Attorneys for the Internal Revenue Service presented their arguments before a federal appeals court in an effort to reinstate mandatory testing and continuing education of tax preparers.

A three-judge panel of the U.S. Circuit Court for the D.C. Circuit heard oral arguments Tuesday in the case (see IRS Appeals to Reinstate Tax Preparer Regulation). 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 appeals court heard oral arguments in the case Tuesday, the first time the case has been presented in open court. Up until this week, the federal government and the law firm suing on behalf of the tax preparers, the Institute for Justice, have been exchanging their arguments via legal briefs. The three judges on the appeals court panel—David Sentelle, Brett Kavanaugh and Stephen Williams—were reportedly skeptical of the IRS’s argument that an 1884 law about agents who represented Civil War soldiers who were suing the government about dead or missing horses was meant to apply to income tax preparers. Even the Justice Department attorney who presented the case seemed wary of using the argument that it could rely on the Horse Act of 1884, which had already been rejected by Judge Boasberg.

“I hate to beat a dead horse, especially one from the Civil War era,” said Gilbert Rothenberg, according to Reuters.

Dan Alban, lead attorney on the case at the Institute for Justice, told Accounting Today on Wednesday about how the hearing went from his perspective.

“I don’t think the court was very convinced by the argument that the IRS was trying to present, that somehow the fact that the original 1884 language used the word ‘agent,’ along with ‘attorney, agent and other persons,’ that that meant there were people who had a non-agency relationship, meaning they acted outside of an agency relationship, that they were covered by the statute,” he said. “The term ‘agent’ in the 1884 statute was in reference to the profession of a ‘claim agent.’ It was talking about attorneys, claim agents and other persons who were representing these soldiers who had these claims for lost horses, and so it wasn’t any statement about whether or not these representatives had an agency relationship with the soldiers they were representing. They clearly did. Clearly they were acting as agents because they were their representatives and they were the ones appearing before the Department of Treasury to argue for their claims, much in the same way that today attorneys, CPAs and enrolled agents appear in front of the IRS to argue in tax appeals and other disputes about tax liability. That’s what Section 330 allows the IRS and the Department of Treasury to regulate. And Section 330 does not cover tax return preparers who do not engage in that sort of representation.”

The arguments Tuesday only tangentially touched on Circular 230 requirements for tax preparers. “The underlying regulations that we challenged are in the new version of Circular 230,” Alban explained. “That was sort of working in the background. That’s where the new regulations are found that we’re challenging. The Registered Tax Return Preparer licensing scheme is part of the new Circular 230, and that’s what Judge Boasberg enjoined in the District Court decision from January. Certainly those were the regulations that were at issue. The focus of my argument was on the actual language in the statute, and what those words meant and how the words that were used by Congress in the statute exclude tax return preparers. The two main arguments I advanced on that point are, first of all, tax return preparers are not representatives before the agency. And secondly, tax return preparers do not present cases before the agency. ‘Representatives’ and ‘cases’ are words that appear in the statute, and without any other context, without the historical context or anything else, just those words exclude tax return preparers from the people who can be regulated under Section 330.”

So far, Congress has not passed any of a number of pieces of legislation that have been introduced over the years about tax preparer regulation. “I think that came up briefly,” said Alban. “I think the court was a bit more focused on the very long period of time that the statute had been in existence. It was 130 years, give or take a few years, that the statute has been around since 1884, and how it wasn’t until 2011 that the IRS suddenly claimed that it had discovered this new authority to license tax return preparers under the statute. It certainly doesn’t seem plausible historically that Congress intended to give the Treasury or the IRS that authority since the income tax didn’t exist in 1884, not the modern income tax, and the Internal Revenue Service certainly didn’t exist in its modern form in 1884. Over the 130 years since then, although Congress has occasionally amended Section 330, it has never amended it to authorize the IRS to license tax return preparers."

The appeals court will probably not rule on the case for several more months. “It usually takes several months for a decision to come down,” said Alban. “We don’t have any expectation of precisely when that will happen, but we do expect that it will take a few months at least.”

Alban noted that the judges appeared to have been very engaged in examining the documents that have been filed in the case so far. “I think their questions indicated that they were more skeptical of the positions the IRS was advancing, but I think the judges were clearly very engaged,” said Alban. “They certainly had read the briefs very closely. They cited specific footnotes out of our brief. They cited specific arguments from both briefs and from some of the amicus briefs. They clearly were very engaged in the facts and law that apply in the case, and I think their questions did indicate that they were skeptical of the legal arguments being made by the IRS.”

Alban will be appearing on a panel Friday alongside a former IRS commissioner, Lawrence Gibbs, at the Villanova University School of Law in Villanova, Pa., to discuss the IRS’s efforts to regulate tax preparers.

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