The D.C. Circuit, reversing the District Court for the District of Columbia, held that the IRS can charge a fee for issuing a preparer tax identification number (PTIN). The court concluded that the IRS acted within its authority under the Independent Offices Appropriations Act of 1952 (IOAA) (31 U.S.C. §9701) in charging tax return preparers a fee to obtain and renew PTINs and that the IRS's decision to charge the fee was not arbitrary and capricious.
Background
In 1976, Congress amended Sec. 6109(a) to allow the IRS to require a preparer to list an identifying number on any return he or she prepares, and it specified that the identifying number would be the preparer's Social Security number (SSN). In 1998, afraid that this requirement might lead to inappropriate use of a preparer's identifying number, Congress again amended Sec. 6109 to allow the IRS to permit or require preparers to use a different identifying number than their SSNs. The IRS in response issued regulations that allowed, but did not require, a preparer to obtain his or her own preparer tax identification number (PTIN) and to list the PTIN as the identifying number on any return he or she prepared.
However, the IRS, concerned that taxpayers were being poorly served by undertrained tax return preparers, began an ill-fated foray into tax return preparer credentialing. The IRS decided that it had the power to regulate preparers under 31 U.S.C. Section 330(a)(1), and to implement its plan of tax return preparer regulation, which became known as the registered tax return preparer program, the IRS issued regulations (T.D. 9527) that imposed three requirements.
The first requirement was that preparers, other than CPAs, attorneys, or enrolled agents, become "registered tax return preparers." To become a registered tax return preparer, a person would need to undergo a background check, pass a competency exam, and satisfy continuing education requirements. The second requirement was that all preparers, not just registered tax return preparers, obtain a PTIN and renew it annually. As one of the reasons for this requirement, the IRS stated that it would help maintain the confidentiality of preparers' SSNs.
The third requirement was that to obtain a PTIN and renew it annually, all preparers would be required to pay a fee (at first roughly $50 plus a separate "vendor fee"). The IRS stated that this money would be used to cover the costs of issuing PTINs and maintaining the information technology system associated with them, as well as to pay for aspects of the registered tax return preparer program.
Unsurprisingly, a group of tax return preparers who had been happy being uncredentialed challenged the registered tax return preparer program in court, arguing that the IRS lacked the authority under 31 U.S.C. Section 330(a)(1) to establish a licensing system for tax return preparers. The D.C. Court of Appeals agreed with the tax return preparers and invalidated the regulations allowing the IRS to credential preparers in Loving, 742 F.3d 1013 (D.C. Cir. 2014). The court, however, did not eliminate the PTIN requirement, and the IRS continued to require, and charge a fee for doling out and renewing, PTINs. However, it did lower the fee to $33 (with no additional vendor fee), saying that the reduced amount reflected the part of the fee that was allegedly allotted to running the part of the registered tax return preparer program that the D.C. Circuit had invalidated inLoving.
While tax return preparers welcomed these developments, many still believed they should not have to pay a fee to obtain or renew a PTIN. Thus, another group of tax return preparers filed a class action suit in the district court seeking to have the fee invalidated, arguing that the PTIN fee was contrary to the IOAA and the IRS's decision to impose it was arbitrary and capricious.
The district court sided with the tax return preparers (Steele, 260 F. Supp. 3d 52 (D.D.C. 2017)). As the D.C. Circuit had in Loving, the district court upheld the requirement that tax return preparers obtain a PTIN, but it further held that the PTIN fee was invalid on the ground that it violates the IOAA. The court found that for an assessment to qualify as a valid fee under the IOAA, as opposed to an unauthorized general tax, the assessment must relate to a specific benefit conferred to an identifiable set of users. In the court's view, after Loving, essentially any person can obtain a PTIN, so that the program was no longer a benefit to a particular set of individuals rather than the public in general.
The IRS also contended that the PTIN fee could be sustained based on an interest in protecting tax return preparers' SSNs, but the district court rejected this contention because it concluded that the agency had not adequately raised or explained that rationale when it issued the regulation establishing the fee.
The IRS appealed to the D.C. Circuit.
The D.C. Circuit's decision
The D.C. Circuit reversed the district court and held that the IRS could charge a PTIN fee. The D.C. Circuit found that the IOAA provides the statutory authority for the fee and the IRS's decision to impose the fee was not arbitrary and capricious. Having held that the IRS could charge a PTIN fee, the court remanded the case to the district court to determine the permissible amount for it.
The IOAA
The IOAA was passed to help federal agencies recover the costs of services they provide. Under it, an agency may issue regulations establishing a charge for a service or thing of value provided by the agency. The Supreme Court has held that the IOAA only covers fees and not taxes because taxation is a legislative function reserved to Congress. In New England Power Co., 415 U.S. 345 (U.S. 1974), the Court explained that fees, as opposed to taxes, are imposed on identifiable recipients of particular government services, and thus the IOAA allows agencies to impose a "reasonable charge" on an "identifiable recipient for a measurable unit or amount of Government service or property from which [the recipient] derives a special benefit" (id. at 349 (quoting OMB Circular No. A-25 (Sept. 23, 1959))).
The D.C. Circuit, following the Supreme Court's lead, has interpreted the IOAA to allow an agency to charge a fee for "a service that confers a specific benefit upon an identifiable beneficiary" (Engine Mfrs. Ass'n v. Environmental Protection Agency, 20 F.3d 1177, 1180 (D.C. Cir. 1994)). Under this standard, an agency must show that (1) it provides some kind of service in exchange for the fee; (2) the service yields a specific benefit; and (3) the benefit is conferred upon identifiable individuals.
The IOAA and the PTIN fee
The D.C. Circuit determined that the first requirement for a valid fee under the IOAA was met because the PTIN fee was for the service of providing tax return preparers a PTIN. The court observed that the IRS created a unique identifying number, the PTIN, for each tax return preparer and maintains a database of those PTINs so preparers can use them instead of SSNs on returns. To do this, the IRS uses personnel and resources. The court reasoned that this constituted the provision of a service.
The tax return preparers challenged whether, after the decision in Loving, what the IRS was providing for the PTIN fee rose to the level of a service. The court found that while the IRS was offering a "slimmed-down version of the PTIN-related services" that it provided before Loving, it was nonetheless still providing a service. Whether the fee being charged by the IRS was out of line with the services the IRS was providing has a bearing on the reasonableness of the PTIN fee but not on whether the IRS could charge the fee.
The D.C. Circuit found that the specific-benefit requirement was met because the provision of a PTIN and the maintenance of the PTIN database protect the confidentiality of preparers' SSNs. The court stated: "The confidentiality advantages associated with the PTIN requirement readily qualify as a specific benefit: without protection of their [S]ocial [S]ecurity numbers, preparers would face greater risks of identity theft."
The preparers argued that the IRS could not rely on this justification because the agency did not specifically invoke the confidentiality concern when it issued the PTIN regulation. The D.C. Circuit, however, found that the IRS had relied on the confidentiality protections provided by PTINs when issuing the PTIN regulations. Citing statements made by the IRS in the regulation preamble to the 2010 proposed PTIN regulations (REG-139343-08) and the preamble to the PTIN fee regulations reissued in 2015 after the Loving decision (T.D. 9742), the court found that "[t]he IRS's concern with maintaining the confidentiality of preparers' [S]ocial [S]ecurity numbers runs throughout the regulatory history of the PTIN requirement and fee."
The preparers also argued that PTINs did not protect confidentiality because prior to the advent of PTINs, return preparers were already allowed to omit their SSNs from the copies of returns they provided to taxpayers. The D.C. Circuit considered this argument to be belied by the fact that Congress had felt the need to allow the IRS to provide PTINs despite the long-standing rule that preparers could omit SSNs from client return copies. The court also concluded that SSN confidentiality was also an actual concern of preparers, because several groups representing a large number of preparers submitted comments in support of the PTIN mandate when the original PTIN regulations were proposed in 2010.
With respect to the third requirement, the tax return preparers claimed that, because essentially anyone can obtain a PTIN after the decision in Loving, the service and benefit associated with the PTIN extend to the public at large rather than only to specific, identifiable recipients. The D.C. Circuit was not persuaded, finding that it does not matter if the service and benefit are theoretically available to the general public. The court averred that what matters is that the service is provided to, and the corresponding benefit is received by, the specific group of persons who in fact pay the fee.
The court explained that this interpretation was supported by the Supreme Court's identification of passports as an example of a service for which an agency can charge a fee. Although passports are generally available to anyone, the IOAA allows a fee to be charged for passports because the passport application processing service benefits the passport applicant. This, the court reasoned, was analogous to PTIN fees, and because the IRS charges only those who receive the benefit of a PTIN, the specific benefit supporting the fee extends only to identifiable individuals rather than to the public writ large.
Was the decision arbitrary and capricious?
The tax return preparers further argued that the IRS's decision to assess a PTIN fee was arbitrary and capricious, because the IRS's stated rationale for imposing a PTIN fee did not survive the decision in Loving. They based this claim primarily on the fact that the 2010 regulations originally establishing the PTIN fee stated that the fee would pay for the registered tax return preparer program, which Loving invalidated.
The D.C. Circuit, however, found that the IRS had given sufficient justification for its decision to assess a PTIN fee when it reissued the PTIN fee regulations after Loving. The IRS claimed that PTINs would benefit preparers by protecting their confidential information, they would improve tax compliance and administration, and the substantial cost for providing and renewing PTINS was more appropriately recouped from those who obtained them. The IRS further pointed out that it had reduced the fee to account for the functions that were held to be beyond its authority inLoving.
The court stated that while it was up to the district court on remand to determine if the amount of the PTIN fee encompassed costs that the IRS was not allowed to charge based on Loving, the IRS decision to charge a fee was "adequately grounded in services lying within its authority" and therefore was not arbitrary and capricious.
Reflections
While, if this decision stands, the IRS will be able to charge a PTIN fee of some amount, tax return preparers may ultimately win a partial victory. On remand, the district court will address the issue of what is a reasonable fee for issuing and renewing PTINs and maintaining the PTIN database. Given that this realistically could not cost very much, it is possible that the fee the court approves will be much lower than the $33 most recently charged.
Montrois, No. 17-5204 (D.C. Cir. 3/1/19)
