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D.C. Circuit Affirms Loving Decision; IRS Can't Regulate Unlicensed Tax Preparers.
(Parker Tax Publishing February 2014)

On February 11, in a decision that will be a disappointment to many CPAs and enrolled agents, the U.S. Court of Appeals for the District of Columbia Circuit affirmed a district court's holding that the IRS does not have the authority to regulate tax return preparers. In Loving v. IRS, 2014 PTC 73 (D.C. Cir. 2/11/14), the D.C. Circuit concluded that the IRS's authority to regulate the practice of representatives of persons before the Treasury Department did not encompass the authority to regulate tax-return preparers.

OBSERVATION: The IRS has several choices now. It could do nothing, which is unlikely. Or it could appeal to the Supreme Court. But the most likely scenario would be for it to appeal to Congress to legislatively overturn the Loving decision.

The regulations had been seen by CPAs and enrolled agents as a way to level the playing field. Without the regulations, they are at a clear disadvantage because they are required to comply with competency and quality control regulations under IRS Circular 230, while unlicensed tax return preparers are not.


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 annual fees, and complete 15 hours of continuing-education courses each year. The regulations exempted certain tax return preparers, such as attorneys, CPAs, and enrolled agents, from the testing requirements because they have their own testing requirements. According to the IRS, it has authority to issue such regulations under Section 330 of Title 31. That provision, enacted by Congress, authorizes the Secretary of the Treasury and by extension, the IRS, a subordinate agency within the Treasury Department to regulate the practice of representatives of persons before the Department of the Treasury.

In 2012, three independent tax-return preparers brought a 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, 2013, 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 appealed to the D.C. Circuit and, in an unusual move, five former IRS Commissioners, appointed by Democratic and Republican presidents, came together to file an amicus brief (2013 PTC 64) before the D.C. Circuit Court. In that brief, the former Commissioners strongly disagreed with the D.C. district court's decision.

D.C. Circuit's Analysis

The D.C. Circuit began its analysis by noting that the crux of this case was whether the IRS's authority to regulate the practice of representatives of persons before the Department of the Treasury encompasses the authority to regulate tax-return preparers. According the court, there were at least six reasons why this was not so.

First, the court said, was the meaning of the key statutory term "representatives." The court dismissed the IRS's assertion that there "can be no serious dispute that paid tax-return preparers are representatives of persons." The court noted that the IRS never explained how a tax return preparer represents a taxpayer. The term "representative" is traditionally and commonly defined as an agent with authority to bind others, a description that the court said did not fit tax-return preparers.

Second was the meaning of the phrase "practice . . . before the Department of the Treasury." According to the court, while the IRS has long regulated service professionals such as attorneys and accountants who appear as representatives of taxpayers in adversarial tax proceedings before the IRS, the new regulations expanded the definition of "practice" to cover tax-return preparers. To be sure, the court observed, preparing and signing tax returns could be considered a "practice" of sorts, particularly if the tax-return preparer is providing advice or making judgment calls about a taxpayer's liability. But, the court said, Section 330 does not regulate the act of "practice" in the abstract. The statute instead addresses "practice . . . before the Department of the Treasury."

Third was the history of Section 330. The original language of the provision, the court noted, plainly would not encompass tax-return preparers. Even after tax-return preparation became a significant industry, Congress did not broaden the language. The fact that Congress used the words "agents," "attorneys," "claimants," "otherwise," and "presentation of their cases" in the original version of the statute, the court said, and the fact that Congress then expressly stated in the statute itself that it intended no change in meaning when it streamlined the statute in 1982, further indicated to the court that the statute contemplates representation in a contested proceeding, not simply assistance in preparing a tax return.

Fourth was the broader statutory framework. The court noted that it is a fundamental canon of statutory construction that the words of a statute must be read in their context and with a view to their place in the overall statutory scheme. Yet, the court observed, accepting the IRS's view of Section 330(a)(1) would effectively gut Congress's carefully articulated existing system for regulating tax-return preparers.

Fifth was the nature and scope of the authority being claimed by the IRS. The Supreme Court has stated that courts should not lightly presume congressional intent to implicitly delegate decisions of major economic or political significance to agencies. According to the court, if it were to accept the IRS's interpretation of Section 330, the IRS would be empowered for the first time to regulate hundreds of thousands of individuals in the multi-billion-dollar tax-preparation industry. Yet, the court observed, nothing in the statute's text or the legislative record contemplates that vast expansion of the IRS's authority.

The sixth and final reason the court gave for affirming the lower court's decision was the IRS's past approach to this statute. Until 2011, the IRS never interpreted the statute to give it authority to regulate tax-return preparers. Nor did the IRS ever suggest that it possessed this authority but simply chose, in its discretion, not to exercise it. The IRS is free to change (or refine) its interpretation of a statute it administers, the court stated. But the interpretation, whether old or new, must be consistent with the statute. And in the circumstances of this case, the court found it rather telling that the IRS had never before maintained that it possessed this authority. (Staff Contributor Parker Tax Publishing)

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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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