An advocacy group is representing a trio of tax preparers who plan to file suit against the Internal Revenue Service on Tuesday claiming the IRS’s new regulations could force them out of the tax prep business or cause them to raise their fees substantially.
The Institute for Justice is challenging the IRS’s new registered tax return preparer licensing scheme on behalf of the three preparers. The plaintiffs are not seeking any monetary damages, but they want an injunction against enforcement of the regulations. While the lawsuit is not a class-action suit, it could have a wide impact beyond just the three preparers.
“If the court rules in our favor, it would affect all registered tax preparers nationwide who are subject to the registered tax return preparer requirements,” said Dan Alban, an attorney at the Arlington, Va.-based Institute for Justice. “The IRS estimates 350,000 tax preparers would be subject to the competency exam and other requirements. It’s not a class action, but it is a federal lawsuit that would affect the rights of tax preparers nationwide, as well as their clients. There’s something like 80 million or so taxpayers who use a tax return preparer who are affected by these regulations. Many of them would have to find a new tax preparer or pay substantially higher costs to get their tax returns prepared.”
One of the plaintiffs is Elmer Kilian, a sole practitioner in Eagle, Wis. A Korean War veteran whose 80th birthday is this week, he has been preparing tax returns for his clients for about 30 years by hand and even has an old-fashioned wooden shingle hanging outside his office advertising his services. For most of his 100 or so clients, he charges only about $30 to $40, and he has a few business clients with more complicated returns for whom he charges $75. Killian estimates he would probably need to double or triple his prices if he had to pay the new IRS fees and buy a new computer for electronic filing.
“It would basically end up putting out of business all preparers who are self-employed, who are just a single entity,” he said. “I’m a non-computer person and by the time I finished up coming up to code as they want with e-filing and all, buying all the equipment and everything, it would be a financial hardship on myself in that respect. It would cost at least $2,000 for the first year of investments, and after that it just keeps on going. There is no definite figure from IRS as to what and where the classes would be on tax preparation. For the first year, the registration alone would be $115, and then it would require at least two days of going to school every year to accomplish 15 hours of classroom training, as they refer to it. It would end up where everybody would have to raise their fees to the taxpayer. I’m referring to myself basically, but I believe it would go the same way with everybody else. They would have to increase their fees by at least double.”
John Gambino, a Certified Financial Planner who prepares about 40 tax returns for some of his financial planning clients at his business, Inner Circle Platinum Advisory, based in Hoboken, N.J., is another plaintiff who objects to the new requirements. But he emphasized that tax prep is only an extension of his financial planning business.
“I’m not a big tax preparation kind of factory,” said Gambino. “It’s something I offer my clients. A lot of my clients have their own accountants, which is perfectly fine. It’s not my core business. That being said, it’s a useful service I provide to my clients who request it because they get everything—a one-stop shop essentially. When I first heard about this licensing requirement, the IRS said it’s to protect the public. I don’t buy it. The public doesn’t need protection. If somebody wants to go to an attorney or a CPA right now, they’re free to do so. No one is stopping them.”
Gambino is not opposed to the IRS’s registration requirement. “I’m all for transparency and having people be monitored,” said Gambino. “I have no problem with getting a Preparer Tax ID Number. I had to get fingerprinted to e-file people’s returns. I think it’s all about incentives. If you have incentives where people are getting their fee based on the size of refunds, that could lead to a problem. If you want to disclose with a tax preparer ID number if someone has a high rate of audits, by all means do that. I think that will basically ensure enforcement. If you can go on the Web and put in somebody’s ID number without the name and see if their clients get audited at a very high rate, that would be very bad for business, and that would basically ensure that someone is not trying to cheat the IRS.”
However, he is opposed to the exemptions for attorneys and CPAs. “There are tons of attorneys out there who don’t do taxes,” said Gambino. “I have numerous clients who are attorneys who know nothing about taxes. To say that they can go out there and start preparing people’s taxes and I can’t, when I have been doing it for eight years, that’s not necessarily [fair]. If the IRS wants to make sure everyone’s tested, test everyone. Have no exclusions. The CPAs and attorneys say they already do continuing education, but they don’t have to do continuing education on taxes. They can do it on auditing, or an attorney can do it on their area of expertise. I’m a Certified Financial Planner, and I do 30 hours of continuing education myself, but it doesn’t have to be on tax prep.”
The third plaintiff is Sabina Loving, an accountant who has worked for banks and financial services companies for the past 10 years. She opened her own part-time tax prep business, Loving Tax Service, about three years ago to service an impoverished area of Chicago.
“She would have to raise her prices, but she also wants to expand her business by hiring other people she would supervise as tax preparers,” said Alban. “But she’s not an attorney or a CPA or an enrolled agent, so she doesn’t fall under the exemption for attorneys, CPAs and enrolled agents at law firms and CPA firms.”
An IRS spokesman said the IRS does not comment on potential or pending litigation. However, the IRS has in the past argued that the tax preparer regulations are necessary to protect taxpayers from incompetent tax preparers or unscrupulous ones who falsify information to get larger refunds or who even steal refund money from their clients.
Alban contends the IRS is exceeding its authority with many of the new requirements. “They don’t actually have the congressional authority to do this,” he said. “They’re acting under a statute that was passed in 1884 before the IRS existed in its modern form and before the modern income tax. The statute that they’re acting under was actually passed in order to deal with some strange issues at the time dealing with military pensioners who had claims against the Department of the Treasury and the Department of the Interior for lost horses and for unpaid pensions, and it was designed to regulate people who were representing people in hearings when they filed these claims. It’s very similar to an attorney representing someone. Now the IRS is giving a very broad definition to the word ‘practice’ to similarly include preparing and filing a tax return as opposed to actually advocating for someone in some sort of courtroom proceeding or conference with the IRS. So they just don’t have the authority to do it.”
Alban also argues that the IRS hasn’t demonstrated that the new regulations would improve the quality of tax return preparation. “They haven’t shown that there is a substantial problem that is unaddressed by the current laws,” he said. “There are already a number of federal laws on the books that impose civil and criminal penalties ranging up to $100,000 per violation and up to three years in prison for tax fraud, but also regulating things like unauthorized disclosure of a taxpayer’s information. There are already a number of statutes on the books that the IRS can enforce.”
Alban emphasized that his group is not challenging the Preparer Tax Identification Number, or PTIN, registration requirements, which enable the IRS to track all the returns prepared by a particular tax preparer. “If someone is consistently doing something that the IRS thinks is potentially in violation of the law, they can much more easily catch that sort of behavior and notice patterns in the returns that are filed, and do something about it in enforcing the existing laws,” said Alban. “The idea basically is if there are a few bad apples, you shouldn’t crack down on everyone. Instead use the tools you already have to figure out who those bad apples are and go after them and not impose substantial costs on people who are completely above board and doing a good job, but are forced to bear costs that in some cases are so substantial that they are being forced out of business altogether.”
Chuck McCabe, president and CEO of Peoples Income Tax in Richmond, Va., supports many of the IRS’s aims, but he also sees good reason for the lawsuit. “The IRS is pretty far along in the regulations, and it’s already been implemented,” he said. “I’m in favor of the regulations. I think they’re necessary in our industry because there are a lot of incompetent preparers out there who don’t have the qualifications to do tax returns. They should be licensed to cut someone’s hair, but not to do their taxes. I’m not opposed to regulation itself, but what I would be opposed to is the IRS using the regulations as a source of revenue by charging fees beyond what their costs are.”
He believes the cost of administering the PTIN would probably be recovered after the first year, but with each annual renewal it will become a continuing revenue stream for the IRS. “It’s kind of like a toll for the road,” said McCabe. “They usually implement the tolls to build a new road or fix it, but once the road is built the toll never seems to go down. I would be concerned that the fees the IRS charges for the different elements of the regulation not exceed their costs because it wouldn’t be fair to independent tax business owners to become a source of revenue for the IRS.”
McCabe also believes the requirements imposed on the registered tax return preparers in the expanded Circular 230 requirements are excessive relative to their responsibility. “I’m concerned that the IRS is relegating their oversight of taxpayers to tax practitioners because they don’t get enough money from Congress to do their job,” he said. “But I don’t think it would be a good idea to kill the profession of tax preparers.”