D.C. Circuit Reverses District Court, Upholds PTIN Fee on Tax Return Preparers

(Parker Tax Publishing April 2019)

The D.C. Circuit reversed a district court decision invalidating the fee charged by the IRS to tax return preparers for obtaining a Preparer Tax Identification Number (PTIN). The D.C. Circuit concluded that the IRS acted within its authority and was not arbitrary and capricious in implementing the PTIN fee and remanded to the district court for an assessment of whether the amount of the fee is excessive. Montrois v. U.S., 2019 PTC 92 (D.C. Cir. 2019).

Background

The term "tax return preparer" is defined by the Code as any person who prepares a return or claim for refund for compensation. The Code places no professional restraints on who may be a tax return preparer. In 1976, Congress authorized the IRS to require a preparer to list an identifying number on any return he or she prepared and specified that the number would be the preparer's social security number (SSN).

In 1998, Congress, concerned that inappropriate use might be made of a preparer's SSN, allowed the IRS to permit or require preparers to list a different identifying number. The IRS issued regulations allowing preparers to obtain a Preparer Tax Identification Number (PTIN) from the IRS and to list the PTIN instead of an SSN on any return they prepared.

The IRS subsequently became concerned that taxpayers were being poorly served by some preparers who lacked adequate education and training. As a result, in 2010, it issued three sets of regulations. First, the IRS established a credentialing and registration regime for tax return preparers. Second, the IRS required preparers to obtain a PTIN and renew it annually. Third, the IRS decided to charge a fee of $50 to obtain and renew a PTIN. The IRS said the fee would cover the costs of maintaining the PTIN database as well as other administrative costs.

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. In effect, the decision reinstated the previous regime in which anyone who wished to prepare a tax return for compensation could do so as long as he or she obtains a PTIN and pays the fee.

After Loving, several return preparers 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. While the case was pending, the IRS reduced the fee from $50 to $33 to remove the portion of the original fee that covered the costs of the credentialing program invalidated in Loving. The district upheld the PTIN requirement but invalidated the fee on the ground that it violates the IOAA. The IRS appealed to the D.C. Circuit.

Analysis

The IOAA permits federal agencies to charge fees to recover the costs of services they provide. The Supreme Court has held that, for a fee to be permissible under the IOAA, it must (1) provide some kind of service in exchange, (2) yield a specific benefit, and (3) confer the benefit on identifiable individuals.

The preparers argued that after Loving, the IRS's services were limited to generating and maintaining a database of PTINs. They said that the IRS could not simply create an obligation to obtain a PTIN that is untethered to any underlying licensing system and then treat the satisfaction of that requirement as a specific benefit. According to the preparers, protecting confidential information (i.e., the preparers' SSNs) was not a valid justification because the IRS did not invoke that concern when it issued the PTIN regulations. The preparers also questioned the extent to which the PTIN requirement protects confidential information, given the preparers are already allowed to omit their SSNs on the copy of returns provided to the taxpayer. The preparers argued that, even if confidentiality justified the initial issuance of the PTIN, it did not permit the IRS to require annual renewal. Finally, they said that, because essentially anyone can obtain a PTIN after Loving invalidated the credentialing regime, the service and benefit associated with the PTIN extended to the public at large rather than to identifiable, specific individuals.

The D.C. Circuit rejected the preparers' arguments and held that the IRS acted within its authority under the IOAA in charging the PTIN fee. The court further found that the IRS's decision to charge the fee was not arbitrary and capricious. The D.C. Circuit remanded the case in part for the district court to assess whether the PTIN fee unreasonably exceeds the IRS's costs to issue and maintain PTINs.

The D.C. Circuit found that the PTIN database constituted the provision of a service, even if it was a pared down version of the PTIN-related services offered before Loving. The court said that the preparers' concerns pertained not to whether the IRS could charge the fee, but whether the fee amount was reasonable, an issue not addressed by the district court.

The D.C. Circuit found that the PTIN provides the benefit of helping to protect preparers' identities by allowing them to list a number other than their SSN on the returns they prepare. The court concluded that the confidentiality advantages associated with the PTIN requirement readily qualify as a specific benefit because, without such protection, preparers would face greater risks of identity theft. The court found that the IRS adequately relied on the confidentiality protections afforded by PTINs when issuing the PTIN regulations and found that, when Congress amended the Code to allow the IRS to mandate the use of PTINs, it expressed its concerns that inappropriate use could be made of preparers' SSNs. The court also concluded that the IRS's costs associated with maintaining the PTIN database justified the annual PTIN renewal fee.

According to the court, PTINs are a service provided to a group of identifiable recipients, namely tax return preparers. The court said that PTINs are similar to passports, which are available to all citizens for a fee.

The court also held that the IRS did not act arbitrarily and capriciously because it adequately explained its decision when it reissued the PTIN regulations after the Loving decision.

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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