Practice Areas

IRS' Tax Preparer Regulatory Scheme in Jeopardy

January 27, 2013
Scott W. Brunner

In 2011, the IRS developed new regulations mandating that certain tax-return preparers—those who were not licensed attorneys, CPAs, enrolled actuaries, or enrolled retirement plan agents—complete 15 hours of continuing education each year and pass an initial qualifying exam before they may lawfully prepare and file federal income tax returns for clients.  However, a recent court decision out of the United States District Court for the District of Columbia, Loving v. IRS, No. 12-385 (JEB) (D.D.C. Jan. 18, 2012), threatens the IRS’ ability to continue this regulatory scheme.

The court in Loving enjoined the IRS from enforcing this specialized education mandate on the basis that the United States Department of the Treasury (the administrative body that oversees the IRS) did not have the statutory authority to create such a regulation.  The IRS had justified its new examination and education requirements through a statute that allows the IRS to “regulate the practice of representatives of persons before the Department of the Treasury.”  31 U.S.C. § 330(a).  This statute allows the IRS to require such representatives to meet certain levels of character, reputation, qualifications, and competence.  Id.  The IRS’ position was that “practice” included “preparing and signing tax returns and claims for refund.”  See, e.g., 31 C.F.R. § 10.3(f); id. § 10.2(a)(4) (noting that “practice" includes preparing and filing documents).  Yet the Loving court turned that approach on its head by concluding that tax preparers do not “practice” before the IRS simply by filing, signing, and sending tax returns.  The court reasoned that applicable statutes themselves insist the term “practice” cannot include simply preparing tax returns; as such, the court found the above statutory language not permissive of the IRS’ education requirements.  Loving, No. 12-385 (JEB), *10-12.

The Loving decision is, of course, subject to an appeal, and the IRS has already announced it indeed plans to appeal the decision:  But, as it currently stands today, the IRS’ "registered tax return preparer" regulatory scheme developed by Circular 230 of 76 Fed. Reg. 32,286 is invalid because the IRS lacks the statutory authority to create it, and the IRS is also permanently enjoined from enforcing the scheme against any tax preparers.  Loving, No 12-385 (JEB), *21-22.

The decision focused only on the particular regulations over tax preparers who were required to complete continuing education credits, but the court’s reasoning certainly suggests that aspects of the IRS’ regulation over all tax preparers might be invalid.  Indeed, the Loving decision suggests that anyone, by simply preparing and filing tax returns, is not “practicing” before the Department of the Treasury such that the IRS can require application or fee requirements before that individual may submit tax returns, which means aspects of the PTIN application and renewal process could be at risk.

UPDATE:  The Loving court issued an additional opinion and order on February 1, 2013, clarifying and modifying its previous injunction.  Loving v. IRS, No. 12-385 (JEB) (D.D.C. Feb. 1, 2013).  This order denied the IRS' attempt to stay the injunction pending its appeal; however, the court modified the injuction such that the PTIN application and assignment system, at its core, is not implicated (citing 26 U.S.C. § 6109(a)(4) for support that the IRS' preparer numeration system is congressionally supported), and that the injunction has no relation to tax preparers not previously required to complete the IRS education requirements.

TAX ADVICE LIMITATION:  To ensure compliance with the requirements of Circular 230, we inform you that any tax advice contained above is not intended or written to be used and cannot be used (i) by any taxpayer for the purpose of avoiding penalties that may otherwise be imposed under the Internal Revenue Code or (ii) by anyone for the purpose of promoting, marketing or recommending to another party any entity, investment plan or arrangement addressed herein.