Circular 230 Sanction Hearings Move Along, but Due Process Concerns Remain

Posted in Articles & Publications on May 5, 2011 | Share

Recently released opinions in Circular 230 disciplinary proceedings confirm that practitioners under review for alleged ethical violations usually don't have much luck in escaping the sanctions sought by the IRS Office of Professional Responsibility. While both cases dealt with familiar noncompliance issues, several arguments made by OPR might trouble tax professionals concerned about the extent of the office's authority.


In perhaps the more interesting of the recently released opinions, an attorney was disbarred after failing to file his 2007 tax return and untimely filing his 2001-2006 returns, while also failing to pay income taxes for that same period. Both the administrative law judge in her initial order and decision and the appellate authority on review agreed that the practitioner's conduct was willful and disreputable and so upheld OPR's suggested sanction of disbarment. (For the ALJ decision in Director, Office of Professional Responsibility v. Donald J. Petrillo, Complaint No. 2009-21, see Doc 2011-9275 or 2011 TNT 84-70 . For the appellate authority's affirmance, see Doc 2011-9276 or 2011 TNT 84-71 .)

In considering whether Petrillo should be barred from practice before the IRS, the ALJ was not swayed by the attorney's defense that medical and emotional circumstances prevented him from complying with tax return filing requirements. "The general rule of law is that, to be excused from liability for tax failures, a person's incapacity must be virtually complete, such that they are unable to conduct any work," the ALJ said. In the attorney's case, that threshold was not met because Petrillo engaged in client work (including tax return preparation) during the entire time of his filing noncompliance, and therefore his actions constituted a "voluntary and intentional violation of a known legal duty," the ALJ said. 

Consequently, the ALJ concluded that the attorney wasn't fit to practice and imposed OPR's request for disbarment. The ALJ said that the attorney's request for a mitigated sanction was inappropriate because the length of noncompliance was extensive, there was prior disciplinary history, and there was a current lack of filing compliance.

"Practice before the IRS is a privilege, and one cannot partake of that privilege without also taking on the responsibilities of complying with the regulations that govern such practice," the ALJ said.

In Petrillo, OPR said its requested sanction of disbarment should be respected, arguing that the OPR director is "the official with responsibility for regulating practice before the IRS; therefore, her proposed sanction is entitled to deference." The ALJ did not specifically address that deference argument but agreed that the attorney's pattern of filing noncompliance, as well as a prior suspension from 1993 through 1997, evidenced willful behavior under section 10.51 of Circular 230.

The appellate authority affirmed the ALJ's initial decision and order in all respects, while also confirming that the appropriate standard of willfulness in a Circular 230 disreputable conduct case was the familiar "voluntary, intentional violation of a known duty," as laid out by the Supreme Court in Cheek v. United States, 498 U.S. 192 (1991), and United States v. Pompino, 429 U.S. 10 (1976). The prior appellate authority acting on Treasury's behalf had publicly questioned whether the criminal standard was applicable in a civil proceeding. Thus, Cheek seems the settled standard for now. (For prior analysis, see Doc 2010-2640  or 2010 TNT 25-1 .)


In the other set of proceedings, the practitioner, a Florida CPA convicted of aiding and abetting in the failure to pay income tax under section 7203, faced an expedited suspension under Circular 230 section 10.82. The CPA represented himself in the OPR proceedings, which may have been one factor in the outcome. (For the ALJ decision in Acting Director, Office of Professional Responsibility v. Larry Legel, CPA, Complaint No. 2009-16, see Doc 2011-8270  or 2011 TNT 74-46 . For the appellate authority's decision, see Doc 2011-8271  or 2011 TNT 74-47 .) 

OPR wanted to use Legel's prior criminal conviction as evidence of disreputable conduct under Circular 230 section 10.51 and sought an indefinite suspension. Legel defended against the claim on grounds of lack of evidence, ineffective assistance of counsel, prosecutorial misconduct, and due process violations.

The ALJ quickly concluded that Legel's past conviction for a tax crime constituted disreputable conduct and then moved on to consider what the appropriate sanction should be. While Circular 230 section 10.50(d) refers to a facts and circumstances test in determining a sanction, "the regulations . . . do not provide any guidance as to what facts and circumstances are relevant or any standards for determining when it would be appropriate to impose one particular sanction (censure, suspension or disbarment) rather than another," the ALJ said.

The ALJ reviewed the standards applicable in other licensing professions and settled on the factors used by the American Bar Association for lawyer sanctions. The ALJ said OPR had to prove that its proffered sanction was proper by "clear and convincing evidence." In seeking that Legel be indefinitely suspended from practice before the IRS, OPR listed several perceived aggravating factors, including his length of experience, pattern of misconduct, multiple offenses, and submission of false evidence.

In deciding whether to lift the suspension OPR imposed on Legel through its expedited suspension powers, the ALJ noted that suspension of a Circular 230 practitioner doesn't preclude continued professional work. In other disciplinary areas, suspended attorneys are prohibited from earning a living as a member of the legal profession, whereas those who practice before the IRS in an accountancy role are not prevented "from earning a living in [their] chosen profession," the ALJ said. 

Pleading guilty to aiding and abetting in the failure to pay income tax could be interpreted as imputed knowledge necessary to show that Legel displayed willful blindness in his professional role, the ALJ said. "Willful blindness has been found where the evidence supports a finding that the defendant intentionally insulated himself from the knowledge of tax obligations," the ALJ said, adding that Legel's actions were in contravention of his "obligation not to ignore indications that his actions may lead to evasion of tax liability."

Noting the high standard to which Circular 230 practitioners should be held, the ALJ concluded that "as a trained and experienced tax professional, [Legel] knew or should have known that [his client] was attempting to evade taxes."

The ALJ held that OPR could not keep a practitioner on indefinite suspension once a hearing has been held, and it rejected the office's position on reinstatement requirements. "It is concluded that suspension for a term with automatic reinstatement is an appropriate sanction under the Rules, and that if OPR seeks a condition of application for reinstatement, it must show at the hearing a sufficient basis for imposing that condition on a particular respondent," the ALJ said.

The ALJ contemplated imposing a three-year period of suspension to coincide with the length of Legel's probation but decided that the presence of mitigating factors required only a two-year suspension. The ALJ seemed skeptical about giving OPR free rein to set the terms of reinstatement but didn't come to a conclusion about the practice as a whole, deciding that in Legel's case, requiring an application for reinstatement was unnecessary.

On appeal, the appellate authority reviewed the ALJ's decision for any clear error but concluded that Legel's guilty plea "establishes that he engaged in disreputable conduct" under Circular 230 section 10.51(a)(1). The appellate authority took a strong stance on criminal convictions for willful tax evasion assistance, saying that even if it was only a misdemeanor, the conviction was a "very serious charge that strikes at the heart of the agency's mission and is directly contrary to the duties of one who practices before the IRS." Consequently, the appellate authority said, the conviction "casts serious doubt as to a tax practitioner's suitability to practice before the IRS for an extended period of time."

Ultimately, the appellate authority determined that Legel's suspension should be for three years rather than the ALJ's two-year determination, because the misleading statements and lack of remorse negated other mitigating factors. In particular, the appellate authority held that Legel's "inability to own up to his own behavior" was an aggravating factor that reflected "poorly upon his ability to represent taxpayers before the IRS."

In a release announcing Legel's suspension, OPR Director Karen Hawkins said that "convicted practitioners can expect OPR to continue its aggressive use of the expedited suspension procedures in Circular 230 to quickly and efficiently remove them from practice for the taxpaying public's protection." (For IR-2011-48, see Doc 2011-8853  or 2011 TNT 80-8 .)

Appellate Authority Role

The decisions are the first by the new appellate authority, Bernard Weberman, who was appointed in March to determine final agency actions regarding Circular 230. The opinions continue the trend under the previous appellate authority of the office being generally willing to defer to OPR's sanction recommendations. (For the delegation order (CC-2011-007), see Doc 2011-4625  or 2011 TNT 44-26 . For prior analysis, see Doc 2010-2929  or 2010 TNT 27-1 .)

However, practitioners are still suspicious of the appellate authority role as long as it is filled by someone within the IRS or the Office of Chief Counsel. Some practitioners question whether the appellate authority is appropriately reviewing appealed ALJ decisions. Under Circular 230 section 10.78, the "clearly erroneous" standard applies to an ALJ's fact finding, while legal matters are scrutinized de novo.

In the Legel review, the appellate authority imposed a different suspension sentence after deciding that the term length and start date should be modified, based on a "definite conviction under either a de novo standard or a standard deferential to the ALJ, that a mistake has been committed."

The appellate authority's glib passing over of what is required to show a clearly erroneous finding by the trier of fact shocked one practitioner. The appellate authority "simply applied his own opinions to increase the sanction rather than looking for clear error in the ALJ's findings and analysis," the practitioner said. The ALJ's sanction determination deserves deference because "that is the judge who heard the testimony and evaluated the credibility of the witnesses and totality of the circumstances," the practitioner said. "That is what the clear error standard is all about."

Dredging Up the Past

In the matter involving Legel, the ALJ mentioned in a footnote the controversial issue of whether OPR disciplinary proceedings operate within a five-year statute of limitations. The ALJ decided the limitations period issue was immaterial to the ultimate resolution of the case given that conviction on other counts in the complaint was sufficient to justify disbarment. 

The thorny jurisdictional problem has yet to have had a full hearing in past disciplinary cases, but it can be expected to make waves if an ALJ eventually holds that there is no time limit for ethical charges to be brought against a practitioner. While there is no on-point case discussion on the appropriate statute of limitations for Circular 230 proceedings, several practitioners told Tax Analysts that the five-year limit that applies in other contexts involving regulatory policing of individuals representing clients before an agency should apply. Regardless, such a decision, once it becomes public, would undoubtedly be appealed to a district court for review.

Tax practitioners cite several reasons in support of a five-year statute of limitations, but the factual nature of a Circular 230 hearing is perhaps most important. "Practically speaking, memories weaken and documents get lost over time," said a practitioner. An ALJ hearing, when not a default judgment, centers on the facts about a practitioner's alleged unethical conduct, which should require evidence that can easily be obtained to refute charges, the practitioner said.

Because a Circular 230 sanction can have ripple effects professionally, OPR should be circumspect in how far back it can make allegations, the practitioner added. "You can say a sanction is remedial, but if there is a punitive element, a court needs to look at it closely, as an OPR sanction can lead to equivalent disciplinary action by other agencies or professional bodies," the practitioner said, adding, "That can easily destroy someone's livelihood" even if the OPR sanction affects only tax practice.

Kevin E. Thorn of the Thorn Law Group said that "it appears OPR is trying to test the waters on this issue." That's not necessarily a bad thing, he added, because "they need some guidance on the issue; I appreciate the fact that they're trying to flush some of this out."

Reinstatement Standards

Although it was referenced in the complaint, neither the ALJ nor the appellate authority opinions involving Legel addressed OPR's request for reinstatement at its sole discretion. Numerous ALJ decisions in Circular 230 proceedings have failed to object to OPR's control over reinstatement of disbarred practitioners, often ordering "with any future reinstatement possibility being at the sole discretion of OPR, with whatever requirements and terms that Office may insist upon." (See, for example, Director, Office of Professional Responsibility, v. Michael F. Rafferty, Complaint No. 2009-11, Doc 2010-10069  or 2010 TNT 87-13. )

Reinstatement conditions beyond the filing of unfiled tax returns and payment of unpaid taxes, such as a showing of contrition, worry legal representatives of practitioners facing disciplinary action. One practitioner told Tax Analysts that if OPR holds out for remorse, it puts the alleged violator in a bind. "When in a dispute with OPR, showing remorse can undercut your position," the practitioner said, adding that the "fact that a practitioner has not shown remorse doesn't seem to be sine qua non" of guilt.

"If the offense is clear, and the practitioner didn't dispute the charges, then a degree of remorse would be appropriate to expect in evaluating rehabilitation, but the expectation must be congruent with the nature of the offense," the practitioner said.

Another practitioner said that OPR's view of the reinstatement process "doesn't sound right to me." The practitioner said Circular 230 doesn't contain proscriptions on the right to practice once a suspension has been served, although reinstatement conditions could be part of a consent agreement by OPR and the practitioner. But without a consent agreement, OPR is making changes to the disciplinary process that are not outlined in Circular 230, leaving practitioners to question what recourse they have, the practitioner said.

Thorn said that despite the fears of OPR not letting a sanctioned practitioner back into practice before the IRS, "I'm not aware of any practitioner who was not reinstated once he or she was back in compliance."


Most practitioners who violate Circular 230 ethical standards as a result of personal noncompliance issues likely deserve the punishment they receive for failing to abide by the rules. But even in clear-cut cases of Circular 230 violations, adherence to procedural safeguards in the hearing process benefits the entire system for regulating tax professionals.

Treasury, which has administrative oversight power of Circular 230, including disciplinary actions, should be more vigilant in its oversight role. Transparency should also be maintained to ensure that due process is extended at the same time that practitioners who harm the tax system through their misbehavior are appropriately sanctioned.

For more information on these developments and offshore tax issues, please contact Kevin E. Thorn, Managing Partner at the Thorn Law Group, PLLC, 888 16th Street, NW, Suite 800, Washington D.C., Telephone: 1.202.349.4033, Email:

Thorn Law Group

Get Trusted Help Now

Over 80 years of expertise for your complicated tax law issues.

Back to the Top