District Court Decision Prevents IRS from Regulating Certain Tax Return Preparers

UPDATE: On February 20, 2013, the Department of Justice Tax Division filed a notice of appeal with the U.S. Court of Appeals for the District of Columbia Circuit appealing the District Court’s ruling.

In a surprising decision, the U.S. District Court for the District of Columbia found in favor of three plaintiffs who challenged the Internal Revenue Service’s ability to govern tax return preparers pursuant to regulations issued in 2011. The 2011 regulations required, among other things, registration with the IRS and use of a registration number when preparing returns known as the PTIN (Preparer Tax Identification Number). The 2011 rules were based on 31 U.S.C. ยง 330 – a statute which the court noted was originally promulgated in 1884.

That statute gives the Department of Treasury the authority to regulate people who “practice” before it. As an agency of the Department of Treasury, the IRS is within the purview of the statute. The question that captured the District Court was whether tax return preparers were “practicing” before the IRS, and thus the Department, when they prepare and sign tax returns on behalf of others. It found that they were not and thus the IRS could not regulate them under the authority granted by the statute.

The District Court granted the plaintiff’s motion on summary judgment and also entered a permanent injunction preventing the IRS from enforcing the 2011 tax return preparer rules. The IRS responded to the court’s ruling on January 22, 2013 with an announcement on its website acknowledging that those tax return preparers specifically covered by the registration and reporting rules were no longer required to comply.

The case and the injunction does not apply to enrolled agents, CPAs, or attorneys. These individuals are still subject to the rules for practice before the IRS. Though the injunction is permanent, expect to see more action on this issue from the Department of Treasury and/or the IRS.

Read the entire opinion here:
Loving v. Internal Revenue Service, No. 12-385 (January 18, 2013, DC D.C.)