The Tax Man goeth away: IRS cannot regulate tax return preparers

Tax Day! by Brian J. Matis - cc
Tax Day! by Brian J. Matis - cc

WASHINGTON, February 16, 2014 — The IRS may not create rules governing who prepares your tax return, according to the U.S. Court of Appeals for the District of Columbia.

Approximately 60 percent of all U.S. tax returns are filled out by paid tax preparers, according to the Government Accounting Office, a congressional watchdog agency.  This means more than half of us use someone else to account to the government how much we made and what we owe in taxes.

Trust, to say the least, is monumental.  You want all of the deductions you can legally get, and you want to pay as little as legally required; the problem is, is your tax preparer qualified?

Too often, the answer is “no.”

A 2006 GAO study found significant problems with tax return preparation.  Returns were taken to 19 different commercial tax preparers, and 17 of those calculated the taxes due incorrectly.

A common joke is that if you take your return to 10 different preparers, you get 10 different results.

In order to get customers, one major national tax return preparer advertises that it will find mistakes that others made.

Another national entity is now running graphically powerful television commercials saying that U.S. Taxpayers are leaving “billions” of dollars in the governments’ hands because of incorrect returns.  The image of a gentleman depositing $500 on every seat in a sports stadium, and another with stacks of money being raised onto an aircraft carrier’s deck drives home that mistakes are being made on our returns.

The moral of the story is that clearly, tax return preparation is still out in the wild, wild west.

Enter the IRS, who, recognizing that wide discrepancies exist, conducted a Tax Preparer Standards study in 2009.  Data was sought and obtained from all segments of the tax industry, and the plan was to develop “uniform and high ethical standards of conduct for tax preparers” as a way to increase tax compliance and reduce the “tax gap.”

In January, 2010, IRS Commissioner Doug Shulman announced a plan that required “un-enrolled” paid tax preparers to register with the IRS and to pass a basic competency exam.

“Un-enrolled” meant, and still means, individuals other than attorneys, CPA’s (certified public accountants), and EA’s (enrolled agents).

The IRS plan included the requirement that a would-be un-enrolled tax preparer would need to pass both a basic competency exam and a background check.  Thereafter, the successful applicant would have to take 15 hours of annual continuing education.

Sounds reasonable.  If Uncle Bob, who does not have a high school diploma, prepares returns, there is a good chance that there is a problem.  We do want minimum standards of competence here.

In 2012, the IRS began rolling out this new program, developing the competency test and designing the continuing education curriculum.

You say government should not interfere with private enterprise?  If I want Uncle Bob to prepare my returns, that is my prerogative!

The IRS regulations were challenged by an Arlington, Virginia legal group, the Institute for Justice.  They argued, among other things, that the proposed regulations would put thousands of “mom and pop” tax preparers out of business.

The matter went to court in the Washington, D.C. United States District Court.  The Court’s ruling in January, 2013 stopped the IRS plan in its tracks.  The IRS was enjoined from enforcing its regulatory requirements, meaning “mom and pop” would not be required to complete testing nor secure continuing education.

The case was not decided on the effect the new IRS regulations would have on the thousands of moms and pops.  Rather, procedurally, the District Court ruled that Congress never gave the IRS the power to license tax preparers, and that the IRS cannot give itself that power.

District Court Judge Brett Kavanaugh wrote in an opinion that “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…  the IRS may not unilaterally expand its authority…”

The IRS appealed the ruling.  It said the rules are needed to weed out ill-trained and incompetent tax preparers.

Last week, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit unanimously upheld the District Court’s ruling, confirming that the IRS lacked authority to impose new rules without congressional authority.

An independent tax preparer from Chicago, Sabina Loving, who was the lead plaintiff in the case, pleased by the ruling, said “my 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.”

No, Ms. Loving, you are wrong.  Your customers need protection and should only be allowed to choose you if you are qualified.  The ruling was correct. Please observe that it was not made on choice issues.  It was made on procedural grounds.

The IRS motivation is a winner.  Congress should enact regulations on their own, or allow the IRS to implement regulations.  With so many occupations being regulated, albeit some too much, clearly, tax preparation is one in need of minimum standards.

Uncle Bob, mom and pop, thank you for helping us.  Please do not take offense if you are soon required to prove you can do what you do with a minimum of competence.  If you also have to take classes every year to keep up your skills, we are all the better.

Paul A. Samakow is an attorney licensed in Maryland and Virginia, and has been practicing since 1980.  He represents injury victims and routinely battles insurance companies and big businesses that will not accept full responsibility for the harms and losses they cause. He can be reached at any time by calling 1-866-SAMAKOW (1-866-726-2569), via email, or through his website. He is available to speak to your group on numerous legal topics. 

His new book “Who Will Pay My Auto Accident Bills?” can be reviewed on and can be ordered there, or obtained directly on Amazon:  Click here to order



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