Appeals Court: IRS Lacks Authority to Regulate Preparers

A federal appeals court panel of three judges on February 11 upheld a lower court’s ruling early last year that the IRS does not have the legal right to regulate the estimated 600,000 to 700,000 paid tax return preparers in the United States.

“This is a major victory for tax preparers – and taxpayers – nationwide,” Dan Alban of the Institute for Justice, the lead attorney representing three independent tax preparers who filed a lawsuit against the IRS in 2012, said in a written statement. “The court found that Congress never gave the IRS the power to license tax preparers, and the IRS cannot give itself that authority.”

Responding to concerns about the performance of some paid tax practitioners, the IRS on January 1, 2011, launched new regulations through its Registered Tax Return Preparer (RTRP) program. The agency required tax preparers to obtain a Preparer Tax Identification Number (PTIN), pass a competency test, pay an annual application fee, and complete fifteen hours of continuing education annually. Only certain tax return preparers, including CPAs, enrolled agents, and tax attorneys, were exempted from the new testing and education requirements.

But independent tax practitioners Sabina Loving, John Gambino, and Elmer Kilian, who previously weren’t regulated by the IRS, spearheaded a challenge of the RTRP program, claiming the regulations would result in fee increases, a loss of business, and possibly shuttering their mom-and-pop tax-preparation operations.

The IRS had pointed to a statute enacted in 1884 under Section 330 of Title 31 of the US Code that authorizes the agency to “regulate the practice of representatives of persons before the Department of the Treasury.”

“In the first 125 years after the statute’s enactment, the executive branch never interpreted the statute to authorize regulation of tax return preparers. But in 2011, the IRS decided that the statute in fact did authorize the regulation of tax return preparers. The IRS’s statutory authority under Section 330 cannot be stretched so broadly as to encompass authority to regulate tax return preparers,” Judge Brett Kavanaugh of the US Court of Appeals District of Columbia Circuit wrote on Tuesday.

While a tax return preparer certainly assists the taxpayer, the circuit court judges believed preparers do not represent the taxpayer.

“In light of the way the code treats tax preparation, it would be quite wrong to say that a tax return preparer ‘represents’ the taxpayer in any meaningful legal sense. In short, the statute’s use of the term ‘representative’ excluded tax return preparers,” Kavanaugh wrote.

“If we were to accept the IRS’s interpretation of Section 330, the IRS would be empowered for the first time to regulate hundreds of thousands of individuals in the multimillion-dollar tax-preparation industry,” he continued later in the circuit court’s opinion. “Yet nothing in the statute’s text or the legislative record contemplates that vast expansion of the IRS’s authority.”

In a written statement following the decision, Loving, a Chicago resident and the lead plaintiff in the case, said her customers – not the IRS – should be the ones who get to choose who prepares their taxes.

“I have a right to earn an honest living without getting permission from the IRS,” she added.

The circuit court upheld a January 18, 2013, decision by the District Court for the District of Columbia that tax return preparers who prepare and submit returns aren't “practicing” before the IRS, so the agency can't regulate them. Adding that unlicensed preparers would suffer irreparable harm due to the regulations, the district court enjoined the IRS from enforcing the RTRP program.

On February 1, 2013, the district court modified its order, stating that it doesn't affect the requirement for all paid tax preparers to obtain a PTIN.

The IRS announced last May that it would issue refunds to tax return preparers who registered for certification tests that were canceled due to the court-ordered injunction of the RTRP program. Additionally, fees collected from tax preparers who tested on or after January 18 were also refunded.

In a written statement on Tuesday, the IRS said it is reviewing the circuit court’s decision.

“The IRS continues to believe that it’s critical for taxpayers to be able to rely on quality work from tax preparers,” the statement said.

Tax-preparation company H&R Block, which supported the IRS’s regulations, said the circuit court’s verdict “is a blow to honest taxpayers,” and added that much like hair dressers, who are regulated in all fifty states, tax preparers should be required to meet minimum competency standards.

“It is outrageous that all consumers don’t enjoy basic protections with such a significant financial transaction as tax preparation,” H&R Block President and CEO Bill Cobb said in a written statement. “Something is out of whack when you are better protected when getting your haircut than when sitting across the desk from a tax preparer.”

Related articles:

IRS to Refund Tax Preparers for Canceled Certification Tests
Court Denies IRS Appeal to Lift Injunction on Tax Preparer Licensing
Court Upholds Injunction; IRS Revives PTIN System

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