IRS Drops Further Appeals of Court Decision Invalidating Tax Preparer Regulation

The Internal Revenue Service has declined to file a petition with the Supreme Court to appeal a series of rulings invalidating its effort to require mandatory testing and continuing education of tax preparers.

In January of last year, a federal court judge ruled that the IRS had exceeded its statutory authority in attempting to regulate tax preparers and effectively put an end to the IRS’s Registered Tax Return Preparer program. Subsequent appeals by the IRS have not overturned the initial decision. Most recently, in February of this year, the D.C. Court of Appeals ruled in favor of the three independent tax preparers—Sabina Loving of Chicago, Ill., Elmer Kilian of Eagle, Wis., and John Gambino of Hoboken, N.J.—who had sued the IRS in the case, known as Loving v. IRS (see Tax Preparers Defeat IRS in Appeals Court Ruling on Licensing Scheme).

The IRS has now missed a deadline for filing a petition seeking a review from the Supreme Court of the decision. The Arlington, Va.-based law firm that represented the independent preparers, the Institute for Justice, noted that the lapse of the deadline marks the conclusion of a two-year battle over whether the IRS had the authority to impose a nationwide licensing scheme on tax preparers.

The IRS had unsuccessfully argued that the “Horse Act” of 1884—a statute passed to govern compensation claims for dead horses brought on behalf of Civil War veterans—had provided it with such authority.

“This brings finality to a major victory for independent tax preparers—and taxpayers—nationwide,” said lead attorney Dan Alban in a statement. “Four federal judges sitting on two different courts have all agreed that Congress never gave the IRS the power to license tax preparers, and an agency cannot just give itself such licensing authority. By not filing a petition for certiorari, the IRS has wisely chosen not to ride this horse law any further.”

Asked whether his firm had heard from the IRS about any further appeal, Alban told Accounting Today in an email Tuesday, “There is no more appeal. The case is now final. They have not filed a petition for cert. with the U.S. Supreme Court and yesterday was their deadline to do so.”

If the licensing scheme had not been struck down, approximately 350,000 tax-return preparers would have been affected by the IRS regulatory regime.

“These regulations were classic economic protectionism,” said IJ senior attorney Scott Bullock. “The burden would have fallen on small entrepreneurs and consumers, while powerful industry insiders stood to reap the benefits of decreased competition. Instead, taxpayers will enjoy lower prices for tax-preparation services as more preparers compete for their business.”

The IRS did not immediately respond to a request for comment.

This case arose when the IRS, following several failures to secure congressional authorization, imposed sweeping new regulations requiring all tax-return preparers to obtain a license and submit to ongoing, mandatory IRS-approved education. The three independent tax preparers filed suit in March 2012 in the U.S. District Court for D.C., arguing that the IRS exceeded the scope of its authority by attempting to enact the regulations without Congress’ approval. U.S. District Court Judge James E. Boasberg agreed, and struck down the regulations as unlawful in January 2013. However, he left in place the IRS'srequirement for registering paid tax preparers with Preparer Tax Identification Numbers, or PTINs.

In February of this year, a three-judge panel of the D.C. Circuit Court of Appeals upheld the district court opinion, ruling: “The IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of [the statute.]”

IRS commissioner John Koskinen has indicated that the chances of getting the Supreme Court to review the appeals court ruling are unlikely, telling Accounting Today in an interview in February, “We're disappointed with the decision, although the decision is fairly final in the sense that the only appeal would be to apply for a writ of certiorari to the Supreme Court. And getting a writ granted by the Supreme Court is unlikely in most cases, and probably unlikely in this one as well.”

Koskinen pointed out that there wasn't any disagreement between different circuit courts on which to base the appeal. “We don't have controversy between different circuits,” he acknowledged back in February (see IRS Commissioner sees Further Appeals on Tax Preparer Lawsuit as Unlikely). He also admitted that going to Congress to give the IRS the statutory authority to impose tax preparer regulation was also a long shot. “I recognize that in today's political climate, getting legislation to give the IRS authority to do anything is probably a bit of a stretch.”

In a congressional hearing last week, however, Koskinen pointed to the Obama administration's budget proposal asking for legislative authority to regulate tax preparers (see IRS Commissioner Tells Congress about EITC Challenges with Tax Preparers).

Koskinen sees voluntary certification as the most likely route. “So it may well be that our best approach, and we are looking at that as well, is whether, as I've said in the past, some sort of voluntary program would be productive,” he said in the interview in February. “It would be a way of offering educational support for preparers.”