Initial Reactions to the Government’s Loss in Loving

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The DC Circuit affirmed the district court holding in Loving v IRS, an issue we have written about before (see for example, Oral Argument Today in Loving, from last year). In this post, I write a brief summary of the opinion and offer preliminary advice for the government as it seeks to ensure that taxpayers retain preparers who are subjected to the type of oversight that the IRS contemplated when it sought to impose competency and education requirements for unlicensed preparers.


First, I will briefly summarize the opinion and its rationale.  The DC Circuit found that the government lost at Chevron Step 1. Looking at 31 USC 330(a)(1), in its view the IRS unambiguously did not have authority to regulate tax-return preparers under the statutory provision authorizing it to “regulate the practice of representatives of persons before the Department of the Treasury.”  It also noted that even if the government prevailed at Step 1, the government would have lost at Step 2, in light of the statute’s text, history, structure and context.  As to how it got there, the opinion pointed to “at least six considerations” that “foreclose the IRS’s interpretation.”

It led off with perhaps the strongest argument against the government, keying in on the term “representatives.”  The opinion noted how preparers “are not agents” and that while preparers assist taxpayers they do not represent taxpayers in the normal sense of that word.

Looking next to the meaning of “practice before the Department of the Treasury” the DC Circuit distinguished the filing process from the audit process, and how at audit a taxpayer at that later time may designate a representative to act on her behalf, which in its view “underscores that tax-return preparers do not practice before the IRS when they simply assist in the preparation of someone else’s tax return.” (emphasis in original).

The Circuit Court looked beyond 31 USC 330(a)(1) and analyzed 31 USC 330(a)(2)(D). It referred to how the District Court “succinctly and cogently explained” that “[f]iling a tax return would never, in normal usage, be described as presenting a case.” The opinion also looked to the history of the statute, and, in a manner similar to the District Court, to the broader statutory framework in the Internal Revenue Code that specifically prescribes conduct and penalties for preparers:

“Yet accepting the IRS’s view of Section 330(a)(1) would effectively gut Congress’s carefully articulated existing system for regulating tax-return preparers…[I delete the court’s recitation of Congress’ amendments to Code provisions that applied to preparers]

Under the IRS’s view here, however, all of Congress’s statutory amendments would have been unnecessary. The IRS, by virtue of its heretofore undiscovered carte blanche grant of authority from Section 330, would already have had free rein to impose an array of penalties on any tax-return preparer who “is incompetent,” “is disreputable,” “violates regulations prescribed under” Section 330, or “with intent to defraud, willfully and knowingly misleads or threatens the person being represented or a prospective person to be represented.” 31 U.S.C. § 330(b). And that would have already covered all (or virtually all) of the conduct that Congress later spent so much time specifically targeting in individual statutes regulating tax-return preparers.”

A fifth reason the court gave was one that Professor Steve Johnson emphasized in his draft article for the Villanova Law Review Loving and Legitimacy: IRS Regulation of Tax Return Preparation, written before this opinion and presented at a symposium last fall. Namely, the court looked to the non-tax case of Brown & Williamson case (involving FDA efforts to regulate tobacco as a food or drug) that stands for the general proposition that courts should not “lightly presume congressional intent to implicitly delegate decisions of major economic or political significance to agencies…Here, as in Brown & Williamson, we are confident that the enacting Congress did not intend to grow such a large elephant in such a small mousehole. In short, the Brown & Williamson principle strengthens the conclusion that Section 330 does not encompass tax-return preparers.” (at slip op, p. 15).

The final reason the opinion pointed to was the IRS’s “past approach to the statute” which in its view suggested that the agency itself had “never interpreted the statute to give it authority to regulate tax-return preparers.” Here, the opinion pointed to statements in 2005 testimony to Congress by the former head of Criminal Investigations and the National Taxpayer Advocate, as well as the 2009 version of IRS Publication 947.

Going Forward

The government may seek to get Supreme Court review of the matter, or may work with Congress to get specific legislative authority. I offer no views on the odds of the government seeking cert, but its sound beating in two opinions leaves the possibility of obtaining cert and a victory in the Supreme Court seemingly small.

As to legislation, the Baucus discussion draft on tax administrative proposals I wrote about last year here proposes a legislative fix allowing the IRS to regulate unlicensed tax return preparers. I am far from a Washington insider, but I do know from where I sit, the IRS is not held in high regard by many in Congress these days, and I question whether there would be support for such a proposal. There is, however, widespread dislike for refundable credit overclaims. If IRS or the administration can make the convincing policy case for regulation as being part of the tool kit for controlling those errors then perhaps the aversion to the IRS will be less than the dislike of the perception of undeserving poor people getting benefits they do not deserve.

Assuming no Supreme Court or legislative rescue, what is IRS to do? Well, I am working on a broader paper that lays out a stronger case for positive incentives that IRS (and possibly Congress) can give to nudge people to go to preparers that voluntarily opt in to a system premised on competency testing and continuing education. The adoption of sweeteners for taxpayers who visit certified preparers can take many forms, including the possible presumptive protection against certain penalties if a position is disallowed, the potential for expedited refunds, and even more radical provisions that could dovetail with incentives to employers who provide access to qualified return preparation services to their employees.

Despite what happens, and my displeasure with the outcome, congratulations are in order for Dan Alban and Institute for Justice, which brought the case on behalf of its clients and by all accounts handled the case with great skill.

Avatar photo About Leslie Book

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


  1. Here is what is happening in the real world. IRS can already do all the regulation it wants, for nearly all preparers, through its mandates for electronic filers. Its failure to do so can be attributed mostly to budget constraints. Although Congress has not yet legislated that all return preparers must transmit returns electronically, the alleged savings to the IRS budget will eventually be too attractive to pass up.

    As IRS Publication 3112 explains:

    The IRS monitors Providers through review of IRS records and during visits
    to Providers’ offices and other locations where Providers perform IRS e-file
    activities. During monitoring visits, the IRS may investigate complaints and
    ensure compliance with IRS e-file rules. Monitoring may include, but is not
    limited to the following:
    Reviewing the quality of IRS e-file submissions for rejects and other defects,
    Checking adherence to signature requirements on returns,
    Scrutinizing advertising material,
    Examining records,
    Observing office procedures.

    In addition, the IRS may monitor Providers for compliance with the tax return
    preparer regulations, including provisions of IRC section 6695(g), which
    relates to the due diligence requirements for Earned Income Tax Credit claims
    on individual income tax returns.

    Violations of IRS e-file requirements may result in warning or sanctioning
    Principals, Responsible Officials and the Authorized IRS e-file Provider

    Sanctioning may be a written reprimand, suspension or expulsion from
    participation from IRS e-file, or other sanctions, depending on the seriousness
    of the infraction.

    • You speak here of ex post approaches based on sanction and reprimand. The IRS approach at issue in Loving is less about OPR power to discipline preparers after the fact and more about encouraging better and more competent conduct before the fact. IRS cannot solve underreporting gap solely by auditing or visiting preparers for efiling program violations. Testing and education as well as the intact uniform registration are part of an overall balanced approach.

  2. You’re right, of course. The IRS objective is to create barriers to entry. The trend in many other businesses, though, is to encourage private certification and consumer education. Meanwhile, new enterprises using new technology are bypassing regulation (see Uber, and its avoidance of city regulation of the taxi industry — another business where “barrier to entry” is synonymous with “unhealthy restriction of competition”).

    My clients tell me all the time about the guy at work or the couple down the street who pay someone to prepare their returns using TurboTax while not signing as a preparer. That’s the Uber of the tax preparation industry. The IRS approach to catching those is like trying to nail Jello to the wall.

    • You are right I think in that ghost preparers undermine any regulatory regime. Not sure what if anything can, or should, be done about that. I do not think that the IRS’s objectives are to create barriers to entry just for the sake of creating barriers. I think that part of IRS effort is to change the cost benefit calculation for preparers who might otherwise be inclined to facilitate others’ noncompliance.

  3. Bryan Gates, EA says

    Re: the “power to discipline preparers after the fact”

    How many Sec. 6694 penalties have been asserted against preparers? in what total amount?

    What percentage of the asserted penalties have been collected?

    Why does this prohibition exist: IRM (01-01-2010) Return Preparer Penalties Generally, Campus Examination Operation personnel do not develop or assert penalties against tax return preparers.

    Is the Sec 6694 penalty for a willful attempt to understate the liability for tax on 200 returns or a reckless or intentional disregard of rules or regulations not $1,000,000?

  4. Linda Galler says

    The National Taxpayer Advocate’s recent annual report discusses the post-Loving world and makes several recommendations. They are:
    1.Voluntary examination and continuing education certificate
    2.Restricting the ability of unenrolled preparers to represent taxpayers in audits of returns they prepared
    3.Restricting the ability to name an unenrolled preparer as a Third Party Designee on Form 1040
    4.Mounting a consumer protection campaign that would educate taxpayers about the need to select competent preparers
    5.Developing a research driven and Service-wide preparer compliance strategy
    6.Recommending that Congress revise 31 U.S.C. § 330(a)(2) to clarify that the IRS has the authority to regulate unenrolled preparers

  5. While I do not disagree with the notion that the federal government should regulate IRS tax return preparers, it seems that the courts are clearly saying that such regulation is not warranted under existing federal law. Why doesn’t Treasury simply go to Congress and ask for the authority to do this?

    • Steven,

      In light of the House of Representatives’ huge displeasure with the IRS regulating and supervising of 501(c)(4)’s this past year, I think it will be a long time before the House approves IRS supervision of what must be considered small-business people who are tax return preparers.

      • I think that despite Congress’ displeasure with IRS, there are some factors that favor legislation, including support for legislation from the large commercial preparers and a strong sentiment that IRS needs to do more to address refundable credit overclaims. It will be interesting to see how this plays out.

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