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IRS Lacks Authority to Regulate Tax Preparers, Court Says

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Feb. 11 (Bloomberg) -- The U.S. Internal Revenue Service lacks authority to regulate paid tax preparers, a federal appeals panel said, upholding a lower-court ruling throwing out licensing rules for as many as 700,000 practitioners.

The IRS issued new rules in 2011 to address concerns about the performance of some preparers. The agency relied for authority on a 1884 law empowering it to “regulate the practice of representatives of persons before the Department of Treasury,” according to the ruling by a three-judge panel in Washington.

In the 125 years after the law’s enactment, “the executive branch never interpreted the statute to authorize regulation of tax-return preparers,” U.S. Circuit Judge Brett Kavanaugh wrote today for the panel. The law “cannot be stretched so broadly as to encompass authority to regulate” preparers, the court said.

An estimated 142 million individual returns were filed for the 2011 tax year, and almost 70 million taxpayers used a paid preparer, the U.S. Justice Department said today in a statement highlighting its anti-fraud efforts.

Crooked preparers often falsify information to claim refundable tax credits for their clients, typically by manipulating taxpayer income, expenses and dependents, the agency said. Some preparers sell customers deceptive loan products with exorbitant fees.

‘Major Victory’

Today’s ruling “is a major victory not just for tax preparers but for taxpayers,” said Dan Alban, of the libertarian Institute for Justice in Arlington, Virginia, who argued the case on behalf three tax preparers challenging the IRS rules. “This is about the freedom to choose your tax preparers. Taxpayers get to choose, not the IRS.”

“The IRS is currently reviewing the decision,” Julianne Breitbeil, an agency spokeswoman, said in an e-mailed statement. “It’s critical for taxpayers to be able to rely on quality work from tax preparers.”

Accountants and tax preparation companies such as H&R Block Inc., the nation’s largest tax preparer, and Intuit Inc., the maker of TurboTax, supported the regulation.

The decision is “a blow to honest taxpayers,” William Cobb, chief executive officer of Kansas City, Missouri-based H&R Block, said in a statement.

All states regulate hairdressers, the company said. “Something is out of whack when you are better protected when getting your hair cut than when sitting across the desk from a tax preparer” with access to personal data, Cobb said.

Exam, Fees

The rules imposed standards on preparers who aren’t certified public accountants, attorneys or enrolled agents already licensed to practice before the IRS.

The IRS required that paid preparers pass a certification exam, pay annual fees and complete at least 15 hours of education courses annually. The agency spent more than $50 million to set up the program.

U.S. District Judge James Boasberg invalidated the oversight program in January 2013, ruling that the IRS improperly relied on language in the 1884 law. The statute says those who represent people before the U.S. Treasury Department are assisting them in “presenting their cases” to the government.

“Filing a tax return would never, in normal usage, be described as ‘presenting a case,’” Boasberg said.

The appeals panel echoed that reasoning.

“The tax-return preparer certainly assists the taxpayer, but the tax-return preparer does not represent the taxpayer,” Kavanaugh wrote. “In short, the statute’s use of the term ‘representative’ excludes tax-return preparers.”

Alban and other critics said H&R Block and other big tax-preparation companies liked the regulation because they can afford annual fees and other costs that could put some mom-and-pop practitioners out of business.

The case is Loving v. IRS, 13-5061, U.S. Court of Appeals for the District of Columbia (Washington).

To contact the reporter on this story: Andrew Zajac in Washington at azajac@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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