Institute for Justice Takes IRS to Court, Tax Prep Biz at Risk

RUSS REPORT - The Internal Revenue Service is being taken to court over alleged charges that it illegally imposed regulations in 2010 that target millions of tax paying consumers and is in effect for this tax season.

The lawsuit, titled Loving v. IRS, filed by the Institute for Justice (IJ), the nation’s leading legal advocate for the rights of entrepreneurs, on March 13 alleges that the IRS does not have any statutory authority to impose such a licensing scheme because Congress never granted that authority. (Video Link)

The suit seeks to overturn regulations that would affect hundreds of thousands of tax return preparers across the nation who could be forced to close their viable and legal businesses. The defendants in this lawsuit are the Internal Revenue Service, Douglas H. Shulman, the Commissioner of Internal Revenue in his official capacity, and the United States of America.

“Congress never gave the IRS the authority to license tax preparers, and the IRS can’t give itself that power,” said Dan Alban, attorney for IJ. “This is an unlawful power grab by one of the most powerful federal agencies. These licensing regulations do create barriers to entry in the tax prep market, which will reduce competition and give consumers fewer choices. This reduced competition will inevitably lead to higher prices for tax preparation, hurting taxpayers.”

The new regulations, added to an already bulging 72,536 page Tax Code forces tax preparers to obtain IRS permission, take competency tests, sign up for continuing education classes and pay the IRS fees before they can file returns for their customers.

According to the Complaint filed by IJ, “The non refundable fee for the competency exam is $116. This is in addition to the (PTIN) renewable fee of $64.25, the application fee to become a registered tax return preparer, the renewable application fee to maintain that status, the cost of taking 15 hours of continuing education courses, the cost of taking an exam preparation course, the expenses of travel, lodging and meals incurred to attend 15 hours of continuing education courses and exam preparation courses. The IRS offers seminars that qualify for education credits through the IRS Nationwide Tax Forums Online. Depending on the seminar the cost for one credit hour is either $45.00 or $67.50.”

Now, multiply that amount by 15 (hours). Just the annual cost of the education could exceed $1000.00.

In their “litigation backgrounder, IJ points out, “In Circular 230, the IRS defines “practice before the Internal Revenue Service” very broadly to include “preparing documents” and “filing documents” as examples of “practice.”   By broadening the definition of “practice” far beyond its statutory meaning, and then by passing regulations based on this overly expansive definition, the IRS is attempting to dramatically expand its own power to regulate tax return preparers.”

The IRS recognizes authority under 31 U.S.C.§ 330 to regulate tax return preparations because it defines “Practice before the IRS” to include prep of documents/filing of documents.  But IJ’s Lawsuit disputes that authority saying, “31 U.S.C.§ 330 only authorizes the Department of Treasury to regulate those who actually represent or advocate for clients in hearings, conferences, meetings or other proceedings before the Dept. of Treasury. 31 U.S.C.§ 330 DOES NOT authorize the licensing of all tax preparers.”

When one considers the liberally given exemptions by the IRS, it’s easy to figure out just who will be most affected by these regulations and which companies will benefit. The regulations are not applied fairly to all tax preparers, and big business, once again, gets a pass.

Tax preparation giants H&R Block and Jackson Hewitt support the new regulations but are two corporations that have obtained exemptions from the new regulation. Both cite their own standards that are reviewed annually to insure professionalism, among other things, within the industry.

The American Institute of CPA’s (AICPA) also successfully lobbied for an exemption. Aside from CPA’s, the IRS regulation also exempts attorneys and several categories of politically powerful “enrolled agents.”

It costs money to lobby for special favors, and in this case, exemptions, that small businesses and entrepreneurs do not have.

“These regulations are typical government protectionism,” said IJ Senior Attorney Scott Bullock.

“They benefit powerful industry insiders at the expense of entrepreneurs and consumers, who will likely have fewer options and face higher prices. But tax preparers have a right to earn an honest living without getting permission from the IRS. And taxpayers—not the IRS—should be the ones who decide who prepares their taxes.”

The current regulations do not (yet) apply to software or online programs purchased by individuals to prepare personal returns.

The State of California is pushing “CalFile,” a state electronically run program and the “Ready Return” program that searches W-2’s or the year and sends a completed return ready for signature. Both were designed to lure tax filers away from tax software and tax preparers.

Alban mentioned, “The IRS is considering regulations for such programs but has not yet passed anything. They would likely have no statutory authority to do so for the same reasons we filed our lawsuit. Congress has never given them authority to act in this area and the IRS cannot simply conjure the power to regulate out of thin air.”

(Katharine Russ is an investigative reporter. She is a regular contributor to CityWatch and to the North Valley Reporter. Katharine Russ can be reached at: ) –cw

Tags:  IRS, Institute for Justice, tax preparers, H&R Block

Vol 10 Issue 23
Pub: Mar 20, 2012