Two weeks ago, a court ruled that the IRS had no legal grounds to regulate unenrolled tax preparers. The IRS filed a motion seeking a stay of the court’s injunction against the IRS. Late yesterday, Judge James Boasberg (the same judge who made the ruling two weeks ago) denied the IRS’s motion.
The IRS argued in its motion that the IRS would be irreparably harmed if a stay were not granted. The Court disagreed, and agreed with the Institute for Justice’s argument that most of the money that the IRS has received has been for PTIN registration, not the registration of unenrolled tax preparers. (PTINs–Preparer Tax Identification Numbers–are issued to tax professionals and are noted on every return filed. This identifies the preparer, and helps the IRS search for unscrupulous preparers.) But the PTIN program was never challenged (indeed, such a challenge would likely fail as the PTIN program is specifically authorized by statute), just the RTRP (Registered Tax Return Preparer) program. “As Plaintiffs point out, the IRS’s expenses and staff cover both the registered-tax-return-preparer program and the PTIN program, and Plaintiffs do not challenge the latter.”
The Court then throws cold water on the IRS’s argument of harm to the agency:
The IRS’s liability, moreover, turns on the case’s merits, not on the stay. If the Court issues a stay and its merits decision is affirmed above, then the IRS will be on the hook for even more money in refunds. In any event, why should tax-return preparers continue to pay into a system the Court has found unlawful?
The IRS further argues that there would not be harm to others if the injunction were lifted; one of the points the IRS makes is that Dan Alban’s interview with Kelly Erb in Forbes said that one of the three plaintiffs would prepare returns for this year. (Mr. Alban is the lead attorney for the plaintiffs.) But two plaintiffs would be out of business (at least; the other plaintiff might be going out of business after this tax season). The Court summarized it well:
[I]f the injunction is stayed, then all preparers are faced with a Hobson’s choice: they must decide whether (1) to skip the registration requirements, gambling on an affirmance by the Court of Appeals or a reversal that is issued early enough that they could still fulfill their requirements by the end of the year, or (2) to satisfy the testing and continuing-education requirements, knowing that this might well be wasted time, effort, and expense. The harm is thus considerable.
The IRS also lost on its argument that there would be a harm to the public interest by the injunction; “the granting of the injunction effects far less a change in the landscape of tax preparation than does implementation of the regulations.”
The next step for the IRS is to file an appeal to the Court of Appeals for the District of Columbia. The IRS can ask that court to stay the injunction. However, I suspect the DC Circuit will let the injunction stand until the decision is reached. I think Judge Boasberg’s decision makes sense. In any case, expect the IRS to ask the DC Circuit for a stay of the injunction within the next two weeks, and then expect the case to be argued there (regardless of whether the stay is granted or not) this summer or fall.
UPDATE: I just saw that the IRS has restarted the PTIN registration. Tax professionals do need a PTIN (so do those who are going to take the Special Enrollment Examination to become an Enrolled Agent). It appears that the Institute for Justice’s argument that the PTIN system and the RTRP program were easily separated was dead-on accurate.