While the newly announced PTIN fee does not come as a surprise in the wake of the news last month that the Office of Management and Budget had completed its review of the proposed regulations (fee), the timing of the decision is nevertheless a surprise.  Despite the IRS victory in Montrois, the case was, nevertheless, still before the district court on remand.  The Court had to determine what the appropriate PTIN fee should be in light of the various factors discussed by the Panel.  Moreover, in late October 2019, shortly after the Supreme Court denied the taxpayers’ Petition for Certiorari, the parties entered into a stipulation that provided for a detailed discovery schedule – that extends well into 2020.

The proposed discovery schedule, before the outbreak of the COVID-19 crisis, anticipated that the discovery phase of the remand litigation would extend through the summer of 2020 (and perhaps longer).  Among some of the items cited in the stipulation were the voluminous number of documents to be examined and the reluctance of some people (together with the outright opposition of others) to be deposed.  Whether judicial approval of the revised PTIN fee is desirable or, more importantly, whether such approval is a prerequisite to the imposition of the new fee, is an open question.  Given the newly promulgated proposed regulations, the answer to that question seems moot.

The proposed regulations do, however, explain how the new fee was arrived at by the Service.  While a background in cost accounting would be helpful, the explanation that accompanies the proposed regulations describes the direct costs that were used in the computation, together with an overhead component that was also included as part of the fee.  The computational methodology followed the guidance of SFFAS #4: Managerial Cost Accounting Standards and Concepts.  The Service estimated that there would be approximately 800,000 PTIN users (2,400,000 applications/renewals over a three-year period) to arrive at the $21 per tax return preparer fee.  Whether these figures would correspond to the numbers that would have been reached at the completion of the discovery phase of the remand litigation is unknown.

On remand, the district court was responsible for determining whether the fee was reasonable.  The determination would include not only the reasonableness of the fee based upon the direct costs associated with the PTIN program, but would also examine whether the direct costs used to calculate to PTIN fee included amounts for services and charges that went beyond the IRS’s authority to regulate the tax preparation industry.  It was not enough to identify the overall costs of the PTIN program; the court had to also determine the whether the individual cost components were properly within the IRS’s authority.

Apart from the IRS’s sua sponte decision to reduce the PTIN fee in 2015, the only courts that directly ruled on the reasonableness of the PTIN fee was the district court in Buckley (the subsequent appeal in the 11th Circuit was voluntarily dismissed with prejudice by the appellants).Despite the district court’s decision in Loving, the Buckley court nevertheless concluded that the original $50 PTIN user fee was reasonable.  In reaching that conclusion, Buckley did not provide any analysis, nor did it consider any of the components that should be included (or excluded) in the determination of the fee.  Other courts did not consider the fee itself, only whether the IRS was authorized to impose one.

Steele did, however, discuss what costs the PTIN fee should include and, more importantly, exclude from consideration.  Specifically, Steele I held, that under the Independent Offices Appropriations Act, the IRS may only consider the fees it incurs in providing the PTIN service: “the prevailing (and binding) interpretation of section 9701, which states, again, ‘the measure of fees [imposed under section 9701] is the cost of the government of providing the service, not the intrinsic value of the service to the recipients.’” (citing Seafarers Int’l Union of N. Am. v. U.S. Coast Guard, 81 F.3d 179, 185 (D.C. Cir. 1996)).

The IRS may not consider the benefit derived by individual class members from the use of the PTINs – it must be a uniform fee for all tax return preparers.  That holding served as the legal basis for the Steele litigation to proceed as a class action and, likewise, ordering relief on a class-wide basis.  “[T]he IRS has stated time and again that the cost of issuing a PTIN is the same regardless of whether the pin number is issued to an attorney, CPA, or uncertified tax return preparer.  As plaintiffs note, that is why the IRS decided in the first place to impose a uniform fee for every PTIN it issued — regardless of the recipient’s professional status.”

As noted above, the IRS cannot include costs, via the PTIN fee, that not are properly associated with the PTIN program. The plaintiffs alleged that, even following the IRS’s voluntary reduction of the fee in 2015, the amount charged nevertheless included impermissible components. “The IRS has also continued to use the fees to fund activities related to tax compliance, background checks, the voluntary certification program established after Loving, and many other things unrelated to issuing a number.”  The Panel agreed that any costs associated with activities found invalid pursuant to Loving should be reviewed on remand.

Interestingly, however, after Loving was decided but prior to the Montrois opinion, the D.C. Circuit decided AICPA, which held that the IRS could implement a voluntary program to regulate tax return preparers.  While Montrois did not discuss the impact of the AICPA decision, the costs associated with the voluntary program, which by necessity also utilizes the PTINs, should arguably be included in the direct costs of the PTIN program.  The costs associated with the voluntary program will undoubtedly benefit tax return preparers as a whole (if only by increasing the pool of better prepared preparers).

Finally, an additional question that should be examined on remand is the vendor fee itself, paid directly to third party administrators, which is imposed directly on the tax return preparers.  Thus, the original fee was not $50 but rather $64.25 when the processing charge was included.  The prior fee was not $33.00, but rather $50, with the addition of the vendor fee (increased from $14.25 to $17 per application/renewal).  And, the newly announce $21 fee is, in actuality, a $35.95 PTIN user fee because of the additional $14.95 vendor fee that must be paid to obtain (or renew) it. As succinctly, and somewhat rhetorically, stated by plaintiffs in their motion for summary judgement: “And if Accenture [the third party vendor] does everything necessary to issue a PTIN, then what benefit is the government providing to tax-return preparers?”