The Internal Revenue Service has filed a sharply worded reply with a federal appeals court to a group of tax preparers who won rulings from a lower court striking down the IRS’s authority to regulate the tax preparation profession.
In its reply brief Thursday with the U.S. Court of Appeals for the District of Columbia, the IRS countered the arguments in the tax preparers’ response to the IRS’s motion for a stay, while asking the appeals court to suspend the lower court judge’s ruling invalidating the agency’s mandatory testing and continuing education requirements for tax professionals.
“Absent a stay, the injury resulting from the District Court’s injunction will be irreparable,” said the IRS. “The regulations are intended to safeguard taxpayers from incompetent and unethical tax return preparers, who annually cost the taxpaying public billions of dollars. Thus, there is no merit to plaintiffs’ flippant remark that, because before the issuance of the regulations in question there was no regulation of return preparers for the prior 100 years, no harm would come to the Treasury or the taxpaying public from delaying the regulation of return preparers for one more year. The problem of unregulated return preparers obviously represents a major public concern.”
In January, a federal judge in Washington, D.C., ruled that the IRS lacked the statutory authority to impose its Registered Tax Return Preparer regime after three tax preparers filed suit challenging the requirements (see Court Rules IRS Doesn’t Have the Authority to Regulate Tax Preparers). The trio of independent tax preparers—Sabina Loving of Chicago, John Gambino of Hoboken, N.J., and Elmer Kilian of Eagle, Wis.—were represented by the Institute for Justice, a libertarian law firm in Arlington, Va.
The IRS then announced its intention to appeal the ruling in the case, known as Loving v. IRS, and asked the judge, James E. Boasberg, to suspend his original ruling, arguing that it would disrupt tax season (see IRS to Appeal Ruling Barring Licensing of Tax Preparers). Boasberg denied the IRS’s request, but clarified the ruling on February 1, enabling the IRS to re-open its Preparer Tax Identification Number, or PTIN, online registration system for tax preparers. The judge also clarified that tax preparers could take competency tests and continuing education courses on a voluntary basis, but they would not be required to do so while his injunction remained in place (see Court Modifies Ruling Invalidating Tax Preparer Regulations).
Last month, the IRS filed notices of appeal in both the district court and the D.C. Circuit Court of Appeals announcing its intention to appeal the earlier rulings, and then filed a Motion for Stay Pending Appeal in the D.C. Circuit Court, similar to the motion for a stay that it filed in the district court that Judge Boasberg had denied on February 1.
The tax preparers filed a vigorous response last week to the IRS’s motion for a stay pending appeal (see Tax Preparers Challenge IRS Legal Maneuver). The IRS then fired back Thursday with its own reply brief, contending that it had established the usual appeals court requirement of the likelihood of success on its appeal.
“The government has plainly met the requirement that it demonstrate that it has a strong likelihood of success on the merits,” said the IRS. “Consistent with the broad power of the Department of the Treasury to issue rules and regulations to implement its mandate, Congress equipped the Secretary of the Treasury with the authority to ‘regulate the practice of representatives of persons before the Department of the Treasury.’ The Treasury relied upon this authority when issuing, after notice and a comment period, regulations governing the practice of paid tax return preparers, who assist taxpayers in preparing federal tax returns for submission to the IRS.”
The IRS also argued that the government and the taxpaying public would be “irreparably harmed” without a stay on Judge Boasberg’s injunction against the RTRP regulatory regime.
“Absent a stay, the IRS will essentially be forced to abandon its implementation of the regulatory regime for return preparers until the 2015 tax-preparation season for tax year 2014, even if this court were to reverse the District Court’s decision before the close of this year,” said the government.
The IRS pointed out that there are hundreds of thousands of tax preparers who are required under the regulations to pass a competency exam and complete continuing education requirements for 2012 and 2013 who have not yet done so. “Accordingly, absent a stay, even if this court were to reverse the District Court’s decision before the end of this year, the IRS would face a flood of return preparers seeking to take the competency examination and complete the required continuing education courses by the current deadline of Dec. 31, 2013. In that circumstance, for practical reasons the IRS would likely be forced to extend the deadline for meeting the requirements of the regulations, which, in turn, would delay the implementation of the regulatory regime for another entire tax filing season, i.e., until the 2015 filing season (for the 2014 tax year).”
The IRS contended that the problem of unregulated tax preparers was a major public concern, citing a survey of taxpayers last year by the IRS Oversight Board, which found that 93 percent of the taxpayers surveyed indicated that it was either very important (77 percent) or somewhat important (16 percent) that paid tax return preparers meet standards of competency to enter the tax preparation business (see Taxpayers Less Tolerant of Cheating).
The IRS also took issue with the tax preparers’ argument that a delay in the implementation of the regulations until the 2015 tax season did not warrant a stay because the IRS was taking at least four and a half years to roll out the RTRP scheme anyway.
“This argument is specious,” said the IRS. “The government is currently suffering an injury because the injunction is blocking its implementation of the return-preparer regulations for the next tax season, and the full force of this injury will be felt on Jan. 1, 2014, when the tax preparation season for tax year 2013 begins. The amount of time that the government has spent thus far in completing its review of the tax-return-preparation industry, soliciting public comments, issuing proposed regulations, giving another chance for the public (including plaintiffs’ counsel) to comment, and then issuing final regulations has absolutely no bearing on the irreparable injury that the government and the taxpaying public will suffer absent a stay.”
The IRS also brushed aside the tax preparers’ contention that the harm was not irreparable because if the government won the appeal, the IRS could implement the RTRP regulations only one year later than it otherwise would.
“This observation is cold comfort, however, to taxpayers who will be forced to deal with incompetent or unethical tax-return preparers in the interim, since the IRS is currently enjoined from enforcing the return-preparer program that is designed to ensure competency and suitability in the preparation of tax returns,” said the IRS. “Return preparers, after all, are not mere scriveners. Paid tax-return preparers are advising their clients about the tax law and how to report their clients’ financial data to comply with the tax law. And a significant number of them are providing incompetent or unscrupulous advice, as the National Taxpayer Advocate has warned in her annual reports to Congress since 2002.”
In addition, the IRS dismissed the tax preparers’ argument that the regulations impose considerable fees and time commitments, pointing out that the case was not a class-action lawsuit and the plaintiffs were only representing themselves.
“Moreover, if a stay is granted, plaintiffs face only modest expenses in complying with the requirements of the regulations by the Dec. 31, 2013 deadline, i.e., a one-time, three-hour competency examination at any of 260 locations, which costs a total of $116, and the expense of complying with the requirement that they complete 15 hours of continuing education every year,” said the government. “In this regard, the IRS itself offers webinars of qualifying continuing education on its website without charge. See http://www.irs.gov/Tax-Professionals/IRS-Sponsored-Continuing-Education-Programs. Plaintiffs’ expenditures, comprised of the one-time $116 competency-test fee and any continuing-education fees required, plainly do not outweigh the immediate injury that the government and the tax administration will suffer if the injunction is not stayed.”
Asked how the tax preparers would answer the government’s argument, Dan Alban, lead attorney on the case with the Institute of Justice, conceded that the government’s reply brief is the last brief that will be filed in this series of briefs on the government’s request for a stay. “We don’t have an opportunity to respond,” he said. “The ball is in the court’s court now. It’s up to the D.C. Circuit now to decide the matter.”
However, Alban does not believe the government’s arguments will do much to change the original ruling. “I would say that their reply is rather boilerplate and tends to just go through the motions and only responds to our arguments in a rather perfunctory way,” he said. “I doubt that the D.C. Circuit will find it very persuasive. I think if you compare their reply brief to our response, there’s a marked difference in the level of specificity and evidence offered. There’s nothing in their reply brief that gives us pause.”
Alban pointed out that the government’s reply brief did contain one important development, however. In one of the footnotes, it mentioned that the Solicitor General had authorized an appeal in the case, removing one possible obstacle in allowing the appeal to proceed.
Next it will be up to the D.C. Circuit Court of Appeals to set a schedule for further briefings on the appeal. Once the D.C. Circuit sets a briefing schedule, it will receive the record of the case from the District Court, and the IRS would typically have 40 days to file its first brief on the appeal. Meanwhile, both the IRS and the tax preparer plaintiffs will await a decision from D.C. Circuit on the IRS’s motion for a stay on Judge Boasberg’s ruling, which could come at any time.