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.
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.’”
The IRS recently announced on its Facebook page, for example, that tax preparers who had not completed all of the required 15 hours of continuing education last year would be able to make up for them this year (see IRS Gives Preparers a Break on Continuing Education Requirements).
Alban isn’t buying the IRS’s contention that tax season would be thrown into chaos if the RTRP regulatory regime is invalidated. “That argument doesn’t hold water at all,” he said. “No past tax season in history has ever had a requirement that all tax preparers be licensed. This one won’t be any different than those. Those tax seasons haven’t been particularly chaotic, and there’s no reason that this one should be. The thing that would make this chaotic is if a stay was issued, because then the IRS would have announced, at least briefly, that it’s not enforcing the regulations, only to re-impose them a few weeks later.”
The 1884 statute on which the IRS based its legal arguments had given the Treasury Secretary the authority to regulate people who practice before the Treasury Department, including agents, attorneys and other persons representing claimants before the department. The IRS had argued that since it was a bureau of the Treasury Department, the statute covered practice before the IRS as well. The statute had said that before admitting representatives to practice before the department, the Treasury Secretary could require that they demonstrate good character, good reputation, the necessary qualifications to enable them to provide a valuable service to others, and “competency to advise and assist persons in presenting their cases.”
Under this statutory authority, the Treasury Secretary publishes regulations governing practice before the IRS and reprints them in Circular 230, which until recently mostly applied to CPAs, enrolled agents and tax attorneys. In 2011, however, the IRS extended the reach of Circular 230 by bringing tax return preparers under its coverage and creating the designation of Registered Tax Return Preparers. However, Judge Boasberg ruled that the text of the statute did not support the IRS’s argument. “Without deciding whether any of these three textual points alone would be dispositive, the Court concludes that together the statutory text and context unambiguously foreclose the IRS’s interpretation of 31 USC Section 330,” the judge wrote, adding, “The IRS also makes a number of nontextual arguments in favor of its interpretation, but none of these can overcome the statute’s unambiguous text here. In the land of statutory interpretation, statutory text is king.”
Going to Congress
Some have suggested that the IRS may turn to Congress to approve changes in the law. But given the anti-regulation sentiments of many lawmakers, it is far from certain that such a law would pass. There have been several pieces of legislation introduced in the past decade to give the IRS the authority to regulate tax preparers beyond just CPAs, EAs and attorneys, but none have been signed into law.
“I’m skeptical that Congress is going to take action,” said Alban. “Congress is having problems taking action on anything right now, so the idea that they’re going to drop dealing with budget issues or any of the other things that are high-profile news items in order to pass legislation about tax preparers I just don’t find very credible. They have in fact considered eight bills in the past 10 years or so that would have given the IRS the authority to regulate tax preparers and they have not passed any of them. I don’t think there’s any reason to think that’s going to change. Congress has already passed a number of laws imposing both criminal and civil penalties on tax return preparers. If they break their client’s trust or violate the tax laws in some way, I think Congress is satisfied that the IRS can use those or the Department of Justice can use those to go after bad apples.”
Distaste for regulations could also discourage many lawmakers from granting extra authority to the IRS, especially at a time when the IRS has needed to fight to preserve itself from budget cuts. Many lawmakers also like to portray themselves as champions of small business, which could bode ill for any move that would impose extra regulatory burdens and costs on small tax prep practices.
H&R Block Role
“The regulations are only going to be putting tens of thousands of small independent mom and pop tax preparers out of business,” said Alban. “These regulations are just a really striking example of protectionism. They were lobbied by for by H&R Block, Jackson Hewitt and Intuit. Various financial analysts have found that H&R Block will benefit from these regulations so these regulations aren’t in the public’s best interest, but they certainly would help special interests.”
Alban noted that former H&R Block CEO Mark Ernst oversaw the drafting of the tax preparer regulations. “If you look at the return preparer review report, which the IRS prepared in December of 2009, I believe, all of the panels that they held around the country with industry groups to talk about these regulations, he was frequently sort of the chairman of the panel, running all these panels,” said Alban. “He was knee deep in all of this, and it’s unsurprising that the regulations benefit the big tax prep firms like H&R Block as a result.”
H&R Block issued a statement last Thursday saying it continued to support establishing uniform industry requirements despite the court ruling invalidating the testing and competency requirements for tax preparers.
"The court's ruling essentially eliminates key protections for millions of taxpayers," said Kathy Pickering, vice president of government affairs and executive director of The Tax Institute at H&R Block, in a statement. "H&R Block continues to believe the IRS standards and additional oversight strengthen the industry's credibility, reliability and integrity ultimately protecting U.S. taxpayers."
Tax prep fees may go up at the tax prep chains as a result of the regulations. “That’s sort of the ultimate goal of these types of regulations,” said Alban. “First you drive out competition and then because there’s less competition and because there are fewer people that can provide the service, you’re free to raise your fees and consumers can’t do much about it. So they end up having to pay extra money each year for tax return preparation. This is an example of diffuse costs and concentrated benefits.
“We have no objection to people making money,” Alban added. “The issue is when they’re making money because of protectionist regulations that have put their competitors out of business. We’re all in favor of people offering services that other people value and making money because of it.”
Gambino believes tax preparers should still have the option to take the tests, but only on a voluntary basis.
“The ones who like the testing and such, no one is stopping them from becoming enrolled agents,” he pointed out. “I’m not saying education is a bad thing. I’m just saying if a preparer thinks he is not knowledgeable in the subject, by all means you want to be knowledgeable in the subject. I just think you always get into problems when you have the government doing a one solution fits all for everyone. People focus on certain aspects of their practice and they should be skilled there.”
Gambino estimates that the return preparer initiative could cost the tax prep industry up to $500 million a year. “This is supposed to help the consumer,” he said. “This fee is going to have to come from somewhere. Either the small business tax preparer eats up the cost or I’m sure he’s going to pass along some of his costs to the consumers. There’s an extra cost to the public and you’re going to have to weigh this against this flawed licensing regime that has these broad exemptions for different classes of people who may or may not be qualified, because I know there are tons of attorneys who don’t do tax. Are the costs really looked at here, and also the costs of the IRS systems?
“In their motion for a stay, they say they have to reassign all these workers who were working on this project, and they act like that’s a bad thing,” Gambino pointed out. “And I think anyone would argue that having more IRS people actually helping people would be a good thing when you can’t even get through to one on the phone. They’re saying the hold times are getting longer and longer, and fewer and fewer people are actually getting through to the IRS. That’s not a good thing.”