IRS Voluntary Annual Filing Season Program Withstands AICPA's Challenge

(Parker Tax Publishing September 2018)

The D.C. Circuit held that the IRS Annual Filing Season Program, a voluntary arrangement which allows unenrolled preparers to obtain a limited right to represent taxpayers in IRS audits, does not violate the Administrative Procedure Act. Reversing the district court, the D.C. Circuit held that the American Institute of Certified Public Accountants (AICPA) had standing to challenge the validity of the program; however, the court upheld the validity of the Program because it found that it was within the IRS's statutory authority, complied with procedural requirements, and was not arbitrary and capricious. AICPA v. IRS, 2018 PTC 270 (D.C. Cir. 2018).

Background

There are four categories of people who may assist taxpayers with their returns: attorneys, certified public accountants (CPAs), enrolled agents, and unenrolled preparers. Unenrolled preparers were not subject to any licensing requirements until 2011, when the IRS adopted a rule requiring them to become registered tax return preparers. This entailed paying a fee, passing a competency exam, and completing a continuing education course each year. The IRS adopted the program by issuing Rev. Proc. 2014-42, which it did without notice and comment.

In Loving v. IRS, 2013 PTC 10 (D.D.C. 2013) (Loving I), the D.C. district court held that the IRS lacked statutory authority to regulate unenrolled preparers. In Loving v. IRS, 2013 PTC 13 (D. D.C. 2013) (Loving II), the district court allowed the IRS to continue the testing and continuing education portions of the program as long as it did not require any tax preparer to take a test, enroll in continuing education, or pay a fee for either service. The D.C. Circuit affirmed the district court's judgment in Loving v. IRS, 2014 PTC 73 (D.C. Cir. 2014) (Loving III), and the IRS opted to continue with testing and continuing education as parts of its Voluntary Annual Filing Season Program.

The Voluntary Annual Filing Season Program grants an annual Record of Completion to any participant who obtained a preparer tax identification number, took the annual federal tax filing season refresher course, passed a comprehension test, completed at least 18 hours of continuing education, and consented to be subject to the duties and restrictions relating to practice before the IRS in Circular 230.

The IRS offers two incentives to participate in the Program. First, unenrolled agents with a Record of Completion are listed in the IRS's online directory of tax preparers alongside attorneys, CPAs and enrolled agents. Second, unenrolled agents gain a limited practice right to represent a taxpayer in the initial stages of the audit of a return the unenrolled agent prepared. Before the Program was established, all unenrolled agents had this limited practice right.

The AICPA sued the IRS, challenging its authority to conduct the Program. In AICPA v. IRS, 2014 PTC 555 (D. D.C. 2014), the district court initially dismissed the case on the ground that the AICPA lacked standing. In AICPA v. IRS, 2015 PTC 391 (D.C. Cir. 2015), the D.C. Circuit reversed and remanded, holding that the AICPA had standing as the representative of competitors to unenrolled agents.

On remand, the IRS argued that the AICPA did not have statutory standing because its interests were not protected or regulated by 31 U.S.C. Sec. 330, which authorizes the IRS to regulate the practice of taxpayer representatives before it and to require such representatives to demonstrate good character, reputation, and the necessary qualifications and competency. The district court agreed and dismissed the case for lack of statutory standing.

D.C. Circuit Reverses Lower Court on AICPA's Standing

The AICPA again appealed. It argued that it had constitutional standing as a competitor and statutory standing under 31 U.S.C. 330. According to the AIPCA, its members were employers of unenrolled preparers who suffered harm because the Program withdrew the limited practice right unenrolled preparers previously enjoyed. The AICPA also claimed that the Program imposed new supervisory requirements on its members because the Record of Completion is conditioned on consent to be subject to the rules for practicing before the IRS under subpart B of Circular 230. In addition, supervisors must take reasonable steps to ensure the firm has adequate procedures in place for its employees to comply with subparts A, B, and C of Circular 230. Thus, the AICPA claimed that as employers of unenrolled preparers, its members could now be subject to sanctions for Circular 230 violations.

On the merits, the AICPA claimed that the Program exceeded the IRS's authority under 31 U.S.C. Sec. 330 and the APA. According to the AICPA, making the law relevant to tax returns a subject of continuing education showed the IRS's improper intent to regulate tax preparation, contrary to the decision in Loving III. The AICPA also argued that the IRS should have followed the APA notice and comment requirements before issuing Rev. Proc. 2014-42. According to the AICPA, Rev. Proc. 2014-42 withdrew a benefit (the right of all unenrolled preparers to practice before the IRS) which had been created through notice and comment rulemaking, and a rule promulgated by notice and comment should be amended by the same procedure. Finally, the AICPA claimed that the Program is arbitrary and capricious because the IRS never responded to its concern that a public database of provider credentials might confuse taxpayers and the IRS failed consider all reasonable alternatives before adopting the Program.

The IRS did not dispute that the AICPA had constitutional standing based on its competitive injury. The IRS argued that statutory standing was lacking because neither the AICPA nor its members are regulated or protected by 31 U.S.C. Sec. 330. The IRS argued it had statutory authority for the Program under both 31 U.S.C. Sec. 330 as well as under Code Sec. 7803, which gives the IRS the power to administer the tax laws and related statutes.

The D.C. Circuit held that the AICPA had constitutional and statutory standing to challenge the validity of the Program. In the court's view, the AICPA had constitutional standing based on its competitive injury and as a result of the supervisory burden imposed by the Program. The court explained that, by extending Circular 230 to a new class of preparers, the Program expanded the supervisory responsibilities of the AICPA members and increased the supervisory responsibility and hence the potential liability faced by members of the AICPA. The court further found that the AICPA had statutory standing because 31 U.S.C. Sec. 330 regulates AICPA members (albeit indirectly) by imposing supervisory duties on them.

Court Upholds IRS Position on the Merits

Turning to the merits, the court determined that the Program did not exceed the IRS's authority under 31 U.S.C. Sec. 330. The court found that the Program's education, testing and certification portions ensured that participating unenrolled preparers demonstrate the qualifications and competence necessary to practice before the IRS. The court saw nothing in the Program that attempted to impermissibly resurrect regulations of the type enjoined in the Loving decisions because participating unenrolled preparers consented to be governed only by the sections of Circular 230 relating to practice before the IRS, not those pertaining to tax preparation.

However, the D.C. Circuit rejected the AICPA's procedural challenges after concluding that notice and comment rulemaking was not required because the Program did not bind unenrolled preparers but merely provided them an opportunity to participate and satisfy the Program requirements. The court further found that the Program imposed no new or different requirement on supervisors or unenrolled preparers because both were already bound by Circular 230 before the Program took effect. The court explained that the limited practice right afforded unenrolled preparers before 2011 was the product of Rev. Proc. 81-38, which was issued without notice and comment, so no notice and comment were required to withdraw that right. In the court's view, Rev. Proc. 2014-42 was an interpretive rule, which did not require notice and comment procedures, because the Program requirements were the IRS's interpretation of the term "competency" in 31 U.S.C. Sec. 330.

Finally, the court rejected the AICPA's argument that the Program was arbitrary and capricious. The court found that the IRS considered the AICPA's concern over taxpayer confusion because the directory of provider credentials allows users to filter search results by each provider category; it also links to a primer describing the various qualifications in detail. The court further found that the AICPA never proposed an alternative method for the IRS to deal with the problem of incompetent tax preparers, so the IRS could not be faulted for failing to consider an alternative that was never proposed.

For a discussion of the Voluntary Filing Season Program, see Parker Tax ¶271,160.

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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