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.
Filing deadline extended
The court also noted that there was a separate statutory regime for imposing penalties on tax return preparers apart that would be obliterated if IRS had the authority to “disbar” tax return preparers under the new regulations. In addition, the regulations would allow the IRS to sidestep a tax preparer’s protection of procedural due process and judicial review. That would not be a proper result, the court concluded. Only the Congress, by enacting a statute, can authorize the regulatory procedures that the IRS was seeking.
The court granted the plaintiffs’ motion for summary judgment, denied the summary judgment motion of the IRS, held that the IRS lacked the statutory authority to promulgate or enforce the new regulations, and permanently enjoined the IRS from enforcing the regulations.
We’ll have to see if the administration chooses to appeal the court’s decision or whether the D.C. Circuit Court of Appeals enters a stay of the District Court’s opinion. But, for now, the preparer regulations are blocked.
An interesting factual side-note in the case is that the lead plaintiff was a tax preparer from the South Side of Chicago that served low-income clients. Loving, et al. v. Internal Revenue Service, et al., No. 12-385 (JEB) (D. D.C. Jan. 18, 2013).
The other major development on Jan. 18 was that the IRS announced that the March 1 filing deadline for farmers that don’t pay estimated taxes has been moved back to April 15. That’s welcome relief. The lateness of tax legislation delayed the IRS from preparing forms necessary for processing returns (particularly Form 4562 which is used to report depreciation). To be able to use the April 15 deadline instead of March 1 for a farm return, the taxpayer must complete Form 2210-F and check the waiver box. The form must be attached to the return. IRS Announcement, IR 2013-7.