January 18, 2013 was a big day as far as tax is concerned. In one development, the federal district court for the District of Columbia issued an injunction against the new IRS preparer regulations that had been in the works since 2011.  Those regulations created a new classification of tax preparer – the Registered Tax Return Preparer (RTRP).  An RTRP is a non-attorney, non-CPA preparer that prepares tax returns for compensation.  The new regulations required RTRPs to register with the Treasury, pass a “competency” exam, complete 15 hours of continuing education annually and pay an annual fee.  The exam originally had to have been successfully completed by the end of 2013, but the IRS changed its mind on that recently.  The exam, by the way, was open-book. 

(See related: Top ten agricultural law developments of 2012)

But, the regulations were challenged by several tax preparers subject to the new rules who were represented by the Institute for Justice, a libertarian public interest law firm.  The IRS argued that they had the authority to regulate the RTRPs via an 1884 statute (31 U.S.C. §330).  That statute gives the Treasury Secretary the authority to regulate people who practice before the Treasury Department or the IRS.  Under that statutory authority, the Treasury Secretary publishes regulations governing practice before the IRS and reprints them in Circular 230.  That IRS publication lists the duties and restrictions governing practice before the IRS.  But, in 2011, the Treasury Department sought to extend the reach of Circular 230 by applying the rules beyond those persons that practice before the Treasury or the IRS to tax-return preparers.   But, the court wasn’t buying that argument.

While administrative agencies are entitled to deference with respect to regulations that they promulgate, unless the regulations are an arbitrary and capricious interpretation of the applicable law, they can’t go beyond what the statute clearly allows.  The court determined that the statute was not ambiguous as to whether a tax return preparer is a “representative” who “practices” before the IRS.   Preparing and filing a tax return does not constitute “practice” or “presenting a case.”  “Practice” refers to the assisting of a taxpayer in the examination and appeals process.  One must do more than simply complete a tax return to be representing someone before the IRS.  The court compared the scenario to the drafting of a will (any person can write their own will), but someone hired to challenge a will on behalf of someone else in court must be a lawyer admitted to that particular court’s bar.