A trio of tax preparers who successfully sued the Internal Revenue Service to halt its mandatory testing and continuing education requirements is contesting the IRS’s request for a federal judge to suspend his ruling against the agency while it mounts an appeal.
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U.S. District Court Judge James E. Boasberg ruled on January 18 in favor of the tax preparers, agreeing with them that the IRS had unjustifiably expanded the scope of an 1884 law to support its claim that it had the statutory authority to regulate tax preparers (see Court Rules IRS Doesn’t Have the Authority to Regulate Tax Preparers). In doing so, he enjoined the IRS from enforcing its regulations governing Registered Tax Return Preparers. The IRS said last week that it planned to appeal the ruling and asked the court to suspend the injunction pending resolution of an appeal that it intended to file within the next 30 days (see IRS to Appeal Ruling Barring Licensing of Tax Preparers).
“The Internal Revenue Service, working with the Department of Justice, continues to have confidence in the scope of its authority to administer this program,” said a statement from the IRS. “On Wednesday, Jan. 24, the IRS and Justice Department asked for the injunction to be lifted. Regardless of the outcome of that request, an appeal is planned within the next 30 days.”
The lead attorney representing the tax preparers doubts the judge will agree with the IRS. “The judge issued a pretty definitive and unequivocal opinion a week ago striking down these regulations, and we don’t think he’s going to change his mind in the next week or two,” said Dan Alban of the Institute for Justice, a libertarian law firm, based in Arlington, Va., which represented the three preparers.
John Gambino, a Certified Financial Planner who prepares about 40 tax returns a year for some of his financial planning clients at his business, Inner Circle Platinum Advisory, based in Hoboken, N.J., is one of the three plaintiffs who prevailed in the lawsuit against the IRS. He said he was happy with the judge’s ruling, but wasn’t surprised that the IRS decided to file a motion to stay the judgment. “I think it was expected that they would appeal,” he said in an interview Friday. “That’s the way the process works. This is round one, I suppose.
“We know the process isn’t finished yet, but I think it’s a good first base that the judge agreed with our arguments,” he added.
In its legal brief, the IRS contended that immediately discontinuing the RTRP program “would result in a substantial disruption to tax administration.” Thousands of tax preparers who had already submitted their user fees would demand refunds, and the U.S. “would likely face numerous lawsuits—including class action lawsuits.”
The Institute for Justice noted that the IRS’s motion to suspend the injunction while it appeals the decision came despite the judge’s clear ruling that Congress never gave the IRS the authority to license tax preparers, and the IRS could not give itself that authority. The group argued that if the judge lifted the injunction, that would do nothing to prevent lawsuits against the IRS, and would allow even more preparers to become ensnared in the IRS’s costly regulatory regime, potentially exposing the government to additional liability.
Tax Season Not in Danger
Alban dismissed the IRS’s contention that tax season would be thrown into disarray as a result of the judge’s ruling. “The idea that the world is going to end or the sky is falling, which is the essence of the IRS’s motion, is just silly,” he said. “People have been fine working with tax preparers for decades and decades and they’re going to be fine this tax season as well.”
“I think it’s unfortunate that they’re rushing through this,” Gambino said of the IRS’s argument that the ruling would disrupt tax season. “They could have just kept the status quo and let people continue to do their business until the process is resolved. I think people are kind of upset that they had to take the tests and the classes that have been invalidated. By motioning for the stay, the IRS is just perpetuating that uncertainty. lf someone is taking a test now, they have to wonder, ‘Why am I doing this if the ruling has already voided it?’”
In the IRS’s legal brief in support of its motion, the agency admitted it had already received “over $100 million” in user fees from tax preparers, while only spending about $50 million to implement the regulations. But the IRS objected to spending the much smaller sum of $238,000 simply to notify tax preparers of the judge’s ruling in this case.
“One of the main things where the IRS claims there’s a harm is that there are all these tax return preparers who have paid various fees to the IRS in order to take the exam and get this licensing, and they’re going to be bringing lawsuits, possibly class-action lawsuits, for refunds of those fees,” said Alban. “Well, if the judge suspends the injunction, that means all that many more tax preparers will have to pay all those many more fees, and the government’s liability will only increase under that regime. Essentially the government is saying, ‘Look, we’ve created this class of victims who are paying these fees, and now we want to continue to expand this group of victims and make them pay even more fees.’ The argument just doesn’t hold weight.
“The safest thing to do at this point and the thing that makes the most sense is just to freeze things as they are right now, let the appeal proceed, and if the appeals court reverses the district judge, then the IRS can proceed implementing its regulations just as it was doing before and won’t have to worry about an extra year or more of refund claims for these fees,” he added.
In its brief, the IRS argued that thousands of tax preparers would undoubtedly continue studying for and attempting to take the RTRP competency exams, and the IRS would have to undertake an extensive and costly outreach program to attempt to notify those who had already registered and received a preparer identification number. That aspect alone of shutting down the program would cost at least $238,000, the IRS estimated, not including the costs associated with modifying or breaching vendor contracts, shutting down computer systems, and finding other positions for the 167 IRS employees currently working on the return preparer project.
Judge Boasberg will initially hear the IRS’s motion, but Alban doubts the judge will change his mind.
“Their motion for a stay will initially at least be heard by the same judge who ruled against them last week,” Alban told Accounting Today last Friday. “They’re asking that judge to essentially suspend his judgment on the issue of the injunction and suspend the injunction so that the regulations would continue to be in effect while the IRS appeals the case.”
Judge Boasberg has set an accelerated briefing schedule on the issue of the IRS’s request for a stay, and the Institute for Justice has an opposition brief due on Tuesday, while the IRS has a reply brief due on Thursday, according to Alban. “I don’t know if the judge will schedule a hearing or if he’ll just rule on the papers,” he said. “Previously he has indicated that he prefers to rule on the papers unless he has questions that aren’t answered by the briefs.”
Alban is optimistic the tax preparers will prevail. “We think we have very strong arguments that the IRS will not be irreparably harmed,” he said. “Tax preparers have not been licensed ever, so it’s hard to see how postponing these regulations for another year or two while the case is on appeal would harm the IRS in any way. It already took them a couple of years to even impose the regulations in the first place, and it seems like pretty much every deadline they set, as soon as it’s passed that deadline, they announced, ‘Oh well, we didn’t really mean it and we’ll set a future deadline.’”