IRS Sued Over New Tax Preparer Licensing Requirement

March 15, 2012

Under new regulations approved last year and in effect for the first time this tax season, tax preparers must obtain a license from the federal Internal Revenue Service (IRS). The license involves paying extra fees, passing a government exam, and taking 15 hours of continuing education classes every year. Attorneys, CPAs, and other politically-connected groups are exempt from the requirement. (Disclosure: I am an attorney tax preparer and am happily exempt from the license requirement.)

It certainly struck me as unusual that big tax preparation firms escape all obligations under these new regulations but small preparers feel the full brunt of it. The Institute for Justice (IJ) has filed suit against the IRS on behalf of several small preparers, arguing that the IRS doesn't even have the authority to impose a license requirement:

"These regulations are typical government protectionism," said IJ Senior Attorney Scott Bullock. "They benefit powerful industry insiders at the expense of entrepreneurs and consumers, who will likely have fewer options and face higher prices. But tax preparers have a right to earn an honest living without getting permission from the IRS. And taxpayers-not the IRS-should be the ones who decide who prepares their taxes."

The IRS points to 31 U.S.C. §330, permits the government to "regulate the practice of representatives of persons before the Department of the Treasury." IJ convincingly argues that this refers to establishing rules for hearings and appeals within the IRS, not tax preparation. They note that previous efforts have been made to amend federal law to give authority to the IRS to regulate tax preparation, but none have passed. (Disclosure 2: I reviewed and offered comments on IJ's filing in this case.)

National Taxpayer Advocate Nina Olson this week defended the regulations: "Regardless of whether preparer standards are implemented by regulation or by legislation, however, I continue to believe we need to have them. If a preparer cannot pass a basic competency test and does not take courses to remain up-to-date on tax law changes and understand his or her ethical responsibilities to clients and to the tax system, that individual should not be preparing tax returns for compensation."

Here's IJ's video on the lawsuit:

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