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IRS Loses Lawsuit Challenging Its Authority to Regulate Certain Tax Preparers




by:
Wilhelm Dingler
Marshall Dennehey Warner Coleman & Goggin, P.C. - Philadelphia Office

 
January 29, 2013

Previously published on January 24, 2013

On Friday, January 18, 2013, James E. Boasberg of the United States District Court for the District of Columbia granted a Motion for Summary Judgment in which the Court ruled that the IRS lacks statutory authority to promulgate or enforce the new regulatory scheme for "registered tax return preparers" created by 76 Fed. Reg. 32,286. In addition, Judge Boasberg permanently enjoined the IRS from enforcing the regulatory scheme.

The lawsuit, Loving v. Internal Revenue Service, 1:12-cv-00385-JEB (2013 U.S.D.C., D.C.), was brought by three paid tax-return preparers who were not previously regulated by the IRS. The IRS estimates that approximately 600,000 to 700,000 tax-return preparers will be affected by the Court's decision. As a result of the decision, these tax-return preparers will not be required to pass the qualifying exam or pay the annual application fee. In addition, these paid preparers will not be required to take the fifteen (15) hours of continuing education courses each year that was also part of the regulatory scheme. They are now free to provided paid tax-return preparation services without the oversight provided by 76 Fed. Reg. 32,286.

The Court's decision is based upon strict statutory construction and the Court's belief that the regulatory scheme is not supported by existing law.  In June, 2011, the IRS promulgated an extension of the Circular 230 constraints to any person who "prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax under the Internal Revenue Code." The Court held that the act of tax preparation was not "practice" before the IRS and, therefore, the IRS could not extend the Circular 230 constraints to this class of persons and struck down the regulations as applied to them.

This decision leaves intact regulations concerning preparers who are attorneys, CPAs, enrolled agents, enrolled retirement plan agents or enrolled actuaries. Those individuals are otherwise regulated by the IRS under 31 C.F.R. § 10.3 (2009). The IRS options in response to the Court's decision include an appeal and request for a stay of the injunction pending appeal, ask Congress to enact legislation to grant them the authority to do what the Court said was not currently authorized by statute or they could abandon the program entirely. In a conference call held yesterday by the IRS's Return Preparer Office, Director Carol Campbell had numerous questions but few answers.

This decision has potentially far-reaching ramifications. We continue to monitor the issues and will provide updates as necessary.



 

The views expressed in this document are solely the views of the author and not Martindale-Hubbell. This document is intended for informational purposes only and is not legal advice or a substitute for consultation with a licensed legal professional in a particular case or circumstance.
 

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