A federal district court has ruled in favor of tax preparers who filed a class-action lawsuit against the Internal Revenue Service over its right to charge fees for Preparer Tax Identification Numbers, and the IRS may need to refund hundreds of millions of dollars in fees collected each year. In response the IRS has temporarily suspended the system.

The U.S. District Court for the District of Columbia ruled last Thursday that although the IRS has the authority to require the use of PTINs, it does not have the authority to charge user fees. The case revolves around a set of regulations that the IRS and the Treasury Department issued in 2010 for registering tax preparers with PTINs. “In sum, the Court finds that although the IRS may require the use of PTINs, it may not charge fees for issuing PTINs,” wrote U.S. District Judge Royce C. Lamberth.

The same court, under Judge James Boasberg, ruled in 2013 in the case of Loving v. IRS that the IRS’s regulations requiring testing and continuing education of tax preparers overstepped the IRS’s statutory authority, but it left in place the PTIN requirements for registering tax preparers. The ruling was upheld in 2014 on appeal.

Bloomberg

In September 2014, a pair of CPAs, Adam Steele and Brittany Montrois, filed suit against the IRS over the PTIN fees (see CPAs sue over PTIN fees). They sued on behalf of more than 700,000 individual practitioners who are forced to pay for a PTIN every year. The lawsuit sought an injunction barring collection of the fee and recovery of the more than $150 million in fees the IRS had collected since 2010, now estimated to have risen to as high as $245 million. The lawsuit received class-action certification last year (see Lawsuit against IRS over PTIN fees gains class-action status).

“I think justice has been served,” said Allen Buckley, an Atlanta attorney who represented the plaintiffs. “The judge had the courage to do the right thing despite the fact that the federal government has serious financial problems. If appealed, I feel good about the odds of the opinion holding up on appeal.”

An IRS spokesperson declined to comment on the ruling, saying, “We generally don’t comment on litigation.” He also had no further comment on whether the IRS plans to appeal the ruling. Later on Monday, the IRS issued a statement saying it was shutting down the PTIN system for now.

"On June 1, 2017, the United States District Court for the District of Columbia upheld the Internal Revenue Service’s authority to require the use of a Preparer Tax Identification Number (PTIN), but enjoined the IRS from charging a user fee for the issuance and renewal of PTINs," said the IRS. "As a result of this order, PTIN registration and renewal is currently suspended. The IRS, working with the Department of Justice, is considering how to proceed. As additional information becomes available, it will be posted on our Tax Pros page."

The lead attorney in the case of Loving v. IRS, Dan Alban of the Institute for Justice, believes it is likely the IRS will appeal. “This is an opinion of the U.S. District Court, and they can appeal the decision,” he said. “The opinion seems very sound, so I think the IRS ultimately is going to have to disgorge seven years’ worth of unlawful fees that it charged tax preparers. For the first five years that was either $64.25 per year, or $63 if you were renewing, and for the past two years it’s been $50 per year. And in each of those years, there’s been over 700,000 preparers registered with a PTIN. So you do the math, it’s at least $35 million per year in illegally collected fees, and the IRS is going to be forced to refund that money to preparers, assuming the opinion is upheld on appeal.”

Tax preparers will still need to register for PTINs, though they won’t have to pay the user fee, under the court decision. “The plaintiffs claimed that the IRS did not have any right to charge any fee and that the fee was excessive,” said Alban. “The court didn’t rule on the excessive fee claim because it found the IRS has no right to charge a user fee because the IRS wasn’t providing any benefit to preparers. After the Loving case, anyone has a right to prepare a tax return. You still have to obtain a PTIN, and the court upheld the requirement, but it found that the only benefit of preparers getting a PTIN number was to the IRS so the IRS could track preparers, and there was no benefit to preparers from getting a PTIN, so it could not charge a user fee.”

After the court ruled against the IRS in the Loving case, saying it did not have the statutory authority from Congress to regulate the IRS, the IRS introduced a voluntary program for education and testing of preparers known as the Annual Filing Season program. However, the budget proposal issued by the Trump administration last month included a provision giving the IRS “statutory authority to increase its oversight of paid tax return preparers.” Alban doubts it will be included in the final budget that is ultimately passed by Congress.

“This is a bad statutory provision that’s been advocated by Treasury for many years,” he said. “It was in the Obama administration budgets for many years, and now it’s showing up in a Trump administration budget, which is somewhat surprising that the Republicans and President Trump in particular would want to get behind giving the IRS more power over tax preparers, and that someone who campaigned on draining the swamp and dismantling the regulatory state would have as part of his budget a provision that would give additional power to the IRS, of all agencies. But that shows how entrenched bureaucrats can get in D.C. These are provisions that are being added by the Department of Treasury and the IRS, and I doubt very much that anyone in the White House is even aware these provisions are in the budget. This is part of a shopping list or a wish list from the Treasury and the IRS about all of the things they would love to be able to do, and all of the additional power they’d love to be able to get. We’re trying to let everyone know that this is going on, let the White House know that this is in their budget, let House and Senate Republicans know that this is in the budget, and that they should oppose it if they care about anything related to the IRS being given more power by Congress.”

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Michael Cohn

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.