IRS Wins Latest Battle on Voluntary Return Preparer Testing and Education Though Other Battles Likely Remain

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Last week in AICPA v IRS the DC District Court ruled in favor of the IRS in the latest round of the AICPA’s fight to dismantle the IRS’s Annual Filing Season Program. As some of you may recall, the Annual Filing Season Program (AFSP) was the IRS’s reaction to losing in its efforts to impose on unlicensed preparers a mandatory testing and education regime in Loving v IRS. Rather than force unlicensed preparers to take an entrance test and take continuing education, the IRS now allows preparers to opt in, with the benefit that those who sign on appear in an online searchable database of preparers. The AFSP also imposes a cost to those who do not opt in; they are not permitted to engage in limited representation of the clients whose returns the IRS audits.

Last year the DC Court of Appeals, reversing the District Court, held that the AICPA had standing to bring the suit challenging the AFSP. After the case was remanded to the District Court and prior to that court getting to the heart of the merits argument, IRS filed another motion to dismiss, this time not on constitutional standing grounds (where it lost on appeal). Instead, IRS argued that the case should be dismissed because AICPA was not within a zone of interests that Congress sought to protect. In last week’s opinion, the District Court held that while AICPA had standing to bring the suit the suit should be dismissed because AICPA was not within the zone of interests protected by 31 U.S.C. § 330(a) (dealing with regulating practice before Treasury and conditioning practice upon qualifications) and 31 U.S.C. § 330 (b) (comprising of penalties and rules for the disbarment of practitioners).

In this post I will briefly discuss the zone of interests issue and also address some of the procedural implications of the opinion, including how the opinion foreshadows other challenges to the AFSP.

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The AICPA is Not in the Zone of Interests

As last week’s opinion discusses, the zone of interests question is not a constitutional standing question (though it is similar); instead, “it is a ‘statutory question’ that asks ‘whether ‘a legislatively conferred cause of action encompasses a particular plaintiff’s claim.’ Mendoza v. Perez, 754 F.3d 1002, 1016 (D.C. Cir. 2014). Likely for this reason, satisfaction of the zone-of-interests test is no longer a “jurisdictional requirement” and is instead “a merits issue.” Crossroads Grassroots, 788 F.3d at 319 (citations omitted).

Was AICPA within the class of persons Congress sought to protect with 31 U.S.C. § 330(a) and (b)? The court said no. The upshot of the opinion is that AICPA brought this suit because it felt that the Annual Program would threaten its members’ market share; worried that the public would view the Annual Filing Season as a credential that would draw consumers from CPAs during tax season, the AICPA sought to stop the program:

AICPA’s objective here, as it relates to its competitive injury, is to “remov[e] the AFS Rule’s spurious credential from the marketplace.” Opp. at 2; see id. at 3 (“[A]s competitors of unenrolled preparers, AICPA members’ interests” consist of, inter alia, “ensuring that their hard- won qualifications are not diluted by the Rule’s unlawful credential.”). Digging deeper, however, its interest relates to “maximizing . . . profits, apparently by avoiding competition with” unenrolled preparers in the market for tax services. See Liquid Carbonic Indus. Corp. v. F.E.R.C., 29 F.3d 697, 705 (D.C. Cir. 1994).

That, according to the District Court ran counter to the protective purpose of 31 USC § 330, which Congress enacted in the mid-19th Century as a means to protect Civil War veterans against unscrupulous agents:

On the surface, it seems difficult to square AICPA’s interest in dismantling the IRS’s program with Congress’s goal of safeguarding consumers. In creating the AFS Program, the IRS aimed to improve unenrolled preparers’ knowledge of federal tax law, thereby “protecting taxpayers from preparer errors.” Rev. Proc. 2014-42, § 2. This objective appears closely aligned with Congress’s goal of ensuring taxpayers are provided “valuable service.” 31 U.S.C.
§ 330(a)(2)(C). AICPA does not impugn the IRS’s motive in creating the program or otherwise argue that, apart from the risk of “consumer confusion” – i.e., that consumers might confuse a more-qualified but higher-priced CPA with a less-qualified but cheaper unenrolled preparer – the AFS program does not flow logically from Congress’s objective of protecting consumers. Rather, it seeks to eliminate the Program notwithstanding its potential benefit to consumers precisely because the program’s “‘government-backed credential[]’” renders “unenrolled preparers . . . ‘better able to compete against other credentialed preparers,’ ‘uncredentialed employees of [AICPA] members,’ and ‘CPAs and their firms.’” Opp. at 10 (quoting AICPA II, 804 F.3d at 1197-98).

The zone of interests test is more nuanced than this snapshot provides, and I leave to those who wish to dig deeper to read the opinion itself as well as Ed Zollar’s excellent write up of the case and that issue in Federal Tax Developments.

Not the Final Word on Challenges to the IRS Program

In addition to providing a roadmap on the zone of interests test, the opinion itself is worth a careful read for its suggestion that other parties may in fact have a beef with IRS even if the AICPA does not. To that end, while Judge Boasberg, the judge who wrote the district court Loving opinions, carefully recounts the history of IRS efforts to regulate preparers, he also offers a not so subtle critique of the IRS’s decision to use a Revenue Procedure to promulgate the AFSP. He does so by reminding that he issued a clarifying opinion after IRS lost in Loving.  There he rejected IRS’s request for a stay of the injunction pending appeal, though he noted that IRS might choose to keep in place some of the apparatus of its licensing regime as “it is possible that some preparers may wish to take the exam or continuing education even if not required to. Such voluntarily obtained credentials might distinguish them from other preparers.” He notes that “[p]erhaps taking this clarification to heart, the IRS decided to retain much of the rule’s infrastructure, but did so by relying on tax preparers’ willingness to voluntarily participate.”

While referring to the IRS’s possibly taking his advice, this opinion also discusses that IRS put this process in place in a revenue procedure, “albeit without notice and comment.” The IRS use of revenue procedures to carry the hefty weight of meaningful rules is something we have discussed before; as is the IRS penchant for getting rules in place without formal notice and comment (see Dan Hemel’s post  earlier this week for the Chamber of Commerce challenge to Treasury’s inversion regs, for example).

More from the opinion and the hint to other challengers:

A final word. While AICPA does not have a cause of action under the APA to bring this suit, the Court has little reason to doubt that there may be other challengers who could satisfy the rather undemanding strictures of the zone-of-interests test. “The same claim may be viable in the hands of one challenger and not in those of another that, for example, has interests that make it less than a reliable private attorney general to litigate the issue of the public interest in the . . . case.” HWTC IV, 885 F.2d at 925-26 (citations and quotation marks omitted). Given the points raised in the merits briefing, which the Court now has no occasion to consider, Defendant may wish to ensure that its Program was properly promulgated before a suitable party mounts its own challenge.
 (emphasis added)

A few years ago I wrote an article explaining why I thought it was important for IRS to seek greater input especially on rules that have a significant impact on those whose interests are not typically represented through trade associations or lobbying groups. In writing the article, I drew upon a deep literature in administrative law that discusses the pros and cons of requiring agencies to more closely adhere to the requirements to use the notice and comment procedure to promulgate rules. I am no zealot on these issues, and while it has been a while since I deeply waded in those waters I am sympathetic to those who feel IRS should more meaningfully and systematically engage with those whose perspective would improve the quality of the rules the IRS issues. As an added benefit it would also likely engender greater acceptance of the rules from those who may not necessarily like the outcome but who feel that their voice was heard. (I do recognize that before IRS did come up with its ill-fated mandatory testing and education program that the courts invalidated IRS did seek input in the form of hearings and an informal comment period).

We likely have not seen the last of the challenges to the IRS Annual Filing Season Program; nor have we seen the last procedural challenge to the issuance of rules. While this round is a nice IRS victory, Judge Boasberg’s opinion is perhaps a reminder that IRS ignores strict adherence to some administrative law norms at its peril.

 

 

 

 

 

 

 

 

Leslie Book About Leslie Book

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

Comments

  1. Richard Conboy, BSIE, MBA, EA says:

    The problem is this just shows the IRS’ incompetence and the fact they don’t strive for excellent. The RTRP program was pretty good at the time. All they had to do was make it voluntary. But which ever (AFSP or RTRP) they still don’t push “credentials” to the public. Their 154 penalties are supposed to scare the public into “doing taxes right”. They might try motivation, education instead of scare tactics for once.

  2. Jeanne Tatum says:

    The AFSP program is voluntary all right…with a sledgehammer of “you can’t represent your clients”. The IRS cannot regulate tax preparation, especially by sliding mandates in via revenue procedure. First of all, the IRS cannot mandate the public to use a tax preparer. If they tried they would have a massive tax revolt on their hands. As long as the public can do their own returns or have someone else prepare it, then the taxpayer sign it as self-prepared, the process can never really be regulated. There will always be unscrupulous activity like that in tax returns. In my opinion, the IRS already has its own credential, the EA and the states have their own credential, the CPA. If the IRS was serious about regulating tax preparation, they would make either of those mandatory for anyone charging to prepare tax returns of any kind. End of story-that is all they have the ability to regulate. The rest would be “buyer beware” and if they get ripped off, go through legal channels to pursue it.

  3. Bob Kamman says:

    Speaking of battles with the IRS, I seem to be losing mine as I try to help an 85-year-old widow who received a Notice CP01H on Saturday, accusing her of filing a 2015 return when “the person identified as the primary taxpayer or spouse on the tax return was deceased prior to the tax year shown on the tax form. Our records are based on information received from the Social Security Administration.” It adds, “Based on this information, the tax account for this individual has been locked.”

    I prepared the return, filing status single. It has only her name and her SSN. She owed $1,320 and she paid it with the return. IRS cashed the check before April 15. Now, she is told in big bold letters, “We are unable to process your return.” A friend of hers, also widowed in 2014, tells her she has been battling the same problem.

    “What you need to do,” the notice says, is “please contact the Social Security Administration to correct this situation. After the error is corrected, please send the following information to the address shown above: A copy of this letter; A written request that the account be unlocked; A photocopy of at least one of the following: passport, drivers license, social security card; other valid U.S. Federal or State Government issued identification; your tax return with an original signature.”

    There is an IRS phone number on the return, which connects to the IRS identity-theft operation, with an extension number that goes to a recording that says they are getting too many calls and are unable to help. It then hangs up.

    Thinking this may be a systemic problem that requires immediate attention to fix existing cases and prevent new ones, I ask my local Taxpayer Advocate’s office for help. I send a fax describing the problem. A few hours later, I get a phone call berating me for not waiting 30 days for IRS to respond. Well, it has been about four months since the return was filed. The caller from TA (who asks me not to yell at her; I raised my voice the third time I asked for her badge number because the first two times didn’t work) tells me that my client should go to an IRS office, ten miles away. But, I point out, the notice says go to Social Security. Isn’t the IRS office just going to direct her there? Well, then go to Social Security. Just don’t go to TA. Will TA send my client a letter rejecting the case? No. If I start billing my client for this work, will TA recognize a hardship? Only if I submit written confirmation that she is paying me.

    I input a description of the problem to the NTA’s SAMS website (systemic advocacy). This is like throwing a coin into the Grand Canyon, so I also write a letter for my client to ask for help from our Senator who is up for re-election. TAS will then be required to respond to the Congressional, and by next tax season maybe the return will be unlocked. Or maybe IRS will send back the taxes she paid.

  4. Bob Kamman says:

    Update. I received a phone message in response to my systemic advocacy case (SAMS No. 34971). The call came from Tennessee area code 901 — presumably the Memphis Service Center. The caller Sally C (last name given but omitted here) left a callback number for Florida area code 954. I called that number and it has been disconnected or is out of service. So I called the number on my caller ID, and got a recording telling me to call the number that was left by the IRS employee who called me.

    And that, folks, is the way the IRS operates these days.

  5. Michael S Cash, EA says:

    The AICPA claim is right up there with the folks who argue that they want to prevent fraud with Voter ID laws when they really want to eliminate voters from voting for the opposition. In my state, California, you have to complete a short educational course demonstrate minimal competence, get annual update education and enroll with the California Tax Education Council to qualify to be a seasonal tax prep worker bee. A CPA that is threatened by that probably shouldn’t be practicing.

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