Federal court strikes down IRS tax return preparer registration program

The United States District Court for the District of Columbia on Friday struck down the IRS’s registered tax return preparer program and enjoined it from enforcing the regulations (Loving, No. 12-385 (D.D.C. 1/18/13)).

Background

The IRS in 2011 began regulating all tax return preparers who prepare and file tax returns for compensation. In May 2011, it issued final regulations (T.D. 9527) making unenrolled return preparers (i.e., return preparers who are not CPAs, attorneys, or enrolled agents) subject to Circular 230 for the first time and requiring them to pass a qualifying exam, pay an annual fee, and take 15 hours of continuing education courses each year.

The IRS argued that its regulation of tax return preparers is permitted under 31 U.S.C. Section 330, which allows the IRS to regulate “representatives” who “practice” before it.

Three independent tax return preparers brought suit in federal court, arguing that they are not covered by the statute and that the IRS has no authority to regulate their preparation of tax returns. They complained that they would have to raise prices and would lose customers if forced to comply with the IRS’s program. Two claimed they would likely close their businesses if forced to comply. They sought injunctive and declaratory relief and moved for summary judgment.

Court’s decision

The court applied the test from Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984), the first step of which requires the court to determine if Congress has spoken to the precise question at issue; if Congress’s intent is clear, that is the end of the inquiry. In this case, the court said, the question was, is 31 U.S.C. Section 330 “ambiguous as to whether tax-return preparers are ‘representatives’ who ‘practice’ before the IRS?” (slip op. at 9).

The court found that 31 U.S.C. Section 330 is not ambiguous and that tax return preparers are not representatives who practice before the IRS for three reasons. First, Section 330(a)(2)(D) contains a definition of “practice of representatives” that does not include tax return preparers because it equates practice with advising and assisting taxpayers in presenting their cases before the IRS. The court said that “[f]iling a tax return would never, in normal usage, be described as ‘presenting a case’” (slip op. at 11).

Second, the IRS’s interpretation would displace other “statutes scattered across Title 26 of the U.S. Code [that] create a careful, regimented schedule of penalties for misdeeds by tax-return preparers” (slip op. at 13). If Section 330(b) gave the IRS open-ended discretion to regulate tax return preparers, it would displace this existing statutory scheme.

Third, under the IRS’s interpretation, Sec. 7407, which remedies abusive practice by tax return preparers by allowing the IRS to enjoin their preparation of tax returns, “would be relegated to oblivion” (slip op. at 10).

Having decided that the statutory language unambiguously forecloses the IRS’s return preparer regulation program, the court declined to address the IRS’s other arguments. Since the regulation failed under the first step of the Chevron analysis, the court granted a declaratory judgment that the IRS “lacks statutory authority to promulgate or enforce the new regulatory scheme for ‘registered tax return preparers’ brought under Circular 230” (slip op. at 21).

The court also granted permanent injunctive relief, enjoining the IRS from enforcing its registration scheme against unenrolled preparers.

—Alistair M. Nevius (anevius@aicpa.org) is the JofA’s editor-in-chief, tax.