In 2009 the IRS commissioned
a study of the tax preparation industry. Some of the findings were obvious: as
the tax law becomes more complex, taxpayers are increasingly relying upon tax preparers
or tax software (think TurboTax) in preparing accurate returns. The study then
went on to look at the preparers themselves, from attorneys and CPAs to
big-block preparers (such as H&R Block) to someone who prepares a few
returns for compensation from their kitchen table.
It was on that last point that
the IRS had an issue. It noted that anyone could enter the tax preparation business
and that that ill-equipped preparers were making numerous errors that were
costly to the Treasury. The IRS was unsure even of the number of tax preparers
out there, guessing there were between 900,000 and 1.2 million preparers.
The IRS observed that:
...the
American public overwhelmingly supports efforts to increase the oversight of
paid tax return preparers.”
Sorry, that one sounds like
self-serving flourish. I doubt the American public is barely aware of this
issue.
The IRS, then under
Commissioner Shulman, instituted a three-part program to oversee individual income tax preparers:
(1) A specific identification number for each preparer
This
is called the “preparer tax identification number” (PTIN), and every preparer
is required to obtain one and use it on every return he/she signs. Before
January 1, 2011, use of a PTIN was optional.
(2) The competency test
The
IRS mandated that preparers had to take an exam and then went on to exempt categories of preparers, such as attorneys,
CPAs and EAs. There were reasonable grounds for these exceptions, as each of these
groups has its own licensing system.
After
much wrangling, the IRS also exempted preparers supervised by an attorney, CPA or EA. If you worked for me,
for example, you could be exempt by working under my supervision.
(3) Continuing education
Preparers
had to complete 15 hours of continuing education each year. Again, attorneys, CPAs and EAs were
exempt because of their own education requirements.
The government being what it
is, a new unit was created within the IRS – the Return Preparer Office – to
administrate all this activity. The government also created a new designation, the "registered tax return preparer," for those passing the competency exam.
So far, this sounds
reasonable (or, at least, not unreasonable), right?
There was deep cynicism right
away about what the IRS was actually up to. For example, the PTIN cost $63.
Every year. Many practitioners, including some I have worked with, believe this
to be a back-door effort by the IRS to pad its own budget. The facts seem to
bear this out, as the IRS has collected more than $106 million from the
preparer registration and testing system. It has spent approximately $50
million and assigned 167 employees to the program.
What about the testing? No
one is truly certain how many tax preparers have to go through the testing,
given that so many (like me) are exempted. The number I have seen most often is
350,000.
Let’s go with 350,000. As of
December 31, 2012, only 48,000 of 350,000 had finished the certification
process. Sheeeshh. No one is knocking down that door.
That leaves continuing
education. The cost of those 15 hours could vary significantly. For many
preparers, the number of returns prepared might not justify the cost of the
education. Preparers were required to
obtain their first 15 hours in 2012. After complaints, the IRS wound-up allowing
preparers to make-up their 2012 hours in 2013.
Fueling the cynicism was the
program’s open support by H&R Block and Jackson Hewitt. Those big guys are
better positioned to comply with these new rules. The former CEO of H&R
Block – Mark Ernst – was made deputy commissioner of the IRS and drafted many
of the new rules for tax preparers. No conflict there, it appears. The
investment firm UBS advised "the new regulations should help (H&R) Block"
to put their smaller competitors out of business.
This is the United States, so
you know someone sued. Three independent tax preparers did, with the assistance
of the Institute for Justice.
The case is Loving v Internal Revenue Service,
decided on January 23, 2013 by the District Court for the District of Columbia.
Judge Boasberg wrote the opinion and he is – given that tax can be boring – quite
the hoot. Let’s summarize what he said.
The Court immediately
observed that the IRS was interpreting an 1884 statute as giving it authority
for its actions. That statute gives the Treasury Secretary authority to
regulate preparers who “practice” before it. The Court immediately noted that:
...
attorneys, CPAs, enrolled agents or enrolled actuaries are otherwise regulated
by the IRS and thus have no bone to pick with the new regulations.”
That leaves the other
hundreds of thousands of preparers who are not attorneys, CPAs, EAs or enrolled
actuaries. They comprise the 350,000 preparers we discussed previously. Sabina
Loving, of the eponymous case, is a bookkeeper and tax preparer from Chicago.
She is one of those 350,000.
So, is Sabina Loving “practicing”
before the IRS?
Here is the Court:
Under
..., originally enacted in 1884, the Treasury Secretary has authority to regulate people who practice before
the Treasury Department. This is so even
though the casual student of history knows that the Sixteenth Amendment
authorizing the modern federal income tax was not ratified until 1913.”
COMMENT:
Heh.
Section
330(a) authorizes the Treasury Secretary to ‘regulate the practice of representatives.... In dispute is the
IRS’s interpretation that tax-return preparers
are ‘representatives’ who ‘practice’ before the IRS.”
The
IRS hurries through..., arguing that the statute is ambiguous because it defined neither ‘representative’ nor
‘practice’.... That simplistic approach will not fly, however.”
The Court goes on to observe
that the statute refers to a “representative” advising and assisting persons in
presenting their cases. Here is the Court again:
Filing
a tax return would never, in normal usage, be described as ‘presenting a case.’
At the time of filing, the taxpayer has no dispute with the IRS; there is no
‘case’ to present.”
COMMENT:
I like this judge. He likely has blown his chance to be on the Supreme Court,
though.
With an invalid regulatory regime on the IRS’s side of
the scale and a threat to the plaintiff’s livelihood on the other, the balance
of hardship tips strongly in favor of plaintiffs.”
The Court permanently enjoined
the IRS from enforcing its tax preparer program.
Yes, the little guy won, at
least for the moment. In a motion filed January 24 with the Court, the IRS
argued that it has a “reasonable likelihood” of winning its appeal and that the
public will suffer “irreparable harm.” The IRS argued that it would incur “substantial
costs” to restart the preparer program if the injunction is not lifted. The IRS
also noted that that “thousands of return preparers who have already submitted
their users fees would demand refunds, and the United States would likely
face numerous lawsuits—including class action lawsuits.”
My Take: I am both happy and
uncomfortable with the decision. I agree that the IRS went a bridge too far. I also
understand that a rapidly-changing tax code requires ongoing education and that
unscrupulous preparers fueling fraudulent deductions and tax credits have
become a cottage industry.
I point out how much of this
trouble has been caused by Congress introducing what most parties agree are
welfare or transfer payments into the tax code. Congress could remove a lot of
steam from unscrupulous preparers just by eliminating refundable tax credits,
such as the earned income credit, for example. Here is a currently out-of-vogue
idea: why not have a national debate on
whether the purpose of a tax system is to – you know – collect taxes?
The District Court will
either lift its injunction or not. If not, expect an appeal from the IRS to the
Circuit Court. It seems to me a tremendous expenditure of talent and resources
by an over-tasked agency.
