Court upholds IRS PTIN fees

The IRS has authority to charge a user fee for preparer tax identification numbers (PTINs) a federal appeals court held on Friday, paving the way for the agency to reinstate the charges for obtaining and renewing a PTIN (Montrois, No. 17-5204 (D.C. Cir. 3/1/19)). A valid PTIN is required for anyone who prepares or assists in preparing a federal tax return for compensation. The IRS stopped charging a user fee for PTINs in 2017, after it lost a case in federal district court (Steele, 260 F. Supp. 3d 52 (D.D.C. 2017)) that held the IRS had no authority to charge a fee to tax preparers to obtain PTINs.

The district court had agreed with the tax preparers who filed the suit (a class action on behalf of more than 700,000 tax return preparers) that the fee violates the Independent Offices Appropriations Act (IOAA) (31 U.S.C. §9701) and had found that “for an assessment to qualify as a fee under that Act as opposed to an unauthorized general tax, the assessment must relate to a specific benefit conferred to an identifiable set of users” (slip op at 6). The district court agreed that the PTIN program does not confer a specific benefit on tax preparers and also rejected the IRS’s argument that the PTIN program provides a benefit to tax preparers by protecting their Social Security numbers (SSNs) from identity theft. The IRS appealed the lower court’s decision.

The IOAA permits federal agencies to impose fees to provide specific services to members of the public who specifically benefit from the service provided. The appeals court explained that an agency must prove “(i) that it provides some kind of service in exchange for the fee, (ii) that the service yields a specific benefit, and (iii) that the benefit is conferred upon identifiable individuals” (slip op. at 10).

The appeals court looked at each factor in turn and concluded that the IRS provided a specific service to tax return preparers in exchange for the PTIN fee because it required personnel and resources to generate a PTIN, thus providing PTINs was a service. The court found that the PTIN program conferred a specific benefit to preparers of being able to use a number other than a SSN on tax returns, which protected the confidentiality of the preparers’ SSNs. According to the court, although anyone can be a tax return preparer, so anyone in the public at large can request a PTIN, the service was bestowed on identifiable individuals — tax return preparers — and not the public at large.

The next issue was whether the IRS’s decision to continue charging the fee for the PTIN program after the court invalidated the registered tax return preparer program in Loving, 742 F.3d 1013 (D.C. Cir. 2014), was arbitrary and capricious. The appeals court found that the IRS decision to recover the substantial cost of providing PTINs and maintaining a database by charging tax return preparers a fee rather than obtaining funding for the program from the public was not arbitrary and capricious. The service of providing PTINs is distinct from the service involved in Loving, which was the registered tax return preparer program that was struck down.

Having upheld the IRS’s authority to require return preparers to obtain a PTIN and charge a fee, the court then discussed whether the fee the IRS charged was excessive. It noted at first that the IRS had lowered the fee from $50 to $33 (plus a separate processing fee). The appeals court remanded the case to the district court to determine whether the fee is reasonable and complies with the IOAA.

— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a Tax Adviser senior editor.