It turns out that the IRS can’t do everything it wants after all.
Last year, three independent tax preparers, Sabina Loving of Chicago, Illinois, John Gambino of Hoboken, N.J., and Elmer Kilian of Eagle, Wisconsin, took on the IRS, accusing it among other things, of lacking the authority to license tax preparers. The lawsuit was filed on March 13, 2012, against the IRS in the U.S. District Court for the District of Columbia. The three retained lead attorney Dan Alban of the Institute for Justice who, in an interview just after the case was filed, told me that his claim was simple: Congress never gave the IRS the authority to license tax preparers, and the IRS can’t give itself that power.
U.S. District Court Judge James E. Boasberg agrees. On Friday, he issued an opinion that would bar the IRS from regulating tax preparers – all just days before the new tax season officially opens for business. You can read the entire opinion here(downloads as a pdf).
The scheme to regulate tax preparers was a top priority for former IRS Commissioner Doug Shulman. He doubled down on the idea in 2009 and has worked since that time to put it in motion. Shulman felt that requiring tax preparers to register with the IRS, pass a competency test and take continuing education classes would protect taxpayers from potentially fraudulent preparers. Under his watch, the IRS did move towards a new system which required registration (along with a fee), a competency exam and annual requirements to take at least 15 continuing education credits. In exchange for compliance, beginning in 2011, the IRS began issuing PTINs (Preparer Tax Identification Numbers) which must be included on paid returns; a public database of those tax preparers with valid PTINs was expected to be posted on the IRS web site. Shulman crowed about these advances in his “goodbye” speech in November 12, 2012, before the American Institute of Certified Public Accountants (AICPA).
But not everyone thought that regulation was a good idea: the rules put in place under Shulman’s leadership angered some tax preparers. Under the new rules, attorneys, CPAs and enrolled agents (EAs) are exempt from the competency testing and continuing education requirements. That means that the real burden of complying with the new regulations tends to hit independent tax preparers and small businesses disproportionately – those who, under the new rules, must meet the criteria to be called a Registered Tax Return Preparer (RTRP). Without that designation, unless a preparer meets an exemption or exception, he or she may not work. Loving – and other tax preparers – thought those rules were unfair. That’s how the matter ended up in district court.
District courts are a part of the federal court system. With a few exceptions, district courts have jurisdiction to hear nearly all kinds of federal cases, including civil matters like this one. There are 94 federal judicial districts, including at least one district in each state, the District of Columbia and Puerto Rico; this matter was heard in the U.S. District Court for the District of Columbia.
Generally, a final ruling by a district court can be appealed to the United States court of appeals in the federal judicial circuit in which the district court is located. In this case, the matter would be appealed to the United States Court of Appeals for the District of Columbia Circuit; the DC Circuit is notorious for settling questions on matters involving government agencies. And that’s what’s probably going to happen here: I expect an appeal.
But while all that gets sorted out, tax preparers wonder: what does this all mean for the upcoming tax season? That’s not exactly clear. In theory, the decision should allow unregulated and unregistered tax preparers to file tax returns when the season opens on January 30. However, that’s just days away – and the IRS has a system in place already predicated on the idea that preparers have to be registered with a valid PTIN. Whether a return submitted by an unregistered preparer will bounce because of the IRS system is yet to be determined. The IRS has not yet issued a statement about the ruling.
Attorneys for the plaintiffs plan to release a formal statement about the win on Tuesday. For now, their attorney, Dan Alban, simply referred to the registration scheme as an “unlawful power grab by one of the most powerful federal agencies” noting that “thankfully the court stopped the IRS dead in its tracks.” Alban went on to say:
Today’s ruling is a victory for hundreds of thousands of tax preparers across the country and the tens of millions of taxpayers who rely on them to prepare their taxes.
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