In the wake of the IRS’s defeat in the Loving case last February, the agency has lost a similar case in its attempts to regulate return preparers. Separately, the AICPA is suing the IRS over its attempt to implement a voluntary program for tax return preparers.
First punch: A federal district court has ruled that the IRS does not have the statutory authority to regulate fee arrangements related to a CPA's preparation and filing of ordinary tax refund claims. Loving involved tax returns, but the court says returns and ordinary refund claims are effectively the same thing. Section 330 allows the IRS to regulate the “practice” of “representatives” of taxpayers. But the courts in Loving and this new case say that the mere filing of tax returns and ordinary refunds is not “practicing” before the IRS since it does not involve an adversary proceeding and the return preparers are not “representatives” of the taxpayer. However, it’s a different story when the IRS responds to the filing and the preparer submits a power-of-attorney form to the IRS. At that point, the preparer would be considered to be practicing before the IRS as a representative of the taxpayer.
In the recent case, a CPA was charging contingent fees for filing ordinary refund claims. Under Circular 230, tax practitioners cannot charge contingent fees for filing returns or refunds. The CPA sued, claiming the restrictions caused a "loss of clients and significant revenue." He asked the court for a declaratory judgment and an injunction. The court granted the CPA’s request because, as in Loving, he was not a representative of the taxpayer practicing before the IRS. He merely assisted the taxpayer and as such was not subject to the IRS's regulatory authority. Stay tuned for news about the IRS's response.
The case is Ridgely v. Lew, 2014 U.S. Dist. LEXIS 96447 (July 16, 2014). The opinions of the U.S. district court and Court of Appeals in Loving are available at BVLaw.
Second punch: The AICPA has filed a lawsuit against the IRS over the agency's voluntary program for tax return preparers. The AICPA alleges the IRS initiative is “an impermissible end run” around the Loving decision, according to an article in the Journal of Accountancy.
The program, laid out in the recent IRS Revenue Procedure 2014-42, allows unenrolled tax return preparers and others to receive an annual Record of Completion from the IRS if they complete continuing education courses from IRS-approved providers. Participants in the program, known as the Annual Filing Season program, will be listed in an IRS directory of federal tax return preparers.
The AICPA complaint says the IRS improperly sidestepped the Administrative Procedures Act’s rule about rulemaking—giving notice and allowing for public comments—when it started the program using a revenue procedure. The complaint also notes that the Loving case found that the IRS has no statutory authority to regulate tax return preparers. The AICPA says the voluntary program is nearly identical to the mandatory return preparer registration program that the courts invalidated in the Loving case.
Furthermore, the AICPA says, while the new program is purportedly voluntary, it will actually be “de facto mandatory because it creates a strong competitive incentive for unenrolled tax return preparers to comply.” If they participate, they will “stand out from the competition,” according to the IRS’s own remarks. Thus, unenrolled tax return preparers must participate in order not to lose business to those who do.