IRS loses federal appeal on new rules for tax preparers

McLEAN, Va. -- The IRS on Tuesday lost a federal appeal in a legal battle over its effort to institute competency exams and other new regulations for as many as 700,000 paid tax preparers.

A three-judge panel of the United States Court of Appeals for the District of Columbia unanimously upheld a lower court's ruling last year that the IRS lacked authority to impose the new rules without congressional authorization.

The regulations were challenged by the Institute for Justice in Arlington, Va., a libertarian legal group that has filed a variety of lawsuits challenging occupational licensing laws. It argued the proposed regulations for tax preparers were onerous and would have put thousands of mom-and-pop tax preparers out of business.

Dan Alban, a lawyer for the institute who argued the case in front of the D.C. circuit, called the ruling "a clear win both for tax preparers and taxpayers" and said it could have broad implications for federal agencies that attempt to issue regulations without a mandate from Congress.

"Congress never gave the IRS the power to license tax preparers, and the IRS cannot give itself that authority," Alban said.

The IRS has said the rules are needed to weed out ill-trained and incompetent tax preparers. It said it had the authority to impose the regulations under an 1884 law passed to help Civil War soldiers seeking compensation for dead horses.

That law authorizes the IRS to "regulate the practice of representatives of persons before the Department of the Treasury" but the appellate judges said it should not be stretched to give the IRS regulatory dominion over tax preparers.

"It might be that allowing the IRS to regulate tax-return preparers more stringently would be wise as a policy matter. But that is a decision for Congress and the President to make if they wish by enacting new legislation," Judge Brett Kavanaugh wrote in an opinion joined by David Sentelle and Stephen Williams.

"The IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading" of the law.

Kavanaugh was appointed to the court by George W. Bush. Sentelle and Williams are both Reagan appointees.

On Tuesday the IRS said it is reviewing the decision and "continues to believe that it's critical for taxpayers to be able to rely on quality work from tax preparers."

Paid tax preparers fill out 60 percent of all U.S. tax returns, according to a study from the Government Accountability Office, a congressional watchdog agency. The GAO has found significant problems over the years in the quality of work done by them. In one 2006 study, the GAO took tax returns to 19 different commercial tax preparers, and 17 of 19 incorrectly calculated the taxes due.

The regulations sought by the IRS would have required preparers to pass a qualifying exam, pay an annual application fee, and take 15 hours annually of continuing-education courses. Attorneys and CPAs would have been exempt from the rules.

Had the regulations not been challenged, they would have taken effect this year.

Sabina Loving, an independent tax preparer from Chicago who was the lead plaintiff on the case, said in a statement that "(m)y customers -- not the IRS -- should be the ones who get to choose who prepares their taxes. I have a right to earn an honest living without getting permission from the IRS."