IRS Did Not Exceed Its Authority in Charging a Fee to Issue and Renew PTINs

The Court of Appeals for the District of Columbia reversed a prior lower court ruling that barred the IRS from charging a fee to issue or renew Preparer Tax Identification Numbers (PTINs) in the case of Montrois, et al v. United States, Case No. 17-5204, CA DC.

In June of 2017 the U.S. District Court for the District of Columbia ruled in this case that the IRS, following a ruling in the case of Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014), lacked the authority to impose a fee on tax preparers to obtain and renew PTINs.  The original case argued that the fee violated the provisions of the Independent Offices Appropriations Act that the IRS used to justify the fee.

The District Court found that the fee no longer conferred benefits on the affected preparers in exchange for the fee.  As the appellate panel’s opinion summarized the ruling:

The court reasoned in part that, for an assessment to qualify as a fee under that Act as opposed to an unauthorized general tax, the assessment must relate to a specific benefit conferred to an identifiable set of users. But here, the court emphasized, essentially any person can obtain a PTIN after Loving invalidated the PTIN eligibility criteria, such that the PTIN program, in the court’s view, could no longer be said to benefit a particular set of individuals rather than the public in general. Id. at 67. The court also rejected the IRS’s argument that the PTIN fee could be sustained based on an interest in protecting tax-return preparers’ social security numbers. The court believed that the agency had not adequately raised or explained that rationale when it issued the rule establishing the fee. Id.

The District Court issued a permanent injunction barring the IRS from collecting the fee.  The IRS, while ending collection of the fee, filed an appeal with the Court of Appeals for the DC Circuit.

The DC Circuit panel found the District Court’s ruling in error.

The panel first found that the IRS did provide a service to preparers in exchange for the fee.  The generation and use of PTINs allows tax preparers to avoid using their social security numbers as identification on returns filed with the agency.  The IRS has personnel and resources devoted to providing this service.

The panel found that this service does confer a specific benefit on preparers.  The panel found that the confidentiality protection offered by the PTIN service is adequate on its own to count as the necessary benefit received in exchange for a fee.  Even though the maintenance of confidentiality was not stated as a benefit justifying the program when the IRS proposed and instituted the fee in 2009, the panel found the issue of protecting preparer identities was the key driving force behind the original establishment of the PTIN program two decades earlier.

The fact that the IRS had used the mandatory registration program that was struck down in the Loving case as the primary reason it began collecting the fee did not invalidate the fee, since confidentiality remains a benefit obtained by preparers under the program.  The Loving decision may reduce the costs the IRS will incur, that only goes to the reasonableness of the fee, not whether the IRS may assess such a fee.[1]

The panel was also not impressed with the District Court’s holding that no fee could be charged sinc there were no special requirements to obtain a PTIN once the mandatory registration program was struck down in the Loving case.  The panel held:

It does not matter, though, that the service and benefit are theoretically available to the general public. What matters is that the service is provided to, and the corresponding benefit is received by, the specific group of persons who in fact pay the fee.

The Court did not rule the IRS fee charged immediately before the ruling barring collection was a reasonable amount, rather sending the case back to the trial court for a decision on that issue.  But the panel did rule that the IRS is justified in charging a fee so long as its reasonably in line with the agency’s costs incurred to run this program.

[1] In fact, the IRS reduced the fee from $50 to $35 following its loss in the Loving case.