Anyone who prepares federal tax returns for compensation is required to obtain a preparer tax identification number (PTIN). In T.D. 9903 (published in the Federal Register on July 17, 2020, and effective on or after Aug. 17, 2020), the IRS issued final regulations reducing the fees to apply for or renew a PTIN (user fees) from what they had been in 2017. Since then, the IRS had not charged user fees for PTINs, after a court held that the Service lacked statutory authority to charge the user fees and issued an injunction barring it from doing so.
HISTORY OF THE PTIN
The IRS has long required tax return preparers to identify themselves through an identifying number on any return they prepare. Beginning in 1976, pursuant to an amendment to Sec. 6109(a), Congress enabled the IRS to require tax return preparers to list an "identifying number for securing proper identification of such preparer, his employer, or both, as may be prescribed." For individuals, the identifying number was the preparer's Social Security number (SSN). Due to concerns that listing a preparer's SSN could lead to widespread misuse and identity theft, Sec. 6109 was further amended in 1998 to allow preparers to use an identifying number other than their SSN. Although, beginning in 1999, the IRS offered PTINs for this purpose, it did not require preparers to obtain or use one, or to pay a user fee if they did.
In 2010, in an attempt to regulate uncredentialed tax return preparers (i.e., preparers who are not licensed attorneys, enrolled agents, or CPAs), the IRS promulgated a series of regulations that established a "registered tax return preparer" designation, requiring individuals to pass a one-time competency exam and pass a suitability check. Regs. Sec. 1.6109-2(d) also required credentialed preparers and registered tax return preparers to obtain a PTIN and pay a corresponding user fee. The fee was initially set at $50 to be paid upon initial registration (with a $14.25 fee payable to a third-party contractor) and annually upon renewal (with a $13 contractor fee). The IRS contended that the fee was to cover the costs of administering the registered tax return preparer program and issuing PTINs.
Three independent preparers sued the IRS, contending that the regulations exceeded the IRS's statutory authority to regulate the practice of representatives of persons before Treasury under 31 U.S.C. Section 330. In 2014, the D.C. Circuit affirmed a federal district court decision in favor of the plaintiffs (Loving, 742 F.3d 1013 (D.C. Cir. 2014)) invalidating the regulations regarding competency testing and suitability checks but leaving the PTIN requirement and the corresponding user fee in place. The IRS continued to require PTINs and to charge a fee (although, given the decrease in the scope of the program, the IRS lowered the fee from $50 to $33, plus a $17 third-party contractor fee).
USER FEES DISPUTED IN THE COURTS
Another group of tax return preparers filed a class action suit in district court specifically challenging the assessment of the user fee on statutory grounds; namely, that the fee violated the Independent Offices Appropriations Act (IOAA) (Steele, 260 F. Supp. 3d 52 (D.D.C. 2017)). For a fee to qualify as valid under the IOAA, it must relate to a specific benefit enjoyed by a particular set of individuals. The preparers argued that the Loving decision enabled any person to obtain a PTIN; therefore, the PTIN registry did not benefit a particular set of individuals, and the corresponding user fees should be disallowed under the IOAA.
Although the IRS argued that the issuance of a PTIN did in fact provide a particular benefit to a specific set of individuals, i.e., the protection of the identities of tax return preparers, the court sided with the preparers and found that although the IRS may require the use of PTINs, it may not charge fees for issuing them. The Steele court issued an injunction against charging user fees. The government appealed the decision to the D.C. Circuit and halted the collection of user fees in the interim.
In Montrois, 916 F.3d 1056 (D.C. Cir. 2019), the D.C. Circuit reversed the district court's Steele decision. With regard to precisely what service the IRS was providing to a particular set of individuals, and acknowledging that the IRS was offering a "slimmed-down version of the PTIN-related services" it had offered prior to the Loving decision, the court in Montrois reasoned that the IRS was still providing an essential service; namely, the provision of a unique PTIN (as well as maintenance of a PTIN database) for tax preparers so they would not have to use their SSN. The court further stated that the specific benefit the PTIN program provided was the protection of preparers' identity. This benefit would not be available if they had used an SSN, which could expose them to identity theft.
While the court allowed the assessment of user fees, it stressed that the fee charged must only include costs associated with the assignment and renewal of the PTIN (including costs associated with maintenance of the PTIN database). The court agreed that any costs still tied to activities found invalid based on the Loving decision were beyond the scope of the fee assessment. The court remanded to the district court the issue of whether the amount of the fee was reasonable to cover the costs of the PTIN program. The court has not addressed the issue as of this writing.
REGULATING THE USER FEE
On April 16, 2020, the IRS issued a notice of proposed rulemaking (REG-117138-17) proposing to decrease the amount of the user fee from $33, plus a $17 contractor fee, to $21, plus a $14.95 contractor fee. After consideration of written comments and testimony at a May 26, 2020, public hearing on the regulations, the IRS decided to adopt the proposed regulations without adjustment. The preamble to the final regulations addressed some of the primary concerns of those who submitted comments and/or testimony:
Cost of the user fee
The IRS justified the costs, indicating that, after conducting a biennial review, it determined the full cost to the IRS to administer the PTIN program was in fact $21 per initial application or renewal. The IRS rejected the idea of charging a lower fee for credentialed or low-volume return preparers.
Use of third-party contractor
The IRS stated that the contractor was chosen through a competitive bidding process and that the contractor fee was appropriate and reasonable, given the number of tasks the contractor performs, which include processing PTIN applications and operating a call center.
Reinstituting a user fee during pending litigation
The IRS stated that despite the ongoing litigation regarding the amount of the user fee, because Montrois vacated the injunction against charging a user fee, the IRS was entitled to resume assessing it.
PRACTITIONERS TAKE HEED
PTINs expire annually on Dec. 31 and can normally be renewed beginning in mid- to late October for the following year. Given that the regulations are already in effect as of Aug. 17, practitioners applying for their initial PTIN, or practitioners renewing PTINs in the coming months, must anticipate paying a user fee after a lengthy hiatus.
Michelle Davidowitz, CPA, MBA, is an assistant professor at the City University of New York. To comment on this article or to suggest an idea for another article, contact Paul Bonner, a JofA senior editor, at Paul.Bonner@aicpa-cima.com or 919-402-4434.