Should I Violate Federal Law or State Law?

Suppose you have a federal license to perform your occupation in your state of residence. That license allowed you to do [whatever it is you do] anywhere in the United States. Now, further suppose your state legislature passed a law specifically overriding that license, and, in fact, making some of [whatever it is you do] illegal under state law. And further suppose that if you obey that new state law you would be violating federal law as you would not be performing [whatever it is you do] properly under federal law. No state legislature could be that stupid uninformed, right?

One should never take a bet against legislatures doing dumb things, and the actions over the past fifteen months of the Nevada legislature demonstrate that. In 2017 the Nevada Legislature passed AB 324 that amended NRS (Nevada Revised Statutes) Chapter 240A; that reclassified Enrolled Agents (what my federal license is) as people who performed “Document preparation services.” We would have to register with the Nevada Secretary of State, post a surety bond, and we would not be able to negotiate with anyone else or communicate to anyone else the position of a client; if we did so, we would be subject to penalties including possible imprisonment. Hmmm, might an Enrolled Agent need to negotiate on behalf of clients with tax agencies such as the IRS and collect confidential information?

The Nevada Society of Enrolled Agents (NVSEA) filed a lawsuit, and in November 2017 had a temporary injunction placed on enforcement of the law. Last month the court heard arguments, and the ruling came out on August 16th.

The Court finds, that as a result of the amendments made to Chapter 240A by AB 324, Nevada Enrolled Agents cannot comply with both federal and state law. Under federal regulations, Nevada Enrolled Agents must provide competent tax advice, must assist clients in preparing accurate tax returns and other forms, must collect documentation which supports a client’s position and must competently and diligently represent taxpayer clients in proceedings before the IRS. Under Chapter 240A as amended, Enrolled Agents in Nevada are prohibited from performing these duties and face civil and criminal liability for violations of the state law.

The Court went on to note why the law is unconstitutional:

This Court finds that Chapter 240A…hinders and obstructs the free use of the Enrolled Agents’ license to practice before the IRS…Pursuant to NRS 240A.240(5), Enrolled Agents are no longer able to “negotiate with another person concerning the rights or responsibilities of a client, communicate the position of a client to another person or convey the position of another person to a client.” This contradicts Section 10.2(4) of Circular 230, which allows agents to “correspond[] and communicat[e] wit hthe Internal Revenue Service” and engage in “matters connected with a presentation to the Internal Revenue Service or any of its officers or employees relating to a taxpayer’s rights, privileges, or liabilities.” The amended law also prohibits an Enrolled Agent from “appear[ing] on behalf of a client in a court proceeding or other formal adjudicative proceeding….” NRS 240A.240(6). This provision conflicts with Section 10.2 of Circular 230, which allows agents to “represent[] a client at conferences, hearings, and meetings.” The amended law prohibits Enrolled Agents from providing “advice, explanation, opinion, or recommendation to a client about possible legal rights, remedies, defenses, options or the selection of documents or strategies….” NRS 240A.240(7) This contradicts Circular 230, which states that Enrolled Agents may give written advice regarding tax matters. 31 C.F.R. §§ 10.2, 10.33, 10.37. Finally, the amended statute contradicts Circular 230 because it requires an Enrolled Agent to provide a copy of a client’s file to government entities. NRS 240A.220(1). Yet, pursuant to IRC §§ 7525, 7216, 6713, Enrolled Agents must keep client information confidential and only share client files when ordered to do by a court…

Accordingly, the Court finds that Chapter 240A of the Nevada Revised Statutes, as amended by A.B. 324, conflicts with federal law to the extent it seeks to regulate Enrolled Agents who are authorized to practice before the Internal Revenue Service. The law is therefore unconstitutional pursuant to the Supremacy Clause of the United States Constitution, Article VI, Clause 2.

The permanent injunction was granted by the Court. While the Nevada Attorney General can appeal (the office has another 20 days or so to do so), it’s not likely; the law is clearly unconstitutional on its face.

There are two points I want to make. First, I didn’t write about this earlier because this law was so stupid it was clear to me that it was going to be found unconstitutional. Even before the temporary injunction was granted the Nevada Secretary of State’s office didn’t enforce the law as it pertained to Enrolled Agents.

The second point is how this law was enacted. The state legislature didn’t contact any tax professionals about the law. There apparently is a problem with some document preparer services, and the Assemblyman who wrote AB 324 made an assumption that Enrolled Agents were part of the problem. We’re actually part of the solution in that we help resolve taxpayer problems, but I digress. I’m a member of the National Association of Enrolled Agents and NVSEA to help with legislative policies vis-a-vis Enrolled Agents. While I don’t agree with all of what the NAEA would like to pass, I agree with most of it. And my dues and contributions to NVSEA helped fight an uninformed law.

No matter your profession, stay informed. Talk to your local legislators. Generally, state legislators are approachable and most want to be informed. I’m making a point of meeting mine later this year, and explaining what Nevada Enrolled Agents do, what we had to do, and why we did what we did. Unfortunately, we remain the Lichtenstein of the tax world.

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