FROM ACCOUNTING TODAY

[michaelmars]

The Internal Revenue Service has declined to file a petition with the Supreme Court to appeal a series of rulings invalidating its effort to require mandatory testing and continuing education of tax preparers.

In January of last year, a federal court judge ruled that the IRS had exceeded its statutory authority in attempting to regulate tax preparers and effectively put an end to the IRS’s Registered Tax Return Preparer program. Subsequent appeals by the IRS have not overturned the initial decision. Most recently, in February of this year, the D.C. Court of Appeals ruled in favor of the three independent tax preparers—Sabina Loving of Chicago, Ill., Elmer Kilian of Eagle, Wis., and John Gambino of Hoboken, N.J.—who had sued the IRS in the case, known as Loving v. IRS (see Tax Preparers Defeat IRS in Appeals Court Ruling on Licensing Scheme).

The IRS has now missed a deadline for filing a petition seeking a review from the Supreme Court of the decision. The Arlington, Va.-based law firm that represented the independent preparers, the Institute for Justice, noted that the lapse of the deadline marks the conclusion of a two-year battle over whether the IRS had the authority to impose a nationwide licensing scheme on tax preparers.

The IRS had unsuccessfully argued that the “Horse Act” of 1884—a statute passed to govern compensation claims for dead horses brought on behalf of Civil War veterans—had provided it with such authority.

“This brings finality to a major victory for independent tax preparers—and taxpayers—nationwide,” said lead attorney Dan Alban in a statement. “Four federal judges sitting on two different courts have all agreed that Congress never gave the IRS the power to license tax preparers, and an agency cannot just give itself such licensing authority. By not filing a petition for certiorari, the IRS has wisely chosen not to ride this horse law any further.”

Asked whether his firm had heard from the IRS about any further appeal, Alban told Accounting Today in an email Tuesday, “There is no more appeal. The case is now final. They have not filed a petition for cert. with the U.S. Supreme Court and yesterday was their deadline to do so.”

If the licensing scheme had not been struck down, approximately 350,000 tax-return preparers would have been affected by the IRS regulatory regime.

“These regulations were classic economic protectionism,” said IJ senior attorney Scott Bullock. “The burden would have fallen on small entrepreneurs and consumers, while powerful industry insiders stood to reap the benefits of decreased competition. Instead, taxpayers will enjoy lower prices for tax-preparation services as more preparers compete for their business.”

The IRS did not immediately respond to a request for comment.

This case arose when the IRS, following several failures to secure congressional authorization, imposed sweeping new regulations requiring all tax-return preparers to obtain a license and submit to ongoing, mandatory IRS-approved education. The three independent tax preparers filed suit in March 2012 in the U.S. District Court for D.C., arguing that the IRS exceeded the scope of its authority by attempting to enact the regulations without Congress’ approval. U.S. District Court Judge James E. Boasberg agreed, and struck down the regulations as unlawful in January 2013. However, he left in place the IRS'srequirement for registering paid tax preparers with Preparer Tax Identification Numbers, or PTINs.

In February of this year, a three-judge panel of the D.C. Circuit Court of Appeals upheld the district court opinion, ruling: “The IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of [the statute.]”

IRS commissioner John Koskinen has indicated that the chances of getting the Supreme Court to review the appeals court ruling are unlikely, telling Accounting Today in an interview in February, “We're disappointed with the decision, although the decision is fairly final in the sense that the only appeal would be to apply for a writ of certiorari to the Supreme Court. And getting a writ granted by the Supreme Court is unlikely in most cases, and probably unlikely in this one as well.”

Koskinen pointed out that there wasn't any disagreement between different circuit courts on which to base the appeal. “We don't have controversy between different circuits,” he acknowledged back in February (see IRS Commissioner sees Further Appeals on Tax Preparer Lawsuit as Unlikely). He also admitted that going to Congress to give the IRS the statutory authority to impose tax preparer regulation was also a long shot. “I recognize that in today's political climate, getting legislation to give the IRS authority to do anything is probably a bit of a stretch.”

In a congressional hearing last week, however, Koskinen pointed to the Obama administration's budget proposal asking for legislative authority to regulate tax preparers (see IRS Commissioner Tells Congress about EITC Challenges with Tax Preparers).

Koskinen sees voluntary certification as the most likely route. “So it may well be that our best approach, and we are looking at that as well, is whether, as I've said in the past, some sort of voluntary program would be productive,” he said in the interview in February. “It would be a way of offering educational support for preparers.”

[Pacun]

"A major victory for independent tax preparers".

It depends on the lens you use to see it.

[mrichman333]

great

[GeneInAlabama]

The IRS may resort to using bigger penalties to control tax preparers.

[Christian]

Only the IRS could construe a Dead Horse statute enacted in 1884 to pay for deceased livestock as a justification to regulate some 700,000 or so tax practitioners in the 21st century.

[kcjenkins]

If they want to do it, they need to do it the right way. Work with both parties to get a bill written that can be passed, not try 'dirty tricks' to try to impose unlawful requirements.

[JohnH]

I think there is some poetic justice in the IRS having to refer to a dead horse statute to try and defend a power grab of this magnitude. Wonder how Judge Boasberg kept it together without bursting into hysterical laughter the first time this came up in open court. At least the IRS was smart enough to skip the spectacle of stinking up the Supreme Corral by flogging this thing all the way to the top.

[FreedomTaxed]

The IRS may resort to using bigger penalties to control tax preparers.

Pardon me if I don't hold my breath on that one.

This giving up in court is a real victory, true, for what really matters: What our liberties are. If you can prepare your own tax returns, then that same liberty extends to some person you pay to perform the same work. People who are screwing up or committing frauds, using that liberty, should be punished.

But our government agencies are filled with desk sitters and paycheck collectors. Placing more demands on the tax preparers doesn't do anything to address that... the extra effort will be enacted by the fraudsters, and the IRS will continue to fail to police these actions. Wasn't $15 billion or so outright stolen last tax season via EIC fraud? It's just too lucrative; hence a guy doing these frauds will take the courses and still file dozens, maybe 100s, of EIC frauds, and collect that $200-$800 per return regardless.

Let me put this another way: We use PTINs now, and still the frauds are rife. The IRS has had plenty of years to flex its muscle. It's clearly not doing it, and with equal clarity I can see that it won't do it in the future. About the only thing that can put this to rest is that the IRS sets an error tolerance number for each PTIN. As soon as you create 3, 5, 10 or whatever number of critical errors in one tax year, your PTIN shuts off (meaning it automatically fails in the e-file) until you show up physically at an IRS Center to answer for those errors. How difficult is that? Oh wait, that comes back to having a functional accountability system in the first place, with IRS employees that actually pursue institutional goals instead of driving desks and collecting pay. Sorry, I forgot about reality there for a second.

[Jack from Ohio]

Pardon me if I don't hold my breath on that one.

This giving up in court is a real victory, true, for what really matters: What our liberties are. If you can prepare your own tax returns, then that same liberty extends to some person you pay to perform the same work. People who are screwing up or committing frauds, using that liberty, should be punished.

But our government agencies are filled with desk sitters and paycheck collectors. Placing more demands on the tax preparers doesn't do anything to address that... the extra effort will be enacted by the fraudsters, and the IRS will continue to fail to police these actions. Wasn't $15 billion or so outright stolen last tax season via EIC fraud? It's just too lucrative; hence a guy doing these frauds will take the courses and still file dozens, maybe 100s, of EIC frauds, and collect that $200-$800 per return regardless.

Let me put this another way: We use PTINs now, and still the frauds are rife. The IRS has had plenty of years to flex its muscle. It's clearly not doing it, and with equal clarity I can see that it won't do it in the future. About the only thing that can put this to rest is that the IRS sets an error tolerance number for each PTIN. As soon as you create 3, 5, 10 or whatever number of critical errors in one tax year, your PTIN shuts off (meaning it automatically fails in the e-file) until you show up physically at an IRS Center to answer for those errors. How difficult is that? Oh wait, that comes back to having a functional accountability system in the first place, with IRS employees that actually pursue institutional goals instead of driving desks and collecting pay. Sorry, I forgot about reality there for a second.

I would dare to say that many of the fraudulent returns are being mailed in without any PTIN. The thieves will just get another PTIN for one of their colleagues and continue business as usual.

Bottom line cause for all the fraud and the need for enforcement is the American Public DEMAND for almost instant refunds, thus opening the door for easy fraud. Take away the ability to get a refund in less than 6-10 weeks and majority of the fraud goes away. The time allows IRS to do proper and thorough screening.

"But I need that refund to pay my bills." Sorry, I live on a budget and the choice not to live on a proper budget is poor judgment and not my fault.

"Failure to plan on your part, does not create an emergency situation on mine.."

[JohnH]

I think we may begin to see IRS slow down refunds in the future.

It's the only way to deal with the fraud problem.

They shot themselves in the foot years ago, back when they used the carrot and stick approach by offering fast-turnaround of refunds to push more people to e-flinging. Now that they have progressed to the e-flinging mandate, there's no longer any reason to keep the carrot out there.

From this point forward, it's more a matter of forcing tax preparers to be uncompensated agents of the government. They're already well on their way and now it's just a matter of gradually tightening the noose.

At this point there is really no downside to slowing down refunds. After one or two tax seasons, the hysteria will subside.

[SaraEA]

A bit of background won't make the dead horse argument seem so silly. Did you know that the Enrolled Agent credential was created by the Horse Act of 1884? Apparently during the Civil War, soldiers were running through the countryside begging, borrowing, and sometimes stealing horses so they could (a) get to battles, and (b ) fight them. After the war the owners who never got their horses back were demanding restitution from the government. There weren't enough lawyers to handle all the cases in a timely manner, plus back in those days attorneys called themselves "esquire" and were thought of as esteemed professionals. They didn't want to mess with missing horse cases. The Treasury Department (this was before the IRS existed) therefore created a new class of professionals who were permitted to represent taxpayers before the US government provided they had specific training to do so. (Before that, only attorneys could do this.) Thus was born the Enrolled Agent credential. The first EAs helped people get paid for their confiscated horses.

Over the past 20 years or so, several bills to regulate tax preparers have passed one or the other house of congress but none passed both. (Maybe one did, but it was vetoed by the President at the time.) I used to follow the hearings on these bills, and there was always strong congressional support for regulation. After years of doing what Congress does best--nothing--the IRS decided to take matters into its own hands and authorize itself to go ahead with regulation. Their argument was that the Horse Act gave it the authority to regulate people who represent taxpayers before it. That is a fact and was not in dispute in the Loving case.

The dispute centered over whether tax return preparation constitutes representation. The IRS unsuccessfully argued that preparing a tax return that is then sent to the agency constitutes representing the taxpayer's intentions to the US government, and the Horse Act gives the IRS the authority to regulate those who do the preparing. The Supreme Court ruled that preparing a tax return does not rise to the level of representation.

The real problem is not incompetent preparers but dishonest ones. Not a week goes by when I don't read about US Justice Dept cases against preparers who ran EITC shops, selling dependents, creating fake Sch Cs, charitable contributions, employee business expenses, etc., each defrauding the government of millions of dollars. I do maybe 500 returns a year, all done to the best of my ability to be true and accurate. One of these shops does 3,000 returns a year, most inaccurate. It doesn't take too many of those shops to dilute my good numbers and make it look like paid preparers are dishonest and idiots. Even ones like me, proudly credentialed under the Horse Act of 1884.

[JohnH]

_{That's an interesting history.}

_{So there's clearly more to the story.}

_{The progression is horse settlements to data entry clerks to EIC compliance agents to uncompensated auditors.}

_{Anybody out there still working on a Dead Horse settlement?}

[Pacun]

I was thinking that if the IRS would issue free PTINs for 3 returns, the problem would be solved. So, any return marked as self prepared, the IRS would send a letter stating, if you prepared your tax return in 2013, please use this PTIN for 2014. If your number is used in more than 3 returns in 2014, you will owe the IRS $XX because we will considered you a Tax Preparer and we are going to send you a bill for that amount. The letter should clearly state, do not share this number with any tax preparer because if someone else prepares your return, that person needs to use his/her PTIN. It should be also be stated that if the number is shared with the tax preparer with the intent to obtain a bigger refund, that would constitute fraud.

Another suggestion is to audit all self prepared returns and have a face to face interview and ask them if they paid someone to prepare their taxes. These should be light audits just to look for bad preparers. A guy has a tax preparation business (all returns are self prepared). I bet you they prepare about 5K returns every year. If the IRS would interview those 5K and ask them "how many years have you prepared your taxes there"? I bet you the answer would have an average of 4 years, so you send a bill that person for $50 for each return that didn't have a signature and the bill will be for 1 million (That's would be called the Al Cap1 strategy).

OK, I understand the IRS doesn't have the muscle to audit all self prepared returns in any particular year, so they could take 2014 and audit all self prepared returns for MD, DC and VA. I bet you they would get about 3 firms that don't sign the returns. Then next year they could audit, CA and the following year, NY and NJ, and so and so.

[Carolbeck]

And then seeing the news about the huge bonus's received by IRS Employee's who are not compliant with their own Personal Tax Filing responsibilities. A case of "Do as I say, not as I do".

Do you think that sets a tone for the average taxpayer civic duty of tax compliance?

[kcjenkins]

Makes me wonder why we bother to file ourselves. However, we know their attitude to our 'doing as they do, instead of as they say' would not be friendly.