Court Orders IRS to Refund Excessive Tax Return Preparer Fees

(Parker Tax Publishing March 2023)

In a case on remand from the D.C. Circuit, a district court held that fees the IRS charged tax return preparers for its issuance and renewal of Preparer Tax Identification Numbers (PTINs) during 2011 through 2017 were excessive in violation of the Independent Offices Appropriations Act and ordered the IRS to determine the appropriate refund to which the return preparers were entitled. The district court also held that in calculating the appropriate fee amounts, the IRS was not entitled to offset the PTIN fees it could have charged during 2018 through 2020 while it was enjoined from charging any PTIN fees. Steele et al. v. U.S., 2023 PTC 38 (D. D.C. 2023).

Background

In 2010 and 2011, the IRS issued a series of regulations expanding its regulatory reach of tax return preparers. A mandatory credentialing process was established for preparers who are not attorneys or CPAs, including a background check, a competency exam, and ongoing education requirements The IRS also expanded the Preparer Tax Identification Number (PTIN) program, retooled it as a broader information-gathering system regarding preparers, made obtaining and renewing PTINs mandatory for preparers, and began charging a fee to obtain and renew one.

To support the expanded PTIN program, the IRS organized a new Return Preparer Office (RPO) with multiple departments, including the Suitability Department, the Compliance Department, and various departments providing support to the entire office. The Suitability Department was responsible for checking personal tax compliance, verifying the professional designations of CPAs and attorneys working as return preparers, checking prisoner lists and specially designated national lists to determine if an applicant was incarcerated or designated as being associated with certain targeted countries or illicit activities. checking compliance of enrolled agents, and other similar tasks. The Compliance Department performed data analytics regarding compliance with PTIN reporting requirements, investigated so-called "ghost preparers" who failed to use a PTIN or used someone else's PTIN or an invalid number, and processed disciplinary referrals of preparers.

The PTIN fee was $50 during 2011-2015. In 2016 and 2017, the fee was reduced to $33. In addition to the PTIN fees themselves, the IRS required preparers to pay a vendor fee to Accenture, a third-party contractor that the agency hired to develop, maintain, and operate the computer system responsible for PTIN registrations.

A group of tax return preparers sued the IRS to challenge the credentialing regulations, arguing that the IRS lacked the authority under the Code to implement such a regime. In Loving v. IRS, 2014 PTC 73 (D.C. Cir. 2014), the D.C. Circuit agreed and invalidated the credentialing regulations. Several return preparers then sued the IRS to challenge the lawfulness of the PTIN fee. They argued that the fee was contrary to the Independent Offices Appropriations Act (IOAA) and was arbitrary and capricious. In Steele v. U.S., 2017 PTC 341 (D. D.C. 2017), a district court upheld the PTIN requirement but invalidated the fee on the ground that it violates the IOAA, and the court permanently enjoined the IRS from charging PTIN fees. The IRS appealed, and in Montrois v. U.S., 2019 PTC 92 (D.C. Cir. 2019), the D.C. Circuit reversed the district court's decision invalidating the PTIN fee because it found that that the IRS acted within its authority and was not arbitrary and capricious. However, the D.C. Circuit remanded to the district court to determine whether the PTIN fee amount was excessive under the IOAA.

The D.C. Circuit held in Montrois that in order to justify a fee under the IOAA, an agency must show (1) that it provides some kind of service in exchange for the fee, (2) that the service yields a specific benefit, and (3) that the benefit is conferred upon identifiable individuals. In calculating the amount of a fee, the D.C. Circuit has identified two constraints: (1) an agency may not charge more than the reasonable cost it incurs to provide a service, or the value of the service to the recipient, whichever is less; and (2) when the specific agency activity in question produces an independent public benefit, the agency must reduce the fee that it would otherwise charge by that portion of the agency's costs attributable to that public benefit.

On remand, the return preparers argued in a motion for summary judgment that the PTIN fees for 2011-2017 were excessive under the IOAA because many of the expenses the IRS used to justify the fee were unnecessary to the maintenance of the PTIN system. The government conceded that the fees were excessive to the extent they included the costs associated with the credentialing requirements which were invalidated by the D.C. Circuit in Loving. However, the government defended costs in four categories: (1) activities of the Compliance Department, which processed taxpayer complaints against return preparers and conducted enforcement activities against return preparers who misused or did not use a PTIN; (2) the Suitability Department's professional designation checks; (3) the Suitability Department's checks to determine whether an applicant was incarcerated or designated as being associated with certain targeted countries or illicit activities; and (4) the Suitability Department's processing of suitability referrals by taxpayers or agency components of preparers who purportedly should not be able to obtain or maintain PTINs - for example, because the person has been legally enjoined from return preparation and from obtaining or renewing a PTIN. The government also argued that it should be entitled to an offset to its liability for sums it could have charged in fees while it was enjoined by the court from assessing them.

Analysis

The district court held that the PTIN and vendor fees the IRS charged return preparers for years 2011-2017 were excessive as a matter of law. The court further held that the appropriate remedy was to remand to the IRS to determine an appropriate refund for the class by calculating reasonable estimates of the portions of the fees it lawfully could have charged. In addition, the court held that in calculating the proper fees, the IRS was not entitled to an offset for PTIN and vendor fees it could have charged during 2018 through 2020 when the injunction against the assessment of any PTIN fees was in effect.

The court found that the PTIN and vendor fees for 2011-2017 were excessive under the IOAA to the extent that they were based on the following activities:

(1) all activities already conceded by the government;

(2) any compliance department activities other than investigating ghost preparers, handling complaints regarding improper use of a PTIN, use of a compromised PTIN, or use of a PTIN obtained through identity theft, and composing the data to refer those specific types of complaints to other IRS business units;

(3) all Suitability Department activities;

(4) the portion of support activities that facilitated provision of an independent benefit to the IRS and the public; and

(5) the portion of Accenture's activities as a vendor that facilitated provision of an independent benefit to the IRS and the public.

Regarding the government's request for an offset to its liability for fees it could have charged during the injunction period, the court declined to order the offset after noting that the period for which the government sought an offset extended past the vacatur of the injunction into a period during which no court order was stopping the IRS from assessing PTIN or vendor fees if it so desired. Further, the court said that an offset to monetary relief requires the existence of mutual debts, which the government did not establish. Finally, the court found that approving the offset would have the effect of retrospectively imposing a user fee - a task that may be carried out under the IOAA only by agency regulations. However, the court noted that nothing prevented the IRS from clawing 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.

For a discussion of the PTIN requirement, see Parker Tax ¶275,105.

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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