The IRS has authority to charge user fees for preparer tax identification numbers (PTINs) a federal appeals court held, paving the way for the Service to reinstate the charges for obtaining and renewing a PTIN.
Facts: 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 the District Court for the District of Columbia (Steele, 260 F. Supp. 3d 52 (D.D.C. 2017)) held that the IRS did not have the authority to charge the fee.
The district court had agreed with 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 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, because it believed that the IRS had not adequately raised or explained that rationale when it issued the rule establishing the fee. The IRS appealed the decision to the D.C. Circuit.
Issues: The IOAA permits federal agencies to impose fees to provide specific services to persons who specifically benefit from the service provided. The D.C. Circuit 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 plaintiff preparers argued that the IRS had made use of the PTIN mandatory as part of regulations it issued in 2010 to require all paid preparers to register with the IRS, which included competency tests and continuing-education requirements. The D.C. Circuit invalidated those regulations except for the PTIN requirement in Loving, 742 F.3d 1013 (D.C. Cir. 2014). This elimination of the preparer registration regime removed the service or specific benefit that justified the fee, the preparers contended. They further argued that because the IRS now issues a PTIN to essentially anyone who applies for one, any benefit is provided to the public at large rather than to identifiable individuals. The preparers additionally contended that the IRS did not sufficiently justify continuing the fee after Loving, making its imposition arbitrary and capricious, in violation of the Administrative Procedure Act (5 U.S.C. §706(2)(A)).
Holding: The D.C. Circuit concluded that the IRS did provide a specific service to tax return preparers in exchange for the PTIN fee because it devoted personnel and resources to issuing and renewing PTINs and maintaining a database of PTINs. Although the IRS did not provide the same level of PTIN-related services it had before the decision in Loving, providing and maintaining PTINs is still nonetheless a service, the court stated. Whether the amount of the fee is commensurate with the reduced level of services was a question to be addressed by the district court on remand, the court stated.
The court also found that the PTIN program conferred a specific benefit to preparers of being able to use a number other than an SSN on tax returns, which protected the confidentiality of the preparers' SSNs. This benefit both predated and survived the additional purposes of the PTIN invalidated under Loving, the court held. As for whether the PTIN is offered to identifiable individuals, it does not matter that a PTIN is available to the general public, according to the court. It is sufficient that a PTIN — and its related service and benefit — is provided to the specific persons who in fact pay the fee. Finally, the appeals court found that the IRS sufficiently justified the PTIN fee independently of the purposes struck down in Loving, so that the Service's decision to continue charging the fee was not arbitrary or capricious.
Having upheld the IRS's authority to require return preparers to pay for a PTIN and its renewal, the court remanded the case to the district court to determine whether the amount of the fee unreasonably exceeds the costs to the IRS to issue and maintain PTINs.
- Montrois, No. 17-5204 (D.C. Cir. 3/1/19)
— By Sally P. Schreiber, J.D., a JofA senior editor.