exam. Under the rule, and except as otherwise prescribed, only attorneys, CPAs, enrolled agents, and registered tax preparers could for compensation prepare or assist with the preparation of all or substantially all of a tax return or claim for refund. The D.C. Circuit invalidated these regulations in Loving v. IRS, 2014 PTC 73 (D.C. Cir. 2014) holding that tax-return preparers fall outside the IRS's statutory authority to regulate "the practice of representatives of persons before the Department of the Treasury."
In June of 2005, while working as a tax preparer, John Bowman pled guilty to mail fraud, wire fraud, and money laundering and was sentenced to 57 months in prison. He began serving his sentence in August of 2005. Three months later, while Bowman was still in prison, IRS agent Kimberly Iddon submitted a report of Bowman's suspected misconduct to the IRS Office of Professional Responsibility (OPR). The form on which Iddon submitted the report required her to identify whether Bowman was an attorney, CPA, enrolled agent, or enrolled actuary. Though Bowman had never been an enrolled agent, Iddon erroneously identified him as one, citing "personal knowledge" and attaching newspaper articles on Bowman's prosecution. None of those articles, however, identified Bowman as an enrolled agent, and Iddon never searched the IRS's records to confirm Bowman's status.
A few weeks later, Iddon faxed Bowman's IRS Centralized Authorization File to an OPR paralegal. Although the space on the form for "Enrollment Number" is empty, someone handwrote the words "Enrolled Agent" at the bottom of the page. An IRS official who later searched the agency's records reported that she "did not find any record indicating that [Bowman] was authorized to practice before the IRS as an enrolled agent."
OPR nonetheless initiated disciplinary proceedings to suspend Bowman from doing what, as a tax preparer, he had no authority to do: practice before the IRS. Due to a second mistake by the IRS, Bowman received neither the complaint that initiated those proceedings nor an opportunity to correct the agency's obvious error. Specifically, the IRS mailed a copy of the complaint to his business address, even though the IRS knew Bowman was incarcerated and had forfeited his business property to the government as restitution. Unsurprisingly, the letter was returned undelivered.
The IRS announced Bowman's suspension in its quarterly bulletin, as well as on a website listing disciplinary actions for "Attorneys, Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries." An OPR manager emailed more than 20 people informing them that Bowman had been suspended from practice before the IRS and should not be recognized as a taxpayer's representative. Having left prison, and having received no correspondence from the IRS, Bowman learned of OPR's disciplinary decision through a Freedom of Information Act request in September 2011. By this time, the IRS had issued its "registered tax return preparer" rule extending Circular 230 to tax preparers. In November of 2012, Bowman filed a petition for reinstatement with OPR pursuant to Circular 230.
Two years later, after the D.C. Circuit's Loving decision invalidated the 2011 rule, the IRS responded to Bowman's petition. Now recognizing that Bowman was not and had never been an enrolled agent, OPR sent him a letter informing him that "[a]ccording to the [IRS's] Enrolled Agent database, you are not an Enrolled Agent." OPR went on to warn Bowman that "unless you currently possess a license under section 10.3 of Circular 230, you may not engage in full practice before the Internal Revenue Service . . . ." But OPR concluded by restoring Bowman's "ability to engage in limited practice before the IRS, as defined in section 10.7 of Circular 230, by removing [his] name from the list of individuals currently barred from practice before the IRS."
Bowman's Lawsuit
Bowman filed suit in a district court alleging that five IRS employees barred him from representing taxpayers before the IRS without due process in violation of the Fifth Amendment. In his lawsuit, Bowman sought damages under Bivens v. Six Unknown Named Agents of the Federal Bureau of Narcotics, 403 U.S. 388 (1971). The district court dismissed the case, concluding that the Internal Revenue Code's remedial scheme for tax practitioners foreclosed a Bivens action. Bowman appealed to the D.C. Circuit. In Atherton v. District of Columbia Office of the Mayor, 567 F.3d 672 (D.C. Cir. 2009), the D.C. Circuit held that a procedural due process violation occurs when an official deprives an individual of a liberty or property interest without providing appropriate procedural protections. In his complaint, Bowman alleged a serious procedural defect, i.e., that he received neither notice of his suspension nor an opportunity to challenge it.
D.C. Circuit's Decision
The D.C. Circuit affirmed the district court's decision but on the alternative ground that Bowman failed to state a claim under Federal Rule of Civil Procedure 12(b)(6) because his complaint contained no allegation that the IRS agents deprived him of a constitutionally protected interest. The court noted that Bowan identified no constitutionally protected interest lost through the IRS's actions. His complaint, the court said, repeatedly identified a property interest in his enrolled-agent status and then describes his Bivens claim in one sentence: "Because Plaintiff has not received the quantum of process he was due before being suspended indefinitely as an Enrolled Agent [he] has suffered damage to his reputation and business in perpetuity." However, the court noted, to enjoy a "property interest in a benefit," Bowman had to have a legitimate claim of entitlement to it. Yet, the court stated, Bowman disclaimed any claim of entitlement to enrolled-agent status in his court affidavit, which stated "[a]t no time was I an Enrolled Agent." Obviously, the court concluded, if Bowman never obtained enrolled-agent status, the IRS could not have deprived him of his interest in that status, however careless their actions.
Amicus Argument
An amicus brief filed in the case argued that "Bowman's claim involves . . . the deprivation of his liberty interests in the ability to engage in his chosen profession as a tax preparer and in his reputation." Indeed, the D.C. Circuit noted that it has recognized that when the government formally debars an individual from certain work, there is a cognizable deprivation of liberty that triggers the procedural guarantees of the Due Process Clause. An individual may also bring a "stigma-plus" claim, the court said, if a defendant has harmed a taxpayer's reputation and deprived the taxpayer of some benefit to which he or she has a legal right. According to the amicus, Bowman satisfied both of these theories of liability because "he has alleged injury to his liberty interest in pursuing his chosen profession as a tax preparer in addition to damage to his reputation."
According to the amicus, the IRS's 2006 decision suspended Bowman from practice before the IRS, and although at that time the suspension only prevented him from working as an enrolled agent, the IRS later amended its regulations to permit only practitioners including registered tax preparers to prepare taxes. From then until the D.C. Circuit's decision in Loving, the amicus argued, the suspension barring Bowman from practicing before the IRS prohibited him from becoming a practitioner and thus from preparing taxes.
While the D.C. Circuit found the amicus's theory clever, it noted that the theory appeared nowhere in Bowman's complaint. Not once, the court observed, did Bowman allege that he was prevented from preparing taxes. Instead, the court said, he repeatedly referred to himself as an enrolled agent and linked his harm to his enrolled-agent status.
Observation: Two of the judges separately wrote that the resolution of the case avoided the need to address Bowman's Bivens claim. However, they found it important to note that the issue was one of first impression in the D.C. Circuit and they would have concluded that Bowman was entitled to pursue his claim against the IRS if he had alleged that the IRS barred him from preparing taxes.
For a discussion of the rules relating to practice before the IRS, see Parker Tax ¶271,100.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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