Tax Law

Loving v. IRS and Tax Return Preparer Regulations

by Kimberly Stanley, J.D., LL.M. *

Introduction

Like more than half of United States taxpayers, you probably pay someone else to prepare your federal income tax return. Although about 40 percent of paid return preparers are attorneys, CPAs, or enrolled agents, the remaining 60 percent have no professional credential or license at all. [Rev. Proc. 2014-42, 2014-29 IRB 192 (July 1, 2014)]...

In 2012, the IRS moved to require all federal tax return preparers to submit to registration, competency testing, and continuing education. These efforts were dashed this spring, however, when a federal appellate court ruled in Loving v. Internal Revenue Service [Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014)] that the IRS lacked any statutory authority to impose these regulatory controls on what has become a vast new industry. The IRS response in the wake of that defeat to incentivize participation by return preparers in a voluntary program remains controversial.

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Background

Since 1884, well before the enactment of the federal income tax, the Department of the Treasury has had the authority to "regulate the practice of representatives of persons" before it. [31 USC § 330(a)(1).]

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... [I]n 2011, the IRS, claiming authority under Section 330, issued a new rule making unregistered tax return preparers subject to Circular 230. [See Regulations Governing Practice Before the Internal Revenue Service, 76 Fed Reg 32,286 (June 3, 2011).] The rule defined a "tax return preparer" as a person 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 under the Internal Revenue Code." [26 CFR § 301.7701-15(a).] Under the rule, all paid tax return preparers were required to register with the IRS, pass a competency exam, pay an annual fee, and complete at least 15 hours of continuing education classes each year. [31 CFR §§ 10.3(f)(2), 10.4(c), 10.5(b), 10.6(d)(6) and (e).]

The Loving Case

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This case set up a classic fight about the bona fides of an agency's regulation...

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... [T]he district court in Loving stated that the case "boil[ed] down to one question: Is [USC Section]330(a)(1) ambiguous as to whether tax return preparers are 'representatives' who 'practice' before the IRS?" Ruling for the plaintiff tax return preparers, the court held that the statute was not ambiguous and did not allow the agency to regulate them. The court articulated three basic reasons for this decision.

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After Loving – Voluntary Registration of Return Preparers

The IRS wisely decided not to seek Supreme Court review of the Loving decision. But in June 2014, it announced that it was instituting a voluntary program to regulate tax return preparers in place of the mandatory program struck down by the D.C. Circuit. This program, called the "Annual Filing Season Program," provides a return preparer with a "Record of Completion" each year upon showing that he or she has registered with the IRS and taken 18 hours of continuing education.  [Rev. Proc. 2014-42, 2014-29 IRB 192 (July 1, 2014). Since the program was not announced until June 2014, a transition rule will apply to prorate the required hours for the first year. To obtain a Record of Completion for the 2015 filing season, a return preparer will need to complete a total of 11 hours of continuing education before the end of 2014, which must include a six-hour refresher course, three hours of other federal tax law topics and two hours of ethics. Id. §4.05(3)(c).] The education must include ten hours on federal tax law topics, two hours on ethics, and a six-hour refresher course that includes a comprehensive test. The Record of Completion is effective for one calendar year beginning January 1 (or from the date of issuance to December 31 of the calendar year of issuance). [Rev. Proc. 2014-42 § 4.04. Thus, if a Record of Completion is issued on February 25, 2015, the return preparer's Record of Completion will be effective for tax returns and claims for refund prepared and signed from February 25, 2015 through December 31, 2015.]

Importantly, to receive a Record of Completion under this new program, the return preparer must consent to abide by the duties and restrictions relating to practice before the IRS in subpart B and section 10.51 of Treasury Department Circular No. 230. [Rev. Proc. 2014-42 § 4.05(4).] The voluntary program does not bind return preparers to all of Circular 230. Subpart B of Circular 230 describes noncontroversial ethical duties and responsibilities applicable to anyone who represents a taxpayer before the IRS, such as the duty to provide information promptly when requested, the duty not to charge an unconscionable fee, and rules regarding conflicts of interests and solicitation of business. More interesting is that the voluntary program requires return preparers to be bound by section 10.51 in subpart C of Circular 230, which defines "incompetence" and "disreputable conduct" – interesting because return preparers are not required to agree to be bound by the rest of subpart C, which gives the IRS power to sanction those who violate the ethical rules outlined in subpart B.

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Concerns about the Annual Filing Season Program have quickly surfaced. The program got an immediate negative response from the American Institute of Certified Public Accountants (AICPA), which called it "unlawful and improper." [Letter dated June 24, 2014 to Commissioner John A. Koskinen from Chairman of the Board of Directors William E. Balhoff and President and CEO Barry C. Melancon, American Institute of Certified Public Accountants, available at http://www.aicpa.org/press/pressreleases/2014/pages/irs-proposed-voluntary-program-for-tax-preparers-is-unlawful-and-improper-says-aicpa.aspx) (hereinafter "AICPA Letter").]

Conclusion

The regulation of tax return preparers to ensure competency and the integrity of the tax system is a necessary and laudable goal. What is not clear is whether either the mandatory program struck down in Loving, or the voluntary program just announced, will solve the problem...

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... Without a competency exam, the program does little to assure taxpayers of anything other than that the preparer has taken some recent tax classes. It remains to be seen whether return preparers will flock to register simply so that they can be included on the IRS directory, particularly given the short time remaining before the onset of the 2015 filing season. The better approach, rather than a hastily concocted voluntary program, would be for the IRS to press Congress for statutory authority to launch a new, comprehensive scheme for oversight of this growing and important industry.

Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.

* Kimberly Stanley, J.D., LL.M, is Associate Dean and Professor of Law for the LL.M. Taxation Program at Golden Gate University School of Law in San Francisco, California. She has served as a clerk for the U.S. Tax Court and was an appellate attorney with the U.S. Department of Justice's Tax Division. She also has significant private practice experience in tax litigation and tax controversy.

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