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.

Institute for Justice attorney Dan Alban called the IRS registration and regulation program an “unlawful power grab by one of the most powerful federal agencies.”

In response to the court decision the IRS issued the following statement Tuesday:

“As of Friday, Jan. 18, 2013, the U.S. District Court for the District of Columbia has enjoined the Internal Revenue Service from enforcing the regulatory requirements for registered tax return preparers. In accordance with this order, tax return preparers covered by this program are not currently required to register with the IRS, to complete competency testing or secure continuing education. The ruling does not affect the regulatory practice requirements for CPAs, attorneys, enrolled agents, enrolled retirement plan agents or enrolled actuaries.
"The Internal Revenue Service, working with the Department of Justice, continues to have confidence in the scope of its authority to administer this program. It is considering how best to address the court’s order and will take further action shortly.”

Carol Campbell, director of the IRS Return Preparer Office, confirmed that the IRS was no longer scheduling RTRP competency exams.

On Wednesday the Justice Department filed a motion on behalf of the IRS requesting that the court suspend the injunction and allow the Service to continue its RTRP program, pending resolution of an appeal to be filed within 30 days.

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