Court Invalidates Fee Requirement for Preparer Tax ID Numbers

(Parker Tax Publishing June 2017)

A district court held that the IRS may require the use of preparer tax identification numbers (PTINs) but may not charge fees for issuing PTINs. The court found that the fee requirement was unlawful under Loving v. U.S., 2014 PTC 73 (D.C. Cir. 2014), which held that the IRS does not have the authority to regulate tax return preparers. The district Steele v. U.S., 2017 PTC 265 (D. D.C. 2017).

Observation: The IRS has stated on its website that, as a result of the court's ruling, it has suspended PTIN registrations and renewals as it works with the Department of Justice to determine how to proceed. The full IRS statement reads: "On June 1, 2017, the United States District Court for the District of Columbia upheld the Internal Revenue Service's authority to require the use of a Preparer Tax Identification Number (PTIN), but enjoined the IRS from charging a user fee for the issuance and renewal of PTINs. As a result of this order, PTIN registration and renewal is currently suspended. The IRS, working with the Department of Justice, is considering how to proceed. As additional information becomes available, it will be posted on our Tax Pros page."

Background

In the world of tax return preparers, some have credentials, such as CPAs, EAs, and attorneys, but others are known as uncredentialed tax return preparers. Before 2010, anyone could file a tax return on behalf of someone else, credentialed or not. In 2010, however, the IRS, attempting to regulate both credentialed and uncredentialed tax return preparers, issued regulations to regulate all tax return preparers.

It created a new designation, registered tax return preparer, and required preparers other than CPAs, EAs, and attorneys to pass a competency exam, pass a suitability check, and obtain a preparer tax identification number (PTIN). Under Reg. Sec. 1.6109-2(d), payment of a user fee was required in order to obtain a PTIN. As authority for issuing these regulations, the IRS relied on 31 U.S.C. Sec. 330(a) (i.e., Circular 230), which states that the IRS may regulate the practice of representatives before it and, before admitting a representative to practice, require them to demonstrate good character, good reputation, the necessary qualifications to enable the representative to provide valuable service, and competency to advise and assist in presenting cases before the IRS.

Under Code Sec. 6109(a)(4), which was in effect before the new regulations, any return or claim for refund prepared by a tax return preparer must include an identifying number, specifically a social security number (SSN) unless otherwise provided in the regulations. The 2010 regulations specified for the first time that tax return preparers must obtain and exclusively use the PTIN rather than an SSN. The IRS said that a separate identifying number would enable it to accurately identify tax return preparers, match them with returns and refund claims they prepare, and better administer the tax laws with respect to tax return preparers and their clients. It also said that use of PTINs would help maintain the confidentiality of SSNs.

In imposing the user fee for PTINs, the IRS relied on the Independent Offices Appropriations Act of 1952 (IOAA), which permits agencies to establish a charge for a service or thing of value provided by the agency. The IRS said that the PTIN is a service or thing of value because, without it, a tax return preparer could not receive compensation for preparing tax returns. A PTIN was available only to a subset of the general public and it therefore conferred the special benefit of receiving compensation for preparing tax returns, according to the IRS.

In 2014, the tax preparer exam and education requirements were challenged in Loving v. U.S., 2014 PTC 73 (D.C. Cir. 2014). In that decision, the D.C. Circuit held that the IRS did not have the authority to regulate tax preparers, and the competency testing and continuing education requirements were invalidated.

Class Action Suit to Return PTIN Fees

In 2016, tax preparers who paid a PTIN fee obtained class certification and sued in the D.C. district court for a declaratory judgment (1) that the IRS lacked the legal authority to charge these fees or that the fees charged are excessive, and (2) for the return or refund of all fees previously collected or for the return and refund of the excessive fees. They argued that after Loving, the IRS's stated rationale for requiring the fees - to regulate tax return preparers - no longer applied. Alternatively, they argued that because Loving held that Congress did not grant the IRS licensing authority, tax return preparers received no special benefit in exchange for the fees, and the fees were therefore unlawful under the IOAA.

IRS's Arguments

The IRS argued that the PTIN and user fee regulations were separate from the regulations imposing eligibility requirements on registered tax return preparers. According to the IRS, the PTIN requirements are not arbitrary and capricious because they make it easier to identify return preparers and the returns they prepare, which the IRS said is a critical step in tax administration. The IRS also asserted that PTINs are a thing of value because the ability to prepare tax returns for compensation is a special benefit provided only to those people who obtain PTINs. Further, PTINs protect the confidentiality of tax return preparers' SSNs, and that protection is itself a service or thing of value, the IRS argued.

District Court's Decision

The district court held that the IRS was clearly authorized under Code Sec. 6109(d) to issue regulations requiring the exclusive use of PTINs. However, the court said, the IRS did not have the authority to charge fees for issuing them. According to the court, charging fees for PTINs is equivalent to imposing a regulatory licensing scheme and, under Loving, the IRS did not have such regulatory authority. The court reasoned that granting the ability to prepare tax returns for others for compensation, which is what the IRS said was the special benefit of the PTIN, was functionally equivalent to granting the ability to practice before the IRS.

Loving held that the IRS had improperly expanded the definition of practice before the IRS to include preparing tax returns, the district court said. In that case, the D.C. Circuit reasoned that practice before an agency usually refers to practice during an investigation or adversarial proceeding, which is different from filing a tax return, where the taxpayer is not presenting arguments or advocating in support of a position. Based on this reasoning, the district court concluded that in charging a PTIN fee, the IRS was attempting to grant a benefit it was not authorized to grant and charging a fee for granting such a benefit.

The district court acknowledged that the PTIN fees were held permissible by the Eleventh Circuit in Brannen v. U.S., 2012 PTC 150 (11th Cir. 2012). The court noted that Brannen was decided before Loving. In the court's view, Loving made clear that the IRS may not regulate return preparers or require that they obtain an occupational license. The court said it was unaware of similar cases where an agency was allowed to charge fees for issuing an identifier when that agency was not allowed to regulate those to whom the identifier was issued. The court further reasoned that after Loving, anyone can obtain a PTIN without meeting any type of eligibility criteria. It was thus no longer true, in the court's view, that only a subset of the general public could obtain a PTIN and prepare tax returns for others for compensation. There was therefore no special benefit being conferred by the issuance of a PTIN.

Finally, the court rejected the IRS's argument that PTINs protected the confidentiality of SSNs. The court noted that the confidentiality justification was mentioned only briefly in the regulations, and was not discussed in the regulations specifically addressing user fees. The regulations did not indicate that SSNs were being inadvertently disclosed or that their confidentiality was at risk, so in the court's view, it was not clear that requiring PTINs was necessary for this reason.

For a discussion of preparer tax identification numbers, see Parker Tax ¶275,101.

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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