Posts Tagged ‘PreparerRegistration’

AICPA Has Standing Per DC Court of Appeals; IRS’s Annual Filing Season Program In Jeopardy

Friday, October 30th, 2015

The American Institute for Certified Public Accountants (AICPA) filed a lawsuit in July 2014 challenging the IRS’s Annual Filing Season Program (AFSP). Almost exactly one year ago, a District Court for the District of Columbia ruled that the AICPA did not have standing to sue. The AICPA appealed that ruling, and in a decision announced today the Court of Appeals for the District of Columbia ruled that the lower court was wrong: The AICPA did have standing and the lawsuit will move forward.

To have standing, a plaintiff in a lawsuit needs three elements:

(1) plaintiffs must have suffered an injury in fact that is “concrete and particularized” and “actual or imminent, not conjectural or hypothetical”; (2) the injury must be “fairly traceable to the challenged action of the defendant, and not the result of the independent action of some third party not before the court”; and (3) “it must be likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.” [citation omitted]

For an association to be able to have standing,

“(1) at least one of their members has standing to sue in her or his own right, (2) the interests the association seeks to protect are germane to its purpose, and (3) neither the claim asserted nor the relief requested requires the participation of an individual member in the lawsuit.” [citation omitted]

The IRS challenged only the first of these issues. The AICPA gave three reasons in their lawsuit why they had standing. One of these, competitor standing, was the focal point of this decision.

Here, the Institute’s members, like the researchers in Sherley and the congressmen in Shays, will face intensified competition as a result of the challenged government action. Specifically, participating unenrolled preparers will gain a credential and a listing in the government directory. The Institute alleges—and we must accept as true for purposes of assessing its standing—that this will “dilute[] the value of a CPA’s credential in the market for tax-return-preparer services” and permit unenrolled preparers to more effectively compete with and take business away from presumably higher-priced CPAs.

The Court found that the AFSP harms the AICPA’s members even if it doesn’t cause confusion.

The Institute alleges that unenrolled preparers are part of the same tax return preparation market as its members. Indeed, the IRS itself reports that sixty percent of tax return preparers are unenrolled preparers. We see nothing at all speculative or attenuated about the Institute’s contention that “[u]nenrolled preparers with government-backed credentials will be better able to compete against other credentialed preparers, and especially against uncredentialed employees of [Institute] members.” Nor do we see anything speculative or attenuated about the allegation that CPAs and their firms are more likely to lose business to an unenrolled preparer with a Record of Completion and a listing in the government directory than to an unenrolled preparer with no credentials at all. [citations omitted]

The IRS then says because AFSP participants can’t use the words “certified,” “enrolled,” or “licensed” that there’s no problem with increased competition. The Court disagreed with that argument.

Without violating any of these restrictions, however, participating preparers remain free to tell potential clients that they have a Record of Completion demonstrating that they satisfied the Program’s educational requirements and passed the test. Indeed, that is the very purpose of the Program. Moreover, participating preparers’ names will appear in the Directory of Federal Tax Return Preparers alongside the names of CPAs and other credentialed preparers. As the Institute helpfully sums up, “because the Rule distorts the competitive marketplace and dilutes [Institute] members’ credentials by introducing a government-backed credential and government-sponsored public listing, it harms those members regardless of whether it also confuses consumers.”

The Court of Appeals reversed the lower court ruling, so the AICPA’s lawsuit will move forward.

So the AFSP is back on very thin ice. The original lawsuit claims by the AICPA look very accurate to me. And there’s a new one: Unenrolled preparers who do not participate in the AFSP will be denied the ability to represent taxpayers’ whose returns they prepared in examinations (as of January 2016). This makes the program look a lot more mandatory than voluntary. My suspicion is that the one and only tax season for the AFSP was the past filing season.

The NAEA Won’t Like This Post

Monday, September 14th, 2015

I’m a member of the National Association of Enrolled Agents. Generally, I’m supportive of their policies. However, I am not a fan of mandatory preparer regulation. Other than giving the IRS more money and getting rid of the lowest hanging of the bad preparers, preparer regulation won’t accomplish many positives for the general public. Unfortunately, the Senate is about to include preparer regulation in a bipartisan tax bill.

Joe Kristan noted this earlier today.

In June 2011, the IRS issued final regulations that established a new class of tax practitioners known as “registered tax return preparers” that it sought to regulate for the prepared by these now unregulated tax return preparers. There is substantial evidence indicating that incompetent and unethical tax return preparers are harming both their clients and the government. Most of the tax returns that involve refundable tax credits are prepared by unregulated tax return preparers.

Since 2011, the D.C. District Court (and the D.C. Circuit affirming on appeal) has prevented the IRS from enforcing these regulations on the grounds that the IRS’ authority to regulate practitioners is insufficient to permit regulation of tax return preparers who do not practice or represent taxpayers before an office of the Treasury Department.

The provision provides the Treasury Department and the IRS with the authority to regulate all aspects of Federal tax practice, including paid tax return preparers, and overrides the court decisions described above. [Joe’s emphasis]

So let’s consider what preparer regulation does:

1. “It stops identity theft.” Do you really think identity thieves will go away just because preparers are regulated? The TurboTax crew (thieves who buy TurboTax and prepare multiple phony returns) aren’t going away (until they get caught). And earlier this year the IRS itself contributed to identity theft.

2. “The IRS will now be able to put a stop to bad preparers.” Well, yes, but the IRS currently has means of going after bad preparers. They can get court orders, and they do.

3. “Bad preparers won’t register.” Preparer regulation will get rid of two classes of preparers: the lowest of the low-hanging bad preparers who can’t pass a multiple choice exam and preparers who either can’t afford to take the classes/exam or decide to retire and not deal with a bureaucracy. Look at who were plaintiffs in Loving v. IRS. The crooks who violate one law won’t care about violating another.

4. “The NAEA and the AICPA are for it, so it must be good.” Well, it will eliminate some competition, so it will increase the number of tax returns that will be prepared for members of both professional societies. Of course, what’s good for professional societies (and their members) will be bad for the general public; prices are certain to increase. Supply (of tax professionals will decrease), so price will increase.

The above are the most common arguments for regulation. None of them are, imho, persuasive. As Joe Kristan alluded to, the real winners will be H&R Block and other chains.

I’ve been asked by members of the NAEA why I’m against preparer regulation. All it does is increase a bureaucracy, decrease consumer choice, increase prices to the general public, and uses limited IRS resources instead of where they could be better used. I don’t mind competition, and the IRS currently has means of going after bad preparers.

IRS Launches Directory of Tax Professionals

Thursday, February 5th, 2015

This morning I received an email noting that the IRS has released an online directory of tax professionals. The system lists EAs, CPAs, attorneys, and participants in the IRS’s Annual Filing Season Program.

The first time I tried to use it I saw this:


To be fair, the second time I searched the system was up and I found myself. The system sorts alphabetically (by default), though you can select one credential, or look for a specific last name.

There are errors, though; my business partner is listed based on my address (the main office) rather than his address (which is only 2000 miles away).

The good about this system is that a taxpayer can verify that someone has a credential. (That’s about all it’s good for to me.) Was this worth the effort, employee hours, and money that the IRS spent on it? Well, I’d much rather the IRS have spent the money on more employees for the Practitioner Priority Service so I’m not on hold for (on average) two hours. Or bring back the ability for tax professionals to enter POAs through e-services; that would be a great use of money that would save the IRS money (as there would be fewer phone calls to e-services).

AICPA Lawsuit Against IRS Dismissed Over Standing

Tuesday, October 28th, 2014

Earlier this year the IRS announced its new “Annual Filing Season Program,” a voluntary program for tax preparers to register with the IRS. The American Institute of Certified Public Accountants (AICPA) filed a lawsuit asking for the program to be blocked. The IRS asked the court to dismiss the lawsuit, arguing that the AICPA had no standing to sue the IRS in this case. Judge James Boasberg agreed with the IRS, and today the lawsuit was dismissed. Judge Boasberg is the same jurist who decided Loving v. IRS.

I’m not an attorney, so I’m not going to give a treatise on standing. Luckily, there are attorneys who write tax blogs. Leslie Book in Procedurally Taxing gives all the background on standing you might possibly need. Judge Boasberg noted the real reason that the AICPA sued,

Beneath its amorphous rhetoric about confusion, the crux of Plaintiff’s concern is apparent: its membership feels threatened by the specter of increased competition from previously uncredentialed preparers who choose to complete the program.

The AICPA could appeal the decision. I could also envision them refiling the lawsuit, and adding individual CPAs to the lawsuit (and perhaps other types of preparers, such as Enrolled Agents and unenrolled preparers). In any case, it now appears quite likely that the Annual Filing Season Program will go forward.

That said, the long-term prospects for the Annual Filing Season Program aren’t good. As noted in Procedurally Taxing the class action lawsuit against the IRS’s PTIN fee continues. I can foresee other challenges to this program. And until Congress authorizes the IRS to regulate tax professionals the IRS is limited to purely voluntary programs.

AICPA Sues to Stop IRS’s “Annual Filing Season Program”

Tuesday, July 15th, 2014

Well, that didn’t take long.

As I predicted back on June 26th, the American Institute of CPAs (AICPA) has filed a lawsuit asking the court to stop the IRS’s new “Annual Filing Season Program.” From the AICPA’s press release:

The AICPA has been a steadfast supporter of the IRS’s overall goals of enhancing compliance by tax return preparers and elevating ethical conduct. However, the IRS’s new rule regulating tax return preparers is an unlawful exercise of government power.

By implementing a purportedly “voluntary” program that is mandatory in effect, the rule is an end-run around Loving v. IRS, a federal court ruling which struck down the IRS’s earlier attempt to regulate tax return preparers. The IRS simply does not have the authority to proceed with the new rule. By doubling the number of categories of tax return preparers to eight, the rule will also confuse consumers. Worse yet, the new rule will do nothing to address the problem of unethical or fraudulent tax return preparers – which should be a top priority.

As a result, the AICPA has filed suit in federal court to prevent the IRS from moving ahead with this unjustified and unlawful program.

The full lawsuit filing is available here.

The AICPA’s lawsuit contends that the IRS does not have statutory authority for the new program, that the IRS did not allow a comment period (in violation of the law), and that it was arbitrary and capricious in violation of the Administrative Procedure Act. If the latter sounds familiar, it should: The Loving decision was based on the APA. The AICPA contends that the new IRS program is the old RTRP program dressed up with very minor changes.

I suspect the new Annual Filing Season Program will never have its first tax season.

IRS Ignores AICPA & NAEA; Court Likely Destination for IRS’s New “Annual Filing Season Program”

Thursday, June 26th, 2014

The National Association of Enrolled Agents sent the IRS a letter stating that they didn’t like the idea of a voluntary tax preparer regulation program. (Full disclosure: I’m a member of the NAEA.) The NAEA pointed out that there’s already a voluntary preparer regulation program–Enrolled Agents.

The AICPA sent an even stronger letter saying much the same thing. The AICPA noted that there’s no statute allowing the program, it will be looked at as an end run around Loving v IRS, that the IRS didn’t comply with the Administrative Procedure Act, and that the proposal is arbitrary and capricious.

The IRS’s response? Instead of calling it “voluntary tax preparer regulation,” let’s throw a new name on it: Annual Filing Season Program. That will win hearts and minds over…

I expect the IRS’s next destination for this program is a District Court in the District of Columbia. The AICPA got it absolutely correct: The IRS has no legal justification for this program.

All of this reminds me of something from my days in high school where I was on the debate team. Every proposal had a “self-perpetuating program” of some sort. And that’s just what the bureaucracy at the IRS has done: They took the RTRP program, slapped a new label on it, made it voluntary, and voila, it must be legal. This looks to me to be a self-perpetuating program.

In Loving, the Court held that the IRS overstepped it bounds. The IRS’s stick is that you won’t be listed in an IRS master-database of tax professionals if you don’t sign up for this new program. If I’m an unenrolled tax preparer doesn’t sign up, isn’t it discrimination? The IRS has no right to discriminate against me, right? And that would be the case.

All-in-all, this appears to be a program that’s going to die in court again. I don’t know if the Institute for Justice will be fighting it, but it sure looks like the AICPA will. This has not been the best of weeks for the IRS.

Another Example of a Regulated Preparer Committing Tax Crimes

Monday, June 9th, 2014

Yet another example of a regulated preparer committing tax crimes emerged this past week out of Ohio. Larry Couchot is a CPA in Ohio. He’s president and an owner of an accounting firm. Mr. Couchot also may be heading to ClubFed. Here’s what the Department of Justice noted:

According to documents filed with the court, during the period 2006 through 2010, Couchot was aware that these individuals used a substantial amount of company funds to pay for personal expenses, including payments for their personal cars, car insurance, country club dues, personal credit card charges and their individual income tax liabilities. Couchot also admitted that he was aware that one individual used company funds to pay for other personal expenses, including lawn services, repairs and maintenance to personal residences, granite counter tops and TV and audio systems.

One of the rules in tax is that if a preparer has personal knowledge of something, it must go on a tax return. We, too, sign the return under penalty of perjury. For example, if I know that you included $5,000 of granite countertops for your residence in “supplies,” it must be removed as a business expense. That’s what Mr. Couchot didn’t do. He’ll face sentencing later this year.

Regulating Tax Preparers Always Prevents Tax Preparer Fraud (Not True, of Course)

Sunday, March 9th, 2014

I’m generally a supporter of the National Association of Enrolled Agents and its policies. However, I disagree with the idea that both the NAEA and the IRS have that regulating tax preparers will magically make preparer fraud go away. It’s just not true.

Yet another case in point comes out of the San Joaquin Valley in California. From the DOJ press release:

The United States filed a civil complaint asking a federal court in Fresno, Calif., to enjoin Ken Mendoza and Alice Mendoza from preparing federal tax returns for others, the Justice Department announced today. The complaint alleges that the Mendozas frequently prepare tax returns for individuals claiming refunds from the federal government that are not deserved. According to the complaint, since 2010, the Mendozas have prepared over 600 tax returns for individuals in the Fresno area.

According to the complaint, the Mendozas improperly understate their customers’ federal tax liabilities by fabricating business expenses, claiming false or inflated credits, particularly educational credits, and deducting customers’ personal expenses that are not legally deductible. In total, the complaint alleges that the loss to the U.S. Treasury from the Mendozas’ activities could be as much as $2.8 million for tax years 2010 through 2011.

California requires all tax professionals who are not EAs, CPAs, or attorneys to register with CTEC. If the IRS is right that regulating tax professionals stops tax preparer fraud, Mr. Mendoza wouldn’t be registered. The IRS’s view is just another fairy tale.

Mr. Mendoza is registered with CTEC (I checked). That means he went to some continuing education and regurgitated some basic information on taxes. Taking continuing education courses does not turn a good person into a bad person (or vice versa).

I’m hoping that cases such as these–and mind you, I do want the Bozo side of my profession to be gone–will put a stop to the idea that regulating tax professionals will magically make all tax professionals angels. Let me be blunt: Wherever there is money around, there will be bad people around. There will always be people going after the dishonest buck and nothing anyone says or does will ever change that.

I do want to point out the other point of this post for taxpayers who read this: You are responsible for your tax return. Read it. Ask questions if you don’t understand something. The Tax Code is complex, and there are things that seem obvious that aren’t on a tax return. If you have a good tax professional, he or she will want to answer your questions.

DC Court of Appeals Rules Against IRS: Loving Decision Upheld

Tuesday, February 11th, 2014

This morning the US Court of Appeals for the District of Columbia unanimously upheld the district court’s decision in Loving v. IRS. This means that the IRS’s goal of mandating licensing for all tax professionals is dead. At some future date Congress might enact such laws, but until that happens the RTRP designation is likely dead.

The IRS had interpreted an 1884 statute “signed by President Chester A. Arthur” (how often can I put President Chester Arthur into a blog post!) that regulated the practice of representatives of persons before the Department of the Treasury (31 U.S.C. § 330(a)(1)) to mean they could regulate all tax professionals.

In our view, at least six considerations foreclose the IRS’s interpretation of the statute.

That’s what the Court found, and let’s go over each in turn.

First is the meaning of the key statutory term “representatives.” In its opening brief, the IRS simply asserts that there “can be no serious dispute that paid tax-return preparers are ‘representatives of persons.’” IRS Br. 31 n.11. Beyond that ipse dixit, however, the IRS never explains how a tax-return preparer “represents” a taxpayer. And for good reason: The term “representative” is traditionally and commonly defined as an agent with authority to bind others, a description that does not fit tax-return preparers…

Put simply, tax-return preparers are not agents. They do not possess legal authority to act on the taxpayer’s behalf. They cannot legally bind the taxpayer by acting on the taxpayer’s behalf. The IRS cites no law suggesting that tax-return preparers have legal authority to act on behalf of taxpayers.

The second problem is that “practice…before the Department of the Treasury” doesn’t mean tax preparation. And for my friend Scott, some of the argument in this section turns on grammar: Congress used an “and” rather than an “or” in Section 330(a)(2), and the IRS’s view that practice before Treasury meant preparing tax returns was wrong.

The third issue is that Section 330 was enacted for people making claims against the Treasury. Here’s the Court’s excerpt:

[T]he Secretary of the Treasury may prescribe rules and regulations governing the recognition of agents, attorneys, or other persons representing claimants before his Department, and may require of such persons, agents and attorneys, before being recognized as representatives of claimants, that they shall show that they are of good character and in good repute, possessed of the necessary qualifications to enable them to render such claimants valuable service, and otherwise competent to advise and assist such claimants in the presentation of their cases. [Emphases in original]

The Court didn’t believe that this meant tax preparers.

The fourth issue is that the broader statutory framework already includes regulations on tax preparers.

Under the IRS’s view here, however, all of Congress’s statutory amendments would have been unnecessary. The IRS, by virtue of its heretofore undiscovered carte blanche grant of authority from Section 330, would already have had free rein to impose an array of penalties on any tax-return preparer who “is incompetent,” “is disreputable,” “violates regulations prescribed under” Section 330, or “with intent to defraud, willfully and knowingly misleads or threatens the person being represented or a prospective person to be represented.”

The fifth issue is that the scope of authority that the IRS claimed was beyond the scope anticipated by Congress in passing Section 330. I think this is the weakest of the six reasons as noted by the Court: There was no tax preparation industry in 1884. Still, it’s another point where the IRS lost.

The final issue is that the IRS never interpreted the law during the 127 years preceding 2011 as giving it the authority to regulate tax professionals.

Until 2011, the IRS never interpreted the statute to give it authority to regulate tax-return preparers. Nor did the IRS ever suggest that it possessed this authority but simply chose, in its discretion, not to exercise it. In 2005, moreover, the head of the IRS’s Criminal Investigation Division testified to Congress that “[t]ax return preparers are not deemed as individuals who represent individuals before the IRS.” Fraud in Income Tax Return Preparation: Hearing Before the Subcommittee on Oversight of the House Committee on Ways and Means, 109th Congress (2005) (testimony of Nancy J. Jardini). At the same hearing, the National Taxpayer Advocate – the government official who acts as a kind of IRS ombudsperson – stated to Congress that “the IRS currently has no authority to license preparers or require basic knowledge about how to prepare returns.”

All-in-all, the IRS’s proposed regulations on tax professionals are as dead as the dodo bird.

I’ve had quite a few individuals ask me why I’m against regulating tax professionals. I’m regulated as an Enrolled Agent; why shouldn’t others? After all, I report on bozo tax professionals all the time.

If Congress lawfully decides that regulating tax professionals should be done, that’s fine. However, I am very much opposed to the huge expansion of government during the past thirty years. The real problem is the huge complexity of the Tax Code, and the biggest villain here is Congress. Rather than regulating tax professionals, we need to regulate (gut) the Tax Code itself.

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The IRS Has Better Things To Do than the RTRP Designation

Monday, January 13th, 2014

Recently, there has been some discussion in the tax blogosphere regarding the Registered Tax Return Preparer (RTRP) designation. The IRS wanted to make this a mandatory designation for unenrolled tax professionals (those who are not Enrolled Agents, CPAs, or attorneys). The IRS’s goal of a mandatory designation was challenged in federal court; the IRS lost last January and has appealed the decision (a ruling on the appeal is likely in the next few months).

New IRS Commissioner John Koskinen is proposing that if the IRS loses the court case that the RTRP designation continue as a voluntary program. Just last week the Taxpayer Advocate noted that the budget of the IRS needs to be increased. As I’ve said on a few occasions, that has no chance of happening until the IRS scandal is resolved. The IRS also noted that they may have to use funding from other IRS programs to administer ObamaCare.

Given that the IRS is short of funds, why should the IRS use precious funds to administer a voluntary program given that there are mandatory programs that they must enforce? Indeed, another point mentioned in the Taxpayer Advocate’s report was that identity theft programs at the IRS still need lots of work; that would be a far better use of any money gained by shutting down the mandatory RTRP program.

I also agree with Jason Dinesen: The RTRP program will hurt Enrolled Agents. There’s a saying among economists: If you promote something, you get more of it. If the IRS promotes the RTRP designation, there will be more RTRPs (to the detriment of EAs).

I do understand Robert Flach’s basis behind the idea of a voluntary organization promoting unenrolled (but skilled) tax professionals. I just believe that there’s no compelling reason that the IRS need be promoting this.