IRS lacks authority to regulate tax preparers, court says

The Internal Revenue Service lacks the authority to regulate paid tax preparers, a federal appeals panel said, upholding a lower-court ruling that throws out licensing rules for as many as 700,000 practitioners.

The IRS issued new rules in 2011 to address concerns about the performance of some preparers. The agency relied for authority on a 1884 law empowering it to “regulate the practice of representatives of persons before the Department of Treasury,” according to the ruling by a three-judge panel in Washington.

In the 125 years after the law’s enactment, “the executive branch never interpreted the statute to authorize regulation of tax-return preparers,” U.S. Circuit Judge Brett Kavanaugh wrote for the panel. The law “cannot be stretched so broadly as to encompass authority to regulate” preparers, the court said.

Of the estimated 142 million individual returns filed for the 2011 tax year, almost 70 million taxpayers used a paid preparer, the Justice Department said Tuesday in a statement highlighting its anti-fraud efforts.

Crooked preparers often falsify information to claim refundable tax credits for their clients, typically by manipulating taxpayer income, expenses and dependents, the agency said. Some preparers sell customers deceptive loan products with exorbitant fees.

The ruling “is a major victory not just for tax preparers but for taxpayers,” said Dan Alban of the libertarian Institute for Justice in Arlington, Va., who argued the case on behalf of three tax preparers challenging the IRS rules. “This is about the freedom to choose your tax preparers. Taxpayers get to choose, not the IRS.”

“The IRS is currently reviewing the decision,” spokeswoman Julianne Breitbeil said. “It’s critical for taxpayers to be able to rely on quality work from tax preparers.”

Accountants and tax preparation companies such as H&R Block Inc., the nation’s largest tax preparer, and Intuit Inc., the maker of TurboTax, supported the regulation. The rules imposed standards on preparers who aren’t certified public accountants, attorneys or enrolled agents already licensed to practice before the IRS.

The decision is “a blow to honest taxpayers,” William Cobb, chief executive of Kansas City, Mo.-based H&R Block, said in a statement.

The IRS required that paid preparers pass a certification exam, pay annual fees and complete at least 15 hours of education courses annually. The agency spent more than $50 million to set up the program.

U.S. District Judge James Boasberg invalidated the oversight program in January 2013, ruling that the IRS improperly relied on language in the 1884 law. The statute says those who represent people before the U.S. Treasury Department are assisting them in “presenting their cases” to the government.

“Filing a tax return would never, in normal usage, be described as presenting a case,” Boasberg said.

The appeals panel echoed that reasoning.