Catch-22: My Nightmare with Minnesota Statute 332B

At the close of 2020, most tax practitioners–and Americans, in general–held out hope for better things to come in the new year. Without a doubt, 2020 was rough, and the best we could hope for was that it was in our rearview mirror. As a tax practitioner, 2020 was the most difficult year I had experienced professionally since becoming an enrolled agent in 2012. It seemed like every time I turned around, policymakers in Washington, D.C., were changing the tax laws, while the Department of the Treasury struggled to provide timely guidance; tax deadlines were a moving target (at best) and as the pandemic peaked, Internal Revenue Service (IRS) operations ground to a halt for months at a time.

On top of all this, as an enrolled agent (EA) in Minnesota, I personally experienced the single most expensive, time-consuming, and ultimately catastrophic period of my tax career. It all began with a letter from the Minnesota attorney general’s office. This letter set off a chain of events, which ultimately concluded in September 2021. The end result left me with little choice but to close my tax practice and cease the representation of Minnesota taxpayers.

This was all due to a single complaint filed with the Minnesota Department of Commerce. The merits of the complaint were never investigated. And
let me say, I stand by the positive results I obtained for the client in that particular case. Per the Minnesota attorney general’s office, however, it was irrelevant to the issue at hand. According to the State of Minnesota, I was in violation of state law regarding debt settlement services, even though I was an enrolled agent regulated by the Department of the Treasury. That is what I was told in July 2020 and in 2021, when an administrative law judge ruled this was, indeed, the case.

I have personally represented hundreds of Minnesota taxpayers in federal tax matters. I have worked offers-in-compromise, negotiated payment plans, submitted returns for audit reconsideration, and represented taxpayers under examination. All of my representation work for taxpayers–including the case in question–has been fully compliant with the requirements of Circular 230, the Internal Revenue Code (the IRC), and federal regulations. Nevertheless, with the receipt of this letter from the state attorney general’s office, I found myself being subject to the significant penalties of a Minnesota state statute defining “debt settlement services.”

The state of Minnesota defines debt settlement services as “offering to provide advice or offering to act or acting as an intermediary between a debtor and the federal government, state government, or their political subdivisions to delay payment of delinquent taxes owed, establish a payment plan for delinquent taxes owed, or obtain a settlement for less than the full amount of delinquent taxes owed.” Therefore, any individual or company providing said services must register with the Minnesota Department of Commerce and fulfill the requirements of the state statute.

You might be asking, “Is that it? I just need to register as a debt settlement services provider?” No, not by a long shot. Minnesota Statute 332B outlines the many requirements a debt settlement services provider must follow. Failure to follow any of the requirements results in a civil penalty of $5,000 per violation. Unfortunately, a number of these state requirements are in direct opposition to the federal requirements of Circular 230. I found myself in a Catch-22 situation.

For instance, 332B.09.2, regarding the timing and calculation of fees you can charge a Minnesota consumer, unquestionably violates the Circular 230 rules governing contingent fees. Additionally, the state statute requires a data dump of taxpayer information into the Minnesota Department of Commerce that potentially runs afoul with the IRC on use and disclosure of client tax information. And, finally, the registration fees and bonding requirements of the state statute would add thousands of dollars to the cost of representing Minnesota taxpayers.

The next logical question is, does federal regulation of enrolled agents not preempt Minnesota from regulating enrolled agents practicing before the IRS? The answer is a resounding “Yes, but…” When it became clear that I was not going to be able to fight Minnesota all on my own, I reached out the
National Association of Enrolled Agents (NAEA). The NAEA quickly jumped in, raising money from the general membership to implement a three-pronged plan to fight this destructive state regulation.

First, they hired state-level lobbyists to help amend the statute. Second, they hired a prestigious firm in Washington, D.C., to draft the constitutional
arguments against state regulation. Finally, the NAEA assisted me financially in my case so that I would not be overwhelmed by the endless resources of the state attorney general.

The State legislative effort has made progress: State Senator Jeff Howe and Representative Andrew Carlson introduced legislation clarifying that EAs and other Circular 230 tax practitioners are exempt from the act. Additionally, they facilitated the language of the bill with all interested parties including the state American Institute of Certified Public Accountants (AICPA), the American Bar Association (ABA), the consumer rights group
responsible for the original complaint, and the Department of Commerce. While the effort came close to fruition, the time lapsed for the legislative
sessions without final action. The NAEA will continue these efforts during the 2022 session and are optimistic about success this time around.

The NAEA now has a comprehensive memo detailing the legal arguments for why states under the Supremacy Clause of the United States Constitution cannot regulate enrolled agents’ practice before the IRS. While this memo was helpful in my arguments, the administrative law judge for my case ruled that it was outside her purview, which was strictly concerning compliance with the black letter of the state statute.

I want to express my gratitude to the members of the NAEA from around the country who contributed to the Minnesota defense fund. As you can imagine, fighting this unconstitutional state statute was extremely expensive and as a small business owner I would not have been able to do it without help.

When I lost my case and was presented with the dilemma of choosing to violate state or federal law, I chose to discontinue providing taxpayer representation to Minnesota residents. Unfortunately, this meant the closure of my firm. Like many enrolled agents in Minnesota and beyond, I provide debt settlement services. In sworn testimony, Minnesota Department of Commerce representatives acknowledged all enrolled agents are subject to the same fate. My fate may be your fate unless we correct this unconstitutional overreach.