February 24, 2025
Submitted via electronic mail at: www.regulations.gov
Internal Revenue Service
Attn: CC:PA:01:PR (REG-116610-20)
Room 5203, P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
Re: Comments and Request for a Public Hearing on Regulations Governing Practice Before the Internal Revenue Service, (REG-116610-20)
On behalf of National Taxpayers Union Foundation (“NTUF”) we write with comments on the Department of the Treasury and Internal Revenue Service’s (“IRS”) proposed rule on Regulations Governing Practice Before the Internal Revenue Service (the “Proposed Rule”). We also formally request the opportunity to speak at a public hearing.
NTUF has been a leader in developing responsible tax administration for nearly five decades. We strive to offer practical, actionable recommendations about how our tax system should function. Our experts and advocates engage in in-depth research projects and informative, scholarly work pertaining to taxation in all aspects. In 2017, NTUF produced crucial research that guided policymakers as they overhauled the federal tax code for the first time in decades. Our annual Tax Complexity Report highlights the increasing time burden and out-of-pocket filing expenses imposed on taxpayers as they comply with the tax code each year.
NTUF also formed the Taxpayers for IRS Transformation (Taxpayers FIRST) project in 2023 to enlist policy experts, academics, and former government officials in offering guidance on key IRS managerial initiatives. By combining policy expertise, outreach know-how, and true non partisanship, we seek to build lasting consensus for impactful reforms.
Given this background, we write to express our concerns with the Proposed Rule. First, the Proposed Rule stretches 31 U.S.C. 330 beyond its intended meaning and function. Second, the appraisal standards set forth in proposed subsection 10.61(b) should apply equally to private and IRS appraisers. Third, the Proposed Rule’s blanket prohibition of contingency fees is likely to harm taxpayers. Despite these three concerns, we also write to support the establishment of an advisory committee on issues pertaining to oversight, accountability, and public trust of tax advisors. We also request a public hearing on the Proposed Rule.
I. The Proposed Rule’s Standard for Appraisals Should Apply Equally to IRS and Private Appraisers
The Uniform Standards of Professional Appraisal Practice (the “USPAP”) imposed by the Proposed Rule on appraisals should apply with equal scrutiny to appraisals by the IRS, not only those by private appraisers.
Under the Proposed Rule, “[a]ll appraisals submitted in an administrative proceeding should conform to the substance and principles of generally accepted appraisal standards as evidenced by the . . . USPAP[].”1 Although the IRS sets the USPAP as the gold standard for private appraisals, court cases have not insisted on USPAP conformity. In Schwartz v. Comm’r, 348 F. App’x 806 (3d Cir. 2009), for example, the Third Circuit sided with the IRS position that IRS appraisers need not conform with USPAP. The Third Circuit found the IRS’s appraiser’s valuation of the property to be correct when the appraiser “informed the Appeals officer of her preliminary analysis[]”; “appraiser briefly mentioned her appraisal methods in her exchange with the Appeals officer[]”; did not file a formal report; and held an MAI designation.2It concluded “the IRS was not required to use the USPAP in reviewing the Schwartzes’ appraisals.”3 In Whitehouse Hotel Ltd. Partnership v. Comm’r, 131 T.C. 112 (2008), vacated and remanded on other grounds by 615 F.3d 321 (5th Cir. 2010), the taxpayer challenged the appraiser for the Commissioner’s testimony, arguing, in part, the “direct testimony is unreliable because in various respects it is not in conformance with USPAP.”4 The Tax Court found whether the appraiser had fully complied with the USPAP or not was immaterial: “Adherence to those standards is evidence that the appraiser is applying methods that are generally accepted within the appraisal profession. Therefore, at a minimum, compliance with USPAP is an indication that the appraiser’s valuation report is reliable.”5 Nonetheless, “a noncompliant valuation report is not per se unreliable. Full compliance with professional standards is not the sole measure of an expert’s reliability.”6
As Schwartz and Whitehouse Hotel Ltd. Partnership illustrate, USPAP is not the standard which IRS appraisers are required to follow. Rather, it is merely “an indication that the appraiser’s valuation report is reliable.”7 Thus, the Proposed Rule’s requirement that private appraisals follow the substance of the USPAP is not directly in line with case law. Rather, it sets a skewed double standard where, in practice, private appraisers are held to a somewhat higher standard than that of IRS appraisers.8
This is especially true because appraisals can vary for legitimate reasons of professional opinion. As the Tax Court has noted, “[a]ppraising is not an exact science and has a subjective nature.”9 In Schwartz, the taxpayers valued their property at $400,000 or $430,000, but the IRS’s appraiser estimated the value of the house to be 30 to 40 percent more.10 In Whitehouse Hotel Ltd. Partnership, the Commissioner’s appraiser allowed for $1.15 million for the taxpayer’s easement while the taxpayer valued the easement at $7.445 million.11 In Rolfs v. Comm’r, 668 F.3d 888 (7th Cir. 2012), the taxpayers “claimed a $76,000 charitable deduction on their 1998 tax return for the value of their donated and destroyed house[, and] [t]he IRS disallowed the deduction[] . . . .”12 Setting and enforcing uniform appraiser standards for IRS and private appraisers would ensure a smaller margin of valuation difference. Not only would this decrease in valuation differences decrease costly litigation, but also would benefit taxpayers and the IRS alike.
Recommendation: The IRS should actively ensure its appraisers, along with private appraisers, follow USPAP standards. By ensuring its own appraisers are following USPAP, there will no longer be conflicting case law where other approaches are normalized and approved. This will eliminate the higher bar for private appraisers than for IRS appraisers which the Proposed Rule currently sets.
II. The Proposed Rule Should Not Place a Blanket Prohibition on Contingency Fees.
The Proposed Rule purports to prohibit all contingency fees associated with documents which contemplate IRS challenges or litigation. This proposed subsection is overly broad, is outside of scope of the IRS’s statutory authority, and will decrease taxpayers’ access to tax preparers.
Proposed Rule § 10.51(b)(2) states that a “[c]ontingent fee is any fee that is based in whole or in part on whether or not a position taken on a tax return or other filing avoids challenge by the Internal Revenue Service or is sustained either by the Internal Revenue Service or in litigation.”13 The term “other filing” could be interpreted to mean any other document which will be put before the IRS. Even other rules of professional conduct are not this broad and allow contingency fees in some situations. The American Institute of Certified Public Accountants Code of Professional Conduct, as an illustration, provides certain circumstances where contingency fees are allowed.14 Thus, to broadly prohibit contingency fees on any “other filing” may create a more stringent standard than that otherwise accepted by the profession.
Broadly prohibiting contingency fees will eliminate a low-cost option for taxpayers to obtain a tax expert’s services. If the Proposed Rule is enacted as is, “CPAs and EAs would need to be extremely cautious about any fee arrangements that could be construed as contingent on the outcome of a tax matter. This could particularly impact practices that handle tax controversy work or assist with refund claims.”15 As a result, taxpayers who may have a riskier chance of a tax refund or taxpayers who cannot afford expensive representation, will likely not be able to access an expert if they face an audit. Absent a contingency fee arrangement, taxpayers will face high hourly costs from tax professionals, or high flat fees ranging from $5,000 to $12,500.16 For taxpayers that do not have the resources to pay these rates, they will be deprived of obtaining a tax expert’s assistance under the Proposed Rule. Moreover, the IRS’s concern that “[a] practitioner with a direct, financial interest in the tax benefits of a client may be incentivized to increase such tax benefits[,]” is unfounded.17 For instance, lawyers are permitted to charge a contingency fee.18 If a lawyer chooses to do so, he naturally has a vested interest in the outcome of his client’s case.19 But this does not make legal contingency fees illegal. Thus, to prohibit a contingency fee arrangement for accountants under the guise they have a vested interest, while allowing a contingency fee arrangement for the legal profession is illogical. Both have a vested interest to a certain degree (and, indeed, an attorney may be dealing with a larger recovery amount than tax preparers), but this does not diminish the accountant’s or attorney’s professional responsibilities to abide by their respective ethics laws when representing a client.
The Proposed Rule flatly asserts without justification that “[c]harging a contingent fee in connection with the preparation of an original or amended tax return or claim for refund or credit prepared prior to the examination of the tax return is disreputable conduct.”20 The term “disreputable” as used therein appears to be a cross-reference to the term “disreputable” under 31 U.S.C. § 330(c)(2) for which the “Secretary may suspend or disbar from practice before the Department. . . .”21 However, this contention is not correct under a historical context and the purpose of 31 U.S.C. § 330. Under a historical context, “disreputable” as used in the era implied an act of the lowest morality.22 In Ex parte Wall, 107 U.S. 265 (1883), the Supreme Court noted a case where an attorney forged a deposition and used it against his wife in his divorce to b “disreputable conduct.”23 In Carver v. United States, 16 Ct. Cl. 361 (1880), aff’d on other grounds, 111 U.S. 609 (1884), the Court of Claims found soldiers’ actions after the Civil War of “stealing and plundering” to be “disreputable” conduct.24 The District Court in Rice v. Williams, 32 F. 437 (C.C.E.D. Wis. 1887), refused to enforce a contract which provided one party with the personal information of individuals suffering from diseases so that this party could sell the inflicted a supposed “cure” because, “to traffic in the letters of third parties, without their knowledge or consent, and to make them articles of merchandise in the manner attempted here, was, to mildly characterize it, grossly disreputable business.”25
As these cases and definitions show, “disreputable” as used by the 1884 Congress was an act of lower morality such as soldiers’ stealing after the Civil War, selling fake cures to sick individuals, or forging a deposition for a divorce. “Disreputable” as used in the latter half of the 19th century did not include the mere act of charging a contingency fee for the “preparation of an original or amended tax return or claim for refund or credit prepared prior to the examination of the tax return.”26 Accordingly, the IRS’s equation of “disreputable” to the charging of a contingent fee exceeds its statutory authority under Section 330.
Recommendation: The IRS should not place such an expansive prohibition against contingency fees. Contingency fees allow taxpayers without access to a large sum of funds to obtain a tax expert’s assistance. A blanket ban on such arrangements could actually harm taxpayers who need to avail themselves of contingency fees in perfectly legitimate circumstances.27 The IRS should not broadly stretch Section 330 to regulate an area Congress has yet to legislate on. Rather, the IRS should wait for Congress to legislate on the areas of contingent fees and appraiser or appraisal standards.
III. The Proposed Rule’s Establishment of an Advisory Committee is Beneficial to Taxpayers
The Proposed Rule’s establishment of an advisory committee pursuant to proposed subsection 10.111 is an excellent mechanism to ensure the protection of taxpayers’ rights.28 As NTUF has noted in other contexts, entities such as the IRS Advisory Council, the Electronic Tax Administration Advisory Committee, and Taxpayer Advocacy Panels all provide invaluable avenues of communication among taxpayers, tax professionals, policy experts, and the IRS on crucial matters. If properly constituted and managed, an advisory committee in the practitioner area could, similarly, foster a helpful ongoing dialogue among stakeholders that would establish more public trust and accountability for both practitioners and the IRS. All in all, an advisory committee would be a beneficial entity for the IRS and taxpayers.
IV. Conclusion
The Proposed Rule threatens taxpayers’ rights in varying sections. The Proposed Rule’s onus for private appraisals to follow USPAP standards should not be imposed in a one-sided manner but, if imposed at all, equally on both the IRS and private appraisers. Next, the Proposed Rule’s blanket prohibition of contingency fees is overbroad and threatens taxpayers’ ability to access tax experts. Despite these concerns, the Proposed Rule’s establishment of an advisory committee will benefit taxpayers and the IRS alike. We also request a public hearing on the Proposed Rule.
Thank you for your consideration of our comment and please do not hesitate to reach out with any questions.
Sincerely,
Lindsey Carpenter
Attorney, National Taxpayers Union Foundation
Joe Bishop-Henchman
Executive Vice President, National Taxpayers Union Foundation
Pete Sepp
President, National Taxpayers Union Foundation
1 Prop. Treas. Reg. § 116610-20, 89 Fed. Reg. 104915, 104931 (Dec. 26, 2024).
2 Id. at 807-09.
3 Schwartz v. Comm’r, 348 F. App’x 806, 809 (3d Cir. 2009).
4 Whitehouse Hotel Ltd. P’ship v. Comm’r, 131 T.C. 112, 126 (2008), vacated and remanded on other grounds by 615 F.3d 321 (5th Cir. 2010).
5 Id. at 127.
6 Id. (footnote omitted).
7 Id.
8 Indeed, a recent controversy suggests another reason for uniform treatment of IRS and private appraiser standards. “[T]he IRS has allegedly hired an appraisal expert to give a zero valuation but where that same expert was used by the plaintiffs, creating a clear conflict of interest and tainting the evidence the IRS was seeking to introduce.” See Joe Bishop-Henchman, IRS Oversight by House Ways and Means Is Welcomed and Necessary, NTUF (February 15, 2024), https://www.ntu.org/foundation/detail/irs-oversight-by-house-ways-and-means-is-welcomed and-necessary (referencing Kristen A. Parillo, Tax Court Easement Litigants Want To Impeach IRS Appraisal Expert, 184 Tax Notes 367, (Jan. 8, 2024)).
9 J L Mins., LLC v. Comm'r of Internal Revenue, T.C.M. (RIA) 2024-093, at *36-37 (T.C. 2024) (quotation omitted).
10 See Schwartz, 348 F. App’x at 807.
11 Whitehouse Hotel Ltd. P'ship v. Comm’r, 131 T.C. at 118.
12 Rolfs v. Comm’r, 668 F.3d 888, 890 (7th Cir. 2012).
13 Prop. Treas. Reg. § 116610-20, 89 Fed. Reg. 104915, 104930 (Dec. 26, 2024).
14 See American Institute of Certified Public Accountants Code of Professional Conduct § 1.510.010.04 (“The following are examples of circumstances in which a contingent fee is permitted under the ‘Contingent Fees Rule’ [1.510.001]: a. Representing a client in connection with a revenue agent’s examination of the client’s federal or state income tax return b. Filing an amended federal or state income tax return claiming a tax refund based on a tax issue that is the subject of a test case involving a different taxpayer or with respect to which the taxing authority is developing a position c. Filing an amended federal or state income tax return (or refund claim) claiming a tax refund in an amount greater than the threshold for review by the Joint Committee on Taxation or state taxing authority d. Requesting a refund of either overpayments of interest or penalties charged to a client’s account or tax deposits that a federal or state taxing authority improperly accounted for in circumstances in which the taxing authority has established procedures for the substantive review of such refund requests e. Requesting, by means of a protest or similar document, the state or local taxing authority’s consideration of a reduction in a property’s assessed value under an established taxing authority’s review process for hearing all taxpayer arguments relating to assessed value f. Representing a client in connection with obtaining a private letter ruling or influencing the drafting of a regulation or statute.” (emphasis in original)).
15 CPA Trendlines Research, Major Changes to Circular 230: Implications for Tax Professionals / Cornerstone Report, CPA TRENDLINES (Feb. 24, 2025), https://cpatrendlines.com/2025/01/17/major-changes-to-circular-230-implications-for-tax professionals-cornerstone-report/?srsltid=AfmBOop-OHrqhX08Nd1YCtLE35- 4OwgjLZ8NyvfMcVC6xCYN66iUQENB.
16 IRS Audit Representation Services, H&CO (Mar. 14, 2025), https://www.hco.com/insights/irs audit-representation-services.
17 Prop. Treas. Reg. § 116610-20, 89 Fed. Reg. 104915, 104918 (Dec. 26, 2024).
18 See ABA Comm. on Pro. Ethics & Professional Responsibility, Formal Op. 94-839 (1994) (“It is ethical to charge contingent fees as long as the fee is appropriate and reasonable and the client has been fully informed of the availability of alternative billing arrangements. The fact that a client can afford to compensate the lawyer on another basis does not render a contingent fee arrangement for such a client unethical. Nor is it unethical to charge a contingent fee when liability is clear and some recovery is anticipated. If the lawyer and client so contract, a lawyer is entitled to a full contingent fee on the total recovery by the client, including that portion of the recovery that was the subject of an early settlement offer that was rejected by the client.” (emphasis omitted)).
19 See id. (“Some view the contingent fee as the salvation of the impecunious, a means to redress great wrongs, vindicate rights and reform the law. Others view it as an inducement to frivolous lawsuits which abuse tort laws, and a means of exacting outrageously high fees for already overpaid lawyers.” (footnotes omitted)).
20 See Prop. Treas. Reg. § 116610-20, 89 Fed. Reg. 104915, 104930 (Dec. 26, 2024)
21 31 U.S.C. 330(c).
22 Disreputable, WEBSTERS DICTIONARY 1828, https://webstersdictionary1828.com/Dictionary/diseputable (last visited Feb. 21, 2025) (“1. Not reputable; not in esteem; not honorable; low; mean; as disreputable company. 2. Dishonorable; disgracing the reputation; tending to impair the good name, and bring into disesteem. It is disreputable to associate familiarly with the mean, the lewd and the profane.” (emphasis omitted)).
23 Ex parte Wall, 107 U.S. 265, 315 (1883) (“In Penobscot Bar v. Kimball, 64 Me. 140, the attorney had been convicted of forging a deposition, used by him in a suit against his wife for a divorce; and, though pardoned for the crime, the fraud upon the court remained, and for that and for other disreputable practices and professional misconduct, rendering him ‘unfit and unsafe to be intrusted with the powers, duties, and responsibilities of the legal profession,’ he was disbarred.”).
24 Carver v. United States, 16 Ct. Cl. 361, 383 (1880), aff’d on other grounds, 111 U.S. 609 (1884)
25 Rice v. Williams, 32 F. 437, 439 (C.C.E.D. Wis. 1887) (emphasis added).
26 See Prop. Treas. Reg. § 116610-20, 89 Fed. Reg. 104915, 104930 (Dec. 26, 2024).
27 For example, one explanation of a legitimate arrangement from the past Chair of the National Association of Enrolled Agents Education Foundation, who noted:
If a client gives me a return to do and I discover that their previous year’s return was incorrect and they may be able to get a larger refund, I should be able to amend their previous return for a percentage of the refund. I don’t want to do the work for free, and the client has no guarantee that they will collect. So they have nothing to lose, and I can do the additional work knowing that I might get an additional reward.
CPA Trendlines, supa note 15.
28 See Prop. Treas. Reg. § 116610-20, 89 Fed. Reg. 104915, 104934 (Dec. 26, 2024).