Court Shuts Down IRS Regulation of Tax Preparers

NEW YORK (MainStreet) — Late Friday, in a move that surprised the tax preparation community and, I expect, the Internal Revenue Service as well, the U.S. District Court for the District of Columbia shut down the IRS tax return preparer regulation program.

In his decision in Sabina Loving, et. al. v. Internal Revenue Service, Judge James E. Boasberg said the Internal Revenue Service had overstepped its authority by regulating tax return preparers. Congress never gave the IRS the authority to license tax preparers. The judge's order included an injunction that bars the IRS from continuing its implementation of the RTRP program.

So, contrary to what I reported in Tax Tip: Mistakes to Avoid When Finding a Tax Preparer, as of this writing anyone can prepare a 2012 tax return for a fee.

Three independent tax preparers — Sabina Loving of Chicago; John Gambino of Hoboken, N.J; and Elmer Kilian of Eagle, Wis. — joined with the Institute for Justice to file suit against the IRS in March to stop the regulation of tax preparers instituted by IRS Commissioner Douglas Shulman in 2010.

Under the regulation regime, beginning Jan. 1, 2011, all people who prepare federal tax returns or help prepare all or substantially all of a federal tax return for compensation were required to register with the IRS and get a Preparer Tax Identification Number, which had to be renewed annually.

Except for CPAs, attorneys and enrolled agents and “supervised” employees of these professionals, registered preparers had to pass a competency test and maintain 15 hours of continuing professional education in taxation each year. Upon passing the competency exam a preparer would get the designation of Registered Tax Return Preparer.

The requirement of 15 hours of annual CPE took effect for 2012, and non-exempt preparers had until Dec. 31, 2013, to pass the competency exam. As of Jan. 3, more than 320,000 “previously unenrolled” registered preparers still had to sit for and pass the exam.