United States

Recent court decision casts shadow on PTIN scheme

DC District Court disallows PTIN user fees

INSIGHT ARTICLE  | 

On Jun. 2, 2017, the District Court for the District of Columbia held that the Internal Revenue Service (IRS) was authorized by statute to require the use of preparer tax identification numbers (PTINs) for return preparers, but could not charge a user fee for registration and renewal. See Steele, et al, v. U.S., 119 AFTR 2d 2017 (119 AFTR 2d 2017-XXXX). As a result of the court’s ruling, on Jun. 5, 2017 the IRS suspended PTIN registration and renewal.

Background

Prior to 2010 anyone could file a tax return on behalf of someone else.  In 2010, in an attempt to regulate all tax return preparers and to raise the quality of return preparer’s work,  the IRS promulgated new regulations that established a new registered tax return preparer (RTRP) designation.  RTRPs had to pass a one-time competency test, pass a suitability test, obtain a PTIN and pay a user fee for it. New regulations also required renewal of the status and contained continuing education requirements. The justification for the scheme was two-fold.

First, the IRS stated that it was authorized to create the RTRP designation under the federal code (31 U.S.C.§ 330(a)) that granted the IRS authority to regulate the practice of representatives before the Department of Treasury.  RTRPs were required to demonstrate good character, good reputation and the necessary qualifications to enable the representative to provide valuable, competent and accurate tax services. The idea behind RTRPs qualification was to improve overall accuracy of the tax services rendered and increase tax compliance.

Second, the tax preparers needed to have a PTIN so the IRS could monitor and oversee individuals who are involved in tax return preparation services and to insure that the tax preparers are competent and received proper training.   

The IRS also promulgated regulations authorizing the imposition of registration and renewal fees for a PTIN. See 75 Fed. Reg. 60316 (Sept. 30, 2010); 26 C.F.R. § 300.13. The IRS based its authority to charge fees for the PTINs on section 9701(b) of the Independent Offices Appropriations Act of 1952 (IOAA). The Act provides that government agencies may charge fees for a service or thing of value provided by such agency.  The IRS reasoned that a PTIN was a “service or thing of value”  because it allowed a tax return preparer to receive compensation for preparing a return, and it provided a special benefit because only attorneys, certified public accountants, enrolled agents, and registered tax return preparers could get a PTIN and the benefit of receiving compensation.

Tax preparers started to challenge the IRS’ authority to require them to register with the Treasury Secretary, complete competency testing and take continuing education classes. In 2014 the Court of Appeals for the D.C. Circuit in Loving v. U.S., 742 F.3d 1013 upheld a lower court ruling that the IRS lacked authority to regulate tax return preparers.  The court reasoned that tax return preparers are not the taxpayer representatives and tax return preparation does not constitute practice before the IRS. After the decision in Loving, the PTIN is now available to anyone in the general public without needing to demonstrate the qualifications the IRS previously required, but the registration fee requirement still remained.

In Steele, the plaintiffs argued that the PTIN requirement was equivalent to imposing a regulatory licensing scheme and the IRS does not have the authority to do so.  The court in Steele  determined that the fee imposed for registration and renewal of a PTIN is not for a service or thing of value.  Such determination was made because the court in Loving granted the ability for the general public to obtain a PTIN,  thus any person, regardless of qualifications, could obtain a PTIN and prepare tax returns and get compensated.  As a result, a PTIN did not confer any special benefit on the tax preparers.  

IRS response

Following the Steele decision, the IRS announced that it was enjoined from charging a user-fee for registrations and renewals of PTINs.  Due to the court order, the IRS suspended registration and renewal of PTINs. 

The IRS is currently working with the Department of Justice to determine how to proceed next.

Conclusion

It is unclear at this time whether the IRS and the Department of Justice will appeal the ruling.  It is also unclear whether future court orders will require IRS to refund any or all of the already paid fees.  There is speculation that the outcome of Steele could result in substantial liability for the IRS by way of refunding already-paid fees.  However, the court order requiring the IRS to refund the fees already paid is yet to be issued.

The continued use of PTINs is unclear at this time.  As the court in Steele discussed, using a number that identifies the tax return preparer is proper, however the IRS is not authorized to charge a fee.  The IRS has not yet announced whether it will continue to use PTINs and absorb the cost in its budget.  However, considering the recent trend of Congress cutting the IRS’s budget over the last few years, it seems doubtful that the IRS will absorb the costs to continue the program. As of right now, the IRS suspended PTIN registrations and renewals.

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