According to a recent ruling, it appears the the IRS does not have super abilities after all.
In an unexpected ruling on Friday, the Internal Revenue Service’s efforts to regulate the tax preparation profession, was struck down in a federal court.
The scheme to regulate tax preparers was a top priority for former IRS Commissioner Doug Shulman. He doubled down on the idea in 2009 and has worked since that time to put it in motion. Shulman felt that requiring tax preparers to register with the IRS, pass a competency test and take continuing education classes would protect taxpayers from potentially fraudulent preparers. Under his watch, the IRS did move towards a new system which required registration (along with a fee), a competency exam and annual requirements to take at least 15 continuing education credits. In exchange for compliance, beginning in 2011, the IRS began issuing PTINs (Preparer Tax Identification Numbers) which must be included on paid returns; a public database of those tax preparers with valid PTINs was expected to be posted on the IRS web site.
But not everyone thought that regulation was a good idea: the rules put in place under Shulman’s leadership angered some tax preparers. Under the new rules, attorneys, CPAs and enrolled agents (EAs) are exempt from the competency testing and continuing education requirements. That means that the real burden of complying with the new regulations tends to hit independent tax preparers and small businesses disproportionately – those who, under the new rules, must meet the criteria to be called a Registered Tax Return Preparer (RTRP). Without that designation, unless a preparer meets an exemption or exception, he or she may not work. Loving – and other tax preparers – thought those rules were unfair. That’s how the matter ended up in district court.
“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 lead attorney Dan Alban. “This was an unlawful power grab by one of the most powerful federal agencies and thankfully the court stopped the IRS dead in its tracks. 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.”
All three prongs of the IRS tax preparer regulation regime were affected by the ruling, including the testing, continuing education and RTRP registration requirements. However, the Preparer Tax Identification Number, or PTIN, which is part of the registration requirements, is not affected by the lawsuit.
They found that the IRS misinterpreted the statute and was basically trying to use it to expand its own authority in ways that the statute didn’t authorize,” said Alban. “On the first page of the opinion, they said that ‘the statute’s text and context unambiguously foreclose the IRS’s interpretation.’”
Three independent tax preparers—Sabina Loving of Chicago, John Gambino of Hoboken, N.J., and Elmer Kilian of Eagle, Wisc.—joined forces with the Institute for Justice, a libertarian public interest law firm, in filing suit against the IRS in the U.S. District Court for the District of Columbia.
U.S. District Court Judge James E. Boasberg ruled against the IRS and in favor of the tax preparers in enjoining the agency against enforcing its Registered Tax Return Preparer requirements.
The opinion is available online at http://www.ij.org/images/pdf_folder/economic_liberty/irs_tax_preparers/irs-opinion-1-18-13.pdf. The court enjoined the IRS from enforcing its new licensing scheme for tax preparers. The ruling does not affect CPAs, Enrolled Agents and tax attorneys, who were exempted from the RTRP regime as they are already regulated under Circular 230 requirements.
I am guessing this will not be the end of the issue. The IRS put a lot of planning, money and hope into the new rules. So my hedge is on an appeal being filed.
Generally, a final ruling by a district court can be appealed to the United States court of appeals in the federal judicial circuit in which the district court is located. In this case, the matter would be appealed to the United States Court of Appeals for the District of Columbia Circuit; the DC Circuit is notorious for settling questions on matters involving government agencies.
In the meantime, tax preparers should be able to prepare tax returns in this 2013 tax season without getting permission from the IRS. Tens of thousands of tax preparers who would have otherwise been put out of business, can now continue to prepare returns.