Major Court Decision Extends Loving; IRS Enjoined from a Circular 230 Regulation

Thus, what Ridgley challenges here is the IRS’s proclaimed authority to regulate fee arrangements entered into by CPAs for preparing and filing Ordinary Refund Claims before the commencement of any adversarial proceedings with the IRS or any formal legal representation by the CPA.

That’s the gist of Ridgely v. Lew, a major court decision announced earlier this week. Gerald Ridgely is a CPA who wanted to charge a contingency fee when filing an “Ordinary Refund Claim.”

Let’s say you file your tax return for 2013 and you realize you left out a major deduction. When you file an amended return noting the additional deduction, what you’re really doing is filing an ordinary refund claim–a claim for refund prior to the IRS instituting examination (audit) proceedings.

Enrolled tax professionals (attorneys, CPAs, and Enrolled Agents) are regulated under Circular 230 (31 CFR § 10.3). In 2007, the IRS prohibited contingent fees for Ordinary Claim for Refunds. Mr. Ridgely claimed he lost business and that the IRS didn’t have the authority to make this regulation.

At Chevron step one, then, this case boils down to the following question: does Section 330 unambiguously foreclose the IRS’s interpretation that CPAs act as “representatives” who “practice” before the IRS when they prepare and file Ordinary Refund Claims?

This may sound familiar to readers who followed the Loving decision. In Loving, courts held that the IRS does not have authority to regulate unenrolled preparers of tax returns; that preparing a tax return is not practice before the IRS.

But Loving also expressly addressed two key questions that the Court faces here: who are “representatives” and what is “practice” under Section 330? In the Court’s view, Loving is controlling precedent that must guide the Court’s examination of Section 330’s text, context, and history with respect to the claims at issue in this case…

Loving also sheds light on the meaning of the term “practice” in Section 330. As the Court explained, “practice . . . before the Department of the Treasury,” like practice before any agency or court, “ordinarily refers to practice during an investigation, adversarial hearing, or other adjudicative proceeding.” Id. at 1018. The process of filing an Ordinary Refund Claim— again, before any back-and-forth with the IRS—is similar to the process of filing a tax return in that both take place prior to any type of adversarial assessment of the taxpayer’s liability. If a “tax-return preparer do[es] not practice before the IRS when [he] simply assist[s] in the preparation of someone else’s tax return,” then a CPA hardly “practices” before the IRS when he simply prepares and files a taxpayer’s refund claim, before being designated as the taxpayer’s representative and before the commencement of an audit or appeal. Id. at 1018. Following Loving, the Court therefore concludes that the plain text of Section 330 excludes preparers and filers of Ordinary Refund Claims from the ambit of the IRS’s regulatory authority.

The IRS could appeal the decision but unless or until they do, tax professionals can charge contingent fees for Ordinary Claims for Refund.


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