Tax Preparers Defeat IRS in Appeals Court Ruling on Licensing Scheme

[Carolbeck]

Tax Preparers Defeat IRS in Appeals Court Ruling on Licensing Scheme

Washington, D.C. (February 11, 2014)

By Michael Cohn

The D.C. Circuit Court of Appeals ruled Tuesday that the IRS had no legal authority to impose a nationwide licensing scheme on tax return preparers that would have required testing and continuing education as Registered Tax Return Preparers.

The decision affirms a January 2013 ruling by U.S. District Court Judge James E. Boasberg, which struck down the IRS’s new regulations as unlawful (see Court Rules IRS Doesn’t Have the Authority to Regulate Tax Preparers). In the case, known as Loving v. IRS, both courts rejected the IRS’s claim that tax-preparer licensure was authorized by an obscure 1884 statute governing the representatives of Civil War soldiers seeking compensation for dead horses.

“This is a major victory for tax preparers—and taxpayers—nationwide,” said Dan Alban of the Institute for Justice, the lead attorney for the three independent tax preparers who filed the suit. “The court found that Congress never gave the IRS the power to license tax preparers, and the IRS cannot give itself that authority.”

The appeals court held, “If we were to accept the IRS’s interpretation of [the statute], the IRS would be empowered for the first time to regulate hundreds of thousands of individuals in the multi-billion dollar tax-preparation industry. Yet nothing in the statute’s text or the legislative record contemplates that vast expansion of the IRS’s authority.”

More than 350,000 tax-return preparers would have been subject to the regulations. The attorneys for the preparers argued that the regulations would have put tens of thousands of mom-and-pop preparers out of business and increased the cost of tax-return preparation for millions of taxpayers.

“My customers—not the IRS—should be the ones who get to choose who prepares their taxes,” said Sabina Loving, an independent tax preparer from Chicago and the lead plaintiff in the case. “I have a right to earn an honest living without getting permission from the IRS.”

The court ruled that “[t]he IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of [the statute].”

“We think it’s a major victory for both independent tax preparers and taxpayers,” Institute for Justice senior attorney Scott Bullock said in an interview. “The three-judge panel unanimously affirmed all the fundamental points of the District Court’s opinion and held that the IRS does not have the authority to regulate tax preparers under the statute and under the legislative history of the law. The IRS simply cannot assume that authority to license tax preparers. They need to go to Congress to get that authority. That's what the D.C. Circuit held. They gave six separate reasons for affirming the District Court opinion and just really affirmed it across the board.”

Bullock hopes the IRS decides not to pursue further appeals in the case. “It has now been rejected by four judges, both the District Court and by three D.C. Circuit judges,” he said. "They do have the right to petition the entire D.C. Circuit. I believe they have 45 days to do so. The federal government has a little bit longer than most folks. Then the court will decide that relatively quickly. Then, after that, the next step for them would be to go before the Supreme Court and they would have 90 days. If they decide not to petition the entire D.C. Circuit, it would be 90 days from today. If they do decide to petition the entire D.C. Circuit and they reject that, it would be 90 days from whenever that order rejecting the en banc petition came though.”

When Judge Boasberg clarified his original decision last year, he ruled that the IRS can continue to require tax preparers to register for Preparer Tax Identification Numbers, or PTINs, and the latest ruling should not affect that. However, it should also bring some relief to tax professionals.

“It was a big relief to many of the independent tax preparers when the decision was first handed down,” said Bullock. “Hopefully this will end the matter once and for all and they would not be subjected these new licensing requirements, but it’s up to the IRS if they decide to continue to appeal.”

The IRS was noncommittal on whether it plans future appeals. “The IRS is currently reviewing the decision,” the IRS said in a statement. “The IRS continues to believe that it’s critical for taxpayers to be able to rely on quality work from tax preparers.”

Bullock believes the IRS should provide refunds to tax preparers who paid to take the tests and continuing education courses before the RTRP regime was invalidated by the courts.

“I believe they would probably be required to do that, and they [the tax preparers] would have the right if they so choose not to be subjected to these licensing requirements.”

“Administrative agency overreach threatens the economic liberty rights of entrepreneurs,” said Institute president and general counsel William Mellor in a statement. “This precedent ensures that agencies must follow the law and cannot exceed the power given to them by Congress.” As the Court noted, “‘fox-in-the-henhouse syndrome is to be avoided . . . by taking seriously, and applying rigorously, in all cases, statutory limits on agencies’ authority.’”

IRS Commissioner John Koskinen has indicated he would be open to offering the certification on a voluntary basis to tax preparers if the IRS loses the appeal. “If you can’t require it, offer it, and if you complete the information, you get a certificate that says, ‘I have completed the IRS preparer course.’ I think that could be over time very valuable to preparers, and consumers could ask preparers, ‘Have you gone through the IRS training?’” said Koskinen during a press conference last month after he was sworn in as commissioner (see IRS’s New Commissioner Favors Voluntary Tax Preparer Certification). “Whatever happens with the court case, we ought to be able to move forward on that and provide taxpayers with as much assurance as we can that the preparers they are dealing with have met some kind of minimum standards.”

Bullock indicated the Institute for Justice would have no problem with a voluntary certification scheme. “We made that very clear in our statements because they [the IRS] had asked the D.C. Circuit to stay the ruling, and they had stated they had no power to even do this on a voluntary basis,” said Bullock. “And we had said, ‘That’s not true. You can offer this, but you can’t require licensure. But if you want to do this on a voluntary basis, you’re free to do so.’ And the district court judge made it clear that the IRS was free to do this on a voluntary basis, but they could not legally require it, it. If they did that, that of course would end the legal dispute.”

H&R Block Slams Decision
H&R Block, which was one of the main proponents of the RTRP tax preparer regulation regime, reacted with dismay to the Appeals Court decision.

Block said that in a country where all 50 states regulate hair dressers, the tax prep chain found it “stunning” that tax preparers, with extensive access to the personal financial history and identities of their clients, are not required to meet minimum competency standards.

“It is outrageous that all consumers don’t enjoy basic protections with such a significant financial transaction as tax preparation,” said H&R Block president and CEO Bill Cobb in a statement. “Something is out of whack when you are better protected when getting your haircut than when sitting across the desk from a tax preparer. All consumers should have access to the protection that our clients receive when working with our highly trained tax professionals.”

H&R Block noted that it has long supported efforts to better serve and protect consumers through minimum standards for, and oversight of all tax return preparers. Block pointed out that it already trains and has continuing education requirements for all of its tax preparers and added that it looks forward to working with Congress and the Treasury Department on “any legislation that may be necessary to implement minimum tax preparer standards as a formidable tool in the fight against fraud.”

One tax attorney pointed out that the IRS will still be able to check up on errant tax preparers, even after the latest ruling. “The IRS’s ability to require previously unregistered tax preparers to meet certain education and testing requirements, while perhaps now temporarily set back a step, will inevitably come to pass because of the important role preparers play in tax system administration,” said G. Michelle Ferreira, tax attorney and managing shareholder of the San Francisco office of international law firm Greenberg Traurig. “I believe law makers will recognize the need to make explicit that the IRS should be able to set basic standards for individuals who prepare tax returns so that we can be sure such returns are correct and in compliance.”

Because the Loving decision does not disturb the rules requiring all paid preparers to obtain a PTIN, those individuals must still register with the IRS, Ferreira said, “which still gives the IRS the ability to check up on preparers where evidence points to problems.”

CPA Reactions
While attorneys and CPAs would have been exempt from the proposed rules, several CPAs from the New York State Society of CPAs reacted strongly to the news of the court’s decision Tuesday.

“The potential impact is that the storefront tax preparer will thrive on the ignorant and the fraud will continue,” said Vincent Cosenza, CPA and tax manager at Shanolt, Glassman, Klein and Kramer PC in New York City.

“Much of what the IRS was looking for is already being done by most CPA firms,” said David Young, CPA, owner of Young & Company CPAs LLC in Rochester, N.Y. “Having a strong system of quality control for tax return preparation and continuing professional education is in part what differentiates a CPA firm from H&R Block and other non-CPA firms. The taxpayer is ultimately responsible for what is on his or her income tax return.

“When choosing a tax preparer, the taxpayer should consider the possible negative ramifications of choosing an unregulated and unlicensed tax return preparer,” Young advised. “It would be wise for the taxpayer to ask about the tax preparer’s qualifications, continuing professional education, and the firm’s quality control as it relates to tax returns.”

“I am a little upset that unlicensed tax preparers don’t have to deal with taking CPE and keeping themselves up to date with new legislation, as CPA are required to do annually,” said Johnpaul Crocenzi, CPA, a tax manager at Raich Ende Malter & Co. LLP in New York. “Having the IRS regulate tax preparers will actually protect the consumer from having a tax return done by someone that doesn’t know or understand the Tax Code.”

Although the IRS proposed regulation of tax return preparers did not directly affect CPAs, there is always a concern about regulations that can creep into other areas, according to Kevin McCoy, CPA, director of Marvin and Company near Albany, N.Y. But “until the IRS is granted the authority by Congress, it appears the unlicensed tax return preparers are free to continue to operate as before,” he said.

[taxxcpa]

“Having a strong system of quality control for tax return preparation and continuing professional education is in part what differentiates a CPA firm from H&R Block and other non-CPA firms. The taxpayer is ultimately responsible for what is on his or her income tax return.

The taxpayer should be responsible for providing correct information to the tax preparer. The preparer should be required to take some kind of test and continuing education so that the client can feel assured that the preparer understands how to do a tax return.

A preparer should lose his right to prepare tax returns if he enters unsupported figures not provided by the client, but should NOT, in my opinion, be responsible for verifying that everything the client is telling him is the truth (unless the IRS will provide each tax preparer with a polygraph machine and a skilled operator.)

[Terry D EA]

Well I totally agree with quality controls for tax return preparation as well as we can't be responsible for everything the client tells us. However, i wonder about the statement by HRB. I worked for them in the middle 90's and remember being told to do what the client said and not to worry about it. I quit within two weeks cause I couldn't stand how they treated their clients. Maybe this was an isolated incidence in that particular office. Nevertheless, I couldn't put up with it. I am still in agreement there needs to be some type of regualtion of tax return preparers and continuing education as well.

[Mr. Pencil]

the IRS had no legal authority to impose a nationwide licensing scheme on tax return preparers

I don't understand the legalities here. I hope IRS appeals further. But even more I hope IRS turns to Congress, because it would make a lovely discussion. Everyone wants to strengthen the integrity of the tax system. And everyone wants to reduce government regulation.

[jshtax]

Who is regulating CPA, Attorneys, and EA's that have no business doing returns?

[mcb39]

No matter what. I am not removing my RTRP certificate from the wall. I earned it. I will keep it, worthless or not.

[jshtax]

We all have PTIN's so why can't they put a testing requirement against that for renewal purposes?

[Mr. Pencil]

Who is regulating CPA, Attorneys, and EA's that have no business doing returns?

CPAs and attorneys are regulated by individual states and strong professional associations, though of course that varies across the country. EAs are regulated by the IRS and professional associations. Every year millions of their clients are formally audited by state or federal agencies. Every year hundreds in each category are fined, disbarred, or jailed for malpractice in their tax work. ..

[Jack from Ohio]

We all have PTIN's so why can't they put a testing requirement against that for renewal purposes?

That was the original intent of the rules. As in most everything else the government does, it ended up FUBAR and now is non-existent.

[Mr. Pencil]

We all have PTIN's so why can't they put a testing requirement against that for renewal purposes?

Sure, it should be just like a driver's license. Preparing taxes is not a right. It's a privilege!

[Carolbeck]

I agree that Tax Preparation should include licensing and testing of minimum requirements. I have seen some of the returns prepared by people that do not have a clue! What I did not like about the IRS heavy hand regarding the CPE was that you had to use one of their "Sanctioned" providers. I work full time during the day at a large global company in the Tax Department and prepare Large Corporation Federal and State Tax Returns. I have worked here for over 13 years, I have access to and use many other sources for my Tax education during the year that are far better than the "Sanctioned" ones.

Deloitte, KPMG, EY, Thomson Reuters, etc.

I also have my own Tax Prep Business that I have done since 1984 out of my home in the evenings and weekends. I always have attended annual seminars and webinars to keep up on current tax law, but last year having to pay twice for the same CPE just really annoyed me. And the education was so simplified it was an insult.

[BulldogTom]

I don't understand the legalities here. I hope IRS appeals further. But even more I hope IRS turns to Congress, because it would make a lovely discussion. Everyone wants to strengthen the integrity of the tax system. And everyone wants to reduce government regulation.

The legality is very simple. A regulatory agency (ie the IRS and Treasury Department) get their authority from Congress. Only those regulatory actions specifically granted by Congress can be carried out by the agency. The IRS tried to sidestep this constitutional requirement. The court said that the law of 1894 that the IRS was relying upon for their regulatory authority was not valid. They need to go back to congress and get specific regulatory authority to regulate tax return preparation.

For those of us who are EA's, CPA's and Attorneys, we are regulated under the authority to "practice before the IRS". This goes back to the Revenue acts passed during the post civil war era, and are specifically granted authority to the Treasury Department. The IRS has tried to make the argument that tax preparation is "practice" and has been shut down by the courts. This latest attempt to regulate "preparers" was shot down as well, as the court found that the law did not contemplate tax return preparation as a area for the Treasury Department to regulate.

So IRS can appeal or drop the fight in the courts. Their best bet, in my humble opinion, is to go to Congress and ask for the specific authority to regulate preparers.

I am for licensing of preparers. I am also for regulation of IRS employees to the same standard that the preparers and practitioners are held. I would like to see the OPR become an independent agency of the Treasury that writes the rules for preparation, practice, and discipline for preparers, pracitioners, and agents of the Treasury department with full authority to disbar or discipline any preparer or Revenue agent that does not follow the rules.

Tom

Hollister, CA

[gfizer]

No matter what. I am not removing my RTRP certificate from the wall. I earned it. I will keep it, worthless or not.

I'm with you, Marilyn! I studied hard and stressed A LOT over that stupid test. Regardless of whether that certificate means anything to anyone else, it means something to me! We can only hope that those of us who earned the "RTRP" designation will be allowed to skip whatever requirements the IRS seeks to impose in the future. Probably not, but a girl can dream....

Gina

[Janitor Bob]

Same here! I never doubted my tax abilities, but I suffered through the test anxiety and expense to get that RTRP designation. I hope Congress either grants the authority to IRS...or at least that IRS keeps the RTRP program as voluntary

[Jack from Ohio]

As I have been studying and taking the tests to get my EA, I found the RTRP test to be very rudimentary and easy. Total time from arriving at the testing site to having lunch at McD's, 65 minutes.

[gfizer]

As I have been studying and taking the tests to get my EA, I found the RTRP test to be very rudimentary and easy. Total time from arriving at the testing site to having lunch at McD's, 65 minutes.

I agree that the test was easy and like you I was done in under an hour, BUT I didn't KNOW it would be easy when I was studying for it, thus the stress. And maybe it was so easy because I HAD studied for it. Either way, the certificate is staying on the wall.

[Janitor Bob]

The test itself was almost ridiculously easy...but maybe would not have been if I had not brushed up on everything and studied. I do think that it would force those passing to have a least a basic understanding of taxes. In the end, however, the entire program has less to do with preparer standards and more to do with preparer tracking...so that IRS can more easily weed out and nab the fraudulent ones....and I'm all for it.

One day, I would like to study for and take the EA exam...but I only have experience with individuals and small businesses....my Corp and non-profit knowledge is limited....So I'm not sure I'd be up to the EA exam...and my full-time job as cost accountant/payroll/import export/shipping does not afford me the time to do Corps and non-profits to gain that experience...or to study much....or to eat or sleep.

[mcb39]

I felt that the test was just as much about how willing and able you were to do research as it was about how much you knew. The preparation stress was max as I had no idea what to expect. I had to get on the road at 4:00 AM for a four hour drive to a 9:00 AM appointment. Factor in the cost of the trip and the cost of the test and you know that you deserve to keep the certificate on the wall. Also, the ethics questions definitely had to involve study as there was no ability to look up those answers. Add to all of this the fact that everyone did NOT pass the test. Yes, preparers should be tested and licensed.

[MAMalody]

To be honest, I am not sure I see a reason for the IRS to license tax preparers.

[Pacun]

Maybe because I am from El Salvador, a third world country where education used to be hard, I passed the EA on paper on one sitting but didn't register with the IRS. I think the year was 2006, then I took the computer exams about 3 years ago and they are relatively easy. Too easy, I would say. When it comes to preparing some returns, I have to ask questions on this forum and I get good answers here. So, is the EA exams high school and this forum a University? Going back to the question at hand, can the IRS require that only EA and CPAs prepare tax returns? What people who struggle with the EA exams do? Will they prepare the returns and leave it as "self prepared" or will they really study hard and pass the EA exams?

If the IRS would force you to become an EA, will you join a lawsuit?

As some people have stated on this post, the RTRP was a joke. It is like asking a cook with 5 years of experience, what a fillet mignon is.

I don't have my EA diploma hanging on my wall, neither do I have my PTIN number letter on the wall. I visited my friend who doesn't even know what kiddie tax is and she prepares taxes, she has her PTIN letter on a frame and she points that letter to her clients. Some clients question my qualifications because I don't have anything on the wall, but they are happy with her because she has that frame. Perception, perception, perception.