Update on the IRS's Office of Professional Responsibility: the importance of firm responsibility.
Let me start with a bit of background. I think this is a story that we all are familiar with by now. During the 1990s, the size and complexity of the tax system increased enormously. As the economy grew, more revenue came from sources easily subject to manipulation, and it became more difficult and time consuming to conduct sophisticated and timely audits. At the same time, the Internal Revenue Service's enforcement resources shrank when the focus turned to other areas of tax administration.
Some promoters and tax professionals recognized the IRS's diminished capacity and began planning and marketing a wide range of truly abusive tax schemes and devices. The tax gap grew, and taxpayer morale suffered. Although only a small number of unscrupulous practitioners were involved, everyone was affected because of unfair competitive advantages.
Please do not misinterpret my comments. Putting the small number of unscrupulous practitioners aside, I believe the tax field is fortunate to have so many public spirited individuals with high ethical standards. As an alumnus of the private tax bar, I know of no harder working or more dedicated group of professionals. And, by the way, my experience in the last year has not changed that view. You must be current on a mass of materials, including court decisions, regulations; published rulings; tax literature, and an almost continuous flow of new legislation. On a good day, this is a daunting task. Unfortunately, despite the honorable efforts of most practitioners, the unscrupulous few have tarnished the reputation and standing of the entire tax community.
In recognition of the corrosive effect that practitioner misconduct has on tax administration, the Commissioner decided to devote significant resources to building a high profile and effective Office of Professional Responsibility. For those practitioners who choose not to abide by the standards of professional conduct, OPR has the resources and the expertise to pursue appropriate disciplinary sanctions. Having said that, I want to emphasize that I am much more interested in getting the positive "do the right thing" message out so that all practitioners know we care as much about prevention as we do about detection and punishment.
One of the most troubling aspects of the recent wave of practitioner misconduct is the degree to which some of the practitioners were members of prestigious firms. This fact begs the question: "Where was firm management?" If the firms involved had internal procedures to monitor professionalism issues, what went wrong? If they didn't have internal controls, why not?
This is not simply a matter of ethics. Good business practice dictates that managing partners, whether in a small local practice or a large international organization, pay attention to the conduct of the members of the firm. As someone formerly involved in firm management, I can tell you that these issues were of considerable importance to me. And while malpractice is certainly one reason to ensure that effective internal controls are in place, it is certainly not the only consideration.
The notion of firm responsibility is certainly not revolutionary. Taking aside well established common law principles of agency, the bar has long recognized the need to hold the people in charge accountable. For example, Rule 5.1 of the ABA Model Rules of Professional Conduct requires:
A partner in a law firm, ... and a lawyer who individually or together with other lawyers possesses comparable managerial authority in a law firm, shall make reasonable efforts to ensure the firm has in effect measures giving reasonable assurance that all lawyers in the firm conform to the Rules of Professional Conduct.
Our late colleague, Frederic Corneel, was a zealous proponent of internal guidelines tailored to fit the size and practice of a firm. As he wrote in his last article on the subject:
... firms should consider stating in writing what they are about and the standards they expect from those who are working in the firm. To keep that writing a living document, it must be referred to in practice and supplemented or changed in light of experience and changing standards in the profession.
Every firm, whether large or small, has a culture. To borrow a metaphor from Corneel, lawyers and employees should be taught to drive in the center of the highway. If instead the firm culture rewards driving on the edge, it is only a matter of time before the lawyer ends up in a ditch, possibly taking the firm with him or her. Written guidelines setting forth the firm's ethical standards and strong professional behavior by the senior members of the firm will go a long way to keeping everyone out of a ditch.
Of course, there are instances where a rogue attorney will engage in misconduct. But we all know that these cases are the exception. The most effective way to promote professionalism is for the people in charge to be held accountable, whether they are participating in the conduct, turning a blind eye, or simply not paying attention.
Congress acknowledged this fact in the recently enacted American Jobs Creation Act. OPR now has the authority to sanction firms in addition to individuals. Now, if the employer or the firm knew or should have known of the conduct that gave rise to the action, OPR can impose a civil money penalty on the firm. The law provides that the penalty can be as large as the gross income earned from the conduct. Both Congress and the Commissioner recognize that one way to address serious misconduct is to hold those at the top accountable, and we think that this new tool will help OPR accomplish that goal.
I should note that while the long-awaited and recently published Circular 230 regulations do not specifically address the issue of the monetary penalty authority, they do provide some general guidance regarding procedures for ensuring compliance. I want to thank you for your thoughtful comments on the proposed regulations. Many people, myself included, were frustrated by the seemingly endless wait for guidance. In fact, the wait was long because we received numerous constructive comments and considered them seriously. Based on the reaction to the regulations, I think we did a pretty good job of balancing the business needs of tax practitioners and the responsibilities of tax administration.
Two sections of the new regulations emphasize firm responsibility. First, section 10.33 recommends that tax advisers who oversee a firm's practice take reasonable steps to ensure that a firm's procedures for all members, associates, and employees are consistent with the highest standards of professional practice. Examples of best practices include:
* Communicating clearly with a client the terms and scope of the engagement;
* Fully developing the facts of a transaction, making reasonable assumptions about the facts and applying the facts to the applicable law;
* Advising the client regarding the import of the conclusions and whether any accuracy-related penalties may apply; and
* Acting fairly and with integrity in practice before the IRS.
The regulations specifically state that these best practices are aspirational and do not form an independent basis for disciplinary action by OPR. Having said that, I believe the examples reflect basic principles of good legal practice and are worthy of consideration by professional organizations and individual firms.
The regulations governing covered opinions also emphasize firm responsibility, and in the case of covered opinions, the rules are mandatory. Section 10.36 mandates that any practitioner who has or shares responsibility for oversight of a firm's practice must take steps to ensure that adequate procedures are in place to ensure compliance with the covered opinion rules. Disciplinary action may be taken if:
* Through willfulness, recklessness, or gross incompetence the practitioners does not take reasonable steps to ensure that the firm has adequate procedures to comply with the rules for covered opinions, and one or more individuals connected to the firm have failed to comply with the rules for covered opinions; or
* The practitioner knew or should known or should have known that one or more individuals connected to the firm have failed to comply with the rules for covered opinions, and the practitioner through willfulness, recklessness, or gross incompetence fails to take corrective action.
Both scenarios may form the basis for disciplinary action, including the potential for monetary fines. Let me make clear that I do not define success for OPR by the number of practitioners that we sanction or the amount of fines we collect. It is our hope that by encouraging firms to adopt procedures that clearly articulate ethical standards for all members and employees, OPR action will be unnecessary.
In closing I just would like to mention the Commissioner's IRS Strategic Plan for the years 2005-2009. The three main goals are to:
* improve taxpayer service;
* modernize the IRS; and
* enhance enforcement.
One objective of the enforcement effort is to ensure that attorneys, accountants, and other practitioners adhere to professional standards and follow the law. We intend to strengthen partnerships with practitioners to achieve the highest level of professional integrity and to improve compliance.
Thus, we will establish and communicate clear, robust, current, and meaningful standards of conduct for practitioners. We will also establish and maintain a vigorous, targeted and an effective system of practitioner oversight. Lastly, we will establish and administer a fair, diligent, and effective system of sanctions for those who fail to observe standards of conduct. OPR and other components of the IRS are poised and equipped to employ substantial resources and the full range of our authority to detect and address misconduct. When and where appropriate, the IRS will pursue criminal prosecutions for practitioner misconduct. In those instances where criminal charges are not applicable or appropriate, we will pursue other sanctions such as the application of preparer and promoter penalties, the assessment of the new monetary penalty authority for Circular 230 violations, and our traditional sanctions that affect the ability to practice.
Our clear preference is to use communication, education, best practices, and partnerships with responsible professionals to raise the ethical bar. Self correction and self discipline by the vast majority of public spirited professionals, supplemented by sanctions against the unscrupulous few, are the best way to promote public confidence in tax professionals.
CONO NAMORATO is Director of the Internal Revenue Service's Office of Professional Responsibility. Before his appointment in 2004, he was a partner in the Washington, D.C., law firm of Caplin & Drysdale, Chartered, and previously served as a Deputy Assistant Attorney General in the Tax Division of the U.S. Department of Justice and a Special Agent with the Internal Revenue Service. This article is adapted from remarks before the American Bar Association's Section of Taxation on January 22, 2005.
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|Date:||Jan 1, 2005|
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