Tax Strategy: Where RTRPs Stand After Loving

On Jan. 18, 2013, the U.S. District Court for the District of Columbia threw a wrench into the developing Internal Revenue Service requirements for Registered Tax Return Preparers by deciding in Loving, 2013-1 USTC ¶50,156, that the IRS had exceeded its statutory authority in imposing certain requirements on tax return preparers. An appeal is still pending in the Loving case, but it is important to understand where the tax return preparer requirements stand at this point.

REGISTERED PREPARERS

In 2011, the IRS began a return preparer oversight initiative, with requirements phasing in over time. All individuals compensated for preparing or assisting in the preparation of a federal tax return or other tax forms were required to obtain and renew a Preparer Tax Identification Number. Also, paid preparers other than CPAs, attorneys, Enrolled Agents, and certain supervised preparers, were required to pass a competency exam and obtain 15 hours of continuing education annually. A fee was charged for the competency exam. An individual who completed the requirements could identify themselves as a Registered Tax Return Preparer.

THE LOVING CASE

The Institute for Justice sued the IRS on behalf of three unenrolled tax preparers on the basis that the IRS had exceeded its congressional authority to regulate practitioners. The U.S. District Court for the District of Columbia agreed with the plaintiffs and imposed an injunction on the IRS from moving forward with its return preparer oversight initiative.

The court reasoned that Congress had given the Treasury authority to regulate the practice of representatives before the Treasury, but that preparing a tax return did not rise to the status of "presenting a case" before the Treasury.

THE LOVING CLARIFICATION

On Feb. 1, 2013, at the request of the IRS, the court in Loving modified its injunction. The court refused to suspend the injunction, but clarified that the PTIN rules were not part of the injunction. The court also indicated that competency testing and continuing education could proceed on a voluntary basis.

As a result, the IRS re-opened the PTIN program, and those registration and renewal requirements are continuing as before. The IRS has not re-opened the competency testing and continuing education program, even on a voluntary basis. The IRS is in the process of appealing the Loving decision. If the IRS loses, it would still have the option of resuming the testing and continuing education on a voluntary basis, or it could seek statutory relief from Congress to permit a full reinstatement of the mandatory RTRP program. At present, Congress seems inclined to sit on the sidelines, at least until the appeal is settled.

REFUNDS OF TESTING PAYMENTS

The IRS has announced a program to refund certain fees for competency tests taken or scheduled to be taken. Fees for scheduled tests that were cancelled due to the injunction are being refunded. Fees paid by return preparers who took the competency test after Jan. 18, 2013, are also being refunded.

The IRS will send an e-mail about the refund program to affected preparers. The refund will be made to the account from which the payment was made, if possible; otherwise, a refund check will be issued to the preparer at the address on file. The IRS hopes to have all refunds processed by July 13, 2013.

The testing fee was $116. The IRS reportedly received over $100 million in registration and competency testing fees and had spent over $50 million in startup costs for the program.

IRS APPEAL

The IRS filed an appeal of the Loving decision on March 29, 2013. The IRS contends that practice before the IRS should include not only practice as described in Title 31 U.S. Code Sec. 330(a)(2)(D), i.e., presenting cases, but also practice as described in Sec. 330(a)(2)(C): "necessary qualifications to enable the representative to provide to persons valuable service."

The Loving court was troubled that the Internal Revenue Code has a number of specific provisions imposing penalties on tax preparers for particular actions that would not have appeared to be necessary if they were already considered to be practicing before the IRS and subject to the general regs under Circular 230 of one practicing before the IRS. The court also cited past evidence that the IRS had not considered preparers to be practicing before the IRS. The IRS contends that statutory overlap is permissible. Oral arguments on the appeal are expected in the fall of 2013.

SUPPORTING BRIEFS

A group of former IRS commissioners has filed a brief in support of the IRS, contending that filing a return should be considered presenting a case to the IRS, since returns include many claims for tax benefits that are decided on the basis of the return as filed.

The National Consumer Law Center and National Community Tax Coalition have also filed a brief in support of the IRS.

The attorneys for the tax preparers have indicated that briefs in support of them are expected to be filed by the Tax Foundation. At press time, a group of preparers had also filed a brief supporting them.

SUMMARY

At present, the IRS is continuing to require PTIN registration and renewal under the program it initiated in 2011 for the registration of return preparers. The IRS has suspended the competency testing program and announced a refund of testing fees. Even though the Loving court permitted a continuance of a voluntary testing program, the IRS has suspended the testing program completely, at least it appears until the appeal process is complete.

The CE program had never been fully implemented, and it appears that it will not be until the appeal process is complete, even though the Loving court also permitted continuing education on a voluntary basis. It appears likely that this current status of the RTRP program will remain static until a decision is reached on the IRS appeal of the Loving decision.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a part of Wolters Kluwer.