A taxpayer is entitled to hire a licensed attorney, CPA, or enrolled agent to represent them before the IRS. The taxpayer has a fundamental right to choose their tax advisor.
The IRS generally has to accept this choice and work with the tax advisor. The IRS cannot simply ignore the tax advisor. Even to communicate with the taxpayer directly, the IRS has to first issue a bypass letter.
A bypass letter is a letter that the IRS sends to the tax advisor when the IRS believes that the advisor has failed to respond to IRS requests. This is mandatory and can be challenged if the IRS does not follow this process. This is exactly what happened in the People’s Source International, LLC v. United States, No. 06-1116 (10th Cir. 2006) case. The IRS issued a tax attorney a bypass letter and the tax attorney challenged the letter.
Facts & Procedural History
As outlined in People Source, the IRS apparently believed that the tax attorney had failed to respond to the IRS request for information and meetings. The IRS sent the bypass letter to the taxpayers, rather than to the tax attorney.
Upon receipt of the bypass letter, the taxpayers sent notice to the IRS that they would bring suit against the IRS if the IRS failed to retract the bypass letter. The next day the taxpayers filed suit against the IRS in the United States District Court for the District of Colorado, seeking a temporary restraining order and a permanent injunction to prevent the IRS from contacting the taxpayers directly. The taxpayers amended their complaint to ask for injunctive relief and up to $1 million for damages caused by the bypass letter.
Two months later the IRS informed the taxpayer that it had determined it to be in the best interests of the agency to withdraw the bypass letter.
The taxpayers then agreed to withdraw the complaint for damages and the motion for injunctive relief, leaving only their claim for attorney fees. The District Court denied the request for attorneys fees. On appeal, the Tenth Circuit Court of Appeals essentially held that the taxpayers would have been entitled to attorneys fees had the taxpayers merely exhausted their administrative remedies prior to bringing suit. In this case, the administrative remedies would have been exhausted if the taxpayers had attended one conference with the IRS Appeals Office.
The IRS Bypass Process and Letter
The rules set out who can practice before the IRS. There are various rules that apply, but generally, it includes any licensed attorney, CPA or enrolled agent who is in good standing with their licensing body and the IRS.
The tax advisor just has to be appointed by the taxpayer. This is done by having the taxpayer sign Form 2848, Power of Attorney and Declaration of Representative, and providing the form to the IRS. The IRS then has to communicate with the tax advisor. It can still send copies of correspondence to the taxpayer, but the original has to go to the tax advisor.
The IRS’s policy manual sets out the procedures the IRS is to follow when it wants to bypass a tax advisor and communicate directly with the taxpayer.
Internal Revenue Manual Section 22.214.171.124 states that the IRS can bypass a taxpayer’s advisor if they have “unreasonably delayed or hindered an examination, collection, or investigation by failing to furnish, after repeated requests, nonprivileged information necessary to the examination, collection or investigation, the Internal Revenue Service employee conducting the examination, collection, or investigation may request permission from his/her immediate supervisor to by-pass the representative and contact the taxpayer directly for such information.”
The “unreasonably delayed or hindered collection by repeatedly” language means:
- failing to provide the taxpayer’s records or information upon request,
- failing to return telephone calls or respond to written correspondence,
- canceling scheduled appointments at the last minute without timely notification, or
- requesting extensions of time beyond established deadlines for submitting requested records or information.
This is more than simply being slow or a one-time event.
Importantly, this policy also requires the IRS to issue a bypass letter. This starts with a Letter 4020-A, Warning Letter for By-pass Procedures for Preparers covered under Circular 230, that is sent to the tax advisor. It is not sent to the taxpayer. Only after this, can the IRS communicate directly with the taxpayer.
The IRS is required to communicate with the taxpayer’s chosen representative, and cannot override the taxpayer’s choice except in limited circumstances. This means that if a taxpayer has chosen a particular representative to act on their behalf, the IRS must communicate with that representative and cannot refuse to do so simply because they do not like or agree with the choice.
However, there are some situations in which the IRS may override the taxpayer’s choice of representative. One situation is when a bypass letter has been issued. As evidenced by this case, if the IRS attempts to override the taxpayer’s choice of representative without proper justification, the taxpayer may have grounds to file a lawsuit against the IRS. The taxpayer may seek an injunction to prevent the IRS from taking action against their chosen representative, and may also seek damages for any harm caused by the IRS’s actions.