Federal court strikes down PTIN fees, upholds PTINs

A federal district court held that the IRS has the authority to require tax return preparers to obtain preparer tax identification numbers (PTINs) but that it cannot charge a user fee for issuing them. The plaintiffs in the case, tax return preparers, brought a class action suit against the IRS claiming that it lacks legal authority to require preparers to obtain PTINs and to charge a fee for issuing them.

The IRS originally began charging a user fee for issuing a PTIN in connection with its tax return preparer registration program, which required tax return preparers who were not CPAs, attorneys, or enrolled agents to pass an exam and register with the IRS. That program was invalidated in Loving, 742 F.3d 1013 (D.C. Cir. 2014). The fee initially was $64.25 for first-time registration or $63 for renewal (a $50 user fee plus a vendor fee). After Nov. 1, 2015, the fee was $50 (a $33 user fee plus a vendor fee) for both first-time registration and renewal.

Regarding the IRS’s authority to require the use of PTINs, the district court applied the standard of review of agency action found in Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), and Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983). The court found that the IRS had the authority to require PTINs under Chevron because Sec. 6109(d) specifically and unambiguously gives the IRS the power to require the use of a PTIN. Further, as required by State Farm, the IRS’s decision to use PTINs was not arbitrary or capricious, the court held, because “[t]he IRS has articulated satisfactory explanations for its actions” (slip op. at 13).

The plaintiffs argued that the IRS could not charge PTIN fees because a PTIN is not a “service or thing of value,” which is required for agencies to validly impose fees (31 U.S.C. § 9701). According to the Supreme Court, under the “service or thing of value” requirement, agencies may impose fees for bestowing on individuals special benefits not shared by the general public.

According to the court, because the court in Loving found that Congress did not authorize a license requirement for tax return preparers, there are no longer any restrictions on who may obtain a PTIN. As a result, the number confers no special benefit of being able to prepare tax returns for compensation (slip op. at 15). Therefore, PTINs are not a “service or thing of value,” and the IRS cannot charge a fee for issuing them. In a separate order accompanying the opinion, the court ordered the IRS to “provide each class member with a full refund of all PTIN fees paid.” The court earlier certified as class members all individuals and entities who have paid an initial and/or renewal PTIN fee (other than two attorneys and a law firm representing the plaintiffs).

The IRS suspended its PTIN registration and renewal system immediately after the decision, then reopened it later in June and resumed issuing PTINs, but without charge. According to frequently asked questions (FAQs) the IRS posted on its website (irs.gov), the Service was still working with the Justice Department to decide how to proceed. It did not rule out the possibility that preparers obtaining or renewing a PTIN free might have to pay a fee later. The FAQs stated that preparers seeking a refund should not contact the IRS or file a claim regarding it but should direct questions to a class action administrator at ptinclassaction.com. As of this writing, the IRS was still deciding whether to appeal the decision. On July 24, it filed a motion to stay the injunction prohibiting it from charging PTIN fees.

• Steele, No. 14-cv-1523-RCL (D.D.C. 6/1/17)

—By Sally P. Schreiber, J.D., a JofA senior editor.