Taxable Talk

While I was enjoying Texas, the DC Circuit Court of Appeals heard the IRS’s appeal of Loving v. IRS. This is the case that stopped the IRS from regulating tax preparers. The IRS argued that the circuit court got the decision wrong; the Institute for Justice (who represented the original plaintiffs) argued that the lower court was right. Just so you know my bias in this matter, I joined an amicus curiea brief supporting the original plaintiffs (Loving, et. al.) in the case. By all accounts things did not go well for the IRS.

When the IRS decided to regulate tax preparers, they had to find justification. Congress must delegate authority for an agency to issue a regulation; if Congress does so, the agency has what is called “Chevron deference” in their regulations. (The “Chevron” comes from a Supreme Court case that established this doctrine.) Based on news reports it wasn’t a good day for the IRS.

The major problem that the IRS has in this case is that the law hasn’t changed recently. Congress didn’t enact a new law in 2010 allowing tax preparer regulation. The IRS found a law written in 1884. Yes, you read that correctly: A law written 30 years prior the 16th Amendment (you know, the one that allows for the IRS) to regulate tax preparers to the IRS. The 1884 law is the “Enabling Act of 1884,” but it’s more popular name (thanks, Kelly Erb) is the Horse Act of 1884. That act related to claims over dead horses from the Civil War. I should point out that this same law allows for Enrolled Agents.

The Oral Arguments are now available; be advised that the mp3 file runs about 45 minutes. My non-lawyer take agrees with all the coverage I’ve seen: The judges had no loving for the IRS’s arguments.

A decision could happen as quickly as two months, or it could be sometime in 2014 before the decision is announced.

The US Court of Appeals for the District of Columbia set oral arguments for September 24th in the IRS’s appeal of Loving v. IRS. This is the case that stopped the IRS’s scheme to regulate unenrolled tax professionals. While the oral arguments were heard in September, a decision on the appeal will likely not be rendered for weeks to months after the oral arguments (probably in early 2014).

I joined an amicus curiea brief supporting the original plaintiffs (Loving, et. al.) in the case.

Meanwhile, Nina Olson, the National Taxpayer Advocate, released her annual report to Congress. While I agree with many of the items in her report (more on that in a separate post), I disagree with her on preparer regulation. Ms. Olson’s views:

The National Taxpayer Advocate believes that the district court’s decision in Loving is based in part on an outdated understanding of return preparation and filing. The return preparation industry has changed substantially over the last few decades as a result of the ready availability of return preparation software, refundable credits, and refund-based loans. These changes underscore the significance of tax return preparers in our self-assessment system and the role of the tax return in making claims against the government. In fact, the National Taxpayer Advocate believes that the problems associated with refund claims in today’s tax system are directly analogous to the problem Congress sought to address in the original 1884 grant of regulatory authority to Treasury. [footnotes omitted]

Ms. Olson is correct that the return preparation industry has changed. However, having preparers take an open-book exam, and a small amount of continuing education doesn’t make a bad preparer into a good preparer. Yes, it will weed out the lowest of the low, but that’s about all it will do in that regard. The IRS’s preparer regulation scheme will cut the supply of preparers, and that will increase the cost to individuals; that’s basic economics.

Please note that I do agree with Ms. Olson that all taxpayers should make sure that their returns are signed by the preparer, and that the preparer’s PTIN is noted on the return.

In any case, the earliest we’ll see preparer regulation is sometime in early 2014…and only if the DC Court of Appeals overturns the ruling in Loving.

This hasn’t been a good year for the IRS. Everyone is aware of the current scandal involving the IRS’s regulating tax-exempt 501(c)(4) organizations. However, only the tax preparer community and regulators have generally followed Loving et. al. v. IRS et. al. Back in January, the plaintiffs–three “unenrolled” tax professionals–won an injunction against the IRS’s scheme to regulate tax professionals. The IRS has appealed the decision, with the case to be heard this fall by the Court of Appeals for the District of Columbia.

Both the IRS (the appellants) and the unenrolled tax professionals (the appellees) have filed briefs to the DC Circuit. I joined an amicus curiae (literally, “friend of the court”) brief with fellow tax bloggers Joe Kristan and Jason Dinesen along with the Tax Foundation (and others).

My professional society, the National Association of Enrolled Agents (NAEA) is very much in favor of the regulations. Indeed, in last week’s newsletter (distributed by email to members of the NAEA) there were several paragraphs on Loving. As for what the NAEA would like:

Unfortunately for those who believe IRS should be providing some minimal oversight to a multi-billion dollar business conducted in part at kitchen tables by those who believe the costs of education would kill their business model, the fact that attorneys for the plaintiff/appellee don’t appear to know very much about either taxation or representation is probably not a significant stumbling block for their case, which centers on whether IRS has authority under Circular 230 to regulate return preparers.

So why am I against the IRS regulating unenrolled tax professionals? Quoting from the brief:

As an Enrolled Agent, Mr. Fox is not directly affected by the regulations. Nevertheless, based on his extensive experience in tax practice, he has a number of objections to the regulations. In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, Mr. Fox objects to the regulations because the IRS already has ample statutorily authorized tools to apply against incompetent or unscrupulous tax-return preparers; because the regulations will not be effective in eliminating incompetent or unscrupulous tax-return preparers; because they will give a tacit stamp of approval to preparers who are not competent; because they will have the effect of driving many low-volume tax-return preparers out of business, thereby increasing the cost of tax-return preparation services for the clients of those preparers; and because administering the regulations will require scarce IRS resources that could be better used for other purposes, such as combatting identity theft.

There’s another reason, too: I don’t believe the IRS has the authority to regulate tax professionals. I believe that the Institute for Justice (the non-profit that has provided the legal counsel for the plaintiffs-appellees) is absolutely correct that the IRS doesn’t have authority to regulate tax professionals. That’s not covered in the amicus curiae brief because those arguments are part of the plaintiffs-appellees brief.

My fellow tax bloggers also have good reasons for joining the amicus curiae brief. Jason Dinesen:

As an Enrolled Agent, Mr. Dinesen is not directly affected by the regulations. Nevertheless, Mr. Dinesen believes the regulations would have an indirect adverse effect on his business (and on Enrolled Agents generally) because the Registered Tax Return Preparer designation created by the regulations would have the effect of diminishing the value of the Enrolled Agent designation in the market for tax-preparation services, largely because the number of Registered Tax Return Preparers would be substantially greater than the number of Enrolled Agents.

Joe Kristan:

As a CPA, Mr. Kristan is not directly affected by the regulations. Nevertheless, based on his longstanding and extensive experience in tax practice, Mr. Kristan has a number of objections to these regulations. In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, Mr. Kristan objects to the regulations because they will reduce options for consumers of tax-preparation services by driving many low-volume but competent and conscientious tax-return preparers out of business because of the cost of compliance with the regulations; will increase the compliance cost and burden on low-volume tax-return preparers that remain in business; will increase the cost of tax preparation services without increasing the value of those services; will prompt some low-income individuals to resort to tax-return preparers who will evade compliance with the regulations; will prompt some low-income individuals to prepare their own returns, rather than using paid preparers, resulting in less accurate returns; will prompt some low-income individuals to cease filing altogether; will adversely affect Enrolled Agents by diminishing the value of their Enrolled Agent designation; and will likely ultimately be extended to CPAs, attorneys, and Enrolled Agents.

Both Jason and Joe note that the proposed RTRP (Registered Tax Return Preparer) designations would diminish the Enrolled Agent credential. I agree with that, though I think this is less of an issue for my business because I’m established. For potential new EAs competing against the possible huge numbers of RTRPs, this could be a real issue.

Additionally, the Tax Foundation joined the brief because, “[T]he Tax Foundation believes the costs of the regulations substantially exceed potential benefits.” Two unenrolled preparers, Tonda Gordon and Dennis Tafelski, also joined the brief. Ms. Gordon noted that she would be adversely effected (she had to increase her fees) and, “Ms. Gordon objects to the regulations because they are unnecessary, since, in Ms. Gordon’s experience, most tax return preparers to whom the regulations apply are competent and conscientious; and because the regulations are not targeted to the problems they are intended to address but instead are broadly applicable to many situations where no problems exist.” Mr. Tafelski’s objections are also germane:

In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, and the direct effects of the regulations on him, Mr. Tafelski objects to the regulations because they will result in substantially increased tax-return preparation fees for the types of retired individuals for whom Mr. Tafelski has prepared returns; because they contain no exemption for low-volume preparers such as himself; because the regulations’ exemption for attorneys and CPAs is unwarranted because of the normal absence of tax-specific continuing education requirements for attorneys and CPAs; and because the IRS has seldom made use of its existing statutorily authorized tools for regulating tax-return preparers, such as the tax-return preparer penalty.

The next brief due is the IRS’s reply brief to the plaintiffs-appllees brief. That’s due in a couple of weeks. The arguments in the case will likely be heard this fall.

There’s no loving for preparer regulation at the DC Circuit. In a terse three sentence order, the Court of Appeals for the District of Columbia refused to grant the IRS’s request for a stay of the court decision (Loving et. al. v. IRS et. al.) striking down the IRS’s preparer regulation scheme.

The IRS’s appeal will still be heard, and they still could win. However, tax preparer regulation for this tax season won’t happen.

If only we could take a charitable donation made in, say, 2001, and by using a magic printer we could magically change the receipt date to 2011. Imagine all of the donations we could suddenly recycle. Ignoring the illegal nature of this, consider the numerous other applications of such a magical printer outside of tax: No more typographical errors; we could change answers on exams after we got them back; and we’d never have another losing sports bet.

Of course, such a printer doesn’t exist.

So that brings us to a news release from the Department of Justice. Maria Teresita Viray, a tax preparer from Reseda, California (in the San Fernando Valley area of Los Angeles), told her clients that she had such a magical printer. From the Department of Justice press release: “The complaint states that Viray told one customer that she had a special printer that allowed her to change the dates and amounts on charitable contribution receipts.” Added to her problems was allegedly creating phony deductions…and that the IRS discovered this. The Department of Justice was successful in obtaining an injunction prohibiting her from preparing any more tax returns.

If you happened to be one of the “thousands” who used Ms. Viray, you may receive a “Dear Valued Taxpayer” letter informing that your return is being audited; Ms. Viray was ordered to provide a list of her clients to the government.

Finally, this is yet another story of how regulation and mandatory continuing education will prevent such fraud. Well, not really: Ms. Viray appears to have been registered with CTEC (the California agency that regulates non-EAs, non-CPAs, and non-attorney who prepare tax returns). Yet the government lost an estimated $45 million from Ms. Viray’s alleged shenanigans. I leave the obvious conclusion to you….