IRS Loses Class-Action Law Suit

2017’s feel good news story comes to us from a federal court ruling that held that while the IRS had the authority to require tax return preparers to obtain preparer tax identification numbers (PTIN’s), it did not have the authority to charge a fee for issuing the PTIN.  The court further ruled that the IRS was to “provide…a full refund of all PTIN fees paid.” 

The following sets forth the IRS’s immediate reaction to the ruling as found on their web site:

PTIN System Down

On June 1, 2017, the United States District Court for the District of Columbia upheld the Internal Revenue Service’s authority to require the use of a Preparer Tax Identification Number (PTIN), but enjoined the IRS from charging a user fee for the issuance and renewal of PTINs. As a result of this order, PTIN registration and renewal is currently suspended.

The IRS, working with the Department of Justice, is considering how to proceed. As additional information becomes available, it will be posted on our Tax Pros page.

The case revolves around a group of IRS regulations issued in 2010 and 2011 regarding tax-return preparers.  The regulations attempted to impose certain requirements for becoming a tax-return preparer (through exam and education requirements) and included requirements for all preparers to obtain a specific PTIN and pay a user fee for the PTIN.  As statutory authority for these regulations, the IRS relied on a provision of the U.S. Code that states that the IRS “may regulate the practice of representatives of persons before” the IRS. 

A 2014 court challenge to these regulations resulted in a ruling that the IRS’s authority to regulate the practice of representatives of persons did not extend to tax-return preparers, which invalidated the competency testing and continuing education part of the regulations.  However, the requirements for obtaining a PTIN and paying a fee for that PTIN remained undisturbed.  Thus, anyone could be a tax-return preparer if they obtained a PTIN. 

The IRS’s authority to require the use of PTIN’s and charging a fee for the PTIN were challenged in the case ruled on this past June 1.  As noted above, the IRS prevailed on the issue of requiring a PTIN.  With respect to the fee issue, the IRS relied on the Independent Offices Appropriation Act of 1952 which provides that agencies “may prescribe regulations establishing the charge for a service or thing of value provided by the agency.”  The court’s ruling on this issue noted that because the IRS could not regulate or license tax-return preparers and anyone could be a tax-return preparer, no benefit inures to the recipient of the PTIN.  No benefit, no fee. 

The IRS has the ability to appeal this decision.  The potential refund amount is estimated at up to $250 million, making an appeal likely.

While this ruling has little impact on the everyday taxpayer, it is refreshing to see a court look critically at the regulatory actions taken by an agency of the government.

Also, we get to experience a little schadenfreude.