The IRS has lost yet another battle in the United States District Court for the District of Columbia related to their attempts to expand regulation of tax preparers. In the case of Steele, et al v. United States, USDC DC,119 AFTR 2d ¶2017-818, while the Court the IRS was justified in establishing the requirement that tax preparers obtain a practitioner tax identification number (PTIN)—but that the agency had no authority to impose a fee for issuing that number.
The IRS had lost previous cases in this venue regarding their attempt to set up a preparer testing system (Loving, 113 AFTR 2d ¶2014-867) as well as the attempt to apply Circular 230 rules to tax preparation (Ridgely, 113 AFTR 2d ¶2014-5249).
Under regulations issued under IRC §6109, a tax preparer is required to obtain a PTIN before he/she may prepare returns for compensation (Treasury Reg. §1.6109-2(d)). The IRS also required the payment of a user fee to obtain a PTIN under authority claimed in Reg. §300.13. The plaintiffs in this case argued first that the IRS lacked the authority to require a preparer to obtain a PTIN and even if the Court found the agency had that authority, either it lacked the authority to impose a fee for the license or the fee that was imposed was excessive.
The Court first dealt with the question of whether the IRS could require PTINs for all preparers and found that the IRS was given a direct grant of such authority in IRC §6109 and had not acted arbitrarily or capriciously in imposing the requirement. The opinion notes:
The statute specifically says that the Secretary has the authority to specify the required identifying number to be used on prepared tax returns. 26 U.S.C. § 6109(d) (“The social security account number issued to an individual for purposes of section 205(c)(2)(A) of the Social Security Act shall, except as shall otherwise be specified under regulations of the Secretary, be used as the identifying number for such individual for purposes of this title.” (emphasis added)). The Court must give effect to the unambiguous intent of Congress that the Secretary may require the use of such a number.
In addition, the decision to require the use of PTINs was not arbitrary or capricious. The agency offered several justifications for the regulation requiring the exclusive use of PTINs. First, the IRS explained the need to identify tax return preparers in order to maintain oversight, and stated that the use of a single identifying number was critical to such effective oversight. See Furnishing Identifying Number of Tax Return Preparer, 75 Fed. Reg. at 60310, 60313. The IRS stated that the use of a single number would “enable the IRS to accurately identify tax return preparers, match preparers with the tax returns and claims for refund they prepare, and better administer the tax laws with respect to tax return preparers and their clients.” Id. at 60314. The IRS has articulated satisfactory explanations for its actions. See State Farm, 463 U.S. at 43. There is a rational connection between the regulations — requiring the use of PTINs — and the stated rationales — effective administration and oversight. See id. And, there is no indication that the IRS entirely failed to consider an important aspect of the problem, or that its rationales ran counter to the evidence before it, or that its reasoning is completely implausible. See id. In addition, this was not an unexplained change in policy. See Encino Motorcars, 136 S. Ct. at 2126. The aforementioned reasons for the change in policy were identified by the IRS.
But the Court found that the IRS had overstepped its authority in imposing a user fee for the PTIN. The IRS relied on the Independent Offices Appropriations Act (IOAA) of 1952 in justifying the imposition of a user fee on those obtaining a PTIN. The Court explains the conditions under which the IOAA allows an agency to impose a user fee:
The IOAA permits agencies to charge user fees for “a service or thing of value provided by the agency.” 31 U.S.C. § 9701(b). The Supreme Court has read the language of the Act narrowly in order to distinguish between fees and taxes, the latter of which are the province of Congress. See Nat’l Cable Television Ass’n, Inc. v. United States, 415 U.S. 336, 340–41 (1974). Fees are “incident to a voluntary act” and connote a benefit. Id. Agencies may impose fees for bestowing special benefits on individuals not shared by the general public. Id.; Fed. Power Comm’n v. New England Power Co., 415 U.S. 345, 350–51 (1974); Engine Mfrs. Ass’n v. E.P.A., 20 F.3d 1177, 1180 (D.C. Cir. 1994). There must be “a sufficient nexus between the agency service for which the fee is charged and the individuals who are assessed.” Seafarers Int’l Union of N. Am. v. U.S. Coast Guard, 81 F.3d 179, 183 (D.C. Cir. 1996). Agencies must “make clear the basis for a fee it assesses under the IOAA.” Nat’l Cable Television Ass'n, Inc. v. F.C.C., 554 F.2d 1094, 1100 (D.C. Cir. 1976)
The Court found that, following the striking down of the registered return preparer requirement in the Loving case, there was no longer a “service or thing of value” begin granted with the PTIN, since any individual may obtain such a number. The Court held:
First, the argument that the registered tax return preparer regulations regarding testing and eligibility requirements and the PTIN regulations are completely separate and distinct is a stretch at best. While it is true that they were issued separately and at different times, they are clearly interrelated. The RTRP regulations specifically mention the PTIN requirements and state that PTINs are part of the eligibility requirements for becoming a registered tax return preparer. See Regulations Governing Practice Before the Internal Revenue Service, 76 Fed. Reg. at 32287–89; 26 C.F.R. § 1.6109-2(d) (“[T]o obtain a [PTIN] or other prescribed identifying number, a tax return preparer must be an attorney, certified public accountant, enrolled agent, or registered tax return preparer authorized to practice before the Internal Revenue Service under 31 U.S.C. 330 and the regulations thereunder.”). Furthermore, the overarching objectives named in the PTIN regulations indicate a connection to the RTRP regulations. They were 1) “to provide some assurance to taxpayers that a tax return was prepared by an individual who has passed a minimum competency examination to practice before the IRS as a tax return preparer, has undergone certain suitability checks, and is subject to enforceable rules of practice;” and 2) “to further the interests of tax administration by improving the accuracy of tax returns and claims for refund and by increasing overall tax compliance.” Furnishing Identifying Number of Tax Return Preparer, 75 Fed. Reg. at 60310. The first objective clearly relates to the RTRP regulations regarding eligibility requirements for tax return preparers. The second objective is less explicit, but it does not stretch common sense to conclude that the accuracy of tax returns would be improved by requiring tax return preparers to meet certain education requirements.
Having concluded the inter-connectedness of the regulations, the government’s argument begins to break down. The Loving court concluded that the IRS does not have the authority to regulate tax return preparers. Loving, 742 F.3d at 1015. It cannot impose a licensing regime with eligibility requirements on such people as it tried to do in the regulations at issue. Although the IRS may require the use of PTINs, it may not charge fees for PTINs because this would be equivalent to imposing a regulatory licensing scheme and the IRS does not have such regulatory authority. Granting the ability to prepare tax return for others for compensation — the IRS’s proposed special benefit — is functionally equivalent to granting the ability to practice before the IRS.
The District Court goes on to note that D.C. Circuit, relying on the Supreme Court’s holding in Nat’l Cable Television Ass’n, 415 US 336, has generally held that fees are permissible under IOAA for valid regulatory schemes—but here the regulatory scheme (the RTRP program) was struck down.
The opinion goes on:
…[T]he Court notes that after Loving, anyone can obtain a PTIN. They need not meet any type of eligibility criteria. Thus, it is no longer the case that only a subset of the general public may obtain a PTIN and prepare tax returns for others for compensation. Hypothetically, every member of the public could obtain a PTIN, which means that every member of the public would also get the supposed “benefit” of being able to prepare tax returns for others for compensation. There is therefore no special benefit for certain individuals not available to the general public. It seems that if a benefit exists, it inures to the IRS, who, through the use of PTINs, may better identify and keep track of tax return preparers and the returns that they have prepared.
This particular issue had been previously addressed in other courts, with the IRS prevailing on both issues in the Brennan, III, PC, (DC GA) 109 AFTR 2d ¶2012-2439, affd (CA 11 2012) 109 AFTR 2d ¶2012-2442 and later in the case of Buckley, (DC GA) 112 AFTR 2d ¶2013-7255. The District Court recognized this issue and dealt with it as follows:
The Court acknowledges that courts in the Eleventh Circuit have found that the PTIN fees are permissible under the IOAA. See Brannen, 682 F.3d at 1319; Brannen, 2011 WL 8245026, at *5–6; Buckley, 2013 WL 7121182, at *2. But, the Brannen decisions were made prior to D.C. Circuit’s Loving decision, i.e., prior to the finding that the IRS lacks the authority to regulate tax return preparers and the striking down of the regulations attempting to do so. In addition, the Court disagrees with the Buckley court’s finding that Loving (at the time the district court opinion) is entirely inapplicable because although the PTIN scheme was authorized by a different statutory authority, it is, as explained above, interrelated with the RTRP scheme.
In response to the Steele decision the IRS has shut down, for now, the PTIN registration and renewal program. In a statement issued June 6, the IRS stated:
On June 1, 2017, the United States District court for the District of Columbia upheld the Internal Revenue Service’s authority to require the use of a Preparer Tax Identification Number (PTIN), but enjoined the IRS from charging a user fee for the issuance and renewal of PTINs. In accordance with this order, PTIN registration and renewal is currently suspended.
The IRS, working with the Department of Justice, is considering how to proceed. As additional information becomes available, it will be posted at www.irs.gov/taxpros.
For your customers with PTINs, there is no change to what you are doing. CE records should continue to be transmitted to the IRS.
For customers who need PTINs, please hold their CE records until the PTIN system reopens and they are able to obtain a PTIN. These preparers will be given the appropriate credit when reported.
For the moment, the biggest problem is that individuals who do not already have a PTIN cannot obtain one. The notice suggests that the PTIN system will eventually be reopened but does not give a time frame for this to happen. The notice only deals with those who must report their continuing education to the IRS (EAs), but doesn’t explain what those people or anyone else lacking a PTIN is supposed to do about the identification number if preparing a return for compensation.
Current regulations require the use of a PTIN to file a return, but the IRS isn’t issuing them at this point. The IRS has not yet indicated what a preparer with that dilemma is supposed to do at this point. Similarly, those with PTINs aren’t out of woods if the IRS drags its feet on resolving this issue—under Reg. §1.6109-2(e) the IRS is authorized to set an expiration date on PTINs, and all PTINs currently issued have an expiration date of December 31, 2017.
The IRS could have continued to issue and process renewals for PTINs as the court found the agency had the right to impose this requirement—but, apparently, the IRS does not want to incur the costs of processing the applications. In News Release IR-2015-123 indicated that the agency incurs a $17 fee per application that is paid to an outside contractor that handles the application/renewal process.
One “solution” would be for the IRS to remove the regulations mandating the use of PTIN. That would have the advantage to the agency of eliminating the cost of running the PTIN program now that fees will not longer be paid—but it would also result in preparers needing to revert to using social security numbers as identifying numbers on returns under the default provisions of IRC §6109(a). While that number would only be required to be shown on the IRS copy of the return (with would be only in the electronically filed return for e-services), preparers might be wary of the use of the number, especially in cases where a return must be filed in paper form (and thus the number “exposed” to the client).