Big Win for Taxpayers: IRS Loses Effort to Expand Power Over Tax Preparers

February 11, 2014

In May 2013, we filed a brief opposing an IRS appeal of a court decision striking down their regulation of small tax preparers. The new regulations require federal tax return preparers to register with the agency, pay significant fees, and pay for certified continuing education. Larger preparers with other professional credentials were largely exempted from these regulations. The Institute for Justice brought suit against the IRS, and a trial judge struck down the regulations. The IRS appealed to the D.C. Circuit Court of Appeals.

Our brief, in which we were joined by seven small preparers, made three main arguments why the IRS exceeded its powers. First, the IRS could not rely on their power to regulate tax court proceedings, as preparing a tax return is not equivalent to presenting a case. Second, the regulations are poorly targeted for their stated goal of deterring fraud. Third, the IRS did not comply with notice and comment requirements in drafting the regulations.

Today, the D.C. Circuit rejected the IRS's arguments (PDF). They built on our three arguments and went further, writing: "In our view, at least six considerations foreclose the IRS’s interpretation of the statute" (Op. 6; emphasis mine). One by one:

  • The IRS is incorrect in asserting that tax preparers are "representatives" or agents of taxpayers. They have no legal authority to act on a taxpayer's behalf. The court cites IRS regulations indicating so. "The tax-return preparer certainly assists the taxpayer, but the tax-return preparer does not represent the taxpayer." (Op. 8.)
  • Preparing tax returns is not the same as practicing before the Treasury Department or Tax Court, which refers to adversarial proceedings where the taxpayer has secured representation.
  • The statute where the IRS claims its authority to regulate tax preparers was in fact enacted with the stated intent of codifying existing practices without changing them.
  • Congress has enacted specific regulations of tax preparers, such as requiring preparers to sign returns and penalizing deliberate understating of liability. If the IRS had separate authority to do such things, Congress's action would have been unnecessary. "[W]e find at least some significance in the fact that multiple Congresses have acted as if Section 330 did not extend so broadly as to cover tax-return preparers." (Op. 14.)
  • The IRS is asserting a major expansion of authority but "nothing in the statute's text or the legislative record contemplates that vast expansion of the IRS's authority." (Op. 15.)
  • The IRS frequently interpreted the statute narrowly until 2011, when it decided to assert this new authority. "[I]n the circumstances of this case, we find it rather telling that the IRS had never before maintained that it possessed this authority." (Op. 16).

The Court concludes: "It might be that allowing the IRS to regulate tax return preparers more stringently would be wise as a policy matter. But that is a decision for Congress and the President to make if they wish by enacting new legislation.... The IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of Section 330." (Op. 17.)

The decision was unanimous. The case is Loving v. Internal Revenue Service, No. 13-5061 (D.C. Cir. Feb. 11, 2014). The brief for the Tax Foundation and small tax preparers was filed by Patrick J. Smith.

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