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Saturday, July 20, 2024 | Back issues
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IRS Lacks Authority to Regulate Tax Preparers

(CN) - The Internal Revenue Service cannot require paid tax preparers to take a certification exam, or complete continuing education classes, the D.C. Circuit ruled.

The Internal Revenue Service (IRS) has long regulated lawyers, certified public accountants and other tax professional, but private, nonattorney tax preparers remained outside its statutory reach.

The agency attempted to change this in 2011 when it issued new regulations requiring that paid tax-return preparers pass an initial certification exam, pay annual fees and complete at least 15 hours of continuing education courses each year.

The IRS estimated the new rules would affect 600,000 to 700,000 tax preparers.

These new regulations marked the first time in 125 years that the IRS used a statute authorizing the agency to "regulate the practice of representatives of persons before the Department of the Treasury" to regulate tax-return preparers.

Relying on the text and history of the statute, a federal judge found last year that the IRS' authority cannot be stretched so broadly. The D.C. Circuit affirmed Tuesday.

"Put simply, tax-return preparers are not agents. They do not possess legal authority to act on the taxpayer's behalf," Judge Brett Kavanaugh wrote for a three-judge panel. "They cannot legally bind the taxpayer by acting on the taxpayer's behalf."

Acting as a "representative" before the IRS would require a preparer to obtain the taxpayer's power of attorney, which is not typical. The ordinary taxpayer must still sign and submit their tax return in their own name, even if it is prepared by someone else, according to the 19-page opinion.

"The tax-return preparer certainly assists the taxpayer, but the tax-return preparer does not represent the taxpayer," Kavanaugh wrote (italics in original). "In light of the way the Code treats tax preparation, it would be quite wrong to say that a tax-return preparer 'represents' the taxpayer in any meaningful legal sense."

Before 2011, the IRS never asserted that the statute gave it authority to regulate tax-return preparers, and the head of the agency's Criminal Investigation Division even testified before Congress in 2005 that "tax return preparers are not deemed as individual who represent individuals before the IRS."

"The IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of Section 330," Kavanaugh wrote. "As the Supreme Court has directed in words that are right on point here, the 'fox-in-the-henhouse syndrome is to be avoided ... by taking seriously, and applying rigorously, in all cases, statutory limits on agencies' authority.'"

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