The D.C. Circuit Court of Appeals ruled Tuesday that the IRS had no
legal authority to impose a nationwide licensing scheme on tax return
preparers that would have required testing and continuing education as
Registered Tax Return Preparers.
continue below:
Learn how thousands of wealthy U.S. taxpayers have duped the IRS out of paying taxes on over $120 billion dollars. Learn what the IRS and Justice Department is doing about it, and why hundreds of wealthy Americans could be facing prison. A true and documented story, that reads like a criminal mystery. Gab a copy in the Kindle Store today,
Offshore Transparency, IRS & Offshore Banking
The
decision affirms
a January 2013 ruling by U.S. District Court Judge James E. Boasberg,
which struck down the IRS’s new regulations as unlawful (see
Court Rules IRS Doesn’t Have the Authority to Regulate Tax Preparers). In the case, known as
Loving v. IRS,
both courts rejected the IRS’s claim that tax-preparer licensure was
authorized by an obscure 1884 statute governing the representatives of
Civil War soldiers seeking compensation for dead horses.
“This is a
major victory for tax preparers—and taxpayers—nationwide,” said Dan
Alban of the Institute for Justice, the lead attorney for the three
independent tax preparers who filed the suit. “The court found that
Congress never gave the IRS the power to license tax preparers, and the
IRS cannot give itself that authority.”
The
appeals court held, “If we were to accept the IRS’s interpretation of
[the statute], the IRS would be empowered for the first time to regulate
hundreds of thousands of individuals in the multi-billion dollar
tax-preparation industry. Yet nothing in the statute’s text or the
legislative record contemplates that vast expansion of the IRS’s
authority.”
More than 350,000 tax-return preparers would have been
subject to the regulations. The attorneys for the preparers argued that
the regulations would have put tens of thousands of mom-and-pop
preparers out of business and increased the cost of tax-return
preparation for millions of taxpayers.
“My customers—not the
IRS—should be the ones who get to choose who prepares their taxes,” said
Sabina Loving, an independent tax preparer from Chicago and the lead
plaintiff in the case. “I have a right to earn an honest living without
getting permission from the IRS.”
The court ruled that “[t]he IRS
may not unilaterally expand its authority through such an expansive,
atextual,
and a historical reading of [the statute].”
“We think
it’s a major victory for both independent tax preparers and taxpayers,”
Institute for Justice senior attorney Scott Bullock said in an
interview. “The three-judge panel unanimously affirmed all the
fundamental points of the District Court’s opinion and held that the IRS
does not have the authority to regulate tax preparers under the statute
and under the legislative history of the law. The IRS simply cannot
assume that authority to license tax preparers. They need to go to
Congress to get that authority. That's what the D.C. Circuit held. They
gave six separate reasons for affirming the District Court opinion and
just really affirmed it across the board.”
Bullock hopes the IRS
decides not to pursue further appeals in the case. “It has now been
rejected by four judges, both the District Court and by three D.C.
Circuit judges,” he said. "They do have the right to petition the entire
D.C. Circuit. I believe they have 45 days to do so. The federal
government has a little bit longer than most folks. Then the court will
decide that relatively quickly. Then, after that, the next step for them
would be to go before the Supreme Court and they would have 90 days. If
they decide not to petition the entire D.C. Circuit, it would be 90
days from today. If they do decide to petition the entire D.C. Circuit
and they reject that, it would be 90 days from whenever that order
rejecting the
en banc petition came though.”
When Judge
Boasberg clarified his original decision last year, he ruled that the
IRS can continue to require tax preparers to register for Preparer Tax
Identification Numbers, or PTINs, and the latest ruling should not
affect that. However, it should also bring some relief to tax
professionals.
“It was a big relief to many of the independent tax
preparers when the decision was first handed down,” said Bullock.
“Hopefully this will end the matter once and for all and they would not
be subjected these new licensing requirements, but it’s up to the IRS if
they decide to continue to appeal.”
The IRS was noncommittal on
whether it plans future appeals. “The IRS is currently reviewing the
decision,” the IRS said in a statement. “The IRS continues to believe
that it’s critical for taxpayers to be able to rely on quality work from
tax preparers.”
Bullock believes the IRS should provide refunds
to tax preparers who paid to take the tests and continuing education
courses before the RTRP regime was invalidated by the courts.
“I
believe they would probably be required to do that, and they [the tax
preparers] would have the right if they so choose not to be subjected to
these licensing requirements.”
“Administrative agency overreach
threatens the economic liberty rights of entrepreneurs,” said Institute
president and general counsel William Mellor in a statement. “This
precedent ensures that agencies must follow the law and cannot exceed
the power given to them by Congress.” As the Court noted,
“‘fox-in-the-henhouse syndrome is to be avoided . . . by taking
seriously, and applying rigorously, in all cases, statutory limits on
agencies’ authority.’”
IRS Commissioner John Koskinen has
indicated he would be open to offering the certification on a voluntary
basis to tax preparers if the IRS loses the appeal. “If you can’t
require it, offer it, and if you complete the information, you get a
certificate that says, ‘I have completed the IRS preparer course.’ I
think that could be over time very valuable to preparers, and consumers
could ask preparers, ‘Have you gone through the IRS training?’” said
Koskinen during a press conference last month after he was sworn in as
commissioner (see
IRS’s New Commissioner Favors Voluntary Tax Preparer Certification).
“Whatever happens with the court case, we ought to be able to move
forward on that and provide taxpayers with as much assurance as we can
that the preparers they are dealing with have met some kind of minimum
standards.”
Bullock indicated the Institute for Justice would have
no problem with a voluntary certification scheme. “We made that very
clear in our statements because they [the IRS] had asked the D.C.
Circuit to stay the ruling, and they had stated they had no power to
even do this on a voluntary basis,” said Bullock. “And we had said,
‘That’s not true. You can offer this, but you can’t require licensure.
But if you want to do this on a voluntary basis, you’re free to do so.’
And the district court judge made it clear that the IRS was free to do
this on a voluntary basis, but they could not legally require it, it. If
they did that, that of course would end the legal dispute.”
H&R Block Slams DecisionH&R
Block, which was one of the main proponents of the RTRP tax preparer
regulation regime, reacted with dismay to the Appeals Court decision.
Block
said that in a country where all 50 states regulate hair dressers, the
tax prep chain found it “stunning” that tax preparers, with extensive
access to the personal financial history and identities of their
clients, are not required to meet minimum competency standards.
“It
is outrageous that all consumers don’t enjoy basic protections with
such a significant financial transaction as tax preparation,” said
H&R Block president and CEO Bill Cobb in a statement. “Something is
out of whack when you are better protected when getting your haircut
than when sitting across the desk from a tax preparer. All consumers
should have access to the protection that our clients receive when
working with our highly trained tax professionals.”
H&R Block
noted that it has long supported efforts to better serve and protect
consumers through minimum standards for, and oversight of all tax return
preparers. Block pointed out that it already trains and has continuing
education requirements for all of its tax preparers and added that it
looks forward to working with Congress and the Treasury Department on
“any legislation that may be necessary to implement minimum tax preparer
standards as a formidable tool in the fight against fraud.”
One
tax attorney pointed out that the IRS will still be able to check up on
errant tax preparers, even after the latest ruling. “The IRS’s ability
to require previously unregistered tax preparers to meet certain
education and testing requirements, while perhaps now temporarily set
back a step, will inevitably come to pass because of the important role
preparers play in tax system administration,” said G. Michelle Ferreira,
tax attorney and managing shareholder of the San Francisco office of
international law firm Greenberg Traurig. “I believe law makers will
recognize the need to make explicit that the IRS should be able to set
basic standards for individuals who prepare tax returns so that we can
be sure such returns are correct and in compliance.”
Because the
Loving decision does not disturb the rules
requiring all paid preparers to obtain a PTIN, those individuals must
still register with the IRS, Ferreira said, “which still gives the IRS
the ability to check up on preparers where evidence points to problems.”
CPA ReactionsWhile
attorneys and CPAs would have been exempt from the proposed rules,
several CPAs from the New York State Society of CPAs reacted strongly to
the news of the court’s decision Tuesday.
“The potential impact
is that the storefront tax preparer will thrive on the ignorant and the
fraud will continue,” said Vincent Cosenza, CPA and tax manager at
Shanolt, Glassman, Klein and Kramer PC in New York City.
“Much of what the IRS was looking for is already being done by most
CPA firms,” said David Young, CPA, owner of Young & Company CPAs LLC
in Rochester, N.Y. “Having a strong system of quality control for tax
return preparation and continuing professional education is in part what
differentiates a CPA firm from H&R Block and other non-CPA firms.
The taxpayer is ultimately responsible for what is on his or her income
tax return.
“When choosing a tax preparer, the taxpayer should
consider the possible negative ramifications of choosing an unregulated
and unlicensed tax return preparer,” Young advised. “It would be wise
for the taxpayer to ask about the tax preparer’s qualifications,
continuing professional education, and the firm’s quality control as it
relates to tax returns.”
“I am a little upset that unlicensed tax preparers don’t have
to deal with taking CPE and keeping themselves up to date with new
legislation, as CPA are required to do annually,” said Johnpaul
Crocenzi, CPA, a tax manager at Raich Ende Malter & Co. LLP in New
York. “Having the IRS regulate tax preparers will actually protect the
consumer from having a tax return done by someone that doesn’t know or
understand the Tax Code.”
Although the IRS proposed regulation of
tax return preparers did not directly affect CPAs, there is always a
concern about regulations that can creep into other areas, according to
Kevin McCoy, CPA, director of Marvin and Company near Albany, N.Y. But
“until the IRS is granted the authority by Congress, it appears the
unlicensed tax return preparers are free to continue to operate as
before,” he said.
Tax Loopholes do exist for the middle income taxpayer. Everything from deducting a percentage of the cost of your cell phone bill when your mobile phone is used for business and your employer does NOT reimburse you to deducting the cost of security provided by security dogs who remain on your business property overnight.
