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.
read more...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.
About Leslie Book
Reagan appointee and former DC District Court chief judge Royce Lamberth, previously known for his ruling on Dickey-Wicker, now may be remembered for playing the sticky wicket of IRS regulation of tax preparers. Ironically, his decision may lead to an IRS victory, when Congress realizes that this refund claim could have been prevented with a few sentences tacked on to some tax bill in the last seven years.
I do not understand the argument that IRS can track preparers with PTINs but could not track preparers by SSN. I do remember asking Commissioner Richardson (born two months before and 180 miles away from fellow Texan Lamberth) at a practitioner meeting, more than 20 years ago, when IRS would get around to implementing the long-promised PTIN program so that preparers would not have to share their SSN with the world. If she was aware of the problem, she did not show much concern. Perhaps the archaic IRS computers are better able to deal with an eight-digit number, rather than one with nine.
In any case, I paid nothing for my PTIN, years before the program to regulate preparers by PTIN took effect. And that was the case with most of us in 2011: a GAO report stated, “As of March 20, 2011, according to an IRS official involved in implementing the new requirements, IRS had issued 692,297 PTINs, approximately 60 percent of which were issued to paid preparers with existing PTINs and approximately 40 percent of which were issued to paid preparers without existing PTINs.” Following the example of Social Security, IRS back then did not think about charging for a PTIN although it was a service only to those interested in SSN confidentiality.
The $64.25 annual fee, paid through a third party that took its cut, was intended to cover the cost of regulation, not of one-time issuance of a number. But the IRS approach was “collect first, plan later.” The same 2011 GAO report noted, “IRS has discussed but not documented a framework for how it plans to develop service and enforcement efforts that leverage the new paid preparer requirements to improve taxpayer compliance. Likewise it has not developed a framework for evaluating the effect of any planned service and enforcement efforts or the effect of the requirements themselves on improving taxpayer compliance.”
So we paid $64.25 annually for a nebulous enforcement program later found to be illegal. In some regulatory schemes, enforcement costs are paid by penalizing those who violate the rules. With IRS, those who are honest and competent were charged the expense of pursuing those who are not. Really? I want my money back.
The underlying question of Steele is not whether the court’s opinion was “misguided,” but rather why the IRS persists in relying on regulations without a statutory basis instead of asking Congress to fix the problem.
One may rightfully lament the inability of an important government agency to keep track of practitioners who participate in and facilitate the bulk of its transactions with the sector of the country which it regulates – taxpayers. However, the IRS has no one to blame but itself for its inability to do so. Instead of trying a legislative fix it doubles down and hopes for a friendly court. The IRS will overreach every chance it gets.
Loving was decided by the D.C. Circuit in 2014. Steele was filed in 2014. One might think that a government agency which has been defeated on a major issue would either give up or seek a legislative remedy. Not the IRS.
The true believers that populate the IRS middle and upper management perhaps are aware that the IRS has no political capital or goodwill in Washington (except perhaps amongst the statists of the Beltway Bureaucracy). That is the reason it has to resort to regulations that have no or sketchy statutory basis, with the inevitable litigation. That is the story of Steele.