Court Strikes Down IRS’s Arbitrary Tax Preparer Licensing Requirements
January 18, 2013
Back in March, the libertarian public interest law firm the Institute for Justice sued the IRS over its new and arbitrary requirement that tax preparers pay fees, pass a government exam, and take 15 hours of continuing education classes every year. Attorneys, CPAs, and other politically-connected groups are exempt from the requirement. (Disclosures: I am an attorney tax preparer and am happily exempt from the license requirement. I also reviewed and offered comments on IJ's filing in this case.)
IJ argued on behalf of several small tax preparers that the IRS had no authority to impose such regulations, noting that Congress had considered it on a number of occasions but never passed it. The IRS pointed to 31 U.S.C. § 330, which permits the government to "regulate the practice of representatives of persons before the Department of the Treasury"; IJ convincingly argued that this refers to establishing rules for hearings and appeals within the IRS, not tax preparation.
And when I say convincingly, I mean they convinced the U.S. District Court for the District of Columbia (PDF), granting summary judgment to IJ:
[I]f § 330 covers tax-return preparers, the IRS would have the discretion – with few restraints – to impose an array of penalties for [violations]. That unstructured independence by the IRS would trample the specific and tightly controlled penalty scheme in the [Internal Revenue Code].[…]
Because the U.S. Code already sets forth a comprehensive scheme targeting specific problems with specific solutions, § 330 should not be interpreted to allow the IRS to penalize tax-return preparers for conduct while preparing and filing returns.[…]
The IRS also makes a number of nontextual arguments in favor of its interpretation, but none of these can overcome the statute's unambiguous text here.[…]
With an invalid regulatory scheme on the IRS's side of the scale and a threat to Plaintiffs' livelihood on the other, the balance of hardships tips strongly in favor of Plaintiffs. Finally, the public interest would be served by a permanent injunction because the IRS's new Rule is ultra vires [beyond its power].
Congratulations to IJ and to taxpayers!