The IRS Office of Professional Responsibility (OPR) has no authority or jurisdiction over a disbarred attorney/tax preparer or his tax preparation practice and cannot regulate his provision of tax advice, a federal district court in Nevada held. The court granted the tax preparer's motion for a permanent injunction against the IRS from seeking to assert authority or jurisdiction over his tax preparation activities.
Facts: James Sexton Jr. was an attorney licensed in South Carolina. He pleaded guilty to four counts of mail fraud and one count of money laundering in 2005. He was disbarred in South Carolina and suspended from practice before the IRS by OPR in 2008. He did not challenge his IRS suspension from practice.
Sexton is the president of his tax preparation company, Esquire Group LLC, where he prepares tax returns and manages the business. OPR began an investigation after a former client filed a complaint. Sexton had assisted in preparing 2010 and 2011 tax returns for that client and offered to write a memorandum for her about her business tax obligations. When she found out he had been disbarred, she sent him an email firing him and filed the OPR complaint.
When OPR opened the investigation, it requested information from the South Carolina Supreme Court about Sexton's education and background. OPR then asked for a large amount of information from Sexton, which it later amended after Sexton objected.
Sexton filed his case seeking declaratory judgment relief that (1) he is not a "practitioner" as defined by federal law, and OPR has no statutory authority over him or his company, and (2) OPR and its agents are prohibited from regulating the providing of tax advice generally, except as specifically provided by statute and Congress. He also sought a permanent injunction preventing the IRS from attempting to enforce Section 10.20, Information to Be Furnished, of Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), against him.
OPR filed a motion for summary judgment.
Issues: Sexton argued that the ruling in Loving, 742 F.3d 1013 (D.C. Cir. 2014), means that the IRS's authority does not extend to individuals who are not representing taxpayers before the IRS and that, as a result, the IRS had no jurisdiction over him or his company. Under Loving, preparing and signing tax returns is not practice before the IRS. Therefore, the IRS cannot regulate tax return preparers. According to the district court, "The analysis and holding in Loving apply with equal force to this case."
The IRS argued that suspended representatives are subject to OPR's authority under 31 U.S.C. Section 330 because, as a general principle, a licensing or disciplinary body retains jurisdiction over individuals who have been suspended from practice. The court rejected this argument, stating that the IRS cited only nonbinding state cases, and the court was unaware of any binding authority or federal case law supporting the position. For the same reason, the court dismissed the IRS's claims of an "inherent jurisdiction" or "inherent authority" over unauthorized or suspended practitioners or an "inherent power" to investigate unauthorized practice or violations of its rules, as applied to tax preparation and other services not covered by Section 330 under the Loving analysis. Also, because there was no evidence that Sexton or his firm practiced or represented taxpayers before the IRS within Loving's interpretation of Section 330, the court found that the IRS could not claim authority over Sexton as a practitioner representing a taxpayer before the IRS.
With regard to Sexton's provision of written advice to taxpayers, the IRS argued that 31 U.S.C. Section 330(e) applied to prohibit Sexton from doing so. The court disagreed, finding that, under Loving, Section 330(e) applies only if the practitioner is representing the taxpayer before the IRS and otherwise does not govern providing written advice to taxpayers. The court also noted that Sexton had only offered to provide written advice but never did so because the client fired him first.
Holding: Finding for Sexton on all counts, the court issued the declaratory judgments and permanent injunctions he requested and denied OPR's motion for summary judgment.
- Sexton v. Hawkins, 2:13-cv-00893-RFB-VCF (D. Nev. 3/17/17)
—By Sally P. Schreiber, J.D., a JofA senior editor.