IRS Responds to Court Ruling Upending its Regulatory Plan

In a surprising turn of events, the U.S. District Court for the District of Columbia issued a ruling Friday effectively stopping the Internal Revenue Service from implementing its Registered Tax Return Preparer (RTRP) program launched in 2011.

The IRS issued a statement today in response to the decision that it “continues to have confidence in the scope of its authority to administer this program.” The statement went on to say that the Service is “considering how best to address the court’s order” noting that further action will be taken soon.

The RTRP program was created to regulate paid tax preparers other than those already under Circular 230’s regulatory structure such as Enrolled Agents, certified public accountants and attorneys. The program required other paid preparers to register with the IRS, pass a competency test and complete specified continuing education.

Ultimately, the Court opined that the IRS overstepped its statutory authority in interpreting language in an 1884 law referring to “representatives” that “practice” before the IRS. The Court asserted that tax preparation is not included in the definition of “practicing” before the IRS. Thus, the Court maintains that the IRS has no authority to regulate preparers who only prepare returns.

The Court issued both a declaratory judgment that IRS lacks statutory authority to promulgate or enforce the new regulatory scheme for RTRPs and injunctive relief that permanently enjoins IRS from enforcing this registration scheme. Citing the Administrative Procedure Act, the Court explained that its decision was based on the requirement that it “hold unlawful and set aside agency action, findings, and conclusions” that are “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.”

According to statements made today by IRS Return Preparer Office Director Carol Campbell the IRS concedes that at this point there are more questions than answers surrounding the Court’s decision. Campbell invited stakeholders to submit questions for consideration as the IRS assesses the ramifications of the court decision and evaluates next steps.

For the time being, IRS has shut down its RTRP operation, which means preparers other than EAs, CPAs and attorneys will not be required to register with the IRS, take a competency exam or take courses toward continuing education. However, it should be noted that the decision does not impact the PTIN program, so all practitioners should still maintain their PTINs.

Clearly, the question of the hour is, what happens now? The IRS essentially has three options: (1) to accept the Court’s decision as issued and unwind its RTRP program, perhaps making it voluntary; (2) to enlist Congress’ help to pass a law granting the IRS authority to regulate preparers other than those previously defined in Circular 230; or (3) to appeal the Court’s decision to the Circuit Court, which seems likely based on the statement issued today.

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