On September 8, 2014, plaintiffs Adam Steele, Brittany Montrois, “and a Class of More Than 700,000 Similarly Situated Individuals and Businesses” filed a class action suit against the federal government seeking to recover allegedly unlawful license fees paid to the Internal Revenue Service (IRS). Nearly three years later, the plaintiffs, which then included Joseph Henchman, an attorney with the Tax Foundation, who joined Steele and Montrois, got a win after Judge Royce C. Lamberth ruled that “all fees that the defendant has charged to class members to issue and renew a PTIN … are hereby declared unlawful.” The potential cost to the IRS? More than $175 million.
The lawsuit stems from IRS efforts to regulate tax preparers. As part of those efforts, effective September 30, 2010, the IRS required all paid tax preparers obtain and use a preparer tax identification number (PTIN).
If you use a paid preparer, you’ll see the PTIN on page two of your tax return:
For years, the IRS has made it clear that a paid preparer may not file a return without a PTIN – there’s even a PTIN directory on the IRS website so that taxpayers can easily find a preparer with a valid PTIN. Think of a PTIN like a substitute Social Security Number (SSN) for tax preparers. That is what it is, more or less – since 1999, tax return preparers have been able to use a PTIN on tax returns instead of their Social Security Numbers. It was a balancing act: the IRS was trying to protect taxpayers by requiring preparers to identify themselves on returns while simultaneously protecting the individual privacy concerns of preparers. At the time, PTINs were issued for free.
The issuance of PTINs wasn’t problematic. Here’s what was. Beginning with the 2010 rules, PTINs not only became mandatory, they also became expensive. That year, the IRS required an initial fee of $64.25. Each year, an additional renewal fee of $63 applied. The government justified the fee by pointing to 31 U.S.C. § 9701, which permits federal agencies to “charge for a service or thing of value provided by the agency.”
Other efforts to regulate tax preparers, however, were invalidated in Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014). But the PTIN rules stuck. (You can find out more here.)
The plaintiffs filed suit after Loving alleging that the IRS was not allowed to require PTINs and subsequently charge PTIN fees. The plaintiffs argued that IRS did not have the authority to charge preparers PTIN fees because the fees were not in exchange for a “service or thing of value.” And, the plaintiffs argued, even if the IRS did have the authority to charge preparers PTIN fees, the fees charged were excessive.
The Court eventually ruled that the IRS was authorized to issue regulations requiring the use of PTINs, finding that “the decision to require the use of PTINs was not arbitrary or capricious.” The Court also found a “rational connection” between the regulations and the stated reasons for the regulations (“effective administration and oversight”). The result is that the Court agreed that the IRS could continue to require the use of PTINs for tax preparers.
But the fees? The Court found that PTINs did not constitute a “service or thing of value” which would justify a fee. In fact, the Court argued that the opposite may be true: the real benefit of the PTIN “inures to the IRS, who, through the use of PTINs, may better identify and keep track of tax return preparers and the returns that they have prepared.”
As a result, the Court ruled that the IRS could require the use of PTINs by tax preparer but the IRS “may not charge fees for PTINs because this would be equivalent to imposing a regulatory licensing scheme and the IRS does not have such regulatory authority.” The last bit – the regulatory authority – has been a thorn in the side of the IRS for a while now. The court found in Loving that the IRS did not have the authority to regulate tax preparers without authorization from Congress. And while Congress has made noise about regulating tax preparers for years, it has consistently failed to do so.
Ouch, right? But the ruling is even bigger. Not only is the IRS barred from charging PTIN fees to tax preparers in the future, the Court also ordered that the IRS has to provide “a full refund of all PTIN fees paid.” The Court specifically referenced a refund to the “class” since the suit was brought as a class action suit. The class consists of “all individuals and entities who have paid an initial and/or renewal fee for a PTIN, excluding Allen Buckley, Allen Buckley LLC, and Christopher Rizek.” Buckley and Rizek are two of the attorneys for the plaintiffs.
According to court documents, it is believed that between 700,000 and 1,200,000 preparers have paid at least the initial PTIN registration fee, if not additional annual renewal fees, amounting to more than $175,000,000 collected by the IRS (Dan Alban points out that this number could be much higher since it was initially calculated in 2015). Assuming that the ruling stands, that’s a substantial amount of money to be refunded. By way of comparison, the IRS’ budget for Fiscal Year 2016 (downloads as pdf) was $11.235 billion.
The IRS declined to comment.
The case is Adam Steele, et al. v. United States of America, Case No. 1:14-cv-01523-RCL.
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