Former IRS Commissioners File Amicus Brief Supporting IRS's Position on Regulating Return Preparers. Loving v. IRS (Parker's Federal Tax Bulletin: April 27, 2013)

In an unusual move, five former IRS commissioners, appointed by Democratic and Republican Presidents, came together to file an amicus brief (2013 PTC 64) before the D.C. Court of Appeals. In that brief, the commissioners strongly disagreed with the D.C. district court's decision in Loving v. IRS, 2013 PTC 10 (D. D.C. 1/18/13). The district court had ruled that Congress had not empowered the Department of Treasury to regulate tax return preparers. Since the lower court's ruling against the IRS, the IRS's regulation of tax return preparers, other than CPAs, enrolled agents, and certain other licensed professionals subject to Circular 230, has been put on hold.

OBSERVATION: The National Consumer Law Center and National Community Tax Coalition have also filed an amicus brief in the Loving case (2013 PTC 65, April 5, 2013).

Background

On January 18, 2013, in Loving v. IRS, 2013 PTC 10 (D. D.C. 1/18/13), the U.S. District Court for the District of Columbia agreed with three independent tax return preparers that the registered tax return preparer (RTRP) rules under Reg. Sec. 1.6109-2 were invalid - and that the IRS could not enforce them. The IRS subsequently said that, in accordance with the district court order, tax return preparers covered by the PTIN program would not be required to register with the IRS, complete competency testing, or secure continuing education. On January 23, the IRS filed a motion to suspend the district court's injunction pending its appeal of the court's decision to the U.S. Court of Appeals for the D.C. Circuit. The IRS also shut down the RTRP exam testing system as of January 23, 2013, thus cancelling all exams from that date forward. On February 1, 2013, in Loving v. IRS, 2013 PTC 13 (D. D.C. 2/1/13), the D.C. district court rejected the IRS's request to stay the injunction but did modify the injunction to make clear that the IRS is not required to suspend it PTIN program, nor is it required to shut down all of its testing and continuing-education centers; instead, they may remain, but no tax-return preparer may be required to pay testing or continuing-education fees or to complete any testing or continuing education unless and until the injunction is stayed or vacated by the D.C. Circuit Court of Appeals. On March 27, 2013, in Loving v. IRS, 2013 PTC 37 (2013), the D.C. Court of Appeals rejected the IRS's motion for a stay pending appeal. The IRS now must wait for the D.C. Circuit Court to hear its appeal

Friend of the Court Brief Filed by Former IRS Commissioners

On April 5, 2013, five former IRS commissioners banded together to support the IRS position on the RTRP rules. In a friend of the court (i.e., an amicus curiae) brief, the former commissioners cited Supreme Court decisions, other court decisions, and statutory and regulatory materials that supported their opinions that the IRS was well within its authority to regulate tax return preparers.

OBSERVATION: An amicus curiae informs the court on points of law that are in doubt, gathers or organizes information, or raises awareness about some aspect of the case that the court might otherwise miss. The person is usually, but not necessarily, an attorney, and is usually not paid for her or his expertise. An amicus curiae cannot be a party to the case, nor an attorney in the case, but must have some knowledge or perspective that makes her or his views valuable to the court.

Commissioners' Arguments

Tax Return Preparers Are Representative of the Taxpayers and Thus Subject to Regulation

The commissioners noted that the district court equated representation of persons (which may be regulated by the Treasury Department under Circular 230) with advising and assisting in presenting a case. The district court then concluded that the filing of a tax return would never, in normal usage, be described as presenting a case. According to the commissioners, the district court erred in reaching this conclusion. Preparing and filing a tax return is indeed, the commissioners said, the presentation of a case, in which taxpayers pursue a wide variety of financial claims against the U.S. Treasury. Most significantly, Congress has decided to administer an increasingly wide variety of governmental assistance programs through the federal income tax system, including assistance for low-income families, health care, education, and homebuyers. In each instance, the commissioners stated, preparing and filing a tax return is the sole means by which taxpayers are able to present to the Treasury their qualification for these programs and to obtain the financial assistance intended by Congress.

Congress's willingness to use its taxing power to effectuate public policies in areas such as health care, the commissioners argued, has fundamentally changed the roles of the tax return and tax return preparers. Tax return preparers now find themselves on the front line of administering these programs. For example, the commissioners said, return preparers must counsel taxpayers about issues such as the decision to buy health insurance, explain to taxpayers how those decisions affect their claims against or liabilities to the government, and then represent taxpayers by asserting these claims through the taxpayers' tax returns.

Perhaps the most important manifestation of Congress's use of the Internal Revenue Code to administer public policy programs, the commissioners noted, is the increasingly frequent enactment of refundable tax credits. A refundable tax credit is treated as an overpayment of tax by the taxpayer. Thus, if the taxpayer owes no tax, the taxpayer receives a cash paymentin the form of a tax refund equal to the amount of the creditas if the taxpayer had paid tax when none was owed. In this way, refundable tax credits delink the financial assistance Congress intended to provide from the taxpayer's actual tax liability, but permit the intended financial assistance to be administered by the tax system through the preparation and filing of tax returns. The taxpayers thus must present their qualifications for the assistance by preparing and filing tax returns. As a result, the commissioners argued, the tax return preparer is not merely calculating tax liability; he or she is very often representing the taxpayer by preparing the return establishing the taxpayer's eligibility to receive the benefits provided by these public policy programs.

Approximately 120 million claims for refund are filed each year. Although only a tiny fraction of those claims will result in any sort of contested administrative or judicial proceeding, the IRS nevertheless must review and act on each of them. A vigorous annual IRS audit of every return would be prohibitively expensive to the fisc, and inconsistent with a democratic system. But, the commissioners argued, the absence of a contested tax proceeding for every taxpayer for every year does not change the critical fact that a tax return makes a case for the taxpayer's financial claim against the government.

Complex Tax Laws Result in Complexity in Self-Assessment

The process of self-assessment and self-reporting requires much more than taxpayers identifying themselves so that the government can determine their eligibility for certain programs. The commissioners cited the Supreme Court's analysis in Comm'r v. Lane-Wells Co., in which the Court said that the purpose of a system of self-assessment is not just to get tax information in some form but also to get it with such uniformity, completeness, and arrangement that the physical task of handling and verifying returns may be readily accomplished.

Consistent with this principle, the complexity and scope of information required to complete a federal income tax return have increased as the number and scope of the policies and programs being administered through the tax system have expanded. The commissioners cited the rules relating to the earned income tax credit (EITC) and noted that most tax professionals cannot understand the statutory provisions relating to the EITC without detailed and focused study. And the IRS website dealing with the EITC, the commissioners noted, repeatedly encourages taxpayers to seek assistance from a tax professional in determining their eligibility for this refundable credit.

Lamenting the complexity of the Internal Revenue Code is easy sport, the commissioners observed. However, they said, that complexity is the key to understanding the important role tax return preparers perform in helping taxpayers prepare and file their tax returns to present and establish their eligibility for the benefits distributed through the tax system.

In addition, the commissioners said, scrupulous tax return preparers help guard against fraud against both taxpayers and the government. By way of example, they cited a 2010 report by the Treasury Inspector General for Tax Administration (TIGTA), which highlighted potential fraud related to the first-time homebuyer tax credit. In that report, TIGTA identified 4,608 incarcerated individuals who had attempted to claim the first-time homebuyer credit. TIGTA analyzed a sample of 715 prisoners from that group, and found that 174 of the claims had been prepared by paid tax return preparers, and 241 of the claims had been paid, totaling more than $1.7 million. Stopping bad tax return preparers from striking, the commissioners argued, is wholly consistent with the Treasury Department's authority to regulate commercial tax return preparers in ways reasonably designed to prevent these bad acts from happening in the first instance.

According to the commissioners, the manner in which tax return preparers assist taxpayers in pursuing their claims aligns with the history giving rise to Treasury's authority to regulate representatives under 31 U.S.C. Section 330 (i.e., Circular 230). That section was enacted on July 4, 1884, to address the disreputable conduct of claims agents assisting soldiers seeking pensions, back pay, and various other government benefits. The modern counterpart, the commissioners said, is that benefit claims are pursued through a submission of a tax return to the IRS.

Conclusion

The commissioners concluded that, in deciding that filing a tax return would never, in normal usage, be described as presenting a case, the district court ignored the real workings of the United States' modern federal income tax system. Far from being a mere bookkeeper, a tax return preparer who advises and assists in preparing a tax return may be solely responsible for presenting the case for the taxpayer's eligibility for the benefits provided by crucial government programs administered through the tax systemgovernment programs that result in hundreds of billions of dollars in Treasury disbursements each year based almost exclusively on self-reporting through a tax return. In 1884, Congress empowered the Treasury to regulate the conduct of claims agents pursuing financial benefits from the government; and in 2013, the commissioners concluded, Treasury retains that authority to regulate the conduct of tax return preparers who similarly assist in preparing and filing tax returns that present to the Treasury millions of claims worth billions of dollars each year.

RELATED ARTICLE April 10, 2013

D.C. Court of Appeals Rejects IRS Request to Stay Lower Court Order in Loving Case (Parker's Federal Tax Bulletin: April 10, 2013)

The D.C. Court of Appeals rejected an IRS motion to stay a lower court order which held that the return preparer rules in Reg. Sec. 1.6109-2 are invalid. Loving v. IRS, 2013 PTC 37 (D.C. Cir. 3/27/13).

On January 18, 2013, in Loving v. IRS, 2013 PTC 10 (D.C. D.C. 2013), a district court agreed with three independent tax return preparers that the registered tax return preparer (RTRP) rules under Reg. Sec. 1.6109-2 were invalid - and that the IRS could not enforce them. The IRS subsequently said that, in accordance with the district court order, tax return preparers covered by the PTIN program would not be required to register with the IRS, complete competency testing, or secure continuing education. The IRS appealed the district court's decision to the D.C. Court of Appeals.

On January 23, the IRS filed a motion with the district court to suspend the district court's injunction pending its appeal of the court's decision. The IRS also shut down the RTRP exam testing system as of January 23, 2013, thus cancelling all exams from that date forward. On February 1, 2013, in Loving v. IRS, 2013 PTC 13 (D. D.C. 2/1/13), the D.C. district court rejected the IRS's request to stay the injunction but did modify the injunction to make clear that the IRS is not required to suspend its PTIN program, nor is it required to shut down all of its testing and continuing-education centers; instead, they may remain, but no tax-return preparer may be required to pay testing or continuing-education fees or to complete any testing or continuing education unless and until the injunction is stayed or vacated by the D.C. Circuit Court of Appeals.

The IRS then asked the D.C. Court of Appeals for a stay of the district court's order. On March 27, 2013, in Loving v. IRS, 2013 PTC 37 (3/27/13), the D.C. Court of Appeals rejected the IRS motion for a stay pending appeal, saying that the IRS did not satisfy the stringent requirements for a stay pending appeal.

RELATED ARTICLE February 13,2013

IRS Reopens Online PTIN Program; Court Rejects IRS Request for a Stay of the RTRP Injunction
(Parker's Federal Tax Bulletin: February 13, 2013)

A district court rejected the IRS's request to stay the injunction on its registered tax return preparer program but did modify the injunction to make clear that the IRS is not required to suspend its PTIN program, nor is it required to shut down all of its testing and continuing-education centers. Loving v. IRS, 2013 PTC 13 (D. D.C. 2/1/13).

On Friday, January 18, 2013, the District Court for the District of Columbia in Loving v. IRS, 2012 PTC 10 (D. D.C. 2013), enjoined the IRS from enforcing the regulatory requirements for registered tax return preparers (RTRPs). In accordance with this order, RTRPs covered by the IRS program are not required to complete competency testing or secure continuing education. The ruling does not affect the regulatory practice requirements for CPAs, attorneys, enrolled agents, enrolled retirement plan agents or enrolled actuaries. On January 23, the IRS filed a motion to suspend the district court's injunction pending its appeal of the court's decision. The IRS also shut down the RTRP exam testing system as of January 23, 2013, thus cancelling all exams from that date forward.

The district court rejected the IRS's request to stay the injunction but did modify the injunction to make clear that the IRS is not required to suspend its preparer tax identification number (PTIN) program, nor is it required to shut down all of its testing and continuing-education centers; instead, they may remain, but no tax-return preparer may be required to pay testing or continuing-education fees or to complete any testing or continuing education unless and until the injunction is stayed or vacated by the D.C. Circuit Court of Appeals.

The district court rejected the IRS's argument that no harm would be done if the court stayed the injunction. According to the court, the harm would be considerable because, if it stayed the injunction, then all preparers would be faced with a choice of either (1) skipping the registration requirements, gambling on an affirmance by the D.C. Court of Appeals or a reversal that would be issued early enough that they could still fulfill their requirements by the end of the year, or (2) satisfying the testing and continuing-education requirements, knowing that this might be wasted time, effort, and expense.

As a result of the court's ruling, the IRS has reopened the online PTIN system

RELATED ARTICLE February 1,2013

Loving v. IRS: District Court Slams IRS for Overreaching Its Authority
(Parker's Federal Tax Bulletin: February 1, 2013)

In 2011, the IRS began requiring all tax return preparers to have a preparer tax identification number (PTIN). Additionally, the IRS issued regulations requiring preparers to pass a qualifying exam, pay an annual application fee, and take 15 hours of continuing-education courses each year. Certain tax return preparers, such as attorneys, CPAs, and enrolled agents, are exempt from the testing requirements because they have their own testing requirements.

In 2012, three independent tax-return preparers brought suit against the IRS in the U.S. District Court for the District of Columbia, arguing that the IRS exceeded its authority in issuing the return-preparer regulations. On January 18, in Loving v. IRS, 2013 PTC 10 (D.C. D.C. 1/18/13), the district court agreed and held that the regulations were invalid and that the IRS could not enforce them. The IRS subsequently released a statement saying that, in accordance with the district court order, tax return preparers covered by the PTIN program are not currently required to register with the IRS, complete competency testing, or secure continuing education. On January 23, the IRS filed a motion to suspend the district court's injunction pending its appeal of the court's decision.

OBSERVATION: Many CPAs and enrolled agents have expressed disappointment at the holding, saying it places them at a clear disadvantage because they are required to comply with competency and quality control regulations under IRS Circular 230 while, if this court's decision holds, unlicensed tax return preparers would escape regulation.

Background

In January 2010, the IRS issued IRS Pub. 4832, Return Preparer Review. The publication discusses the results of an in-depth review of the tax return preparer industry. The IRS recommended increased oversight of tax return preparers through the issuance of regulations governing tax return preparers.

The IRS subsequently issued Reg. Sec. 1.6109-2, which provides that, after December 31, 2010, all individuals who prepare all, or substantially all, of a tax return or claim for refund for compensation must have an IRS-issued PTIN and must use that PTIN as their sole identifying number. A PTIN must be included on any tax return or claim for refund prepared for compensation. Under the regulations, attorneys, CPA, enrolled agents, registered tax return preparers, and individuals authorized under Reg. Sec. 1.6109-2(h) are eligible to receive a PTIN.

Reg. Sec. 1.6109-2(h) provides that the IRS, through forms, instructions, or other appropriate guidance, may prescribe exceptions to the requirements of Reg. Sec. 1.6109-2, including the requirement that an individual be authorized to practice before the IRS before receiving a PTIN or other prescribed identifying number. The IRS, through other appropriate guidance, may also specify specific returns, schedules, and other forms that qualify as tax returns or claims for refund for purposes of the regulations.

In Notice 2011-6, the IRS identified two additional groups of individuals who are eligible under Reg. Sec. 1.6109-2(h) to obtain a PTIN: (1) specified individuals who are supervised by the attorney, CPA, enrolled agent, enrolled retirement plan agent, or enrolled actuary who signs the tax return or claim for refund prepared by the individual; and (2) individuals who certify they do not prepare or assist in the preparation of all or substantially all of any tax return or claim for refund covered by a competency examination (Form 1040 series tax returns and accompanying schedules until further notice).

In IR-2011-89 (9/6/11), the IRS said that, to become a registered tax return preparer, an individual (other than a CPA, attorney, EA, etc.) must pass a one-time competency test, a tax compliance check, and a suitability check. Preparers who meet these requirements are then given the designation "registered tax return preparer." Additionally, the IRS said, preparers must complete 15 hours of continuing education each year, starting in 2012. The IRS issued specifications for the competency test, which was last updated in July 2012.

In 2012, three independent tax return preparers, including Sabina Loving, filed suit in the U.S. District Court for the District of Columbia, contesting the new return preparer requirements. All three previously were not subject to regulation by the IRS. They argued that, under 31 U.S.C. Section 330, which forms the basis for the IRS return-preparer requirements, the IRS has authority to regulate only those people who practice before the Treasury Department and that did not include them.

OBSERVATION: The Treasury Department publishes regulations governing practice before the IRS in Circular No. 230. The crux of Circular 230 is a long list of duties and restrictions relating to practice before the IRS. Circular 230 also lays out sanctions and sets the rules for disciplinary proceedings. The Circular 230 regulations have long applied to attorneys, CPAs, and a handful of other specified tax professionals.

District Court's Decision

The district court noted that 31 U.S.C. Section 330(a) authorizes the Treasury Secretary to regulate the practice of representatives of persons before the Department of the Treasury. The dispute in this case involved the IRS's interpretation that tax-return preparers are representatives who practice before the IRS.

According to the district court, the case centered on whether or not Section 330 is ambiguous as to whether tax return preparers are representatives who practice before the IRS. The court concluded that Section 330 unambiguously forecloses the IRS's interpretation for two reasons. First, the court stated, the text of Section 330(a)(2)(D) defines the practice of representatives in a way that does not cover tax-return preparers. The court concluded that the IRS cannot regulate return preparers pursuant to its inherent authority because 31 U.S.C. Section 330 governs only the IRS's authority to regulate those who practice before it. Second, the court stated, the IRS's interpretation would displace an existing statutory scheme that comprehensively regulates penalties on tax return preparers. Thus, the court enjoined the IRS from enforcing the regulatory requirements for registered tax return preparers.

The court's ruling does not affect the regulatory practice requirements for CPAs, attorneys, enrolled agents, enrolled retirement plan agents, or enrolled actuaries.

IRS's Motion

The IRS has filed a motion (January 23rd motion) asking that the district court's injunction be suspended while the IRS appeals the court's decision. According to the IRS (in a memorandum supporting the motion), the court's injunction has far-reaching negative implications not only for the IRS, but also for the public. The IRS said that it and the public would suffer irreparable harm if the injunction remains in place during the pendency of the appeal. At press time, a decision had not yet come down from the district court on the IRS's motion.

OBSERVATION: This is not the first time a preparer has challenged the IRS's return preparer regulations. In Jesse E. Brannen, III, P.C. v. U.S., 2012 PTC 150 (11th Cir. 2012), the taxpayer challenged the requirement that compensated tax return preparers obtain a PTIN and pay an annual fee for that number. The Eleventh Circuit held that, because in exchange for the tax preparer user fee the IRS assigns a PTIN and confers a special benefit upon tax return preparers, the IRS has the statutory authority to impose the fee.

Staff Editor Parker Tax Publishing

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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