January 28th, 2013 by Melissa Rager
In a January 18, 2013 U.S District Court decision of Sabina Loving, et al., v. Internal Revenue Service, Judge James E. Boasberg overturned the IRS’s authority to regulate tax preparers. I should point out that this ruling has no effect on CPAs, Enrolled Agents or tax attorneys since these individuals are already regulated by Circular 230. But, as of last Friday, individual preparers (who are not CPAs, EAs or tax attorneys and regulated by Circular 230) no longer have to pass a competency exam to prepare tax forms. Before this decision was made, the IRS was trying to mandate all return preparers become Registered Tax Return Preparers (RTRPs). To receive the RTRP designation, an individual would have to pass a basic IRS exam, apply for a PTIN at a cost of $65 each year and satisfy the continuing education requirement of 15 hours each year.
The concern among small practitioners was the cost burden of this additional IRS designation. Unable to absorb the extra costs, small tax practices were face with two options: raise return preparation fees or close down entirely. Because of this extra regulatory burden, Sabina Loving and two other tax preparers brought suit against the IRS arguing that the IRS doesn’t have statutory authority to regulate tax preparers.
The IRS argued that under 31 U.S.C §300, originally enacted in 1884, the Treasury Secretary has authority to regulate those people that practice before it. Because the IRS is a bureau of the Treasury Department, the IRS took the position that this statute also extends to them, regardless of the fact that 31 U.S.C. §300 was enacted 29 years before the 16th Amendment to the Constitution, which created the “income tax”. Nevertheless, the IRS’s position was if you practice before the IRS, the IRS has the authority to license and regulate your practice.
Interestingly enough, the definition of “practice” became the deciding issue. The court concluded that “practice” before the IRS only constituted circumstances where the individual “presented a case” before the IRS. The court concluded that preparing a return does not constitute “presenting a case” before the IRS because not every return is audited. In fact, only a small percentage of cases are audited and an audit is outside the normal scope of tax preparation. The court also pointed out that, at the time of filing, the IRS and the taxpayer have no dispute, so therefore there is no “case” to present.
The IRS tried to argue that it was nonsensical that Congress would allow the IRS to regulate those individuals that present cases and not those that prepare returns. However, the court disagreed with the IRS’s assertion. The court concluded that Congress could conceivably require a higher standard for those individuals who present cases because there is a greater burden of knowledge required to litigate cases. Using a will as an example, the court pointed out that anyone can draft a will but only a lawyer can dispute what the will entails.
So where does this leave the RTRP designation? Will the IRS abandon this designation all together? Currently, the IRS online PTIN renewal site is offline likely due to removing the requirement of the exam for PTIN issuance and renewal. In the first official statement regarding the RTRP program on January 22nd, the IRS hinted this issue is not yet resolved. The agency reiterated that Congress gave the IRS authority to regulate preparers and that the agency is still considering how to best address the court’s ruling. Perhaps the next step is to appeal the ruling to a higher court or ask Congress to pass a bill with expressed consent to regulate tax preparers. We will have to wait to see how this all unfolds. Meanwhile, those individuals who are RTRP are left to wonder what this new designation even means.
*Thank you to Micheal Hock, Tax Senior, for his contributions to this post.