Latest Round in PTIN Litigation With District Court Finding For Government In Steele v US

Longtime readers may recall a series of blog posts discussing the class action litigation challenging the IRS’s statutory authority to charge a fee for PTIN issuance and renewal. After an initial plaintiff victory in district court, the DC Circuit Court of Appeals held that the IRS was within its authority to charge the PTIN fees but remanded the case to determine whether the amount charged was excessive. For more on the DC Circuit opinion, as well as prior rounds in the skirmish, see In Major Victory for IRS DC Circuit Upholds IRS Annual Filing Program.

Late last month in the latest round in Steele v US the district court issued an order on discovery issues. The order includes some strong language about both parties, but the order reflects a decisive government win though the case awaits a resolution on the merits.


The latest issue concerns the plaintiffs’ motion to compel discovery about the creation and implementation of the original PTIN program. The government alleged that some of the requested information was protected by the deliberative process privilege. In addition, the court considered the sufficiency of government’s responses to interrogatories.

As to deliberative process, as the opinion describes, that privilege protects from discovery “advisory opinions, recommendations and deliberations comprising part of a process by which governmental decisions and policies are formulated.” To benefit from it, the party asserting the privilege must demonstrate that the information is predecisional and deliberative.

The opinion nicely summarizes DC Circuit law on the substance and means for the government to assert deliberative process. It requires proof that the requested document was part of assisting an agency decisionmaker in making the decision, rather than supporting a decision that was already made.

In addition, case law provides the following three elements to benefit from the privilege:

  • A formal claim of privilege by the head of the department possessing control over the requested information,
  • An assertion of the privilege based on actual personal consideration by that official, and
  • Details regarding the information for which the privilege is claimed, along with an explanation why it properly falls within the scope of the privilege.

The major issue that the plaintiffs raised with respect to the government’s assertion of deliberative process was that the government failed to assert the privilege with sufficient detail, instead relying on “boilerplate descriptions” of the withheld documents. The remedy that the plaintiffs sought was discovery of every document withheld solely under the deliberative process privilege.

In strong language, the court disagreed. Calling the proposed remedy “incredible” the court criticized the motion for failing to evaluate the documents and asserted privilege on their own terms:

Plaintiffs’ compact motion shuns individual analysis of the documents in question, instead taking a blanket approach where one bad privilege log entry spoils the bunch.

The order also held that it was  “insincere of plaintiffs to argue that the government has failed to meet its burden in asserting the privilege for every privilege log entry” given that the given the declaration by the IRS’s Deputy Associate Chief Counsel that provided “details why twenty-six of the log entries were withheld.”

The order also included snippets of the government’s privilege log, which in its view also provided sufficient description beyond boilerplate. Some of the included details identified the contractor working with the IRS in setting up the PTIN program, the date, the topic, and who in the government was the intended recipient.  While some of the government’s language was repetitive, the order found that the government met its burden in establishing the elements for the privilege.

While there may have been a question as to whether the government was entitled to rely on deliberative process with specific documents the plaintiffs’ failure to drill down individually was fatal:

Because plaintiffs did not produce “a set of objections that identifies each log entry” that they challenge and because this Court cannot agree that each log entry is insufficient—especially given Goldman’s accompanying declaration—plaintiffs are essentially asking this Court to engage in an entry-by-entry analysis of the privilege log to evaluate whether the government has fulfilled its burden.

The second category of information in this discovery dispute related to interrogatories about the amount of time that IRS employees spent on PTIN-related tasks.  The government argued that the requests were irrelevant and in any event asked for information that the government did not in fact have. As to relevance, information about time spent could be helpful in establishing that the original fees in the PTIN program were excessive, and the court found that the low relevance bar was easily met. 

Unfortunately for the plaintiffs, however, the government prevailed on this challenge. As the order described, the plaintiffs were not really looking for an order forcing a response, but were in fact looking for an order requiring a “different response.”

The government has already provided plaintiffs with numerous declarations from various employees regarding staffing and PTIN work, including some time allocation breakdowns.  However, not all employees kept contemporaneous time records. The government contends that if the information sought by plaintiffs is not included in those materials already provided, it does not exist. 

The court chided the government, stating it “should have stated the nonexistence of this information more clearly in their actual interrogatory answers, instead of in their response to plaintiffs’ letter alleging deficiencies.” Despite that deficiency, the court declined to compel any additional responses, and agreed that “forcing employees and former employees to produce a detailed record of time spent on PTIN tasks over the last ten years based on memory alone is absurd.”


With this round over for now, the case slowly marches towards a resolution, though perhaps other more targeted discovery challenges await. In the meantime, a couple of years ago IRS reworked the PTIN user fees (see IRS Announces New PTIN User Fee in Proposed Regulations), with the fee now at $35.95 for initial applications and renewals. 

DC Circuit Oral Argument in Challenge to PTIN Fees

Last week the government and counsel for the plaintiffs faced off in the DC Circuit Court of Appeals, with Judges Garland, Srinivasan, and Millett peppering both sides with pointed questions.

Readers may recall the Steele case (now styled Montrois v US), where the DC district court enjoined the IRS from charging for new and renewed PTINs. I enjoy listening to oral arguments and this superstar panel was well-versed with the issues.

A few things jumped out at me during the one-hour oral argument. In response to Judge Millett, a healthy part of the DOJ’s portion of the argument centered on what exactly the IRS did with the money it received; that to me anyway seems more related to the plaintiffs’ alternate argument that the fees were excessive (recall that the district court did not reach that as it found that the IRS did not have authority to charge any fees). I suspect that if the court finds that it was within the IRS’s power to charge fees on remand the plaintiffs will pick up this theme to focus on exactly what the IRS did to justify the fees preparers paid.

The panel, and Judge Garland in particular, focused on an alternate rationale for the use of PTIN, that is the benefit of not using preparers’ social security numbersrather than the program’s connection to the ill-fated licensing regime Loving struck down.

The end of the argument concerned a jurisdictional question from Judge Millett that I had not considered, namely whether the preparers who will likely be entitled to some refund were required to file a refund claim before being entitled to receive a return of the fees that they paid. The government has not argued this on appeal, but given its jurisdictional nature I suspect that the court might address its merits.

Government Seeks Reversal of District Court Decision That Invalidated PTIN User Fees

One of the more interesting cases from last year was Steele v US, where a DC district court upheld regulations imposing a PTIN requirement for preparers but held that the IRS did not have authority to require preparers to pay a user fee for obtaining or renewing a PTIN. In Steele, the District Court in invalidating the fees largely relied on the reasoning in Loving, and applied the Independent Offices Appropriations Act (IOAA) which authorizes agencies to charge fees for “a service or thing of value provided by the agency.” The lower court essentially held that the IRS’s fees were a backdoor attempt at regulating return preparers, stating that IRS “may not charge fees for PTINs because this would be equivalent to imposing a regulatory licensing scheme and the IRS does not have such regulatory authority” after Loving.

The government appealed, and it just filed its opening brief.


The main argument that the government makes on appeal is that the district court failed to appreciate the service and value associated with obtaining a PTIN:

The PTIN provides a special benefit to tax return preparers because, as even the District Court held, it is required by statute and regulation to lawfully prepare returns for compensation. If a return preparer does not obtain a PTIN and provide it on returns he or she prepares, the preparer is subject to penalties of up to $25,000 per year, I.R.C. § 6695(c), as well as to being enjoined from preparing returns, I.R.C. § 7407. Return preparers comprise only a tiny fraction of the U.S. population, and the members of the general public who are not preparers have no occasion to request PTINs and receive no direct benefit from their issuance to those individuals who are return preparers. The issuance of PTINs thus provides a special benefit to the recipients of the PTINs, and therefore the IOAA authorizes the IRS to charge a user fee for PTINs.

In addition the government emphasized that the PTIN program helps “to protect preparers’ SSNs, which was Congress’s purpose in authorizing the IRS to create and mandate the use of the PTIN.”

The government on appeal attempts to separate the PTIN requirement from the regulation regime that Loving struck down. In so doing, the government emphasizes that while PTINs played a key role in that ill-fated regulatory regime (essentially only registered or licensed return preparers were eligible for a PTIN in the pre-Loving world) PTINs have a value and role that is distinct from regulating preparers.

As readers may recall, the district court’s conclusion mooted the alternative argument that the user fees IRS charged were excessive. If the government prevails on appeal, that issue will resurface.

Stay tuned.

For a prior post on Steele see here

IRS Loses (Again) in Challenge to PTIN User Fee Regs

Readers may recall our discussing the IRS’s loss in Steele v IRS, where a federal district court in DC struck down the IRS’s requirement that preparers pay a user fee to get or renew a PTIN.

While IRS reopened its PTIN program after the loss, pending an appeal, IRS sought a stay of the court’s order enjoining it from charging fees for preparers who were applying for or renewing a PTIN. This week that same district court ruled against the IRS.

I describe the outcome and issue below.


Getting a court to stay an injunction is difficult. The DC circuit has described a stay as an “extraordinary remedy” that intrudes into the ordinary process of court review. To that end, the standard for granting a stay to an injunction is based on a 4-factor test:

(1) the likelihood that the party seeking the stay will prevail on the merits of the appeal;

(2) the likelihood that the moving party will be irreparably harmed absent a stay;

(3) the prospect that others will be harmed if the court grants the stay; and

(4) the public interest in granting the stay

The DC Circuit has traditionally employed a sliding-scale approach, meaning, for example, that if one factor was particularly strong, it could make up for a weaker showing on another factor.

Most of the discussion in the brief memorandum opinion denying the stay of the injunction revolved around the court’s view of factors 1 and 2, namely that it did not believe that the IRS would prevail on appeal or suffer irreparable harm in the absence of a stay.

As to the first point, the opinion returned to the themes in its original opinion.

In a nutshell, what the earlier opinion and this opinion emphasized was that even though the 11th circuit in Brannen had found that the user fee regulations were valid, that was a pre-Loving opinion. Loving’s rationale and the interconnectedness of the PTIN and invalid testing/education regime led the court to conclude that the PTIN regulations were improper. Furthermore,  the district court found that obtaining a PTIN number is no longer a “service or thing of value” – the standard required to impose a fee under the Independent Offices Appropriations Act. To that end, the court stated that IRS “cannot use an invalidated regulatory scheme to bootstrap in a fee.”

In emphasizing that the IRS was unlikely to prevail on the merits, the district court was blunt:

In sum, the Court is not persuaded that the government’s rehashed arguments present “serious, substantial, difficult and doubtful” issues. The Court has not been presented with any new information that has come to light since it ruled on this matter and remains convinced that the case was correctly decided.

While that alone according to the court was sufficient to decide against granting the stay, the opinion also discussed that the IRS did not prove the case that it was suffering irreparable harm. As support for its position that the original decision was irreparably harming it, IRS said that it was losing all PTIN fees during the appeal and that it needed to cut services.

In rejecting the IRS’s argument about harm, the opinion discussed the high standard that needed to be met to establish harm:

Plaintiffs must demonstrate that the injury is “of such imminence that there is a clear and present need for equitable relief to prevent irreparable harm.” Id. (internal quotations removed). Moreover, the injury “must be beyond remediation” and “mere injuries, however substantial, in terms of money, time and energy necessarily expended in the absence of a stay are not enough.” Id. (internal quotations removed).

The court was skeptical on the IRS’s argument that it could not obtain the fees if it eventually won on appeal:

First off, the Court is not convinced that the government will be unable to recoup uncollected fees should they ultimately prevail. While it might not be easy, the government is unable to say with absolute certainty that a restitution claim would not be viable. Additionally, it is not clear to the Court why if the government, by its own admission, can refund PTIN holders… it cannot also retroactively charge PTIN holders who were not required to pay a fee during the pendency of the appeal. Given these outstanding questions, the government has not established that the harm is “certain,” “not theoretical,” and “beyond remediation.

More pressing to its conclusion was the court’s discussion of how small a percentage the fees are to the IRS’s overall budget:

Here, the government acknowledges that a loss of $ 37.6 million would constitute a mere 0.3% of the IRS’s yearly budget. ECF 82-3 at 9. Put simply, 0.3% is a rounding error when considering the IRS’s overall budget. And courts have consistently found that greater magnitudes of economic harm fall short of the bar for irreparable harm. See e.g. ConverDyn v. Moniz, 68 F. Supp. 3d 34, 48 (D.D.C. 2014) (finding that a $ 10 million expected loss, or 10% of revenues, was “not of sufficient magnitude”); TGS Tech., Inc. v. U.S. Dep’t of Air Force, 1992 WL 19058, at *4 (D.D.C.1992) (holding that plaintiff did not establish irreparable injury when loss amounted to “only” twenty percent of business).

Finally, the court found unavailing the government’s argument that IRS would have to transfer funds from other programs, in part because it felt that IRS could “decide to discontinue the issuance of PTINs entirely during the pendency of the appeal, which would dramatically reduce the cost to the government.”


This is the latest and not last of the Loving fallout. In the absence of direct and clear Congressional oversight authority, IRS is swimming upstream in its underfunded efforts to get in front of a diverse paid preparer community. This opinion, as the original opinion from this past summer, underestimates the potential benefits associated with a uniform preparer identification requirement and the costs associated with additional obstacles that can prevent IRS from easily associating preparers with tax returns.

Stay tuned as this underlying case winds its way through the appeal process.

District Court Strikes Down IRS’s User Fees for PTINs

Readers may be aware of last week’s Steele v US district court opinion that upheld the IRS’s requirement that preparers obtain a PTIN but struck down the IRS’s requirement that preparers pay a user fee to get the PTIN. In light of the Steele opinion, IRS announced it is suspending PTIN renewal and registration.

This is another big setback to the IRS’s approach to gain oversight over tax return preparer community and may result in the IRS refunding millions of dollars in previously collected PTIN fees. The opinion conflicts with Brannen v US, a 2012 11th Circuit opinion that held that the IRS’s PTIN user fee regime passed muster, and is yet another in the ripples following the DC Circuit’s invalidating the IRS’ plan to regulate unlicensed preparers a few years ago in the Loving case.

I will excerpt the parties’ positions and the way the court resolved the dispute, and offer some observations as to why I think the court’s approach is misguided.


The Steele district court opinion turns on the Independent Offices Appropriation Act of 1952 (IOAA) codified at 31 USC § 9701. The IOAA provides broad authority to assess user fees or charges on identifiable beneficiaries by administrative regulation. User fees assessed under IOAA authority must be (1) fair and (2) based on costs to the government, the value of the service or thing to the recipient, public policy or interest serviced, and other relevant facts.

Essentially the plaintiffs argued that the user fee scheme provided no value to preparers in light of the DC Circuit’s Loving opinion:

 [P]laintiffs argue that because Congress did not grant the IRS licensing authority—as found by Loving—tax return preparers receive no special benefit in exchange for the fees, rendering them unlawful under the IOAA. In other words, plaintiffs argue that the IRS originally created a licensing scheme that would limit tax return preparers to those certain people who could meet eligibility criteria. But, because Loving found that Congress did not authorize a license requirement for tax return preparers, there are now no restrictions on who may obtain a PTIN and therefore it is no longer true that only a specific set of people may receive PTINs and the “special benefit” of being able to prepare tax returns for compensation. The only beneficiary of the PTIN system is therefore the IRS.

The IRS, looking to the approach of the 11th Circuit in Brannen, distinguished the PTIN rules from the ill-fated regulatory regime that the DC Circuit struck down in Loving:

The government argues that the PTIN and user fee regulations are separate from the regulations imposing eligibility requirements on registered tax return preparers. It argues that the PTIN requirements are not arbitrary and capricious because they make it easier to identify tax return preparers and the returns they prepare, which is a critical step in tax administration, and because PTINs protect social security numbers from disclosure. In support of its position that it may charge fees for PTINs, the IRS states that PTINs are a service or thing of value because the ability to prepare tax returns for compensation is a special benefit provided only to those people who obtain PTINs, who are distinct from the general public. Individuals without PTINs cannot prepare tax returns for compensation. In addition, the IRS argues that PTINs protect the confidentiality of tax return preparers’ social security numbers, and that protection itself is a service or thing of value.

The district court opinion adopted the view that the PTIN rules were part and parcel of the overall regulatory regime:

The Court finds that PTINs do not pass muster as a “service or thing of value” under the government’s rationale. First, the argument that the registered tax return preparer regulations regarding testing and eligibility requirements and the PTIN regulations are completely separate and distinct is a stretch at best. While it is true that they were issued separately and at different times, they are clearly interrelated. The RTRP regulations specifically mention the PTIN requirements and state that PTINs are part of the eligibility requirements for becoming a registered tax return preparer. See Regulations Governing Practice Before the Internal Revenue Service, 76 Fed. Reg. at 32287–89; 26 C.F.R. § 1.6109-2(d) (“[T]o obtain a [PTIN] or other prescribed identifying number, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer authorized to practice before the Internal Revenue Service under 31 U.S.C. 330 and the regulations thereunder.”). Furthermore, the overarching objectives named in the PTIN regulations indicate a connection to the RTRP regulations. They were 1) “to provide some assurance to taxpayers that a tax return was prepared by an individual who has passed a minimum competency examination to practice before the IRS as a tax return preparer, has undergone certain suitability checks, and is subject to enforceable rules of practice;” and 2) “to further the interests of tax administration by improving the accuracy of tax returns and claims for refund and by increasing overall tax compliance.” Furnishing Identifying Number of Tax Return Preparer, 75 Fed. Reg. at 60310. The first objective clearly relates to the RTRP regulations regarding eligibility requirements for tax return preparers. The second objective is less explicit, but it does not stretch common sense to conclude that the accuracy of tax returns would be improved by requiring tax return preparers to meet certain education requirements.

Once it functionally equated the PTIN regime to the testing and eligibility requirements Loving struck down, the Steele opinion concluded that the benefit that the IRS was supposedly conferring for the user fee was in fact the functional equivalent of regulating the practice of preparing returns, with my emphasis below on the key part of the Steele opinion’s discussion:

Having concluded the inter-connectedness of the regulations, the government’s argument begins to break down. The Loving court concluded that the IRS does not have the authority to regulate tax return preparers. Loving, 742 F.3d at 1015. It cannot impose a licensing regime with eligibility requirements on such people as it tried to do in the regulations at issue. Although the IRS may require the use of PTINs, it may not charge fees for PTINs because this would be equivalent to imposing a regulatory licensing scheme and the IRS does not have such regulatory authority. Granting the ability to prepare tax return for others for compensation—the IRS’s proposed special benefit—is functionally equivalent to granting the ability to practice before the IRS. The D.C. Circuit has already held, however, that the IRS does not have the authority to regulate the practice of tax return preparers. See id. In coming to its conclusion, the Circuit considered the statutory language that the Secretary may “regulate the practice of representatives of persons before the Department of the Treasury.” Id. at 1017–18 (quoting 31 U.S.C. § 330(a)(1)). The court found that the IRS improperly expanded the definition of “practice . . . before the Department of Treasury” to include “preparing and signing tax returns” because to “practice before” an agency “ordinarily refers to practice during an investigation, adversarial hearing, or other adjudicative proceeding.” Id. at 1018. The Loving court concluded that “[t]hat is quite different from the process of filing a tax return” in which “the tax-return preparer is not invited to present any arguments or advocacy in support of the taxpayer’s position . . . [and] the IRS conducts its own ex parte, non-adversarial assessment of the taxpayer’s liability.” Id. The ability to prepare tax returns is the “practice” identified by the IRS in Loving, but the court found that such an activity does not qualify as practicing before the IRS. Therefore, it appears to this Court that the IRS is attempting to grant a benefit that it is not allowed to grant, and charge fees for granting such a benefit.

Parting Thoughts

There are over  700,000 PTIN holders, and I have seen estimates that IRS has collected anywhere between $175 and 300 million since the PTIN program started in 2011. One aspect of the opinion is that by deciding the case in this manner (i.e, IRS has no authority to charge fees for PTINs), the court did not address the plaintiffs’ alternate argument that fees the IRS charged were excessive. (IRS reduced the PTIN fee to $50 from $64 a few years ago).

This is obviously a major setback for the IRS. I am surprised by the court’s narrow view of the benefits associated with PTINs. I recall a decade or so ago the many challenges IRS had in assessing the quality of return preparers in a pre-PTIN required world. When discussing IRS efforts to unify the identification requirement under a single identifying number, GAO noted that past practices made it very difficult for IRS to get a sense of the overall preparer community, let alone associate individual preparers and the returns they prepared. While of course the IRS benefits from the uniformity of identifying requirements, so does the public, and, by extension, so do preparers.

It is in the interest of competent and honest preparers to ensure that the public has confidence in the work that they do. The visibility and accountability associated with a uniform identifying requirement benefits the tax system generally. While the impact of Steele is by no means as far-reaching as Loving, it is a major defeat and is further reason why Congress needs to step in and legislate that IRS has the ability to regulate this important aspect of tax administration.

TIGTA Report on PTINs Finds IRS Not Fully Using its PTIN Powers

While IRS lost the battle in Loving to impose mandatory education and testing requirements over paid preparers, it still holds the keys to allowing paid preparers access to earning money though its oversight of the e-file program and the requirement that all preparers register for a Preparer Tax Identification Number (PTIN). Last month TIGTA released a report reviewing the IRS’s administration of the PTIN program, and its study reveals that IRS has failed to revoke PTINs for preparers who themselves were not compliant with tax return filing or payment obligations.

The following highlights parts of the TIGTA report I found interesting.


The IRS created the Return Preparer Office in 2010 in part to administer the PTIN rules. Part of that responsibility includes reviewing applicants and renewals for suitability. As TIGTA explains,  “a fully completed suitability check includes the IRS matching the preparers in the [Tax Professional PTIN System] to lists of individuals who may be unsuitable for the PTIN program, researching and contacting the preparer, and using judgment to decide which action to take on each case. ”

While the report redacts a portion describing exactly what goes into suitability determinations, that appears to focus on a preparer’s tax compliance history. The suitability review generally occurs after IRS doles out the numbers in applications or renewals. According to TIGTA it does so after issuing PTINS  because “IRS does not want to prevent tax return preparers from completing tax returns during this process.”

There are about 700,000 preparers with PTINS; about 406,000 PTIN holders (or 58%) are unlicensed professionals. Only about 50,000 PTIN holders are enrolled agents and the rest, about 240,000, are licensed professionals like CPAs.

On the positive side, TIGTA found RPO had done a good job administering rules relating to the post-Loving voluntary testing and education program for unlicensed preparers as well as ensuring that preparers met certain minimum requirements, such as being at least 18:

Our review identified that the Return Preparer Office (RPO) has established processes and procedures to ensure that individuals assigned a PTIN were at least 18 years of age, were not using identifying information associated with a deceased individual, and correctly reported professional credentials.

In addition, the RPO ensured that individuals participating in the new Annual Filing Season Program met educational requirements and consented to be subject to the duties and restrictions of practicing before the IRS under Treasury Department Circular 230.

In its main criticism TIGTA found IRS and RPO failed to “revoke PTINs of tax return preparers who were not compliant with their tax filing and payment obligations.” In addition,  TIGTA found that RPO failed to assess suitability of preparers who self-reported felonies or ensure that preparers who had been previously enjoined no longer had PTINs. For an illustration of the extent of preparers with tax compliance issues, TIGTA elaborates:

For example, in January 2015, the RPO identified 19,496 preparers with PTINs that were potentially noncompliant with tax filings and payments. These preparers have over $367.6 million in total taxes due as of January 26, 2015. The RPO also identified 3,055 preparers who failed to file required tax returns for one (2,374 preparers) or more (681 preparers) tax years; eight tax return preparers who failed to file required tax returns for five years, and one tax return preparer who failed to file required tax returns for six years. While the RPO has a process to identify noncompliant return preparers, no actions were taken by the RPO to resolve these cases.

TIGTA connects the preparers’ lack of compliance to extra risk that the returns those preparers prepare are likely to have compliance problems (“[t]hese tax return preparers can negatively affect taxpayers as well as tax revenue if the tax returns they prepare are incorrect or fraudulent.”), though there is no research that I am aware of that TIGTA or IRS has done on that point.

In addition to the findings, TIGTA discussed Section 6109 and the regs under 6109 which contain the underlying PTIN rules and the compliance requirement for preparers. Here is the background on the issue as TIGTA frames it:

Treasury Regulation Section 1.6109-2(f) grants the IRS the authority to conduct tax compliance checks for tax return preparers, stating that the IRS may conduct a Federal tax compliance check on a tax return preparer who applies for or renews a PTIN or other prescribed identifying number. The IRS’s decision to not fully complete tax compliance checks and revoke PTINs as warranted allows some preparers to maintain their PTIN even though they are not in compliance with Internal Revenue laws.

Consistent with the regulatory authority, IRS established tax compliance as a suitability requirement in Notice 2011-6; 2011-1 C.B. 315, Implementation of Rules Governing Tax Return Preparers. The notice states:

Until further guidance is issued, the IRS, in accordance with the authority to provide exceptions to the PTIN rules under section 1.6109-2 (h), will permit any individual eighteen years or older to pay the applicable user fee and obtain a PTIN permitting the individual to prepare, or assist in the preparation of, all or substantially all of a tax return or claim for refund for compensation if: the individual passes the requisite tax compliance check and suitability check (when available).

TIGTA elaborated on IRS views with respect to suitability and compliance checks, including the process within the IRS’s Return Preparer Office and IRS’s views that Section 7803 also provides statutory background for IRS authority to impose requirements on those seeking to obtain or retain PTINS

In May 2011, IRS Chief Counsel issued a memorandum to the Director of the RPO stating that “[n]either section 6109 nor the PTIN regulations provide specific suitability requirements to be satisfied before an individual receives a PTIN other than a Federal tax compliance check.” This memorandum also indicates that the IRS has the authority, under both Internal Revenue Code section 6109 and its general tax administration powers under Internal Revenue Code section 7803, to deny PTINs to certain individuals or classes of individuals when the issuance of PTINs to those individuals or classes of individuals would be inconsistent with the sound administration of Internal Revenue laws. However, the IRS assigns or allows an individual to renew a PTIN prior to performing suitability checks to avoid delays for the tax return preparers and to promote the use of PTINs by tax return preparers. After the PTIN is issued or renewed, the RPO Suitability function performs suitability and other checks to determine if the PTIN holder should retain the PTIN. This process was developed to allow tax return preparers to continue to prepare tax returns while the suitability checks are being completed.

The reference to Section 7803 is interesting, as that provides the Commissioner of Internal Revenue with “the power to administer, manage, conduct, direct, and supervise the execution and application of the internal revenue laws or related statutes and tax conventions to which the United States is a party.” IRC 7803(a)(2)(A). There has been some controversy regarding the powers that are associated with the general provision. For example, AICPA in its criticism and lawsuit over the IRS’s voluntary testing and education program has taken aim at the substantive reach of 7803(a)(2)(A) and whether it provides cover for IRS’s attempt to provide more oversight over unlicensed preparers (see e.g., last year’s AICPA letter on IRS Regulation of Tax Return Preparers After the Loving Decision).

As a related aside, the issue of how much room Title 26 provisions give IRS to oversee unlicensed preparers has been getting some additional attention recently.  Astute tax administration observer (and guest PT poster) Professor Bryan Camp in a recent Tax Notes article How the IRS Can Regulate Return Preparers Without New Law makes a compelling policy case for additional oversight of unlicensed preparers. In that article, Professor Camp explores how IRS may be able to use Title 26 itself to regulate the submission of tax returns as way to expand oversight over unenrolled preparers in light of IRS losses in Loving and Ridgley (the case striking down Circular 230 limits on contingent fees). He explains as follows: “if Treasury has the ability to regulate all returns [looking to Sections 6001, 6011 and 7805], it may also have the ability to respond to the concerns about the unreliability of [unenrolled return preparer] returns with regulations directed at all return preparers, including CPAs, attorneys, and enrolled agents.”

We hope to have more on Professor Camp’s article soon, but bringing it back to PTINs, despite IRS’s own view that Section 6109 allows it to conduct compliance checks on unlicensed preparers,  it appears that IRS does not revoke PTINs or even make inquiries of unlicensed preparers following its compliance or suitability checks. To that end, consider TIGTA’s recommendation that IRS “should ensure that tax compliance checks are complete by timely issuing inquiry letters to preparers after identifying noncompliance with Federal tax laws and that appropriate actions are taken to revoke PTINs when warranted.”

IRS agreed, to a point:

Management’s Response: The IRS agreed with this recommendation. The RPO conducts weekly tax checks on all PTIN holders in the [Tax Professional PTIN System]. Consistent with the IRS’s existing procedures to send letters following the end of the filing season, the IRS began sending letters on June 17, 2015, to credentialed preparers (practitioners governed by Circular 230 guidelines) and preparers participating in the AFSP [voluntary education and testing program] who were noncompliant with their tax obligations. The RPO will continue sending inquiry letters annually after each filing season.

On page 9 and 10, surrounded by a redacted portion of the TIGTA report, IRS stated, however, that at the time of TIGTA’s audit it was not taking action with respect to unlicensed preparers:

After the Loving decision was upheld…management proceeded with caution and decided to not issue inquiry letters to noncompliant preparers and to not revoke the PTINs as warranted.

Parting Thoughts

In reading the TIGTA report, it seems that IRS was not fully using the powers it has at its disposal to oversee preparers and perhaps is still gunshy following Loving when it comes to unlicensed preparers. As someone who believes that additional oversight over unlicensed preparers is an important way to increase accountability and visibility in our tax system, the TIGTA report at a minimum may raise questions as to whether IRS should use its existing powers fully before having more added to its plate.

To be sure, IRS is licking its wounds over Loving and related cases, and there is no doubt that it would welcome explicit legislative cover when it comes to the largest segment of the preparer community, unlicensed preparers. In this environment, that explicit legislative authority is far from a sure thing, and taxpayers and others are testing the limits of IRS powers, including in the AICPA’s challenge to the IRS voluntary testing and education program for preparers. Perhaps IRS reticence is a resource issue, or maybe just an aversion to additional possible setbacks. In any event, the challenges associated with higher errors associated with returns prepared by unlicensed preparers remains a problem still in search of solutions.