Class Action Lawsuit Filed in New Mexico Seeking to Toss Out IRS Voluntary Filing Season Program

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I recently discussed the AICPA’s unsuccessful efforts to have the courts invalidate the IRS’s annual filing season program (AFSP) in IRS Wins Latest Battle on Voluntary Return Preparer Testing and Education Though Other Battles Likely Remain. In the AICPA opinion, Judge Boasberg suggested that while AICPA was not an appropriate plaintiff to challenge the IRS’s plan, “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.” This week in a federal district court in New Mexico a group of low to moderate income taxpayers and an individual doing business as tax return preparer Columbia Tax Services filed a complaint alleging that the IRS was targeting its clients for examination because the preparer did not enter the IRS’s voluntary filing season program.  In addition to seeking a declaratory judgment and injunctive relief relating to violations of the APA and the equal protection clause stemming from what the complaint alleges as unfair targeting of clients of unregistered preparers, the case potentially tees up the legality of the AFSP. Though the complaint does not focus on the IRS issuing the AFSP in a revenue procedure rather than through the regulatory process, it does (Count 1) question the IRS’s statutory jurisdiction and authority to issue those rules.

There are some other aspects of the complaint that stand out on a quick read. For one, the plaintiffs are seeking class certification. That has been a tactic that was not typically associated with challenges to IRS but is now more common. In addition, in Count 4 the complaint seeks to join the National Taxpayer Advocate as an involuntary plaintiff in the case, claiming that she has the “authority and right to take action and intervene” and that her being named as an involuntary plaintiff would facilitate participation without the delay of intervention. I question the conclusion about the NTA’s authority to intervene in lawsuits against the IRS (though have not researched this). Federal Rule of Civil Procedure 19(a)(2) permits courts to join necessary parties as involuntary plaintiffs “in a proper case.” Rule 19(a)(1)(B)(i) requires that an involuntary plaintiff claims an interest in the subject of the action and that disposing of the action in her absence may as a practical matter impair or impede her ability to protect the interest. That seems to me to be a tough standard, though no doubt the NTA is a more than capable lawyer she has been on record as being a proponent of the AFSP. The suit does make allegations and seeks relief stemming from what it describes as illegal and unconstitutional conduct stemming from the examinations of the taxpayers whose returns were prepared by Columbia Tax Services and claims that the pre-assessment notices the IRS issued to the taxpayers fell short of APA standards. With respect to the allegedly misleading and inaccurate notices, as we have discussed before, the Tax Court at least has been rather dismissive of using the APA to impose additional requirements on IRS stat notices and correspondence to taxpayers in light of the Tax Court’s de novo review of the underlying merits in deficiency cases. Moreover, while recent cases have exposed holes in the Anti-Injunction Act and Declaratory Judgment Act, those statutes generally serve as a bar to pre-enforcement relief of the kind this complaint seeks for alleged IRS misconduct in the examinations of the taxpayers themselves.

We will keep an eye on this suit, as well as others that may come to challenge the IRS’s voluntary filing season program.

 

About Leslie Book

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

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