Posts Tagged ‘PTIN’

Court Rules IRS Cannot Charge for PTINs

Friday, June 2nd, 2017

Back in 2010 to 2011 the IRS ordered all tax professionals to obtain a PTIN–a Preparer Tax Identification Number. The IRS stated this was necessary to track tax professionals, and would help in regulating the tax professional community. There is a fee to obtain a PTIN (now $50 initially, with a renewal costing the same $50). A group of tax professionals challenged the PTIN regulation and the fee in a class action suit. Can the IRS force tax professionals to obtain a PTIN? And can the IRS charge for PTINs?

The PTIN regulations came about at the same time as the IRS’s ill-fated efforts to regulate tax professionals. The IRS was challenged on the ability to regulate tax preparation professionals (see Loving v. IRS); the IRS lost the ability to regulate tax preparers. These regulations happen to also contain the IRS’s justification for charging a user fee to obtain a PTIN: As the Court yesterday noted,

As authority for requiring these fees, the IRS relied on the Independent Offices Appropriations Act of 1952 (“IOAA”). The IOAA provides that agencies “may prescribe regulations establishing the charge for a service or thing of value provided by the agency.” The IRS stated that a PTIN is a “service or thing of value” because without a PTIN “a tax return preparer could not receive compensation for preparing all or substantially all of a federal tax return or claim for refund,” and “[b]ecause only attorneys, certified public accountants, enrolled agents, and registered tax return preparers are eligible to obtain a PTIN, only a subset of the general public is entitled to a PTIN and the special benefit of receiving compensation for the preparation of a return that it confers.” [citations omitted]

The first part of the case was whether the IRS can mandate tax preparers use a PTIN. The Court ruled that the IRS can do so.

[P]laintiffs’ arguments fail step one of Chevron. Chevron states that “if Congress has directly spoken to the precise question at issue … that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress.” The statute specifically says that the Secretary has the authority to specify the required identifying number to be used on prepared tax returns. (“The social security account number issued to an individual for purposes of section 205(c)(2)(A) of the Social Security Act shall, except as shall otherwise be specified under regulations of the Secretary, be used as the identifying number for such individual for purposes of this title.” (emphasis added)). The Court must give effect to the unambiguous intent of Congress that the Secretary may require the use of such a number. [citations omitted]

The second part of the case is whether the IRS has justification for charging a fee for obtaining PTINs. The plaintiffs had two arguments: That because of the decision in Loving the IRS no longer had a rationale for charging PTIN fees, and thus charging such fees was arbitrary and capricious. Second, because Congress did not grant the IRS licensing authority (confirmed by Loving), tax return preparers don’t receive a benefit in exchange for the fees; thus, they are unlawful under the IOAA. The government disagreed:

The government argues that the PTIN and user fee regulations are separate from the regulations imposing eligibility requirements on registered tax return preparers. It argues that the PTIN requirements are not arbitrary and capricious because they make it easier to identify tax return preparers and the returns they prepare, which is a critical step in tax administration, and because PTINs protect social security numbers from disclosure. In support of its position that it may charge fees for PTINs, the IRS states that PTINs are a service or thing of value because the ability to prepare tax returns for compensation is a special benefit provided only to those people who obtain PTINs, who are distinct from the general public. Individuals without PTINs cannot prepare tax returns for compensation. In addition, the IRS argues that PTINs protect the confidentiality of tax return preparers’ social security numbers, and that protection itself is a service or thing of value.

The court found that PTINs are not a “service or thing of value.”

First, the argument that the registered tax return preparer regulations regarding testing and eligibility requirements and the PTIN regulations are completely separate and distinct is a stretch at best. While it is true that they were issued separately and at different times, they are clearly interrelated. The RTRP regulations specifically mention the PTIN requirements and state that PTINs are part of the eligibility requirements for becoming a registered tax return preparer…Furthermore, the overarching objectives named in the PTIN regulations indicate a connection to the RTRP regulations. They were 1) “to provide some assurance to taxpayers that a tax return was prepared by an individual who has passed a minimum competency examination to practice before the IRS as a tax return preparer, has undergone certain suitability checks, and is subject to enforceable rules of practice;” and 2) “to further the interests of tax administration by improving the accuracy of tax returns and claims for refund and by increasing overall tax compliance.” The first objective clearly relates to the RTRP regulations regarding eligibility requirements for tax return preparers. The second objective is less explicit, but it does not stretch common sense to conclude that the accuracy of tax returns would be improved by requiring tax return preparers to meet certain education requirements. [citation omitted]

This results in a problem: What’s justifying the user fee?

The Loving court concluded that the IRS does not have the authority to regulate tax return preparers. It cannot impose a licensing regime with eligibility requirements on such people as it tried to do in the regulations at issue. Although the IRS may require the use of PTINs, it may not charge fees for PTINs because this would be equivalent to imposing a regulatory licensing scheme and the IRS does not have such regulatory authority. Granting the ability to prepare tax return for others for compensation—the IRS’s proposed special benefit—is functionally equivalent to ranting the ability to practice before the IRS. The D.C. Circuit has already held, however, that the IRS does not have the authority to regulate the practice of tax return preparers. In coming to its conclusion, the Circuit considered the statutory language that the Secretary may “regulate the practice of representatives of persons before the Department of the Treasury.” The court found that the IRS improperly expanded the definition of “practice . . . before the Department of Treasury” to include “preparing and signing tax returns” because to “practice before” an agency “ordinarily refers to practice during an investigation, adversarial hearing, or other adjudicative proceeding.” The Loving court concluded that “[t]hat is quite different from the process of filing a tax return” in which “the tax-return preparer is not invited to present any arguments or advocacy in support of the taxpayer’s position . . . [and] the IRS conducts its own ex parte, non-adversarial assessment of the taxpayer’s liability.” The ability to prepare tax returns is the “practice” identified by the IRS in Loving, but the court found that such an activity does not qualify as practicing before the IRS. Therefore, it appears to this Court that the IRS is attempting to grant a benefit that it is not allowed to grant, and charge fees for granting such a benefit.

This ruling disagrees with another case (Brannen v United States), but that was pre-Loving (as the Court notes). The Court also noted that if the IRS were allowed to regulate tax professionals, the ruling might be quite different. Additionally,

The Court is unaware of similar cases in which an agency has been allowed to charge fees under the IOAA for issuing some sort of identifier when that agency is not allowed to regulate those to whom the identifier is issued, and the government has not pointed to any.

Thus, the Court ruled that the IRS can require PTINs but cannot charge for them. I do expect the ruling to be appealed, so it’s likely nothing will change for several months.

Case: Steele v United States

UPDATE: The court also ordered that the IRS refund all PTIN fees to all class members.

Again, I expect this ruling to be appealed, so any refunds are many months in the future.

PTIN Follies, Year 4

Thursday, October 31st, 2013

This is the fourth year I’ve had to pay for my PTIN (my third year to renew it). A PTIN is a Preparer Tax Identification Number–it’s a number I use when I prepare a tax return. It’s a means for the IRS to identify which returns are prepared by which tax professionals.

The IRS announced that renewals are open. Seeing no reason to wait I decided to log into the system. I did remember that my user name is all caps (the IRS converted it back for my first renewal, 2011).

Again, my password doesn’t work so I request a new one. I get into the system fine, and enter my information, hit “next” and…I’m logged out. I re-enter the system…and am immediately logged out again.

I try calling the help number for the system…and after hitting the correct combination of digits on my phone, hear the helpful message, “There is no one available to help you at the present time. Your call will now be disconnected.” CLICK!

I remain underwhelmed. (I’ll try again in a week.)

IRS Loses Again to Institute for Justice

Saturday, February 2nd, 2013

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.