IRS Regulation of Tax Return Preparers Struck Down

A U.S. district court ruled that the IRS’s registered tax return preparer program exceeds its statutory authority and enjoined it from enforcing the regulations (Loving, No. 12-385 (D.D.C. 1/18/13)).

In 2011, the IRS issued final regulations (T.D. 9527) making unenrolled return preparers (i.e., return preparers who are not CPAs, attorneys, or enrolled agents) subject to Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10), for the first time and requiring them to pass a qualifying exam, pay an annual fee, and take 15 hours of continuing education courses each year. The IRS based its authority to regulate tax return preparers on 31 U.S.C. Section 330, which allows the IRS to regulate “representatives” who “practice” before it.

Three independent tax return preparers brought suit in federal court, arguing that they are not covered by the statute and that the IRS has no authority to regulate their preparation of tax returns. They sought injunctive and declaratory relief and moved for summary judgment.

The district court held that tax return preparers are not representatives who practice before the IRS under 31 U.S.C. Section 330. It gave three reasons: First, Section 330(a)(2)(D) equates practice with advising and assisting taxpayers in presenting their cases before the IRS. The court said that “[f]iling a tax return would never, in normal usage, be described as ‘presenting a case’ ” (slip op. at 11).

Second, the IRS’s interpretation would displace other “statutes scattered across Title 26 of the U.S. Code [that] create a careful, regimented schedule of penalties for misdeeds by tax-return preparers” (slip op. at 13). If Section 330(b) gave the IRS open-ended discretion to regulate tax return preparers, it would displace this existing statutory scheme.

Third, under the IRS’s interpretation, Sec. 7407, which remedies abusive practice by tax return preparers by allowing the IRS to enjoin their preparation of tax returns, “would be relegated to oblivion” (slip op. at 10).

Having decided that the statutory language unambiguously forecloses the IRS’s return preparer regulation program, the court granted a declaratory judgment that the IRS “lack[s] statutory authority to promulgate or enforce the new regulatory scheme for ‘registered tax return preparers’ brought under Circular 230” (slip op. at 21). The court also granted permanent injunctive relief, enjoining the IRS from enforcing its registration scheme against unenrolled preparers.

As this item went to press, the IRS had reopened the preparer tax identification number (PTIN) system for new applications and renewals after the court clarified that the injunction did not affect PTINs. The IRS said that it intended to a file a Notice of Appeal within 30 days.