November 28, 2014

U.S. District Court Strikes Down IRS’s Registered Tax Return Preparer Regulations

TramLeBy Tram Le

On Jan. 18, 2013, the U.S. District Court for the District of Columbia issued a decision enjoining the IRS from enforcing its new registered tax return preparer program. See Loving v. IRS, No. 12-385, 2013 WL 204667 (D.D.C. Jan. 18, 2013).

In 2011, the IRS issued final regulations requiring all paid tax return preparers, who were not otherwise regulated by the IRS, to comply with Circular No. 230. Specifically, the regulations required tax return preparers who are not attorneys, CPAs or enrolled agents to pass a qualifying exam, pay an annual fee, and take 15 hours of continuing education courses each year.

In promulgating the regulations, the IRS relied on 31 U.S.C. Sec. 330, which gave them the authority to regulate individuals who “practice” before it.

Factual and Procedural History

Three paid tax return preparers, who were not previously regulated, filed suit against the IRS in federal court. The individuals argued that the IRS had no authority under 31 U.S.C. Sec. 330 to regulate tax return preparers who only prepare and sign tax returns, and file claims for refund and other documents with the IRS.

The tax return preparers claimed that the new IRS regulations would likely cause them to lose customers and close their business due to the increased costs and burdens associated with compliance. Therefore, they sought for injunctive and declaratory relief and moved for summary judgment.

Issue and Decision

The issue before the court was whether all paid tax return preparers are “representatives” who “practice” before the IRS under 31 U.S.C. Sec. 330 and therefore, are properly subject to the new IRS regulations. In deciding the case, the court applied the two prong Chevron test. Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984). The first step asks whether “the intent of Congress is clear.” Under this test, if the intent is clear, then the court “must give effect to the unambiguously expressed intent of Congress” and does not need to address the second step.

In this case, the court found that the intent of Congress was clear under 31 U.S.C. Sec. 330 and preparers who are limited to preparing and signing tax returns and claims for refund, and other documents to the IRS are not “representatives” who “practice” before the IRS.

The court reasoned that under 31 U.S.C. Sec. 330(a)(2)(D), the definition of “practice of representatives” does not include tax return preparation. The court equates “practice” as advising and assisting taxpayers in presenting their cases. The court stated that merely filing a tax return would never in its normal usage be described as “presenting a case.”

The court also reasoned that the IRS’s interpretation of 31 U.S.C. Sec. 330 would displace an existing statutory scheme that regulates penalties on tax return preparers. The court referred to Title 26 of the U.S. Code, which provides for a “careful, regimented schedule of penalties for misdeeds by tax-return preparers.” For example, a tax return preparer would be subject to a fine of $50 (with an annual maximum of $25,000) for failing to sign a return without reasonable cause under 26 U.S.C. Sec. 6695(c). If tax return preparers were subject to 31 U.S.C. Sec. 330, the IRS would have a considerable amount of discretion to impose penalties ranging from $0 and the “gross income derived (or to be derived) from the conduct giving rise to the penalty.”

Furthermore, the court stated that a federal penalty provision pursuant to 26 U.S.C. Sec. 7407, which remedies abusive practice by tax return preparers, would be irrelevant under the IRS’s interpretation.

The court held that the statute was not ambiguous based on the plain language and does not clearly cover individuals who prepare and sign tax returns, file claims for refund and other documents to the IRS. Since the regulations failed under the first prong of the Chevron test, the court did not consider the second prong. As such, the court granted a declaratory judgment and permanent injunctive relief, enjoining the IRS from enforcing its new regulations.

Appeal of Ruling

In response to the district court’s decision, the IRS filed a motion to suspend the permanent injunction against the tax return preparer regulations. On Feb. 1, 2013, the court denied the IRS’s motion. However, the court agreed to modify the ruling to clarify that IRS could continue its Preparer Tax Identification Number (PTIN) program and was not required to close its testing and continuing-education centers.

Tram Le, CPA, Esq., LL.M. – SALT Consultant – Golden, CO – With more than six years of government financial and forensic auditing experience, Tram has developed and implemented audit procedures for forensic audits and assisted in investigations of fraud, waste and abuse such as improper payments. Tram is a CPA and a licensed attorney.  She received a joint JD/LL.M. in taxation from the University of Denver. Tram is currently developing knowledge and expertise in State and Local Tax (SALT). She focuses on variety of state and local sales and income/franchise tax issues and assists with protesting and the representation of clients at administrative appeals and appeals meetings. She writes for the CBA Taxation Section newsletter, where this article originally appeared.

The opinions and views expressed by Featured Bloggers on CBA-CLE Legal Connection do not necessarily represent the opinions and views of the Colorado Bar Association, the Denver Bar Association, or CBA-CLE, and should not be construed as such.

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