District Court holds IRS owes tax preparers partial refund of PTIN fees

By Martha Waggoner

The IRS must determine the appropriate partial refund amount for tax return preparers who it overcharged for their preparer tax identification numbers (PTINs) from 2011 to 2017, a district court held in an opinion unsealed last week (Steele, No. 1:14-cv-1523-RCL (D.D.C. 1/23/23)).

The district court's decision, issued Jan. 23 and unsealed Feb. 21, involves an IRS move made over a decade ago to begin charging a fee to obtain or renew a PTIN. Anyone who, for compensation, prepares or assists in the preparation of all, or substantially all, of any federal tax return, claim for refund, or certain other tax form (with certain exceptions) submitted to the IRS must obtain a PTIN.

In 2017, the same court issued an injunction that barred the IRS from charging fees for PTINs (see Steele, 260 F. Supp. 3d 52 (D.D.C. 2017)). The government appealed that decision to the D.C. Circuit, which held that the IRS had the authority to charge a user fee for issuing and renewing PTINs (Montrois, 916 F.3d 1056 (D.C. Cir. 2019)). However, the D.C. Circuit remanded the case to the district court to determine if the amount of the fee unreasonably exceeded the costs to the IRS to issue and maintain PTINs.

Last week, the district court decided that the fees from 2011 to 2017 were excessive, in part because the money that the IRS collected from tax preparers "must have facilitated substantive activities that had nothing to do with protecting return preparers' identities" (slip op. at 26).

"Ultimately, the determination of which support costs were allowable must come down to the portion of those costs that went to support the provision of PTINs and maintenance of the PTIN database, and thus the conferral of the attendant private benefit of identity protection," according to the district court (slip op. at 27).

In addition, the district court held that the IRS cannot recoup dollars lost for years when the agency was not allowed to charge fees under the district court's injunction against the assessment of any PTIN fees. However, the court left open the possibility that the IRS could get that money back in another forum, noting that it "expresses no opinion as to whether the IRS may claw back the forgone PTIN and vendor fees through some other means, such as an administrative process setting fees retroactively for return preparers who registered or renewed their PTINs during the relevant period, or a civil action of its own for restitution" (slip op. at 34–35).

Finding that the case was not suitable for trial, the district court concluded that:

[T]he proper remedy is to remand to the agency to show its work and set a new fee within the bounds of what the law allows. To be sure, this is an unusual case in which the agency will be asked to do so retrospectively. But it would be anomalous to allow plaintiffs the opportunity to have a court set the fee and substitute its own judgment for the agency's simply because they waited until after they had paid the fee for several years to challenge it and seek monetary relief. [slip op. at 38, citations omitted]

In 2020, the IRS issued regulations (T.D. 9903), reinstituting PTIN fees for tax return preparers, effective in 2021.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.

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