New PTIN User Fee: IRS Announcement Despite Ongoing Remand Litigation

By:
Frank G. Colella, Esq, LLM, CPA
Published Date:
Jun 1, 2020

The IRS recently announced its intention to reimpose a practitioner tax identification number (PTIN) user fee for the 2020 tax season. The proposed regulation requires tax practitioners to pay $21 (plus a vendor fee) to obtain or renew their PTINs. The new fee is a marked reduction from the previous cost of $33, which itself had been a significant reduction from the original PTIN fee of $50 (plus the vendor fee). Despite the proposed reduction, however, the issue of what is a “reasonable” charge for the issuance or renewal of a PTIN is still currently before the D.C. District Court for resolution. Under the circumstances, it seems premature for the IRS to have unilaterally announced a new PTIN fee.

Background

In Steele v. United States, the district court ruled against the IRS, holding that it did not have the authority to impose a fee for the use of PTINs. As a consequence, the issuance of PTINs was briefly suspended in 2017. After review, the IRS quickly resumed the issuance of PTINs, but chose to suspend collection of the user fee. In 2019, the D.C. Circuit of Appeals, in Montrois v. United States, reversed Steele and held that the IRS could properly impose a PTIN user fee. Montrois, however, left unresolved how much the IRS could reasonably charge for a PTIN or its subsequent renewal. Instead, that specific issue was remanded to the district court for a hearing to determine the appropriate PTIN fee.

The newly announced PTIN fee does not come as a complete surprise because the Office of Management and Budget had completed its review of the proposed regulation (fee) in March 2019. But the timing of the decision is unexpected, given the pending litigation. The district court must still determine what an appropriate PTIN fee should be in light of the various factors discussed in the Montrois decision. Moreover, there is no guarantee that whatever the court concludes the fee should be will result in finality. Either side could rightfully seek an appeal of the district court’s determination.

In late October 2019, shortly after the Supreme Court denied the taxpayers’ petition for certiorari, the parties entered into a joint stipulation that provided for a detailed discovery schedule extending into 2020. The proposed plan, before the outbreak of the COVID-19 crisis, anticipated that the discovery phase of the remand litigation would be lengthy. Among some of the items cited in the stipulation were the voluminous number of documents to be examined and the reluctance of some people (together with the outright opposition of others) to be deposed. Shortly after the proposed regulation was issued, the Court extended the discovery stipulation until Nov. 30, 2020. 

An Open Question

It’s an open question whether judicial approval of the revised PTIN fee announced by the IRS is desirable—or, more importantly, whether that judicial approval is a prerequisite to the proper imposition of the new PTIN fee. But the answer to that question seems moot, given the IRS’s decision to promulgate the new fee without waiting for the court’s input. Instead, the remand proceeding may result in conflation of the original effort to arrive at a reasonable PTIN fee together with a review of appropriateness of the IRS’s newly announced PTIN fee. 

As for the methodology employed by the IRS in its calculation of the revised fee, a background in cost accounting would have been helpful. The accompanying explanation to the proposed regulations describes, generally, the direct costs used in the computation, together with an overhead component that was applied in determining the overall fee.

The IRS followed the guidance detailed in Statement of Federal Financial Accounting Standards (SFFAS) 4. This is not the first time it applied SFFAS 4 in the calculation of user fees. The IRS followed the same methodology last year when it announced the new enrolled agents fee and the previous year when it announced the fee it would impose on taxpayers who sought installment agreements.

In this instance, the IRS estimated that there would be approximately 800,000 PTIN users (2.4 million applications and/or renewals over a three-year period) to arrive at the $21 per tax return preparer fee.  That user fee, therefore, assumes the IRS will incur roughly $16-plus million in annual costs to maintain the PTIN program over the next three years. That figure excludes the separate processing charge paid directly to the third-party provider. The question is whether that figure, so calculated in the proposed regulation, ultimately corresponds to the cost determined during the remand litigation.

Court Rulings

On remand, the district court was responsible for determining whether the fee was reasonable.  According to both Steele and Montrois, the determination would include not only the reasonableness of the fee based upon the direct costs associated with the PTIN program, but would also examine whether the direct costs used to calculate to PTIN fee included amounts for services and charges that went beyond the IRS’s authority to regulate the tax preparation industry. It was not enough to identify the overall costs of the PTIN program; the court had to also determine whether the individual cost components were properly within the IRS’s authority.

Apart from the IRS’s sua sponte decision to reduce the PTIN fee in 2016, the only court that directly ruled on the reasonableness of the PTIN fee was the district court in Buckley v. United States. Despite the district court’s decision in Loving v. IRS, which held that the IRS did not have the authority to regulate tax preparers, the Buckley court nevertheless concluded that the original $50 PTIN user fee was reasonable. In reaching that conclusion, Buckley did not provide any analysis, nor did it consider any of the components that should be included (or excluded) in the determination of the fee. Other courts did not consider the fee itself, only whether the IRS was authorized to impose one.

Steele did, however, discuss what costs the PTIN fee should include and, more importantly, exclude from consideration. Specifically, Steele held that under the Independent Offices Appropriations Act, the IRS may only consider the fees it incurs in providing the PTIN service: “the prevailing (and binding) interpretation of section 9701, which states, again, ‘the measure of fees [imposed under IRC section 9701] is the cost of the government of providing the service, not the intrinsic value of the service to the recipients.’”

According to Steele, the IRS may not consider the benefit derived by individual class members from the use of the PTINs—it must be a uniform fee for all tax return preparers. That holding served as the legal basis for the Steele litigation to proceed as a class action and, likewise, order relief on a class-wide basis.  “The IRS has stated time and again that the cost of issuing a PTIN is the same regardless of whether the pin number is issued to an attorney, CPA, or uncertified tax return preparer. As plaintiffs note, that is why the IRS decided in the first place to impose a uniform fee for every PTIN it issued—regardless of the recipient's professional status.”

The plaintiffs in Montrois alleged that, even following the IRS’s voluntary reduction of the fee in 2015, the lower fee charged still included impermissible components: “The IRS has also continued to use the fees to fund activities related to tax compliance, background checks, the voluntary certification program established after Loving, and many other things unrelated to issuing a number.” Montrois agreed that any costs associated with activities found invalid pursuant to Loving should be reviewed on remand. As part of the remand, a good portion of the analysis will inevitably require a detailed examination of the direct costs charged to the PTIN program.

Interestingly, however, after the Loving decision but prior to the Montrois decision, the D.C. Circuit decided AICPA v. United States, which held that the IRS could implement a voluntary program that regulated tax return preparers. While Montrois did not discuss the impact of the AICPA decision, the costs associated with the voluntary program, which by necessity also utilizes the PTINs, should arguably be included in the direct costs of the PTIN program. 

Additional Considerations

Finally, an additional question that should be examined on remand is the appropriateness of the vendor fee itself, paid directly to the third-party administrator. Thus, the original PTIN fee was not $50; it was $64.25 when the processing charge was included. The reduced fee was not $33, but rather $50 with the addition of the vendor fee.  And the newly announced $21 fee is, in actuality, a $35.95 user fee because of the vendor charge. Given that practitioners must pay both charges, it would seem appropriate for the combined figure to be used in the determination of what is a “reasonable” PTIN fee.



Frank G. Colella, Esq., LLM, CPA, is a clinical professor in legal studies & taxation at Pace University’s Lubin School of Business and a practicing attorney.  His law practice is focused primarily on federal taxation, estate planning and administration, and corporate transactions.  He teaches courses in tax practice & procedure, business law, and constitutional law.  Mr. Colella has published and lectured extensively on tax-related matters, including testimony before the Internal Revenue Service.

 
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