Copyright 2003, The Tax Resource Group, all rights reserved.

For many tax preparers, losing the ability to e-file is a devastating blow tantamount to losing the ability to earn a living. As you may know, E-filers are subject to very stringent rules of behavior. Many practitioners have been bounced out of the e-filing program for some seemingly minor offenses and find they have little or no recourse. Some in the IRS and Congress want to make all tax preparers (not just e-filers) subject to these same rules. Also, some states (including California) are moving in the direction of mandatory e-filing. I believe that one way or another these stringent rules of behavior and the "hanging judge" mentality of the IRS will sooner or later affect all return preparers.

Over the past few years I have attempted to defend several practitioners from proposed suspension from the e-filing program. Revenue Procedure 2001-31 and IRS Publication 1345 contain the very harsh but very clear rules on this subject. The Service may suspend a participant for any one of the following reasons.

1. Conviction of any criminal offense under the revenue laws of the United States or of a state or other political subdivision;

2. Failure to file timely and accurate Federal, state, or local tax returns, including returns indicating that no tax is due (unless the applicant did not have a legal filing requirement);

3. Failure to timely pay any Federal, state, or local tax liability;

4. Assessment of penalties;

5. Suspension/disbarment from practice before the Service or before a state or local tax agency;

6. Disreputable conduct or other facts that would reflect adversely on the IRS e-file Program;

7. Misrepresentation on an application;

8. Suspension or denial of participation from the Program in a prior year;

9. Unethical practices in return preparation;

10. Assessment against the applicant of a penalty under section 6695(g) of the Internal Revenue Code;

11. Stockpiling returns prior to official acceptance into the IRS e-file Program;

12. Knowingly and directly or indirectly employing or accepting assistance from any firm, organization, or individual prohibited from applying to participate in the IRS e-file Program or suspended from participating in the IRS e-file Program. This includes any individual whose actions resulted in the denial, suspension, or expulsion of a firm from the Form 1040 ELF Program or the IRS e-file Program; or

13. Knowingly and directly or indirectly accepting employment as an associate, correspondent, or as a subagent from, or sharing fees with, any firm, organization, or individual prohibited from applying to participate in the IRS e-file Program or suspended or expelled from participating in the IRS e-file Program. This includes any individual whose actions result-ed in the denial, suspension, or expulsion of a firm from the Form 1040 ELF Program as well as the IRS e-file Program. 

Most of the items on this list seem sensible, but take a look at items 2, 3 and 4: late filing or payment of any tax related to any federal, state, or local tax return and assessment of any penalty.

Recently, I defended (unsuccessfully) a practitioner who did the following. For three years in a row, he filed his personal tax returns late. He had paid in enough to avoid a tax deficiency, and he simply filed his returns when he got around to them (after the extended due date). Also, his returns were examined and a modest amount of T&E and auto expense was disallowed. The IRS assessed the accuracy related penalty for all affected years (as they routinely do). For this the taxpayer was bounced out of the e-filing program for two years. I am quite sure everyone will sleep better at night knowing that this scofflaw is not e-filing for a while. I don't think it is an isolated case. 

The IRS seems to recognize that the rules as written are much too harsh, and it seems to be the case that isolated occurrences of late filing or late payment or imposition of minor tax penalties don't result in suspension. The Service seems to be looking for what it perceives to be a pattern of behavior. However, as a practical matter it doesn't take much to have the appearance of a pattern of behavior. For example, the IRS typically examines two or three years of tax returns at one time. So a little funny business with T&E or automobile expenses over two or three years ends up being two or three instances of penalty imposition and that looks like a pattern of behavior. 

Although there is an internal appeals process for suspensions, in my experience it seems to exist only to provide the appearance of due process. In my experience, once the Service proposes suspension the die is cast. The courts have not as yet been willing to review such matters. Apparently as a legal matter it is fairly well-settled that federal agencies have broad latitude in making their own rules for those who participate in their programs, and the courts are extremely loathe to interfere. See, for example, Brenner Income Tax Centers, Inc. v. Director of Practice of IRS, 87 FSupp2d 252, 2000-1 USTC P50,308 (So. Dist. NY, 2000). The courts take the view that if one voluntarily chooses to participate in a program sponsored by a federal agency, then one must play by the rules established by the agency or else bear the consequences. 

What can we do about all this?

I think we can only be conservative as to tax positions and extremely fastidious as to tax filings and payments where our personal or company tax matters are involved. The Government is telling us very plainly that our livelihoods may depend upon our playing by the very rules from which our livelihoods are derived.

Robert O. Graves, CPA
The Tax Resource Group