To paraphrase Mark Twain, reports of the death of the new IRS registration programs are greatly exaggerated.
On February 1, the District Court for the District of Columbia, which on January 18 had enjoined the IRS from enforcing its new regulatory schemes, modified its order to clarify that the IRS can continue to operate the system requiring Preparer Tax Identification Numbers (PTINs).
Furthermore, the IRS may still offer its competency testing and continuing education programs for tax return preparers on a voluntary basis. But the court also denied the IRS's motion to stay the injunction pending an appeal.
Going back to a statute initially enacted in the nineteenth century – in 1884, to be exact – the Secretary of the Treasury has the authority to regulate those who practice before the Department of the Treasury. Since the IRS is a bureau of the Treasury, the statute also covers "practice before the IRS." The definition of this term is the sticking point in the lawsuit.
In 2010, the IRS launched an effort to impose new regulations on paid tax return preparers. The Registered Tax Return Preparer (RTRP) program required preparers to obtain a 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 three tax return preparers who previously weren't regulated by the IRS – Sabina Loving of Chicago, Illinois; John Gambino of Hoboken, New Jersey; and Elmer Kilian of Eagle, Wisconsin – spearheaded a challenge to the new RTRP program. Loving, who mainly serves low-income clients, claims she'll have to increase her fees if she's forced to comply with the new IRS requirements, likely losing business in the process. Gambino, a financial planner who also prepares tax returns for clients, and Kilian, who has prepared tax returns at home for decades, both say that they'll probably have to close their tax businesses if the rules are allowed to stand.
In declaring injunctive relief, the district court found the IRS lacks the statutory authority to promulgate or enforce the new regulatory scheme for RTRPs. Tax return preparers who prepare and submit returns aren't "practicing" before the IRS, so it can't regulate them. The court said that unlicensed preparers would suffer irreparable harm and that the injunction serves the public interest. After the decision was handed down, the IRS promptly filed a motion seeking to stay the injunction pending an appeal.
Now the district court has refused to stay its previous ruling. However, it did modify the injunction to make it clear that the IRS doesn't have to suspend its PTIN program or board up its testing and continuing education centers. Instead, preparers may pay fees for testing or continuing education, or complete any testing or continuing education requirements, but they must do so voluntarily.
The IRS didn't take long to react to the latest ruling. On February 2 – just one day later – it reopened the online PTIN system. And an IRS spokesperson has stated it "continues to have confidence in the scope of its authority to administer this program and is working with the Department of Justice to address all options, including a planned appeal."