Suspension or Expulsion from the IRS e-File Program: What Preparers Need to Know
The IRS strictly regulates tax professionals and firms (referred to as “Providers”) and maintains wide discretion in suspending or expelling Providers from the IRS e-file program. When a Provider is suspended or expelled, any tax returns that are electronically filed under their Electronic Filing Identification Number (“EFIN”) are automatically rejected by the IRS. Over the years, I have represented Providers who suddenly and unexpectedly found themselves fighting to keep their tax preparation businesses operating after the IRS proposed suspending or expelling them from participating in the e-file program. Many of these Providers had been operating for several years and maintained an excellent history of compliance with IRS e-file rules. Providers must be aware of e-file rules and the severe sanctions that can result if these rules are violated.
The IRS actively monitors Providers to ensure they are following e-file rules. In fact, the IRS regularly conducts suitability checks where an IRS agent visits a Provider’s physical office to determine whether the Provider has violated any IRS e-file rules, including record-keeping, advertising, office security, and tax return quality rules. The IRS also actively monitors a Provider’s compliance with tax return preparer regulations, including compliance with preparer due diligence regulations related to the Earned Income Tax Credit, American Opportunity Tax Credit, and Child Tax Credit. If the IRS determines through the suitability check that a Provider has violated any e-file rules or tax return preparer regulations, they can unilaterally suspend the Provider from the e-file program. For severe violations, the IRS can even permanently expel a Provider from the e-file program.
The IRS generally informs Providers of any proposed e-file suspension or expulsion action in a letter setting forth the reasons for the proposed action. Providers have 30 days from the date of this letter to file an administrative appeal. If an administrative appeal is timely filed, the Provider will have an opportunity to challenge the suspension or expulsion in an IRS administrative hearing. If an appeal is not filed or if it is filed late, then the proposed suspension or expulsion becomes final with no further administrative appeal rights.
One of the most challenging aspects of e-file suspension and expulsion cases is that the outcome is generally unpredictable due to the broad power by the IRS to determine on a case-by-case basis which violations deserve suspension or expulsion. According to IRS Publication 3112, the IRS may suspend or expel a Provider from the e-file program for “violations of IRS e-file rules and requirements that, in the opinion of the IRS, have a significant adverse impact on the quality of electronically filed returns or on IRS e-file.” Notice the key words “in the opinion of the IRS” and the sheer power the IRS possesses to determine the outcome of the case by the IRS’ perceived impact of any violation on the quality of e-filed returns.
Another challenge in e-file suspension and expulsion cases is that Providers have limited options to dispute the IRS in court. This is because the IRS has legal authority to act as the figurative “judge, jury, and executioner” when determining whether to suspend or expel Providers from the e-file program. Courts have held that the ability to file tax returns electronically is not a Constitutionally protected property or liberty interest. Sabat v. Internal Revenue Service, 2000-1 USTC ¶ 50.328 (W.D. Pa. 2000). Therefore, for a Provider’s e-file suspension or expulsion to be upheld in court, the IRS only has to make its decision in accordance with its own regulatory authority, revenue procedures, and publications. Brenner Income Tax Centers v. Director of Practice, 87 F.Supp.2d 252, 257 (S.D.N.Y. 2000). This legal standard makes it difficult for a Provider to successfully challenge e-file suspension or expulsion in court because the IRS regulatory authority (Publication 3112) requires the IRS to determine “in the opinion of the IRS” whether the Provider’s violations adversely impacted the e-file program.
I consider E-file suspension and expulsion cases to be high-stakes legal matters due to the limited opportunities to challenge the proposed actions, the short timeline to file an administrative appeal, and the devastating financial impact at stake if e-file participation is suspended or permanently denied. It is critical for Providers to immediately seek legal counsel if the IRS proposes to suspend or expel them from the e-file program. The skill of a tax attorney experienced in disputing e-file suspensions and expulsions can help identify persuasive legal and factual arguments and strategies that can ultimately make the difference between a successful outcome and loss of participation in the IRS e-file program.