In 2013, attorney Dan Alban of the Institute for Justice argued that the Internal Revenue Service (IRS) could not license tax preparers for one simple reason: Congress never gave the IRS the authority to license tax preparers, and the IRS can’t give itself that power. The courts agreed. However, Senator Rob Portman (R-OH) aims to change that with a new bill, the Protecting Taxpayers Act (S. 3278).
The bill is intended to “amend the Internal Revenue Code of 1986 to provide additional protections to taxpayers.” The full text of the bill is not available yet, but those protections, according to Portman, would include the right of the IRS to “regulate paid tax return preparers in a balanced way.” Portman actually uses the word “reinstates” to describe IRS’ power to regulate tax preparers. U.S. District Court Judge James E. Boasberg would likely disagree with that characterization: His ruling (downloads as a PDF) in Loving v. Commissioner made it clear that the IRS did not have the power to regulate tax preparers because Congress had never authorized them to do so.
The IRS appealed the ruling. However, in 2014, 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].”
With two losses under its belt, the IRS did not appeal again but instead announced the Annual Filing Season Program, a voluntary and temporary program intended to fill the holes. At the time, then-acting IRS Commissioner John Koskinen called the plan “not the ideal solution” and was hopeful that Congress would enact a proposal that would give the IRS the authority for mandatory oversight of return preparers.
In 2015, Congress made a half-hearted attempt to do just that. The Senate Finance Committee, led by Committee Chair Orrin Hatch (R-UT) and Ranking Committee Member Ron Wyden (D-OR), marked up a bill that would have, among other things “help root out the bad actors who pose as law-abiding return preparers.”
The proposal would have provided the Department of the Treasury and the IRS the authority to regulate “all aspects of Federal tax practice, including paid tax return preparers.” Specifically, the proposal would have amended Title 31 of the U.S. Code (“Money and Finance”) to encompass all aspects of federal tax practice “without regard to whether or not it includes representation before the Treasury.” That distinction is important since Title 31 already regulates certain paid tax return preparers such as attorneys, certified public accountants (“CPAs”), enrolled agents and enrolled retirement plan agents. The new language would target those outside of those designations and would include the preparation of tax returns for compensation. In other words, in a post-Loving world, the Loving rulings would be “overridden legislatively.”
The proposal did not advance. Nor did a similar scheme introduced by Representatives Diane Black (R-TN) and Pat Meehan (R-PA). The Tax Return Preparer Competency Act (downloads as a pdf) would have required tax return preparers to pass a competency exam, attend annual continuing education classes, and submit to a background check; tax attorneys, certified public accountants (CPAs), enrolled agents (EAs) would likely have drawn a pass since they already have credential requirements. The bill would have also required preparers to maintain preparer tax identification numbers (PTINs), as they do now. Tax return preparers who complied with the licensing requirements would have been listed in a public database, similar to the PTIN directory already in place.
Despite the failed attempts, Congress is trying again. The latest push likely has backing from IRS Acting Commissioner David J. Kautter, though the IRS does not comment on proposed legislation. Nina E. Olson, the National Taxpayer Advocate, has long been a proponent of tax preparer regulation; she has urged Congress to move forward on such a program since 2002. Olson appeared at a hearing of the Senate Finance Subcommittee on Taxation and IRS Oversight last week as a witness where she testified, “In my view, the need for preparer standards is just as acute today as it was in 2004 and in 2011. Both as a consumer protection measure and to improve the accuracy of prepared tax returns, I have continued to recommend that Congress authorize the IRS to reinstate the same program that key parties agreed on, and the IRS was implementing, before the court overturned it for lack of authority.”
The American Institute of CPAs (AICPA) has expressed its support for the bill, writing to Senators Rob Portman and Ben Cardin: On behalf of our members, the AICPA would like to express its support for Section 202, Regulation of Tax Return Preparers, which will help to promote good tax administration and protect the interests of the American taxpayer by protecting taxpayers from incompetent and unscrupulous preparers.
However, the irony of issuing more regulations is not lost on some. Last year, the President argued for fewer government regulations, directing federal agencies to cull, not add to the rulebooks. In an Executive Order, he declared, “it is important that for every one new regulation issued, at least two prior regulations be identified for elimination, and that the cost of planned regulations be prudently managed and controlled through a budgeting process.”
The last attempt to further regulate preparers wasn’t exactly cost efficient either: A class action suit against the federal government seeking to recover allegedly unlawful license fees paid to the IRS resulted in yet another loss in court – and an estimated hit to the IRS of more than $175 million. The agency has appealed.