In a stunning blow to the Internal Revenue Service’s efforts to regulate the tax preparation profession, a federal judge struck down the IRS’s licensing requirements for tax preparers on Friday, including testing and continuing education.

Three independent tax preparers—Sabina Loving of Chicago, John Gambino of Hoboken, N.J., and Elmer Kilian of Eagle, WS, forces with the Institute for Justice, a libertarian public interest law firm, in filing suit against the IRS in the U.S. District Court for the District of Columbia. U.S. District Court Judge James E. Boasberg ruled against the IRS and in favor of the tax preparers in enjoining the agency against enforcing its Registered Tax Return Preparer (RTRP) requirements.

“Today’s ruling is a victory for hundreds of thousands of tax preparers across the country and the tens of millions of taxpayers who rely on them to prepare their taxes,” said lead attorney Dan Alban. “This was an unlawful power grab by one of the most powerful federal agencies and thankfully the court stopped the IRS dead in its tracks. The court ruled today that Congress never gave the IRS the authority to license tax preparers, and the IRS can’t give itself that power.”  The court enjoined the IRS from enforcing its new licensing scheme for tax preparers. The ruling does not affect CPAs, Enrolled Agents and tax attorneys, who were exempted from the RTRP regime as they are already regulated under Circular 230 requirements.

“Through these regulations, the IRS set itself up as king and sought to license hundreds of thousands of tax preparers without being authorized to so do under the law,” said the Institute for Justice senior attorney Scott Bullock. “But as Judge Boasberg noted, under our system of law, ‘statutory text is king.’”

Former IRS Commissioner Doug Shulman made tax preparer regulation a priority, aiming to root out tax preparers who were unqualified, filed fraudulent refund claims and even cheated clients, with the further goal of improving tax compliance. Shulman ended his term last November and is now a guest scholar at the Washington, D.C., think tank, the Brookings Institution. His successor, IRS Acting Commissioner Steven T. Miller will now have to deal with the fallout from the lawsuit.

Boasberg recognized that the IRS recently did a “flip-flop” with regard to its ability tolicense tax preparers, the Institute for Justice noted, declaring for years it did not have the authority to do so but only recently claiming that it did have that power. The IRS can appeal the ruling to the U.S. Court of Appeals for the District of Columbia Circuit. The IRS had no immediate comment on the ruling, according to IRS spokesman Dean Patterson. “They may very well appeal, but the District Court ruled that the IRS is enjoined from enforcing the RTRP licensing regulations,” said Alban. “Assuming the ruling stands, tax preparers no longer are going to need to comply with the IRS licensing requirements. It returns things to the way they were before the IRS passed those regulations in the first place. No longer do you have to get the IRS’s permission to work as a tax return preparer.”

He noted that the IRS’s continuing education requirements only just went into effect on  January 1, 2013. “The timing on this really couldn’t have been any better,” said Alban. “Tax preparers should be able to prepare tax returns in this 2013 tax season without getting permission from the IRS. Tens of thousands of tax preparers who would have otherwise been put out of business, including two of our clients, can now continue to prepare returns.”

All three prongs of the IRS tax preparer regulation regime were affected by the ruling, including the testing, continuing education and RTRP registration requirements. However, the Preparer Tax Identification Number, or PTIN, which is part of the registration requirements, is not affected by the lawsuit. “Anything that’s part of the RTRP regulations is struck down by this decision today,” Alban explained. “The PTIN is a separate regulation and it’s done under separate statutory authority. It’s a ‘shall issue’ type of permit. If you pay $65, you’ll get a PTIN. The IRS was going to make the PTINs conditional on having the RTRP credentials, but now they’re not allowed to do that. It will go back to how it was last year, when you had to get a PTIN, but anyone could get one and you didn’t have to pass an exam or complete any continuing education.”

It is unclear how the IRS will deal with tax preparers who were scheduled to take the competency exam. “I don’t know how the IRS is going to wind things down,” said Alban. “As of the court’s ruling today, those regulations are null and void. Tax preparers don’t have to take that exam and they don’t have to comply with those regulations. The court ruled that these regulations did not have statutory authority.”

Judge Boasberg found that the text of the relevant statute does not support what the IRS claims as its authority to regulate tax preparers. “Without deciding whether any of these three textual points alone would be dispositive, the Court concludes that together the statutory text and context unambiguously foreclose the IRS’s interpretation of  31 USC  Section 330,” the judge wrote, adding, “The IRS also makes a number of nontextual arguments in favor of its interpretation, but none of these can overcome the statute’s unambiguous text here. In the land of statutory interpretation, statutory text is king.”

“They found that the IRS misinterpreted the statute and was basically trying to use it to expand its own authority in ways that the statute didn’t authorize,” said Alban. “On the first page of the opinion, they said that ‘the statute’s text and context unambiguously foreclose the IRS’s interpretation.’”  “With an invalid regulatory regime on the IRS’s side of the scale and a threat to plaintiff’s livelihood on the other, the balance of hardships tips strongly in favor of plaintiffs,” Boasberg wrote later in the ruling.

There was no trial in the case because there were no disputed facts, Alban noted. The ruling came after cross-motions for summary judgment. The lawsuit was originally announced in March 2012. The Institute for Justice filed a motion for summary judgment in September 2012, and the IRS filed a cross-motion for summary judgment in October 2012.  “We trialed a couple of reply briefs, and that was it,” said Alban. “It was just in front of the court on the papers to rule on the case.” The IRS had argued that the statute was unambiguous and could be read expansively to give the agency the authority that it claimed. “They also claimed that they had inherent authority as an agency to regulate anything related to what they do and the court rejected both of those arguments,” said Alban.

On the first page of the opinion, the court said, “Agency action, however, requires statutory authority. The IRS interpreted an 1884 statute as enabling these new regulations. That statute allows the IRS to regulate ‘representatives’ who ‘practice’ before it. Believing that tax-return preparers are not covered under the statute, and thus cannot be regulated, plaintiffs — three independent tax-return preparers — brought this suit.”  “That was pretty much the basis of its decision,” Alban explained. “An agency can’t act without statutory authority, without Congress giving them authorization to do something.”

If the IRS appeals the ruling, which it is almost certain to do, Alban said the Institute would then argue the case in front of the D.C. Circuit court, and to higher courts if necessary. “If the IRS loses again in front of the D.C. Circuit, we’d be happy to argue it in front of the Supreme Court if they take the case. But all of that is speculative. I have no idea if the IRS is going to appeal the decision on this. We’ll certainly take it as far as it goes. We’re willing to represent the rights of independent tax preparers.”

It is funny that while IRS required all tax preparers have to be certified but no one pays attention to the VITA program was funded by IRS for so many years. The VITA preparers don’t need to have any tax knowledge, experiences, nor college degree; just  3 days training to do EF, and could be any one who know how to use the computer sets. Due to their ability, they are the ones who let so many of EIC’s cheaters filing through. VITA preparers are the one IRS should required to have PTIN and be certified. Another problem is the cost to obtain the minimum 15 hours [by] attending class [to receive a] certificate. Many preparers with low volume clients could not afford for the cost of keeping up to date the certificates and license fees yearly. Especially for people who live far away from the location of class. The IRS ruling forces these people out of service or will find some another way around to avoid the requirement but still doing their jobs.

The yearly PTIN fee is just a new way IRS tries to collect the “permit” fee to do tax filing ($65 x  400,000 = $26 million or over $100 million in 4 years of fees). It should be free to all active and good standing preparers, because we are all working for IRS anyway.

Reactions and Comments from Tax Practitioners

(hargo, Albany, NY).  I disagree with Alban’s comment on VITA people not being  “qualified” or “experienced”.  Many of them have been doing this for years.  EVERYONE who works in this program is required to pass a test on standards of conduct for working at a VITA center and dealing with taxpayers, a basic, intermediate, and advanced level test with a minimum grade of  80% and complete three tax returns in each level  before they can be certified to work in the program.  Each test gives the candidate various scenarios with tax information for a typical taxpayer. There are questions on tax law applications regarding the taxpayer (e.g., what is the proper filing status, can they claim certain persons as a dependent, are they eligible for the EIC and others).  On the tax returns, there are questions about certain information on the returns (e.g., taxpayer information entered correctly, the amount of the child tax credit, the additional child tax credit, child and dependent care credit, residential energy credits, pay back of the residential house purchase credit taken in 2008 and prior years, capital gains and losses, including the limit on capital loss deductions, capital loss carryovers, allowable charitable contributions and required documentation, as well as other relevant information.). This certification must be completed EVERY YEAR, someone works in the program, regardless of how many years they have been doing it, or their qualifications (such as a CPA or EA).  Every return is reviewed by a supervisor with many years of experience. These volunteers are probably better qualified than other tax return preparers who are not CPAs or EAs.  I have worked in the VITA program for three years and the AARP volunteer tax return preparation program for two years (I am a CPA with 20 years experience). All these volunteers I have seen are dedicated, conscientious and do a quality job. They provide a great service at no cost for seniors and low income people.

(KODY).  The new ruling yesterday showing that again there is another failure from IRS in trying to force the preparers out of the services. Who could guarantee that CPA or EA levels did not violate tax filing process? Why just only one group, but not all? People no wonder why IRS now has to go court hearing to defend it ruling.

(hg, Clifton park, NY).  I am a CPA with 20 years experience. I have many clients who came to me after being dissatisfied with unlicensed preparers, H & R Block, and other chain preparers, receiving an IRS notice regarding an incorrect tax return.  Upon reviewing prior years returns, I found incorrect filing status, not taking the American Opportunity Education credit, the child tax credit, the additional child tax credit, incorrect amounts for contributions of property, the incorrect EIC. Now the client has to pay me an extra fee to file amended returns.

(mikeo24).  I am a sole practitioner who passed the RTRP exam three weeks ago and am currently preparing to take the SEE (Enrolled Agent) exam. I have also amended many tax returns prepared by incompetent preparers (and CPA’s). By cleaning out the incompetent and unscrupulous preparers, it improves the industry’s reputation for all of us. If you can’t pass the EA exam, you shouldn’t be in this business anyway, become a Quick Books advisor instead.

(Ddrumm55). . . A  person wanting to practice law is required to meet the minimum requirements to practice. An individual can represent themselves in a court of law without the professional requirements. The same should be with the preparation of tax returns. An individual can choose to prepare their return themselves, but if they pay to have someone prepare the return, that person paid to prepare the return should meet certain licensure requirements for the protection of the public.

(jemco2).  The only people that this would have put out of business are those that don’t keep up with the new laws and are simply afraid to take a test. The test wasn’t due till end of this year anyway. Jackson Hewlett advised all it’s company stores and franchises to wait until the last minute to crash the system ….. that shows how afraid they are of simple testing of people Those that do as the IRS requires are the only ones that will be put out. I suggest those that took and passed the test be hired by the IRS.

(Ddrumm55).  I am a CPA and an EA and one of the areas I specialize in is tax audit representation. The majority of the cases I represent are tax returns prepared by preparers that either do not have the experience or take the time to adequately research the internal revenue code to prepare a complex return. Taxpayers are the ones that lose when an unlicensed individual prepares their return. A CPA and an EA are required to demonstrate their competence to obtain licensure, required to attend continuing professional education, and can have their license to practice revoked. Unlicensed return preparation allows weekend tax hackers to prepare return and the public pays the price. I can’t tell you how many times I have reviewed a return and asked the taxpayer if the preparer they went to was licensed and their response is typically “don’t they have to be licensed to prepare a return.” The majority of the public believe that if they go to a tax franchise the preparer is licensed because of the advertising they see on television ads. You get what you pay for, and if you pay them a little right now, I will see you later and bill you a lot more to help you fix the mess they created. Here is a suggestion-always use a CPA or EA to prepare your tax return! Ask the person who wants to prepare your return if they are a CPA or an EA!!! Doesn’t mean there will not be any errors or issues but by going to a CPA or EA you know they demonstrated their competence to practice!

(vpickens).  If the IRS were willing to allow another body (outside itself) to be the authority on the matter then why couldn’t the AICPA’s existing standards work for the CPA’s, the attorney’s professional organization must have standards for their practitioner’s and EA’s probably have standards for their professionals. Couldn’t the IRS determine like other federal agencies, such as HUD, Health and Human Services, that it will only accept tax returns of taxpayers (say those who file anything other than a short form _ 1040EZ and 1040A) if professionally prepared, be prepared by a CPA, attorney and EA because they meet certain standards. Then these three bodies (CPA’s through the AICPA; attorneys through their professional association and EA’s through their professional association) can self-regulate as they do for all their other services.

(topbeancounter).  While I’m no fan of more and more federal regulations (or State for that matter), this is a bad call by the judge. I’d look for those dysfunctional 535 members of Congress to take this up in a bill once someone bothers to point out all the revenue it’s losing by incompetent and crooked preparers. Sort of like the Dr. Soliman case involving home office deductions; it’s an unintended consequence, this time by the judges doing it to the IRS, rather than the other way around. Since I’m already an over-regulated California CPA for 40 years, I don’t have much sympathy about anyone complaining about acquiring the knowledge necessary to pass a simple test. To you that would complain, would you also go to an unlicensed mechanic to repair your car? How about an unlicensed physician to care for you when you are sick? And to the idiot that thought it was a liberal vs. conservative issue.

(Cherishwisdom).  I am a tax preparer and although we’re no longer required to take the exam, I still want to take it to have the credentials. I do agree with many people stating that there should be some sort of regulations. Taking the RTRP is not going to make a fraudulent tax preparer an honest one. Yes, the IRS was implementing the RTRP; however crooks can take an exam and pass it. So guess what, now you have a certified crook in the tax industry. Regardless of what the IRS or any government entity tries to impose, crooks will always find a way. The one thing out of many that bothers me is that honest tax preparers are really the ones paying for the crooks who commit fraud.

(taxbus).  A true tax professional will always abide by professional ethics and due diligence when preparing taxes for their client. I believe that taxpayers are smart enough people to review their tax return before authorizing it to be filed. Continuing education is one of the keys to providing inexperienced tax professionals with the necessary skills level, and to keep criminal minded tax preparers out of the tax preparing business. Even if preparers are tested for competency and pass, how are they going to expose the taxpayer who chooses to provide fraudulent information to the tax preparer?  Would the tax professional be considered as a fraudulent preparer because the taxpayer provided fraudulent information?  Yes, testing may reduce the number of the unskilled and fraudulent tax preparers from practicing, but if the individual was smart enough to create a criminal scheme, they’re probably smart enough to pass the competency test as well. As tax professionals, we’re not on the IRS payroll. So, I think we should be allowed to do our job with honesty and dignity.

(JATAX).  I agree with the RTRP exam, regulations and continuing education for tax preparers. If you provide services and charge a fee, you need to be regulated to ensure you are providing correct services and you are complying with the law. This is a profession, we are not selling apples and tomatoes. Any profession, CNA, realtor, loan officer, broker, etc, may not at some point require you to have a bachelors degree but requires some type of education and certification such as state exams, federal licenses, etc. If you are not an attorney or a CPA and did not complete  4, 6, or 8 years of college, then you should be regulated and should be registered to provide paid services. I am a tax preparer, not a CPA, or attorney.

(annemcdowell).  I believe the lawsuit centered around the financial burden placed on small businesses that prepare tax returns, rather than objecting to the competency part of the requirement. One business, in particular, prepared returns for low income clients with very little margin. CPE is very expensive. Perhaps the IRS should have offered all of this without the burden of additional cost and no one would have objected.

(mastertype).  If those three tax preparers who brought this lawsuit were honest tax preparers, they would not be trying to get out of taking the competency exam or the required continuing education. It seems to me that honest tax preparers would see the benefits of the RTRP requirements and registration. I don’t give a rip that the RTRP requirements may put some tax preparers out of business. The ones who are forced out of business are the ones who refuse to be subjected to IRS scrutiny. These are the ones who give the honest tax preparers a black eye, and cause the honest tax preparers to be subjected to even more scrutiny by the IRS and possible sanctions, fines, penalties, etc. If you are an honest tax preparer, the RTRP requirements should make you feel more secure. The RTRP requirements are there to make us all better tax preparers (through the required CPE), not to cause us to close our businesses. If we, as tax preparers, are not willing to take the required education, how can we know the changes in tax law from one year to the next? I take a minimum of 48 hours of tax law CPE every year, and more often than not, I feel this is not enough education to properly cover the number of changes being made every year in tax law. I agree with many of the comments made regarding this lawsuit. It is an insult to those who have taken and passed the exam and who have taken the required 15 hours of CPE. The RTRP credential can only help to enhance our (tax preparer) credibility.

(taxguy94612).  While I would expect the IRS to acquiesce. I hope congress is paying attention and acts on this issue. One of the several reasons why the IRS is back logged is due to tax preparers who don’t know what they’re doing.

(chris filby).  While this ruling provides injunctive relief for very small practices, it fails to solve an over all problem of providing accountability and minimum competency generally. Based on my reading of the decision it is unlikely IRS will appeal. It seems more likely they will seek a legislative solution through Congress which may prove to be more expensive and burdensome than the apparatus that was in place under the guise of Circular 230. Regardless, IRS now has been put on notice that over reaching by using regulation over law is not a path they want to go down. That is good news for everyone, and other agencies should take notice. This could be the beginning of a sea of change in Washington D.C. and for that we can all be grateful.

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