Court Rules IRS Can't License Tax Return Preparers

By Frank Byrt and Anne Rosivach

A federal court struck down the IRS's licensing effort that would have required thousands of independent tax preparers to pass a competency exam and abide by a litany of new rules.
 
On January 18, 2013, Judge James Boasberg in the US District Court for the District of Columbia ruled against the IRS in favor of three tax preparers who filed suit in March of last year with the help of a libertarian legal group, the Arlington, Virginia–based Institute for Justice.
 
"Today's ruling is a victory for hundreds of thousands of tax preparers across the country and the tens of millions of taxpayers who rely on them to prepare their taxes," said attorney Dan Alban of the Institute for Justice, which calls itself "the nation's leading legal advocate for the rights of entrepreneurs.
 
"The court ruled today that Congress never gave the IRS the authority to license tax preparers, and the IRS can't give itself that power," he said, in a statement issued by the organization.
 
The IRS launched an effort in 2010 to impose new regulations on tax preparers to stanch what it saw as a growing problem of poorly done tax returns by individuals ill-equipped for the task. The Registered Tax Return Preparers (RTRP) program required 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. 
 
Beginning January 1, 2014, only registered tax return preparers would be authorized to prepare and sign federal tax returns. Attorneys, certified public accountants, and enrolled agents were exempt from the requirements. 
 
Some representatives of the tax return preparation industry have supported the new requirements. "We have embraced the fact that there should be minimum standards for the preparation of tax returns," said John Hewitt, CEO of Liberty Tax Service. "I have been in the industry for forty-four years, and I do not think that just anyone can hang out their shingle."
 
The Institute for Justice said the IRS rules would be unfair in particular to small, independent tax preparers as "powerful interest groups, such as the American Institute of CPAs, successfully lobbied for an exemption that allows tax preparers who are supervised by CPAs, as well as attorneys or IRS-designated enrolled agents at law firms, CPA firms, or recognized firms to prepare tax returns without meeting the licensing requirements."
 
The judge's order includes an injunction that bars implementation of the RTRP program. The IRS can appeal the ruling to the US Court of Appeals for the District of Columbia Circuit. An IRS spokesman said on January 22 that the agency did not have a comment at this time.
 
"There will be no effect that we can see on the 2013 tax season," Hewitt said. "There are a number of things the IRS can do; for example, file an appeal and say that this decision only applies to those three individuals." 
 
H&R spokesman Gene King said, "At this time, H&R Block can't speculate as to what the IRS will do next on this. We've always held our tax professionals to some of the industry's highest standards and will continue to do so this tax season and every tax season."
 

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Alban told AccountingWEB that according to an IRS estimate, its proposed regulations would have impacted about 350,000 tax preparers. He said that unofficial estimates are that potentially "tens of thousands" of tax preparers would have been put out of business by not being able to comply with the new rules. 

 
"The timing [of the court decision] is great for tax preparers because it came down eighteen days after the regulations that went into effect on January 1," and just as tax season starts, said Alban.
 
Nina Olson, the National Taxpayer Advocate, has long recommended that the government do more to protect taxpayers from tax return preparer fraud and incompetence. She wrote in her 2009 Annual Report to Congress, "I have recommended the regulation of unenrolled return preparers since my 2002 Annual Report to Congress, and reiterated and supplemented that recommendation in successive reports." 
 
The three independent tax preparers who brought the suit with the Institute for Justice are: Sabina Loving of Chicago, Illinois; John Gambino of Hoboken, New Jersey; and Elmer Kilian of Eagle, Wisconsin.
 
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