Appeals Court Backs IRS over AICPA in Preparer Registration Case

Chris Gaetano
Published Date:
Aug 20, 2018

The U.S. Court of Appeals for the D.C. Circuit has sided with the IRS over the AICPA, allowing the agency to keep its voluntary return preparer program, according to Accounting Today. The appeals court ruled in the case, AICPA vs. IRS, that, despite the AICPA's arguments, the IRS did indeed have the proper authority to create the program. 

This is the latest chapter in a years-long saga over IRS regulation of all paid tax preparers. The IRS announced in 2010 that it intended to compel individuals who are required to sign a federal tax return as paid return preparers to register with the IRS and pay a user fee, as well as make mandatory the use of preparer tax identification numbers (PTINs). The program was initiated in response to an internal study indicating that many taxpayers were being ill-served by their preparers, and voicing alarm that such a large industry was largely unregulated. While CPAs, attorneys and enrolled agents were subject to professional standards, the report found that "a large share of tax return preparers do not pass any government or professionally mandated competency requirements before they prepare a federal tax return."

Consequently, the IRS program would require all paid tax preparers—excepting CPAs, attorneys and enrolled agents—to take an initial competency test, take regular professional education, be enrolled in a public database, be subject to IRS compliance checks, and be subject to Treasury Department Circular 230, which concerns penalties for unethical and unprofessional conduct. 

The program drew immediate protest from non-CPA tax preparers, culminating in the suit, Loving v. Internal Revenue Service, filed in 2012 by three preparers who argued that Congress did not give the IRS authority to level such requirements, making the entire program invalid. In January 2013, the U.S. District Court for the District of Columbia enjoined the IRS from implementing its regulatory program as it allowed the plaintiffs' lawsuit to go through. The IRS appealed the district court decision in March of that year. Finally, in February 2014, the U.S. Court of Appeals for the D.C. Circuit ruled that the plaintiffs were correct and that the IRS had overstepped its authority. 

The IRS responded to the loss by launching the Annual Filing Season Program, which on a functional level was identical to the regulation save that participation would be voluntary. Those who cleared the requirements would receive a "Record of Completion" which the practitioners could then display, indicating their participation in the program. This program, however, sparked a lawsuit from the AICPA, which argued that the voluntary program was an unacceptable end run around the court decision, as the the advantages it confers would lead to enormous pressures to complete it, making it voluntary in name only. 

Later that year, however, the U.S. District Court for the District of Columbia dismissed the lawsuit. The ruling, made by the same judge who'd heard the Loving case, said that the AICPA lacked the authority to sue, as it represents CPAs and not the unenrolled tax preparers the initiative would likely affect. However the AICPA was later able to successfully appeal the decision, allowing the suit to go through.

In its recent ruling, the D.C. Circuit decided that, even though the AICPA does have standing for this case, its arguments still lack merit. The appeals court said it did not see the IRS trying to resurrect its regulatory program, as participants can consent to its requirements. The court also pointed out that the program focuses specifically on tax preparers when they represent clients before the IRS, not when they engage in the act of paid tax preparation work in general, which indicates that the requirements are indeed within its statutory authority. The court agreed with the IRS that "§330(a) authorizes the IRS to establish and operate the Program, and § 7803(a)(2)(A) authorizes the agency to publish the results of the Program." Finally, the court determined that the IRS did not violate the Administrative Procedure Act because the program was an interpretive rule instead of a legislative one, meaning that the IRS did not have to follow notice-and-comment rulemaking procedures connected to it. 

One of the three judges on the appeals court panel concurred in part and dissented in part. He largely stood with the majority but disagreed that the IRS could skip the public-notice-and-comment part of issuing the new rule, saying that the statute does not really differentiate between types of rules and only refers to rules generally. While the program was not explicitly a legislative rule, the judge believed that it had all the features of one and so faulted the IRS for not following the proper process. 

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