IRS Appeals to Reinstate Tax Preparer Regulation

The Internal Revenue Service is set to square off in court Tuesday against a trio of tax preparers who won a key ruling earlier this year invalidating the IRS’s efforts to impose mandatory testing and continuing education of Registered Tax Return Preparers.

Three preparers—Sabina Loving of Chicago, John Gambino of Hoboken, N.J., and Elmer Kilian of Eagle, Wis.—won a victory against the IRS in January when U.S. District Court Judge James E. Boasberg ruled in their favor and found the IRS had exceeded its statutory authority in imposing its Registered Tax Return Preparer requirements (see Court Rules IRS Doesn’t Have the Authority to Regulate Tax Preparers).

The IRS appealed the decision in the case, known as Loving v. IRS, and Judge Boasberg clarified the ruling in February, 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). An appeals court in the District of Columbia later rejected the IRS’s request to lift the injunction, pending its appeal of the judge's decision (see Appeals Court Refuses to Lift Injunction against IRS Tax Preparer Regulation).

The same appeals court, the U.S. Court of Appeals for the D.C. Circuit, has scheduled oral arguments in the case for Tuesday. Up to now, the case has largely been argued and appealed in the form of legal briefs from the plaintiffs’ and defendants’ legal counsel, along with amicus briefs from supporters on either side, but the oral arguments will give the two sides a chance to air their views in court and take questions from the three judges on the panel.

Dan Alban, the lead attorney on the case at the Institute for Justice, a libertarian law firm in Arlington, Va., which successfully represented the three tax preparers in their lawsuit against the IRS, has been focusing intently on preparing for the hearing. “We’re going to continue making the same argument we’ve made since we filed the case, that Congress never gave the IRS the authority to license tax preparers and the IRS simply can’t give itself that power,” he said in an interview Monday. “The district court agreed with us, found that the IRS did not have any statutory authority to pass these RTRP regulations, and we hope the court of appeals will agree.”

As for the IRS, Alban assumes its attorneys will make arguments similar to the kind in the briefs that they have already filed, essentially arguing that the IRS does possess the legal authority to impose the RTRP requirements. “They’ll go first because they are the ones appealing the decision,” said Alban. “We’ll go second and then they’ll have a short opportunity for rebuttal, usually just a few minutes. There’s 15 minutes per side.”

Besides giving the two sides the opportunity to air their legal arguments in open court, the hearing will also give the judges on the three-judge panel an opportunity to ask questions of the attorneys on both sides. “Typically oral argument consists more of a Q&A type format rather than a prepared speech,” Alban explained. “The content of what is discussed will be dependent on what questions the judges ask.”

In March, the Senate Finance Committee offered a proposal, among the many tax reform options it is considering along with the House Ways and Means Committee, to re-impose the tax preparer regulation regime through legislation (see Senators Lay out Tax Reform Options and Consider Re-imposing Tax Preparer Regulation). One of the tax reform option papers proposes to “ensure that the IRS has authority to oversee paid preparers by providing clear statutory authority for the IRS to regulate tax return preparers if the IRS loses its appeal in the Loving case.”

So far, no federal legislation has been passed, but some states may decide to license and regulate tax preparers on their own, as California and Oregon have for years. The New York State Division of Taxation and Finance proposed last month to add to its existing registration requirements for tax preparers by also requiring continuing professional education and a competency examination for registered preparers. Under the proposal, tax preparers in New York State would be denied a license if they have not satisfied the CPE and competency exam requirements, or if they have violated any tax laws, been the subject of any adverse disciplinary actions relating to their tax preparation conduct, engaged in fraud or deceit related to their tax preparation activities, failed to truthfully complete the registration application or pay their registration fee, lacked a high school diploma or its equivalent, and failed to satisfy the applicable IRS requirements for tax return preparers.

Alban does not anticipate that many states will impose their own tax preparer regulations. “There are only a handful of states—depending on how you count them, either two or four states that do that sort of thing—and they have had mixed results,” he pointed out. “California is one of the states with, I think, the longest licensing scheme, and they’ve also had among the highest error rates on returns prepared by preparers. I don’t think that’s an encouraging sign to a lot of states, and I don’t necessarily think they’re going to follow suit.”