IRS Has the Right to Operate Credential Program for Unenrolled Preparers

The AICPA won and then lost in the case of American Institute of Certified Public Accountants v. IRS, Case No. 16-5256, DC CA.

The AICPA had instituted a challenge to the IRS’s Annual Filing Season Program, established in Revenue Procedure 2014-42.  The opinion describes the program as follows:

The Program grants an annual “Record of Completion” to any participant who has obtained a preparer tax identification number, taken the annual “federal tax filing season refresher course,” passed a comprehension test, completed a minimum of eighteen hours of continuing education, and “consent[ed] to be subject to the duties and restrictions relating to practice before the IRS in subpart B and section 10.51 of Circular 230 for the entire period covered by the Record of Completion.” Id. § 4.05(1)-(4).

The IRS offers two incentives to participate in the Program. First, the IRS lists unenrolled agents with a Record of Completion in its online directory of tax preparers alongside attorneys, CPAs, and enrolled agents. Second, the IRS gives them the “limited practice right” to represent a taxpayer in the initial stages of the audit of a return he or she prepared; for this the unenrolled agent must have a Record of Completion for both the year of the return and the year the IRS initiated the audit. Id. § 6. Before the Program was established, all unenrolled agents had this limited practice right.

The IRS appealed District Court opinion that ruled the AICPA had no standing to bring this suit on behalf of its members.  The AICPA appealed that ruling to the DC Circuit Court of Appeals which reversed the District Court and held that the AICPA had standing to bring the suit.

But the DC Circuit went beyond that ruling—the panel moved on to consider the merits of the AICPA position.  While normally a Court of Appeals would return the case to the trial court when reversing on a question of standing, the appellate panel noted:

Although our “general practice” is to remand the case when we reverse the district court's denial of standing, it may be appropriate to address the merits when the parties have “fully briefed the issue before this court,” the merits “involve purely legal questions,” which we would review de novo in a subsequent appeal, “[t]he district court has no comparative advantage in reviewing the agency action” for compliance with applicable law, and therefore “[a] remand to the district court would be a waste of judicial resources.” Mendoza v. Perez, 754 F.3d 1002, 1020 (D.C. Cir. 2014). Because each of these conditions obtains here, we proceed to the merits of the dispute.

The panel’s decision on the merits of the AICPA’s position did not go so well for the organization.

The panel first found that the program did not exceed the IRS’s statutory authority in the area.  The opinion holds:

The AICPA argues the Program is beyond the statutory authority delegated by the Congress to the Secretary of the Treasury, and hence to the IRS. The IRS responds that the Program is authorized by two statutes, 31 U.S.C. § 330(a) and 26 U.S.C. § 7803(a)(2)(A). As we have seen, § 330(a) authorizes the IRS to “[r]egulate the practice of representatives of persons before the [agency]” and to admit to practice only individuals of good character and good reputation, who have the necessary qualifications and competence. Section 7803(a)(2)(A) grants the Commissioner of the IRS “the power to administer, manage, conduct, direct, and supervise the execution and application of the internal revenue laws or related statutes,” which obviously includes § 330(a).

Consistent with its authority under § 330(a), and contrary to the AICPA's argument, the IRS uses the education, testing, and certification portions of the Program to ensure the unenrolled preparers who participate demonstrate the qualifications and competence necessary to practice before the agency. The Program specifies the education and testing requirements in detail, including the subject matter, number of instructional hours per year, form of testing, and minimum passing grade. REV. PROC. 2014-42 § 4.05. These requirements implement the IRS's stated purpose of encouraging unenrolled preparers “to complete continuing education courses for the purpose of increasing their knowledge of the law relevant to federal tax returns,” id. § 1, consistent with its reasonable view that an “unenrolled tax return preparer who successfully completes continuing education courses related to federal tax law will generally have a better understanding of the tax law necessary to represent a taxpayer before the IRS during an examination” than one who has not. Id. § 2.

The panel also disagreed with the AICPA’s argument that the IRS had acted arbitrarily and capriciously in adopting the program.   The AICPA first argues under this theory that the IRS failed to consider an important aspect of the problem it was addressing:

Specifically, the AICPA argues the IRS did not respond to its concern, before implementing the Program, that a public database of provider credentials may confuse taxpayers. The AICPA expressed these concerns in a July 6, 2011 letter to the IRS and again in its July 28, 2011 congressional testimony. The AICPA argued then that “any public database developed by IRS that is designed to serve as a 'look-up' function where taxpayers may search for their preparer should be structured to mitigate any taxpayer confusion regarding the relative qualifications of the different classes of tax return preparers.” The Implementation of the IRS Paid Tax Return Preparer Program: Hearing Before the Subcomm. on Oversight of the H. Comm. on Ways and Means, 112th Cong. 52 (2011) (statement of Patricia Thompson).

But the panel found the IRS had responded to that concern.  The ruling holds:

The IRS responds that the directory does what the AICPA requested, and indeed it does: It allows users to filter the directory to show each category of service provider separately, including those identified in the directory as “Annual Filing Season Program Participant[s].” See IRS, Directory of Federal Tax Return Preparers with Credentials and Select Qualifications, (last accessed May 6, 2018). The directory is also linked to a primer describing the various qualifications in greater detail. See IRS, Understanding Tax Return Preparer Credentials and Qualifications, (last accessed May 6, 2018). These features indicate the IRS considered and addressed the AICPA's comment.

The AICPA also argued that the IRS had failed to consider all alternatives available to it.  The Court did not accept this argument, noting:

In particular, the AICPA points to a June 24, 2014 letter it submitted to the IRS in the wake of the Loving litigation, suggesting the agency had ample authority to punish “unethical or fraudulent tax return preparers” without adopting the Program. Nowhere in those comments, however, did the AICPA propose an alternative way to deal with the problem of incompetent tax preparers and taxpayers who cannot tell whether an uncredentialed tax preparer is or is not competent. We cannot fault the IRS for failing to consider an alternative that was not addressed to the problem with which it was concerned.

The panel concluded that the case should be decided in favor of the IRS, and thus the agency has the right to continue to operate the program.