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IRS options after losing tax preparer regulation appeal

And the Internal Revenue Service's troubles continue.

On Tuesday, Feb. 11, a three-judge panel of the U.S. Court of Appeals for the District of Columbia unanimously upheld a lower court's ruling that the IRS has no authority to force tax preparers to take continuing education courses and tests.


Tax preparers fight back: After years of study, hearings and pilot programs, in 2011 the IRS formally proposed a system under which it would register tax pros and require certain paid preparers to take continuing education courses and be tested on their tax competency. CPAs, Enrolled Agents and tax attorneys would be exempt because they already must meet professional standards for their professions. 

The IRS' argument for the formal oversight is that too many unregulated tax preparers show up each filing season and at best do a bad job of completing individuals' returns or at worst are crooks. Tighter regulation, according to the IRS and supporters of the plan, would make sure taxpayers got better service. It also would make the IRS' job easier if it didn't have to follow up on so many wrong returns.

In 2012, three tax return preparers filed a federal lawsuit, Loving v. IRS, challenging the IRS' authority to implement the plan. They contended that the proposed regulations would put tens of thousands of mom-and-pop tax preparers out of business and increase the cost of tax preparation for millions of taxpayers.

With help from the libertarian leaning Institute for Justice, the Loving trio won its case at the U.S. District Court level in January 2013.

The IRS appealed the decision to the U.S. Court of Appeals for the D.C. Circuit. That appellate panel now has sided with the tax preparers, too.

In its decision, the Court of Appeals panel dismissed the IRS argument that tax preparers are "representatives" or agents of taxpayers and therefore subject to IRS oversight. "The tax-return preparer certainly assists the taxpayer," said the court, "but the tax-return preparer does not represent the taxpayer."

As for the heart of the argument against the proposed regulation, the judges determined that the IRS' interpretation of its statutory authority to regulate paid tax return preparers was unreasonable and an attempt to "unilaterally expand its authority."

So with this latest legal setback, what's next for the IRS? The tax agency essentially has four options.

1. Continue the court fight
The IRS can appeal this latest ruling. It can petition the entire D.C. Circuit for a review. The next step after that would be to take the case to the Supreme Court.

Given everything else the agency is facing -- continued Congressional hearings into its operations, budget cuts, filing season in full force -- and the two legal smack downs, it's going to be hard to justify more days spent in court.

At least that's the assessment that the Loving attorneys hope the IRS takes.

"It was a big relief to many of the independent tax preparers when the decision was first handed down," Institute for Justice senior attorney Scott Bullock told Accounting Today. "It has now been rejected by four judges, both the District Court and by three D.C. Circuit judges. Hopefully this will end the matter once and for all."

The official IRS word is that the agency "is currently reviewing the decision" and that it "continues to believe that it's critical for taxpayers to be able to rely on quality work from tax preparers."

2. Focus on legislative authority
Such assurance of proper tax preparation could come from another route, suggested by the latest court ruling itself.

"It might be that allowing the IRS to regulate tax-return preparers more stringently would be wise as a policy matter," the circuit court wrote. "But that is a decision for Congress and the President to make if they wish by enacting new legislation."

So expect the IRS, regardless of what it does in the legal arena, to get busy lobbying Congress to enact legislation giving it the power to regulate tax preparers. Lawmakers on both sides of Capitol Hill already have expressed support for such legislation.

The question is when will it happen? As noted earlier, the IRS currently is a popular political punching bag and will remain so at least until after the November mid-term elections. It's hard to see Representatives and Senators blast the agency as the Evil Tax Empire and then turn around and give it more power.

I suspect such legislative authority eventually will be enacted. But I doubt it will happen until sometime in 2015.

3. Look to the states
The IRS can hope that more states will do what Uncle Sam can't do (yet) when it comes to regulating paid tax preparers.

It does have some has some allies in its state and local level tax collecting colleagues. But so far the move for official tax professional regulation at those levels is slow.

So far, only four states -- California, New York, Oregon and Maryland -- impose minimum qualification requirements, testing and continuing education courses for paid tax preparers.

Still, every little bit helps in the IRS' larger fight.

4. Establish voluntary tax pro testing
Finally, the IRS can push its proposal as a voluntary option for tax professionals. This seems to be the approach, at least right now, that new IRS Commissioner John Koskinen prefers.

During his confirmation hearings and again at press conferences after taking over at the tax agency, Koskinen has said the IRS would continue its efforts to regulate tax-return preparers even if it loses in court. That approach also has the support of National Taxpayer Advocate Nina Olson.

A formal paid preparer certification system with minimum continuing education would bolster taxpayers' confidence in the tax services they buy, Koskinen said. As for the tax pros, the IRS' new chief expects many to welcome voluntary IRS certification and continuing education as a valuable marketing tool.

"Win or lose in the court case, we ought to be able to move forward on that," the new commission said. "The fact that it's tied up in court shouldn't keep us from moving forward even on a voluntary basis."

Look for the IRS to start spinning its testing system as a value-added credential for tax preparers.

The agency likely will get support for a revised voluntary testing system from the many accounting groups and tax preparation companies, such as tax prep franchise giant H&R Block (it issued a statement expressing disappointment in the latest ruling) and Intuit, maker of the most popular individual tax software TurboTax, that were on the IRS' side in the regulation fight

Tax preparer regs, eventually: Tax preparer oversight eventually will be the standard, either on a piecemeal, state-by-state basis or nationally under a new federal law.

And a competency testing system should be in place.

There needs to be some basic standard for something that's so important to individual taxpayers and our country's finances.

What do you think? Is caveat emptor good enough for taxpayers searching for competent tax preparation help? Or should the IRS be given the ability to regulate the folks who get paid to fill out 1040s?

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