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Tax Bulletin (February 2013)

Tax Return Preparer Litigation




By Nora E. Burke, a tax associate in the New York office of Pillsbury Winthrop Shaw Pittman LLP.

If you have or can obtain the Acrobat Reader, or have an Acrobat-enabled web browser, you may wish to download or view our February 2013 Tax Bulletin (a 137K pdf file), containing a printed version of this article and also available via ftp at:

    ftp.pmstax.com/gen/bull1302.pdf

This bulletin concerning tax matters is part of the Tax Page, a World Wide Web demonstration project, no portion of which is intended and cannot be construed as legal or tax advice. Comments are welcome on the design or content of this material.

In 2011, the Internal Revenue Service ("IRS") issued rules to regulate tax return preparers who prepare returns for compensation but who are neither attorneys nor CPAs.[fn. 1] The regulations require each preparer to pass a qualifying exam, pay an annual fee, and take 15 hours of continuing education classes each year.[fn. 2] It is estimated that somewhere between 600,000 and 700,000 individual tax return preparers are currently subject to these rules. The IRS issued the regulations pursuant to a statute that allows it to regulate representatives who practice before it.[fn. 3] Three tax preparers subject to these regulations filed suit against the IRS arguing that they should not be subject to the regulations because the IRS did not have the authority to regulate tax return preparers. Both the IRS and plaintiffs moved for summary judgment in the matter.

On January 18, 2013, the United States District Court for the District of Columbia sided with the plaintiffs and enjoined the IRS from regulating tax return preparers who were neither attorneys nor CPAs.[fn. 4] In reaching this result, the court first examined section 330 of Title 31 of the United States Code. That statute, which was enacted in 1884, gives the Treasury Secretary the authority to regulate those representatives practicing before the Treasury Department (and the IRS). Section 330 allows the Treasury Department or IRS to disbar or censure any representative who is incompetent, disreputable, violates regulations under the section or misleads the person being represented with the intent to defraud. The statute also permits the Secretary of the Treasury to impose a monetary penalty on such representatives. Following the Chevron framework, the court first focused on the language in section 330 that the IRS claimed gave it authority to regulate tax return preparers. That language allows the Treasury Secretary to test the competency of those who "advise and assist persons in presenting their cases." The court concluded that in normal usage, filing a tax return would never be considered presenting a case and therefore the statute should not be used to regulate preparers. Next, the court examined how section 330 would interact with the penalties and punishments for tax preparers already contained in the Internal Revenue Code (Title 26 of the United States Code). The Internal Revenue Code contains several provisions that impose a range of fines, up to $25,000 for a variety of misdeeds committed by tax return preparers.[fn. 5] The court stated that if section 330 could be used to punish preparers with higher fines and potential disbarment, then the statutes under the Internal Revenue Code would be completely irrelevant. The court concluded that this could not be what Congress intended. Based on this, the interpretation of the plain language of the statute and the dismissal of several other arguments presented by the IRS, the Court concluded that the plaintiffs met the requirements for an injunction.

On January 23, 2013, the IRS filed a motion to suspend the injunction during the pendency of the appeal of the injunction. In its memorandum, the IRS argued that the injunction should be suspended because (i) if it was not, it would cause the IRS irreparable harm, (ii) the plaintiffs would not be substantially harmed and (iii) it would be in the public interest. In arguing that the failure to suspend the injunction would cause the IRS irreparable harm, the IRS stated that immediately discontinuing the tax preparer registration program would cause a substantial disruption to tax administration. It also argued that halting the program would result in significant loss of revenue (the IRS had already received $100 million in registration and testing fees) and there would be costs associated with shutting down the program (in addition to the $50 million invested to create the program, the IRS estimated that it would cost an additional $238,000 to shut the program down). The IRS next argued that the plaintiffs would not be substantially harmed because two of the three plaintiffs had already received their Preparer Tax Identification Number ("PTINs"). Finally, the IRS concluded with its argument that the suspension of the injunction was in the public interest, because the public largely supported the regulations and that the regulations were meant to protect the public from inexperienced, untrained and fraudulent tax return preparers. The IRS alternatively asked for the suspension of the injunction for 14 days to allow it to seek relief from the Court of Appeals.

On February 1, 2013, the district court issued a modified order, clarifying that its injunction regarding the regulation by the IRS of certain return preparers does not affect the requirement for all paid preparers to obtain a PTIN. In response to this modified order, the IRS announced that the online PTIN system had been reopened. On February 20, 2013, the IRS filed its notice of appeal to the Court of Appeals for the District of Columbia Circuit.

Notes

  1. 31 C.F.R. § 10.8 ("Any individual who for compensation prepares or assists with the preparation of all or substantially all of a tax return or claim for refund must have a preparer tax identification number.")[return to text]

  2. 31 C.F.R. § 10.4(c) ("The Commissioner, or delegate, may designate an individual eighteen years of age or older as a registered tax return preparer provided an applicant demonstrates competence in Federal tax return preparation matters by written examination administered by, or administered under the oversight of, the Internal Revenue Service, or otherwise meets the requisite standards prescribed by the Internal Revenue Service, possesses a current or otherwise valid preparer tax identification number or other prescribed identifying number, and has not engaged in any conduct that would justify the suspension or disbarment of any practitioner under the provisions of this part.")[return to text]

  3. 31 U.S.C. § 330. [return to text]

  4. Loving v. Internal Revenue Service, 111 AFTR 2d 2013-___ (D.D.C. 2013).[return to text]

  5. I.R.C. §§ 6694, 6695, 6713, 7216, 7407.[return to text]


This material is not intended to constitute a complete analysis of all tax considerations. Internal Revenue Service regulations generally provide that, for the purpose of avoiding United States federal tax penalties, a taxpayer may rely only on formal written opinions meeting specific regulatory requirements. This material does not meet those requirements. Accordingly, this material was not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal or other tax penalties or of promoting, marketing or recommending to another party any tax-related matters.


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