Part IV. Items of General Interest

Notice of Proposed Rulemaking and Notice of Public Hearing

Contingent Fees Under Circular 230

REG–113289–08

AGENCY: Office of the Secretary, Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document proposes modifications of the regulations governing practice before the Internal Revenue Service (Circular 230). These proposed regulations affect individuals who practice before the IRS. The proposed amendments modify the rules relating to contingent fees under Circular 230. This document also provides notice of a public hearing on the proposed regulations.

DATES: Written or electronically generated comments must be received by September 10, 2009. Outlines of topics to be discussed at the public hearing scheduled for November 20, 2009 at 10 a.m. must be received by September 10, 2009.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–113289–08), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–113289–08), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (IRS and REG–113289–08). The public hearing will be held in Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Amy L. Mielke at (202) 622–4940; concerning submissions of comments and the public hearing,

Regina Johnson at (202) 622–7180; (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Section 330 of title 31 of the United States Code authorizes the Secretary of the Treasury to regulate practice before the Treasury Department. The Secretary has published the regulations in Circular 230 (31 CFR part 10). On September 26, 2007, the Treasury Department and the IRS published final regulations in the Fed- eral Register (REG–138637–07, 2007–45 I.R.B. 977 [72 FR 54540]) modifying rules governing the general standards of practice before the IRS, including the rules relating to contingent fees in §10.27 of Circular 230. Section 10.27 of the final regulations generally preclude a practitioner from charging a contingent fee for services rendered in connection with any matter before the Internal Revenue Service, including the preparation or filing of a tax return, amended tax return or claim for refund or credit. The final regulations, however, permit a practitioner to charge a contingent fee for services rendered in connection with the IRS examination of, or challenge to: (i) an original tax return, or (ii) an amended return or claim for refund or credit when the amended return or claim for refund or credit was filed within 120 days of the taxpayer receiving a written notice of the examination of, or a written challenge to, the original tax return. The final regulations also permit a practitioner to charge a contingent fee for services rendered in connection with a claim for refund or credit of interest and penalties assessed by the IRS, and for services rendered in connection with a judicial proceeding arising under the Internal Revenue Code. The final amendments to §10.27 made by the final regulations apply to fee arrangements entered into after March 26, 2008.

Section 406 of the Tax Relief and Health Care Act of 2006, Public Law 109–432 (120 Stat. 2958) (December 20, 2006) (the Act) amended section 7623 of the Internal Revenue Code concerning the payment of awards to certain persons who detect underpayments of tax. Prior statutory authority to pay awards at the

discretion of the Secretary was re-designated as section 7623(a), and a new section 7623(b) was added to the Code. Additional off-Code provisions in section 406 of the Act established a Whistleblower Office within the IRS and addressed reward program administration issues. See Notice 2008–4, 2008–2 I.R.B. 253, for interim guidance applicable to award claims submitted under the authority of section 7623. After consideration of comments received following the publication of the final regulations on contingent fees and the Act, on March 26, 2008, the Treasury Department and the IRS published Notice 2008–43, 2008–15 I.R.B. 748, providing interim guidance and information concerning contingent fees under Circular 230. The interim guidance in Notice 2008–43 clarified that §10.27(b)(2)(ii) of Circular 230 does not require the IRS to furnish a written notice of examination to a taxpayer as a prerequisite to a practitioner charging a contingent fee for services rendered in connection with an IRS examination of, or challenge to, an amended return. The interim guidance also clarified that §10.27 permits practitioners to charge a contingent fee with respect to whistleblower claims under section 7623. The interim rules in Notice 2008–43 are applicable to fee arrangements entered into after March 26, 2008, and will remain in effect until these proposed regulations are finalized.

Explanation of Provisions

This document proposes modifications to the standards for contingent fees consistent with the interim guidance provided in Notice 2008–43. Section 10.27 generally prohibits a practitioner from charging a contingent fee for services rendered in connection with any matter before the IRS. The primary rationales behind the prohibition on contingent fees is to preclude any fee arrangement that is related to or requires a favorable ruling by the IRS and that has the potential to exploit the audit selection process or compromise a practitioner’s duty of independent judgment. Consistent with the interim guidance provided in Notice 2008–43, proposed revisions to §10.27 provide that a practitioner may charge a contingent

2009–33 I.R.B. 244 August 17, 2009

The public hearing is scheduled for November 20, 2009, at 10 a.m., and will be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. All visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit written or electronic comments by September 10, 2009 and an outline of the topics to be discussed and the time to be devoted to each topic by September 10, 2009. A period of 10 minutes will be allocated to each person for making comments.

An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal author of the regulations is Amy L. Mielke of the Office of the Associate Chief Counsel (Procedure and Administration).

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Proposed Amendments to the Regulations

Accordingly, 31 CFR part 10 is proposed to be amended as follows:

Paragraph 1. The authority citation for 31 CFR part 10 continues to read as follows:

Authority: Sec. 3, 23 Stat. 258, secs. 2–12, 60 Stat. 237 et. seq .; 5 U.S.C. 301, 500, 551–559; 31 U.S.C. 321; 31 U.S.C. 330; Reorg. Plan No. 26 of 1950, 15 FR 4935, 64 Stat. 1280, 3 CFR, 1949–1953 Comp., p. 1017.

Par. 2. Section 10.27 is amended by revising (b),(c)(1) and (d) and adding paragraph (e) to read as follows:

fee in three limited exceptions. Under proposed §10.27(b)(2)(i) and (ii), a practitioner may charge a contingent fee for services rendered in connection with the IRS’s examination of, or challenge to: (i) an original tax return; or (ii) an amended return or claim for refund or credit filed before the taxpayer received a written notice of examination of, or a written challenge to, the original tax return (or filed no later than 120 days after the receipt of such written notice or written challenge). The intent of this exception is to discourage the tactical preparation of a refund claim or amended return filed late in the examination process. The exception for contingent fee arrangements with respect to an amended return or claim for refund or credit may be used if the amended return or claim for refund or credit is filed before the taxpayer receives written notice of the examination or written challenge to the original return (or if the taxpayer never receives such notice or writing) or within 120 days of the taxpayer receiving the notice or writing. For purposes of proposed §10.27(b)(2)(ii), the 120 days is computed from the earlier of a written notice of the examination, if any, or a written challenge to the original return. Further, under proposed §10.27(b)(3) and (4), practitioners also may charge a contingent fee for services rendered in connection with a claim for refund or credit of interest and penalties assessed by the IRS, and for services rendered in connection with a claim under section 7623.

In response to comments received following the publication of the final regulations on contingent fees, this document also clarifies the definition of a contingent fee in §10.27(c)(1) to provide that a contingent fee includes a fee that is based on a percentage of the refund reported on a return, that is based on a percentage of the taxes saved, or that otherwise depends on the specific tax result attained. The definition in §10.27(c)(1) states that a contingent fee depends on the specific result attained without directly providing that it is the specific tax result that is relevant to the definition of a contingent fee. Contingent fees based on the closing of a transaction or other non-tax contingencies do not present the same concerns posed by tax-related contingent fees. Accordingly, this document clarifies the existing definition

to provide that a contingent fee includes, but is not limited to, any fee that depends on the specific tax result obtained in any given transaction.

The scope of these regulations is limited to the rules relating to contingent fees under the general standards of practice before the IRS. These regulations do not alter or supplant other ethical standards applicable to practitioners.

Effect on Other Documents

Notice 2008–43, 2008–15 I.R.B. 257, will be obsolete when regulations finalizing these proposed regulations are published in the Federal Register .

Special Analyses

It has been determined that this proposed rule is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. Persons authorized to practice before the IRS have long been required to comply with certain standards of conduct. These regulations do not alter the basic nature of the obligations and responsibilities of these practitioners. These regulations clarify when a practitioner may charge a contingent fee under §10.27(b)(2) in response to public comments. Therefore, a regulatory flexibility analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses.

Comments and Public Hearing

Before the regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) and electronic comments that are submitted timely to the IRS. The Treasury Department and the IRS specifically request comments on the clarity of the proposed regulations and how they can be made easier to understand. All comments will be available for public inspection and copying.

August 17, 2009 245 2009–33 I.R.B.

§10.27 Fees .

• • • • (b) Contingent fees —(1) Except as provided in paragraphs (b)(2), (3), (4), and (5) of this section, a practitioner may not charge a contingent fee for services rendered in connection with any matter before the Internal Revenue Service.

(2) A practitioner may charge a contingent fee for services rendered in connection with the Internal Revenue Service’s examination of, or challenge to—

(i) An original tax return; or (ii) An amended return or claim for refund or credit filed before the taxpayer received a written notice of examination of, or a written challenge to, the original tax return; or filed no later than 120 days after the receipt of such written notice or written challenge. The 120 days is computed from the earlier of a written notice of the examination, if any, or a written challenge to the original return.

(3) A practitioner may charge a contingent fee for services rendered in connection with a claim for credit or refund filed solely in connection with the determination of statutory interest or penalties assessed by the Internal Revenue Service.

(4) A practitioner may charge a contingent fee for services rendered in connection with a claim under section 7623 of the Internal Revenue Code.

(5) A practitioner may charge a contingent fee for services rendered in connection with any judicial proceeding arising under the Internal Revenue Code.

(c) * * * For purposes of this section— (1) Contingent 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. A contingent fee includes a fee that is based on a percentage of the refund reported on a return, that is based on a percentage of the taxes saved, or that otherwise depends on the specific tax result attained. A contingent fee also includes any fee arrangement in which the practitioner will reimburse the client for all or a portion of the client’s fee in the event that a position taken on a tax return or other filing is challenged by the Internal Revenue Service or is not sustained, whether pursuant to an indemnity agreement, a guaran

tee, rescission rights, or any other arrangement with a similar effect.

(2) - - (d) Applicability date. This section is applicable to fee arrangements entered into after March 26, 2008.

(e) Effective date. This section is effective on the date that the final regulations are published in the Federal Register .

Linda E. Stiff, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on July 27, 2009, 8:45 a.m., and published in the issue of the Federal Register for July 28, 2009, 74 F.R. 37183)

Deletions From Cumulative List of Organizations Contributions to Which are Deductible Under Section 170 of the Code

Announcement 2009–61

The Internal Revenue Service has revoked its determination that the organizations listed below qualify as organizations described in sections 501(c)(3) and 170(c)(2) of the Internal Revenue Code of 1986. Generally, the Service will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the Service is not precluded from disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c)(2) if the organization has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omissions of the organization that brought about this revocation.

If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would begin on August 17, 2009, and would end on the date the court first

determines that the organization is not described in section 170(c)(2) as more particularly set forth in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a husband and wife treated as one contributor. This benefit is not extended to any individual, in whole or in part, for the acts or omissions of the organization that were the basis for revocation.

Frank and Nora Harty Center of Staten

Island, Inc. Staten Island, NY Higgs Carter King, Inc

San Antonio, TX World Orphanage and Refugee Relief

Foundation, Inc. Ft. Lauderdale, FL Triple EEE

Long Beach, CA American Budget Credit Debt Services,

Inc. Spring Valley, NY Craig Family Foundation

Chicago, Illinois Aloha Consumer Credit Counseling

Service Kaneohe, HI Charity Neighborhood Auxiliary

Brooklyn, NY Lamar Dixon Expo Foundation

Prairieville, LA Reno & BJ Foundation

Detroit, MI Reading Enhancement and Development

Tumwater, WA First Foundation

Petersburg, VA The Denis B and Mary Elizabeth

O’Donnell Foundation West Orange, NJ Good Times Foundation

Salt Lake City, UT Animal Adoption Center of Garland

Garland, TX Le Tulle Foundation

Bay City, TX YMCA of Manchester Coffee County

Manchester, TN The Light Center, Inc.

Columbus, OH Seventh Regiment Fund, Inc.

New York, NY Fair Credit Foundation

Los Angeles, CA Student Loan Fund of Idaho

Fruitland, ID

2009–33 I.R.B. 246 August 17, 2009

XI, or Form 990–EZ, Parts I through VI, with the completed Schedule A, Public Charity Status and Public Support, as filed with the Internal Revenue Service for the taxable year immediately preceding the taxable year in which the request is made; or b. The organization’s support information for the past five completed tax years, using the organization’s overall method of accounting used to complete the Form 990 or Form 990–EZ for such years. This information may be provided to the Internal Revenue Service on a completed Schedule A, Public Charity Status and Public Support, to the Form 990 or Form 990–EZ (2008 or later year, as appropriate).

Like all requests for a determination, the request must be signed under penalties of perjury by the organization’s officer, director, trustee, or other authorized official. The complete reclassification request should be mailed to:

IRS-TEGE Attn: Correspondence Unit,

Room 4024 P.O. Box 2508 Cincinnati, OH 45201

If an organization previously submitted a request for reclassification pursuant to Announcement 2006–93 before the issuance of this announcement, that request will still be processed. Organizations will receive a determination letter in response to their request for reclassification indicating whether a change in public charity classification has been made. There is no user fee for this determination letter.

This announcement supersedes Announcement 2006–93, which is revoked.

For further information, contact Melinda Williams at (202) 283–9467 (not a toll-free call).

Positive Alternatives

Salt Lake City, UT Family Budget Association of America,

Inc. Washington, DC Scott Olsen Foundation

Alpine, UT Helping Other People Excel Faith-Based

Coalition, Inc. Jackson, MS Changing Attitudes Counseling Services,

Inc. Washington, DC Christian Center for the Performing Arts

• Denver Lakewood, CO Advancement of Sound Science Center,

Inc. Potomac, MD

Procedures for Section 509(a)(3) Supporting Organizations to Change Public Charity Classification

Announcement 2009–62

This announcement provides procedures that a section 509(a)(3) supporting organization may use to request a change in its public charity classification. This announcement supersedes Announcement 2006–93, 2006–2 C.B. 1017.

Background

In the Pension Protection Act of 2006, Pub. L. 109–280 (PPA), Congress enacted a number of changes to the tax law affecting supporting organizations described in section 509(a)(3) of the Internal Revenue Code (Code). In recognition of the fact that organizations classified as supporting organizations under section 509(a)(3) might wish to seek reclassification under sections 509(a)(1) and 170(b)(1)(A)(vi) or section 509(a)(2) of the Code, the Internal Revenue Service (IRS) issued Announcement 2006–93, 2006–2 C.B. 1017, to provide procedures under which supporting organizations could request a change in public charity classification for reasons related to the changes made by the PPA. The IRS processed status change requests submitted under Announcement 2006–93 on an expedited basis.

On September 9, 2008, the Treasury Department and the IRS issued temporary and proposed regulations to implement the redesign of the Form 990, Return of Or- ganization Exempt From Income Tax . 73 Fed. Reg. 52,528. The new regulations provide for the elimination of the advance ruling process and a change in the public support computation period from the four years preceding the tested year to a five year-period that includes the tested year. An organization that meets a public support test for the tested year is a public charity for the tested year and the next succeeding year. The new regulations also made changes to the method of accounting for computing public support. This announcement provides procedures consistent with the new regulations for supporting organizations to request changes in public charity classification. In addition, this announcement provides that the IRS will no longer process classification changes on an expedited basis unless the request otherwise meets the expedite criteria set forth in Revenue Procedure 2009–4, 2009–1 I.R.B. 118.

Procedures for Supporting Organizations to Request Change in Public Charity Classification

Organizations that are seeking to change their public charity classification from a section 509(a)(3) supporting organization to a section 509(a)(1) or (a)(2) organization should submit a written request for a determination as to public charity status pursuant to Revenue Procedure 2009–4, 2009–1 I.R.B. 118.

The request for reclassification must include the following:

1. A subject line or other indicator on the first page of the request in bold, underlined, or all capitals font indicating “REQUEST FOR DETERMINATION AS TO PUBLIC CHARITY STATUS.”
2. A statement requesting reclassification from section 509(a)(3) to another public charity classification under sections 509(a)(1) and 170(b)(1)(A)(vi) or section 509(a)(2); and
3. Either a. A copy of the organization’s signed Form 990, Parts I through

August 17, 2009 247 2009–33 I.R.B.