Independent tax preparers win challenge the IRS’s efforts to expand Circular 230 requirements—and win

BVWireIssue #125-3
February 20, 2013

In 2011, the IRS expanded the definition of tax preparer under Circular 230 to reach an additional 600,000 to 700,000 non-CPAs and non-attorneys, or anyone who “prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax.” The new regulations required each tax preparer to pass a qualifying exam, pay an annual application fee, and take 15 hours of continuing education courses each year.

Last year, three independent tax preparers filed suit to enjoin the regulations, claiming the IRS lacked authority to regulate their practice and the new rules would put them out of business. The federal district court agreed, and the IRS—backed by the Department of Justice—filed a request to stay the injunction pending an appeal. The agency had already spent more than $50 million to roll out 250 new testing centers for tax preparers, it said, receiving nearly 100,000 registrants so far.

Once again, the district court sided with the taxpayer. Its ruling did not require the IRS to dismantle its scheme. The agency might very well keep some testing centers open for independent tax preparers who believe the additional credentials will distinguish them from others. Tax preparers must still obtain a tax ID number, the court said, but the agency could not condition PTIN eligibility on meeting the registration requirements. Moreover, any stay of the injunction “would only lead to more confusion for preparers and their clients as the tax season gets underway," the court said, leaving the government’s only hope for extending the reach of Circular 230 with the appellate circuit.

Note: Although the court’s decisions invalidated the registration requirements of Circular 230, in her recent webinar on tax law updates, Linda Trugman (Trugman Valuation) questioned whether the rulings may have invalidated other provisions as well. Read the complete case digests of Loving v. IRS, 2013 U.S. Dist. LEXIS 7980 (Jan. 18, 2013) and 2013 U.S. Dist. LEXIS 13878 (Feb. 1, 2013) in the April Business Valuation Update; the district court’s decisions will be posted soon at BVLaw.

Please let us know if you have any comments about this article or enhancements you would like to see.