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

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 11^th 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.”

Conclusion

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.