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Jan 23

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Federal Court Overturns IRS Tax Preparer Program

00011810Effective August 12, 2011, the IRS required all tax return preparers who prepare and file tax returns for a fee to (i) pass an exam, (ii) pay an annual fee, and (iii) do 15 hours of continuing education each year [see: IRS Regulations].  Attorneys, CPA’s and Enrolled Agents were exempt from this new regulation.  The court’s decision [see: Court Decision] indicated that the IRS estimated 600,000 to 700,000 tax preparers would fall under this new regulation.

A Journal of Accountancy Article, written by Alistair M. Nevius, summarized the court’s ruling as follows:

The court applied the test from Chevron U.S.A. Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984), the first step of which requires the court to determine if Congress has spoken to the precise question at issue; if Congress’s intent is clear, that is the end of the inquiry. In this case, the court said, the question was, is 31 U.S.C. Section 330 “ambiguous as to whether tax-return preparers are ‘representatives’ who ‘practice’ before the IRS?” (slip op. at 9).

The court found that 31 U.S.C. Section 330 is not ambiguous and that tax return preparers are not representatives who practice before the IRS for three reasons. First, Section 330(a)(2)(D) contains a definition of “practice of representatives” that does not include tax return preparers because it equates practice with advising and assisting taxpayers in presenting their cases before the IRS. The court said that “[f]iling a tax return would never, in normal usage, be described as ‘presenting a case’” (slip op. at 11).

Second, the IRS’s interpretation would displace other “statutes scattered across Title 26 of the U.S. Code [that] create a careful, regimented schedule of penalties for misdeeds by tax-return preparers” (slip op. at 13). If Section 330(b) gave the IRS open-ended discretion to regulate tax return preparers, it would displace this existing statutory scheme.

Third, under the IRS’s interpretation, Sec. 7407, which remedies abusive practice by tax return preparers by allowing the IRS to enjoin their preparation of tax returns, “would be relegated to oblivion” (slip op. at 10).

Having decided that the statutory language unambiguously forecloses the IRS’s return preparer regulation program, the court declined to address the IRS’s other arguments. Since the regulation failed under the first step of the Chevron analysis, the court granted a declaratory judgment that the IRS “lacks statutory authority to promulgate or enforce the new regulatory scheme for ‘registered tax return preparers’ brought under Circular 230” (slip op. at 21).”

The IRS released the following statement regarding the decision see: IRS Statement.

Although the court’s legal analysis may be correct, the spirit of the IRS’ regulation was well served for both tax preparers and those who use their services.

About the author

Anand Khemlani

I am a founding member of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA), Accredited in Business Valuation (ABV), a Certified Fraud Examiner (CFE) and am a licensed Real Estate Broker. I regularly serve as an expert witness involving results of my forensic accounting assignments and damage analyses. My resume is available on Fulcrum's website

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