The United States District Court for the District of Columbia struck down the IRS’s Registered Tax Return Preparer program and enjoined the IRS from enforcing their related regulations. The Court issued a Memorandum Opinion in Sabrina Loving, et al., v. Internal Revenue Service, et al. (See Civil Action No. 12-385 (JEB).
In 2011 the IRS began regulating all tax return preparers who prepare and file tax returns for compensation. In May 2011, the IRS issued final regulations (T.D. 9527) making an un-enrolled return preparer (those return preparers who are not either a CPA, attorney, or an enrolled agent) subject to the Circular 230 rules for the first time and requiring them to pass an exam, pay an annual fee, and take continuing education courses each year.
The IRS argued that its regulation of tax return preparers is permitted pursuant 31 U.S.C. Section 330, which allows the IRS to regulate “representatives” who “practice” before them.
The Loving Case stemmed from three independent tax return preparers that brought suit against the IRS arguing that they are not subject to the statute and that the IRS has no authority to regulate their preparation of tax returns. In their complaint they argued that complying with the IRS’s rules would cause them to have to raise prices and they would lose customers if forced to comply with the IRS’s program. Two claimed they would likely close their businesses if forced to comply.
The court applied the legal analysis previously developed from Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837. Under Chevron, the Court first undertook to determine if Congress has spoken to the precise question at issue. If Congress’s intent is clear on an issue then there is no ambiguity and the analysis ends. In this case, the Court said the question was whether 31 U.S.C. Section 330 was “ambiguous as to whether tax-return preparers are ‘representatives’ who ‘practice’ before the IRS?”
The Court found that 31 U.S.C. Section 330 was not ambiguous and that tax return preparers are not representatives who practice before the IRS. The Court’s analysis was based on three factors. First, the Court found that Section 330(a)(2)(D) contains a definition of “practice of representatives” that does not include tax return preparers. The Court reasoned that because that provision equates the term “practice” with “advising and assisting taxpayers in presenting their cases before the IRS” the filing a tax return would not be described as presenting a case before the IRS.
Second, the Court found the IRS’s interpretation of these provisions would disrupt other statutory references within the Tax Code that are used to penalize tax-return preparers for certain wrongdoings.
Third, under the IRS’s interpretation, the Court reasoned, Code Sec. 7407 (which the IRS may use to prevent abusive practices by tax return preparers), would be relegated to oblivion.
The Court granted a declaratory judgment holding that the IRS lacks the authority to promulgate or enforce the new regulatory scheme, a decision that prevents the IRS’s from continuing their Return Preparer Regulation Program.
Many Tax professionals were surprised by the Court’s decision, and feel the Judge’s ruling is bad for consumers. Many consumer advocates point to increasing abuses and fraud committed by tax return preparers and question why good and honest preparers have to compete with others that don’t share the same standards of competency, integrity, or professionalism. The IRS website noted “The Internal Revenue Service, working with the Department of Justice, continues to have confidence in the scope of its authority to administer this program. It is considering how best to address the court’s order and will take further action shortly.”
Many taxpayers generally look favorably upon court decisions that restrict the authority of the IRS, but it may be in the best interests of many consumers for the IRS to either appeal the decision or to seek legislation from Congress that will grant the necessary authority.
Dopkin Law Firm advises clients on the intricacies of business and tax law matters. To discuss these or other issues with attorney and CPA Matt Dopkin, contact us at 215-519-4269 or via email at firstname.lastname@example.org.
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This Alert is published by Dopkin Law Firm. It is provided solely as legal information, not legal advice. Legal advice depends, to a large extent, upon the particular facts of a matter. For legal advice, contact your legal advisor.