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Loving v. IRS: District Court Slams IRS for Overreaching Its Authority
(Parker's Federal Tax Bulletin: February 1, 2013)

In 2011, the IRS began requiring all tax return preparers to have a preparer tax identification number (PTIN). Additionally, the IRS issued regulations requiring preparers to pass a qualifying exam, pay an annual application fee, and take 15 hours of continuing-education courses each year. Certain tax return preparers, such as attorneys, CPAs, and enrolled agents, are exempt from the testing requirements because they have their own testing requirements.

In 2012, three independent tax-return preparers brought suit against the IRS in the U.S. District Court for the District of Columbia, arguing that the IRS exceeded its authority in issuing the return-preparer regulations. On January 18, in Loving v. IRS, 2013 PTC 10 (D.C. D.C. 1/18/13), the district court agreed and held that the regulations were invalid and that the IRS could not enforce them. The IRS subsequently released a statement saying that, in accordance with the district court order, tax return preparers covered by the PTIN program are not currently required to register with the IRS, complete competency testing, or secure continuing education. On January 23, the IRS filed a motion to suspend the district court's injunction pending its appeal of the court's decision.

OBSERVATION: Many CPAs and enrolled agents have expressed disappointment at the holding, saying it places them at a clear disadvantage because they are required to comply with competency and quality control regulations under IRS Circular 230 while, if this court's decision holds, unlicensed tax return preparers would escape regulation.


In January 2010, the IRS issued IRS Pub. 4832, Return Preparer Review. The publication discusses the results of an in-depth review of the tax return preparer industry. The IRS recommended increased oversight of tax return preparers through the issuance of regulations governing tax return preparers.

The IRS subsequently issued Reg. Sec. 1.6109-2, which provides that, after December 31, 2010, all individuals who prepare all, or substantially all, of a tax return or claim for refund for compensation must have an IRS-issued PTIN and must use that PTIN as their sole identifying number. A PTIN must be included on any tax return or claim for refund prepared for compensation. Under the regulations, attorneys, CPA, enrolled agents, registered tax return preparers, and individuals authorized under Reg. Sec. 1.6109-2(h) are eligible to receive a PTIN.

Reg. Sec. 1.6109-2(h) provides that the IRS, through forms, instructions, or other appropriate guidance, may prescribe exceptions to the requirements of Reg. Sec. 1.6109-2, including the requirement that an individual be authorized to practice before the IRS before receiving a PTIN or other prescribed identifying number. The IRS, through other appropriate guidance, may also specify specific returns, schedules, and other forms that qualify as tax returns or claims for refund for purposes of the regulations.

In Notice 2011-6, the IRS identified two additional groups of individuals who are eligible under Reg. Sec. 1.6109-2(h) to obtain a PTIN: (1) specified individuals who are supervised by the attorney, CPA, enrolled agent, enrolled retirement plan agent, or enrolled actuary who signs the tax return or claim for refund prepared by the individual; and (2) individuals who certify they do not prepare or assist in the preparation of all or substantially all of any tax return or claim for refund covered by a competency examination (Form 1040 series tax returns and accompanying schedules until further notice).

In IR-2011-89 (9/6/11), the IRS said that, to become a registered tax return preparer, an individual (other than a CPA, attorney, EA, etc.) must pass a one-time competency test, a tax compliance check, and a suitability check. Preparers who meet these requirements are then given the designation "registered tax return preparer." Additionally, the IRS said, preparers must complete 15 hours of continuing education each year, starting in 2012. The IRS issued specifications for the competency test, which was last updated in July 2012.

In 2012, three independent tax return preparers, including Sabina Loving, filed suit in the U.S. District Court for the District of Columbia, contesting the new return preparer requirements. All three previously were not subject to regulation by the IRS. They argued that, under 31 U.S.C. Section 330, which forms the basis for the IRS return-preparer requirements, the IRS has authority to regulate only those people who practice before the Treasury Department and that did not include them.

OBSERVATION: The Treasury Department publishes regulations governing practice before the IRS in Circular No. 230. The crux of Circular 230 is a long list of duties and restrictions relating to practice before the IRS. Circular 230 also lays out sanctions and sets the rules for disciplinary proceedings. The Circular 230 regulations have long applied to attorneys, CPAs, and a handful of other specified tax professionals.

District Court's Decision

The district court noted that 31 U.S.C. Section 330(a) authorizes the Treasury Secretary to regulate the practice of representatives of persons before the Department of the Treasury. The dispute in this case involved the IRS's interpretation that tax-return preparers are representatives who practice before the IRS.

According to the district court, the case centered on whether or not Section 330 is ambiguous as to whether tax return preparers are representatives who practice before the IRS. The court concluded that Section 330 unambiguously forecloses the IRS's interpretation for two reasons. First, the court stated, the text of Section 330(a)(2)(D) defines the practice of representatives in a way that does not cover tax-return preparers. The court concluded that the IRS cannot regulate return preparers pursuant to its inherent authority because 31 U.S.C. Section 330 governs only the IRS's authority to regulate those who practice before it. Second, the court stated, the IRS's interpretation would displace an existing statutory scheme that comprehensively regulates penalties on tax return preparers. Thus, the court enjoined the IRS from enforcing the regulatory requirements for registered tax return preparers.

The court's ruling does not affect the regulatory practice requirements for CPAs, attorneys, enrolled agents, enrolled retirement plan agents, or enrolled actuaries.

IRS's Motion

The IRS has filed a motion (January 23rd motion) asking that the district court's injunction be suspended while the IRS appeals the court's decision. According to the IRS (in a memorandum supporting the motion), the court's injunction has far-reaching negative implications not only for the IRS, but also for the public. The IRS said that it and the public would suffer irreparable harm if the injunction remains in place during the pendency of the appeal. At press time, a decision had not yet come down from the district court on the IRS's motion.

OBSERVATION: This is not the first time a preparer has challenged the IRS's return preparer regulations. In Jesse E. Brannen, III, P.C. v. U.S., 2012 PTC 150 (11th Cir. 2012), the taxpayer challenged the requirement that compensated tax return preparers obtain a PTIN and pay an annual fee for that number. The Eleventh Circuit held that, because in exchange for the tax preparer user fee the IRS assigns a PTIN and confers a special benefit upon tax return preparers, the IRS has the statutory authority to impose the fee.

(Staff Editor at Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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