“A big victory for independent tax preparers and taxpayers/consumers alike.”
That’s how attorney Dan Alban, of the Institute for Justice, a libertarian public interest law firm, described the February 11 ruling by the U.S. District Court of Appeals that the Internal Revenue Service did not have the legal right to regulate tax preparers. The decision affirmed a 2013 ruling (downloads as a pdf) by U.S. District Court Judge James E. Boasberg that Congress never gave the IRS the power to license tax preparers and the IRS cannot give itself that authority.
The case, Loving v. Commissioner. (complaint downloads as pdf) was originally filed on March 13, 2012, by three independent tax preparers, Sabina Loving of Chicago, Illinois; John Gambino of Hoboken, N.J.; and Elmer Kilian of Eagle, Wisconsin. The three accused the IRS, among other things, of lacking the authority to license tax preparers.
It turns out the courts agreed.
Although the original case was filed in 2012, the issue of tax preparer regulations has been in the public eye for some time. Most notably, former IRS Commissioner Doug Shulman introduced a proposal in 2009 that would require tax preparers to be licensed and certified. The immediate feedback on the proposal was mixed. While most tax professionals agree that it’s in the best interest of taxpayers to improve compliance and reduce tax fraud, there is a real concern as to whether certification would actually make that happen. At the time that Shulman made his proposal, two states had already implemented certification requirements: Oregon and California (Maryland has since implemented similar requirements). A study indicated that post-certification, the accuracy of returns prepared in Oregon had increased while in California, the accuracy of returns actually decreased. Perhaps not a magic bullet after all.
Alban, however, had a different concern. He said simply, “Tax preparers have the right to earn an honest living without permission from IRS.” He argued that a handful of tax professionals, including lawyers, disproportionately benefit from the regulations since they would be exempt from certain of the additional requirements. Other existing tax preparers would have been required to seek permission from the IRS in order to continue to work. The scheme to regulate those preparers, Alban claims, was an “unlawful power grab by one of the most powerful federal agencies.”
Tax preparer Bob Flach agreed. Flach told me, at the time, his biggest gripe was the IRS interfering with his business at this stage of the game, questioning why he is, “after 40 years of preparing 1040s for a living without incident, having to take a test to prove that I know what I have been doing all these years.”
Despite opposition within the industry, the IRS moved forward with a slate of tests, fees, and registration requirements. They did so relying on regulation authority allegedly given in a statute that predated the modern income Tax Code. The 1884 law, which governed the representatives of Civil War soldiers seeking compensation for dead horses, was passed to protect military pensioners. According to Alban, it was not intended to authorize the IRS to regulate tax preparers and, he says, “they cannot give that authority to themselves.” U.S. District Court Judge James E. Boasberg agreed and in 2013, he issued an opinion that barred the IRS from regulating tax preparers. The IRS, of course, appealed.
The U.S. Court of Appeals agreed with Judge Boasberg’s findings, ruling that “[t]he IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of [the statute].” The Court also questioned the IRS’ newfound reliance on the statute more than 100 years later, writing that “we find it rather telling that the IRS had never before maintained that it possessed this authority… In light of the text, history, structure, and context of the statute, it becomes apparent that the IRS never before adopted its current interpretation for a reason: It is incorrect.”
Of course, not everyone agrees with the Court. H&R Block, which has long supported efforts to regulate tax return preparers, was disappointed with the decision, calling it a “blow to honest taxpayers.” Bill Cobb, the President & CEO of H&R Block went further, saying:
It is outrageous that all consumers don’t enjoy basic protections with such a significant financial transaction as tax preparation. 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, like a number of other retail tax preparers, currently trains and has continuing education requirements for its preparers without additional IRS oversight. Many of those preparers, as well as CPAs, attorneys, and Enrolled Agents (EAs) would have been excluded from additional education and licensing requirements under the IRS regulation scheme.
So what’s next? Another appeal? I don’t think so. The IRS lost this case pretty solidly and I think that, even if another court agreed to hear the matter, there likely wouldn’t be a different result. There are a few other options for IRS:
- Ignore it and move on (Doubtful);
- Pressure Congress to actually write a statute that gives IRS authority to regulate (Congress moving much on anything that IRS wants these days? Don’t hold your breath); and
- Move for voluntary certification (Bingo).
I have my money on option 3. The new IRS Commissioner, John Koskinen, indicated early this year that he would support voluntary certification, suggesting:
… [i]f 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?’
That sentiment is shared by Nina Olson, the National Taxpayer Advocate, who said: “We are recommending Plan B to be going to a voluntary approach.”
Many in the industry – Flach included – have long supported voluntary certification. Other industries have done it with success. And Alban says that the Loving plaintiffs certainly wouldn’t oppose voluntary certification.
That doesn’t mean everyone is on board with the idea. Joe Kristan worries that it would harm EAs, writing, “If the IRS runs the now-mothballed Registered Tax Return Preparer literacy test as a voluntary program, it will be a crippling blow to the more rigorous and underappreciated EA designation.”
Any moves to change the existing tax preparer scheme, including voluntary compliance, will likely have to wait: tax season officially opened on January 31, 2014, and tax preparers are already rushing to file returns for taxpayers.
It is important to understand that this most recent ruling does not exempt your tax preparer from the requirement to have a Preparer Tax Identification Number (PTIN). The PTIN requirement is still valid. If your preparer doesn’t have one, he or she is likely part of an increasing share of “black market” tax preparers – run, don’t walk, away from those preparers. Not everyone who hangs a shingle has your best interest at heart: certification or not, let’s be careful out there.
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