AICPA Suit Against IRS Voluntary Education and Testing Regime Thrown Out of Court

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We have previously discussed the AICPA’s lawsuit challenging the IRS’s voluntary Annual Filing Season Program, as well as other major developments relating to preparers in a post last month. After AICPA sued, IRS filed a motion to dismiss the suit due to lack of standing. Yesterday Judge Boasberg of the DC District Court (the same District Court judge in Loving) held in favor of the IRS and granted its motion to dismiss in AICPA v IRS

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The dismissal turned on the court finding that the AICPA did not have standing to sue the IRS. Standing rules are tricky when organizations rather than individuals bring the suit (recall that in Loving the plaintiffs were 3 previously unlicensed preparers).

I will briefly describe the basis for the court’s opinion, but first provide some background on standing generally, courtesy of Judge Boasberg.

Background on Standing

As the opinion cogently explains, standing rules are based on the constitution:

Article III of the United States Constitution limits the jurisdiction of the federal courts to resolving “Cases” or “Controversies.” U.S. Const. art. III, § 2, cl. 1. A party’s standing “is an essential and unchanging part of the case-or-controversy requirement of Article III.” Lujan, 504 U.S. at 560. To have standing, a party must, at a constitutional minimum, meet the following criteria. First, the plaintiff “must have suffered an ‘injury in fact’ – an invasion of a legally- protected interest which is (a) concrete and particularized . . . and (b) ‘actual or imminent, not ‘conjectural’ or ‘hypothetical.’” Id. (internal quotation marks and citations omitted). Second, “there must be a causal connection between the injury and the conduct complained of – the injury has to be ‘fairly . . . trace[able] to the challenged action of the defendant, and not . . . th[e] result [of] the independent action of some third party not before the court.’” Id. (alterations in original) (citation omitted). Third, “it must be ‘likely,’ as opposed to merely ‘speculative,’ that the injury will be ‘redressed by a favorable decision.’” Id. at 560-61 (citation omitted). A “deficiency on any one of the three prongs suffices to defeat standing.”

The standing rules differ when an organization (such as the AICPA) brings a suit. Here is how the DC District framed the standing rules with organizations:

 Here, Plaintiff does not claim injury to itself, but to its members. When an organization is suing on behalf of its members, it must establish “representational” or “associational” standing. To do so, it needs to show that “(1) at least one of [its] members has standing to sue in her or his own right, (2) the interests the association seeks to protect are germane to its purpose, and (3) neither the claim asserted nor the relief requested requires the participation of an individual member in the lawsuit.” American Library Ass’n v. FCC, 401 F.3d 489, 492 (D.C. Cir. 2005) (citing Hunt v. Washington State Apple Advertising Comm’n, 432 U.S. 333, 343 (1977)).

For good measure, the court framed the standing issue in a way that favored the IRS:

Finally, because the agency program at issue here is not directed at Plaintiff or its members, but at third-party uncredentialed tax preparers, a “heightened showing” is required to establish standing. Renal Physicians, 489 F.3d at 1273. “[W]hen the plaintiff is not himself the object of the government action or inaction he challenges, standing is not precluded, but it is ordinarily substantially more difficult to establish.”

AICPA Argument and Court’s Analysis

The AICPA’s argument was based on “three theories of standing here, claiming that its members: (1) “employ individuals [i.e., uncredentialed tax preparers] who will be injured by the additional regulatory burdens created by the AFS Rule”; (2) “will be directly injured by the AFS rule because it requires firms to ‘take reasonable steps’ to ensure that their newly regulated employees comply with Circular 230”; and (3) “will suffer injuries because the rule will cause confusion among consumers.”

The court proceeded to find fault with the three respective theories. With respect to the first theory, that its members will be injured due to employee costs, the court rejected that basis because under federal standing law employers do not have standing based on employee costs. Moreover, that employers may choose to incur some of those costs directly was not enough to bring the harm to the level needed under federal standing law because those would be voluntarily incurred and not traceable to the  IRS’s program.

As to the second theory, that the member firms will be directly injured by the AFS rule due to the reasonable steps needed to ensure Circular 230 compliance, the court also dismissed that as more properly attributable to Circular 230, and not the voluntary program. Perhaps hinting at a future suit, the order states that “[a]ny objection AICPA wishes to make to the “reasonable steps” obligation, see Opp. at 22-23, must be raised in a challenge to Circular 230 rather than to the Program.”

Finally the order dismissed the notion that the AFS program would cause confusion as speculative. With blunt language, the court described the likely motivation for the suit:

Beneath its amorphous rhetoric about confusion, the crux of Plaintiff’s concern is apparent: its membership feels threatened by the specter of increased competition from previously uncredentialed preparers who choose to complete the program.

While in certain circumstances, increased competition can lead to standing (so called “competitor standing”), the court did not find that to be the case here because “an aspiring litigant must show “an actual or imminent increase in competition” resulting from the challenged regulatory action.” Here, AICPA failed to show that.

Parting Thoughts

This is a major though perhaps temporary legal victory for IRS. There are other developments that portend for some difficult times ahead for IRS as it attempts to target preparers for additional oversight as a way to reduce the tax gap. Judge Boasberg (and others, including Mike Desmond in a guest post on Procedurally Taxing) suggests that future challenges to IRS under Circular 230 are possible. This seems especially likely in light of the Ridgely v Lew descision that invalidated Treasury Circular 230 10.27 insofar as it prevents the charging of contingent fees for refund claims practitioners charge for preparing and filing refund claims after an original filing and before the Service has commenced an audit.. In addition, the class action challenge to the user fees that IRS charges for PTINs is still ongoing. Nonetheless, this opinion, for the time being, allows the IRS to proceed with its ambitious plans for the upcoming filing season.

 

 

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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