The American Institute of CPAs has filed a federal lawsuit against the Internal Revenue Service challenging the legality of the IRS's plans for voluntary continuing education and testing of tax preparers.

The IRS announced the voluntary program, which it called the Annual Filing Season Program, last month after federal courts ruled last year that the IRS had overstepped its statutory authority in imposing a mandatory testing and continuing education program of tax preparers (see IRS Offers Voluntary Tax Preparer Education Program). The AICPA wrote to the IRS warning that the voluntary program would also be unlawful, but IRS commissioner John Koskinen told reporters last month when announcing the program that the agency’s Office of Chief Counsel and the Treasury Department’s General Counsel had reviewed the matter carefully and assured the IRS that it had the legal authority to proceed.

However, the AICPA insists the new program is unlawful, even though it is voluntary. “The AICPA has been a steadfast supporter of the IRS’s overall goals of enhancing compliance by tax return preparers and elevating ethical conduct,” said AICPA president and CEO Barry Melancon in a statement. “However, the IRS’s new rule regulating tax return preparers is an unlawful exercise of government power.

"By implementing a purportedly 'voluntary' program that is mandatory in effect, the rule is an end-run around Loving v. IRS, a federal court ruling which struck down the IRS’s earlier attempt to regulate tax return preparers," Melancon added. "The IRS simply does not have the authority to proceed with the new rule. By doubling the number of categories of tax return preparers to eight, the rule will also confuse consumers. Worse yet, the new rule will do nothing to address the problem of unethical or fraudulent tax return preparers—which should be a top priority. As a result, the AICPA has filed suit in federal court to prevent the IRS from moving ahead with this unjustified and unlawful program. The IRS should withdraw the new rule, consult with stakeholders, and use the tools and data already at its disposal to monitor unethical tax return preparers. At a minimum, the IRS must conduct a legitimate notice-and-comment rulemaking before proceeding.”

The IRS insisted that it did have the legal authority. “The IRS has the authority to implement a voluntary continuing education program for uncredentialed tax return preparers, and this does not conflict with any administrative or legal requirements,” said a statement from the IRS.  “We have reviewed the matter and believe that it does not violate the court’s decision in the Loving case. This voluntary continuing education program is a reasonable attempt to address the difficult problems of return preparer competency.

"Additionally, our efforts to encourage Congress to enact legislation consistent with the President’s 2015 budget proposal will continue," the IRS added. "While we agree that a voluntary program is not the ideal solution for providing return preparer oversight, we believe that in the interim, encouraging uncredentialed tax return preparers to improve their filing and tax law education will benefit preparers, taxpayers and overall tax administration.  By providing an annual record of completion, the IRS’ acknowledgement of a preparer’s efforts may stimulate program participation, improve return preparation for the filing season and allow participating preparers to differentiate themselves from those in the marketplace who have not exhibited any level of readiness or competency.”

The Annual Filing Season Program would allow unenrolled return preparers to obtain a record of completion when they voluntarily complete a required amount of continuing education, including a course in basic tax filing issues and updates, ethics, and other federal tax law courses. Tax return preparers who elect to participate in the program and receive a record of completion from the IRS will be included in a database on IRS.gov that will be available by January 2015 to help taxpayers determine return preparer qualifications. The database will also contain information about practitioners with recognized credentials and higher levels of qualification and practice rights. These include attorneys, CPAs, enrolled agents, enrolled retirement plan agents and enrolled actuaries who are registered with the IRS.

In the lawsuit, the AICPA argues that the IRS did not comply with the Administrative Procedure Act, which requires federal agencies to issue a notice of proposed rulemaking and solicit comments. Instead, the IRS adopted the rules for the Annual Filing Season Program in the form of a revenue procedure. The AICPA argued that by circumventing the protections afforded by the APA, the IRS avoided having to respond to comments that would have demonstrated that the Annual Filing Season rule “is fatally flawed and arbitrary and capricious.”

The AICPA also argued that the Annual Filing Season rule is nearly identical to the rule invalidated in Loving v. IRS. It noted that among other requirements, the new rule requires tax return preparers to pass a written examination consisting of at least 100 questions, complete between 15 and 18 hours of continuing education each year, and agree to be subject to portions of Treasury Department Circular No. 230—which regulates practice before the IRS—to which they would not otherwise be subject. As with the earlier Registered Tax Return Preparer program that the courts invalidated, the AICPA noted that the Annual Filing Season Program also provides for when certain individuals are ineligible, for example, when an individual who has previously been disbarred, suspended, or disqualified from practicing before the IRS may not obtain a Record of Completion or a place in the Directory of Federal Tax Return Preparers during the period in which he is disbarred, suspended, or disqualified.

To try to justify the earlier RTRP program, the IRS had cited an 1884 law on regulating horse traders as giving it the statutory authority to regulate tax preparers, but a federal district court judge disagreed with that argument last year. Similarly, the AICPA argued that the IRS did not have the authority to introduce the voluntary program. “The IRS lacks statutory authority to proceed with the AFS rule,” said the lawsuit. “Notably, the IRS cites no authority for its new rule. Without statutory authority, the AFS rule is invalid.”