Loving v. Internal Revenue Serv., Civil Action No. 12-385 (JEB)
Decision Date | 18 January 2013 |
Docket Number | Civil Action No. 12-385 (JEB) |
Parties | SABINA LOVING, et al., Plaintiffs, v. INTERNAL REVENUE SERVICE, et al., Defendants. |
Court | United States District Courts. United States District Court (Columbia) |
To close a gap in the federal oversight of tax professionals, in 2011 the Internal Revenue Service began regulating hundreds of thousands of non-attorney, non-CPA tax-return preparers who prepare and file tax returns for compensation. The new regulations require each such preparer to pass a qualifying exam, pay an annual application fee, and take fifteen hours of continuing-education courses each year. Agency action, however, requires statutory authority. The IRS interpreted an 1884 statute as enabling these new regulations. That statute allows the IRS to regulate "representatives" who "practice" before it. Believing that tax-return preparers are not covered under the statute, and thus cannot be so regulated, Plaintiffs - three independent tax-return preparers - brought this suit. Plaintiffs and the Government have now cross-moved for summary judgment. Concluding that the statute's text and context unambiguously foreclose the IRS's interpretation, the Court will grant Plaintiffs' Motion.
This case turns on whether certain tax-return preparers are representatives who practice before the IRS, and thus are properly subject to the new IRS regulations. Before probing that question, however, it helps to know something about the IRS adjudication process. The Court therefore begins by outlining how the IRS resolves disputes about tax liability, then moves to the statutes and regulations at issue in this case.
"The Internal Revenue Service is a bureau of the Department of the Treasury under the immediate direction of the Commissioner of Internal Revenue." 26 C.F.R. § 601.101(a); see also 26 U.S.C. § 7803(a) ( ). Taxpayers can progress through three stages of interaction with the IRS: assessment and collection, examination, and appeals.
First up is assessment and collection. Our federal tax system "is basically one of self-assessment" in which each taxpayer must compute the tax due, file a return showing "facts upon which tax liability may be determined and assessed," and pay the tax due. 26 C.F.R. § 601.103(a). After such a filing (or a failure to file), the Government performs an "assessment" - that is, "the calculation or recording of a tax liability." United States v. Galletti, 541 U.S. 114, 122 (2004); see 26 U.S.C. §§ 6201-6204. Galletti, 541 U.S. at 122. After an assessment, the IRS collects unpaid taxes. See 26 C.F.R. § 601.104(c)(1); see also 26 U.S.C. §§ 6301-6306.
Next, for some lucky taxpayers, comes the IRS audit, known in tax jargon as an "examination." See 26 C.F.R. §§ 601.103(b), 601.105(a). The IRS may conduct the examination by mail or by in-person interviews, and it will sometimes visit a taxpayer's home or business to examine his books and records. See 26 C.F.R. § 601.105(b). "During the examination of a return a taxpayer may be represented before the examiner by an attorney, certified public accountant, or other representative." 26 C.F.R. § 601.105(b)(1); see also 26 U.S.C. § 7521(b)(2) ( ).
Last, if the taxpayer and the IRS still disagree, the taxpayer can request an in-person conference with an IRS "Appeals office." See 26 C.F.R. §§ 601.103(b), (c)(1), 601.106. While "[p]roceedings before Appeals are informal," taxpayers may "designate a qualified representative to act for them." 26 C.F.R. § 601.106(c).
With that framework in mind, the Court now outlines the statutory and regulatory scheme at play in this case. Under 31 U.S.C. § 330, originally enacted in 1884, the Treasury Secretary has authority to regulate people who practice before the Treasury Department.1 As the IRS is abureau of the Treasury Department, see 26 C.F.R. § 601.101(a), this statute covers practice before the IRS as well. This is so even though the casual student of history knows that the Sixteenth Amendment authorizing the modern federal income tax was not ratified until 1913. In full, the first two subsections of § 330 currently provide:
(Emphasis added.)
Using this statutory authority, the Secretary publishes regulations governing practice before the IRS in the Code of Federal Regulations, Title 31, part 10. The Treasury reprints those regulations under the name "Treasury Department Circular No. 230." The meat of Circular 230 is a long list of duties and restrictions relating to practice before the IRS, giving content to statutory terms like "incompetent" and "disreputable." See 31 C.F.R. §§ 10.20-.38. Circular 230 also lays out sanctions and sets the rules for disciplinary proceedings. See 31 C.F.R. §§ 10.50-.82. These regulations have long applied to attorneys, CPAs, and a handful of other specified tax professionals. See 31 C.F.R. § 10.3 (2009).
In 2011, the IRS extended the reach of Circular 230 by bringing tax-return preparers under its coverage. See Regulations Governing Practice Before the Internal Revenue Service, 76 Fed. Reg. 32,286 (June 3, 2011) (final rule) ("the Rule"); see also Regulations Governing Practice Before the Internal Revenue Service, 75 Fed. Reg. 51,713 (Aug. 23, 2010) (proposed rule). Although technically promulgated by the Treasury Department, this Opinion will usually attribute the new Rule to the IRS. Under the Rule, a tax-return preparer is a person who "prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax under the Internal Revenue Code." 26 C.F.R. § 301.7701-15(a); accord 26 U.S.C. § 7701(a)(36); see 31 C.F.R. § 10.2(a)(8) () (emphasis in original). The IRS estimated that the new Rule sweeps in 600,000 to 700,000 new tax-return preparers who were previously unregulated at the federal level. See 76 Fed. Reg. at 32,299.
"Practice" as a tax-return preparer for the most part (and for our purposes) "is limited to preparing and signing tax returns and claims for refund, and other documents for submission to the Internal Revenue Service." 31 C.F.R. § 10.3(f)(2). The Rule thus encompasses those preparers whose only "appearance" before the IRS is the preparation and submission of tax returns, and this Opinion's subsequent references to tax-return preparers concern this limited role.
Before engaging in such practices, the new regulations force all tax-return preparers to register with the Secretary. This registration requirement is the vehicle by which the Rule adds burdens on tax-return preparers. To initially register, a tax-return preparer must pay a fee and pass a qualifying exam. See 31 C.F.R. §§ 10.4(c), 10.5(b). Then, to maintain her registration, each year the preparer must pay another fee and complete at least 15 hours of continuing-education courses. See 31 C.F.R. §§ 10.6(d)(6), (e)(3). Plus, on pain of censure, suspension, disbarment, or monetary penalties permitted by §...
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