Issues to Watch

The Annual Filing Season Program: A Brief Examination of AICPA v. IRS and the Resulting Regulations on Tax Return Preparers


*Brenton Conrad

I.  Introduction

On August 14, 2018, the United States Court of Appeals ruled in favor of the Internal Revenue Service’s (IRS) Annual Filing Season Program, which was enacted to serve as a means of combatting the growing concerns involving fraudulent tax returns.  AICPA v. IRS, No. 16-5256, 2018 U.S. App. LEXIS 22583 (D.C. Cir. Aug. 14, 2018).  This program seeks to incentivize unenrolled tax preparers (preparers not subject to any licensing requirement with the IRS) to voluntarily obtain a “Record of Completion.”   Id. at 3.  A Record of Completion grants these preparers a “limited practice right” in representing a taxpayer in the audit and tax return process and places their names on the IRS’s online directory of tax preparers.  Id. at 3, 4.  While on its face the IRS’s program may benefit taxpayers, the American Institute of CPAs (AICPA) disagrees.  Then-AICPA President Barry C. Melancon made this clear when he stated, on behalf of the association and its constituents, “[w]e believe a voluntary program would create confusion regarding the relative proficiencies of the various types of preparers.”  Isaac M. O’Bannon, AICPA Says IRS Voluntary Preparer Regulation System Doesn’t Protect Taxpayers, CPA Practice Advisor (May 21, 2014), https://www.cpapracticeadvisor.com/news/11474865/aicpa-says-irs-voluntary-preparer-regulation-system-doesnt-protect-taxpayers.  Then-chair of the AICPA Tax Executive Committee Jeffery A. Porter said that “any voluntary regime constructed would still not address the problems with unethical and fraudulent tax return prepares.”  Id.

II.  History

In 2009, a study by the IRS estimated that there were between 900,000 and 1.2 million paid tax return preparers practicing in the United States.  Return Preparer Review, Dep’t of the Treasury: Internal Revenue Service 1 (2009), https://www.irs.gov/pub/irs-pdf/p4832.pdf.  Of these preparers, the majority had not passed any form of competency requirements and were not required to obtain any minimum education, knowledge, or training before filing a tax return for a fee.  Id.  Even with the lack of IRS support, tax preparer usage hit an all-time high in 2007 and 2008 when over 80% of all federal tax returns were reportedly prepared by third party tax preparers or tax preparer software.  Rochelle Hodes et al., Regulation of Tax Return Preparers, Tax Advisor (May 1, 2011), https://www.thetaxadviser.com/issues/2011/may/hodes-may11.html.  The lack of regulations over these third-party tax preparers led to many problems for taxpayers in 2010 with the IRS reporting 938,664 cases of identity theft tax refund fraud, with an estimated value of $6.5 billion in fraudulent tax refunds issued.  Robert Holtfreter et al., Identify Theft Tax Refund Fraud: A Growing Epidemic, Part 1 of 2, Fraud Mag., Mar./Apr. 2014, at 50, http://www.fraud-magazine.com/article.aspx?id=4294982014.  These numbers continued in 2011 with the Treasury Inspector General for Tax Administration (TIGTA) estimating that tax identity theft fraud will result in a loss of $21 billion over the next five years.  Id.

In 2010, the IRS assumed control over tax preparers by issuing new regulations that compelled all tax-return preparers to pass a certification exam, complete mandatory continuing education courses annually, pay annual fees to the IRS, and register with the IRS by using the preparer tax identification numbers (PTINs) issued by the IRS.  Chris Gaetano, Appeals Court Backs IRS over AICPA in Preparer Registration Case, Trusted Prof. (Aug. 20, 2018), https://www.nysscpa.org/news/publications/the-trusted-professional/article/appeals-court-backs-irs-over-aicpa-in-preparer-registration-case-082018; see Loving v. Internal Revenue Serv., 742 F.3d 1013, 1014 (2014).  To enact these new regulations, the IRS relied on 31 U.S.C. § 330, which gives the IRS the power to “regulate the practice of representatives of persons before the Department of the Treasury.”  Loving, 742 F.3d at 1014 (quoting 31 U.S.C. § 330(a)(1)).  In response, three independent tax-return preparers, all subject to the regulations, filed a claim seeking injunctive and declaratory relief in an attempt to prevent the enforcement of the IRS’s new regulations.  Loving, 742 F.3d at 1015.  In the resulting case, Loving v. IRS, the United States Court of Appeals for the District of Columbia ruled that the IRS’s regulations exceeded the power granted to them by 31 U.S.C § 330 in that Congress never intended the IRS to have the power to regulate tax preparers in enacting the statute.  Id. at 1021.

III.  The IRS’s Response to Loving v. IRS and the Current Regulations on Tax Preparers

After the IRS’s defeat in Loving v. IRS, the IRS responded in 2014 by enacting the Annual Filing Season Program, which functioned almost identically to the regulations struck down in Loving v. IRS except that the new program was voluntary.  Gaetano, supra.  Participation in this new program would grant an unenrolled preparer a “Record of Completion” from the IRS after obtaining a PTIN, taking the annual “federal tax filing season refresher course,” passing a comprehension test, completing a minimum of eighteen hours of continuing education, and consenting to be subject to restrictions and obligations to practice before the IRS.  AICPA, 2018 LEXIS 22583, at *4.  In response, the AICPA filed a claim against the IRS arguing that the voluntary program was a way around the court’s decision in Loving v. IRS, and would be voluntary in name only, as it would place pressure on all preparers based upon the advantages it presents after participation.  Gaetano, supra.

In the resulting case, AICPA v. IRS, plaintiff AICPA argued that the Program extends beyond the statutory authority delegated to the IRS by Congress, and that the IRS failed to follow the proper procedure of notice and comment rulemaking in issuing the Program because the Program constitutes a legislative rule pursuant to the Administrative Procedure Act (APA).  AICPA, 2018 LEXIS 22583, at *14, *19, *22; Administrative Procedure Act § 1, 5 U.S.C. § 551 (2012).  In addressing the AICPA’s first claim, the Court reasoned that because preparers are voluntarily consenting to the obligations that the IRS puts on preparers, the Program does not go beyond the IRS’s authority provided by 31 U.S.C. § 330(a).  Id. at *16–*17.  Additionally, the Court interpreted codified IRS regulations which allow the IRS to “administer . . . the execution and application of the internal revenue laws or related statutes,” as a means of authorization to publish a public directory of preparers who obtained a Record of Completion.  Id. at *18; 26 U.S.C. § 7803(a)(2)(A) (2012).  The AICPA’s second argument against the IRS’s Program failed as well after the Court ruled that, because the Program interpreted who § 330(a) means by “competency,” the Program was interpretive rather than legislative and therefore not subject to the notice-and-comment rulemaking requirements set out in the APA.  AICPA, 2018 LEXIS 22583, at *22.  Ultimately, for the reasons presented above, the Annual Filing Season Program was found to not exceed the powers granted to the IRS by Congress and therefore is currently in practice today.  Id. at *25.

IV.  Conclusion

While the ruling of AICPA v. IRS constitutes a major victory for the IRS, it remains to be seen whether or not the Annual Filing Season Program will have any effect on lessening the amount of fraudulent tax preparer cases.  Stu Bassin, American Institute of Certified Public Accountants v. Internal Revenue Service – A Contrary Perspective, Procedurally Taxing Blog (Aug. 21, 2018), http://procedurallytaxing.com/american-institute-of-certified-public-accountants-v-internal-revenue-service-a-contrary-perspective/.  In a recent study by the TIGTA, the IRS has issued 1.3 million PITNs since 2010 and the majority of those who receive a PITN are granted their number without regard to the preparer “having a criminal background, history of defrauding taxpayers, or history of committing identity theft.”  Treasury Inspector Gen. for Tax Admin., The Internal Revenue Service Lacks a Coordinated Strategy to Address Return Preparer Misconduct 18, 20 (2018), https://www.treasury.gov/tigta/auditreports/2018reports/201830042fr.pdf.  It is argued by some that the resources put toward the investigation of returns is now focused on reviewing the paperwork of honest tax preparers as a result from the TIGTA instead of focusing on identifying the dishonest ones.  Bassin, supra.  With Ohio Senator Rob Portman recently introducing the Protecting Taxpayers Act in the Senate in an effort to expand the IRS’s power and “provide additional protections to taxpayers,” it remains to be seen whether legislation will support the IRS in regulating unenrolled preparers or remain on the side lines as the IRS works to protect American taxpayers from further fraudulent preparation services.  See Isaac M. O’Bannon, Bill Would Allow IRS to License and Regulate Tax Preparers, CPA Prac. Advisor (Aug. 3, 2018), https://www.cpapracticeadvisor.com/news/12423540/bill-would-allow-irs-to-license-and-regulate-tax-preparers.

*Brenton Conrad is a second-year law student at the University of Baltimore School of Law, where he is a staff editor for Law Review. Brenton is also a member of the 2019 Tax Moot Court Team, Event Coordinator of the Entertainment and Sports Law Society, and a member of the Royal Graham Shannonhouse III Honor Society. Brenton will be spending his 2019 summer with Council Baradel as a summer associate.

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