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IRS suffers multiple blows in its attempt to regulate tax professionals

Tuesday, 22 July, 2014

The Internal Revenue Service (IRS) has recently suffered multiple defeats in federal court which many experts believe could undermine its authority to regulate tax preparers and other tax practitioners.

A few months ago it lost the case of Loving v IRS in the United States Court of Appeals for the District of Columbia, which hampered its efforts to regulate the tax preparer industry.

The IRS has now suffered another setback – again in the United States Court of Appeals for the District of Columbia – in Ridgely v Lew.  

These court decisions now open the gates for additional challenges to the authority of the IRS to regulate tax professionals not directly engaged in legal proceedings before the IRS, according to Forbes.

This means tax advice, tax preparation, and a variety of other tax practices performed by attorneys and certified public accountants (CPAs) may no longer place them under the regulatory control of the IRS.

In the recently decided Ridgely case, the plaintiff challenged the statutory authority of the IRS to prohibit lawyers, CPAs, and other tax professionals from charging contingent fees for certain services related to the filing of taxes before the IRS. 

The court held the IRS lacks the statutory authority from Congress to "regulate the preparation and filing of Ordinary Refund Claims", and concluded that it does not have the authority to regulate fee arrangements entered into by CPAs for the preparation of filing of Ordinary Refund claims before the commencement of adversarial proceedings before the IRS for the representation of a taxpayer.

This decision comes a few months after Loving v IRS, in which the Court stated the IRS lacked the statutory authority to regulate tax preparers.

In response to this setback, the IRS decided to implement some "voluntary" rules in an attempt to regulate this industry. It is to issue guidance on an Annual Filing Season Program (AFSP) for the 2015 filing season; a voluntary initiative offering certification to unenrolled preparers who complete educational requirements.

However, the American Institute of Certified Public Accountants (AICPA) has filed a federal lawsuit calling for this voluntary tax return preparer regulatory program to be declared unlawful.

AICPA President Barry Melancon stated that while the proposed program is being held out as voluntary, "in reality tax return preparers would face an overwhelming, compelled incentive to participate in the IRS's credentialing program, meaning that the proposed program will be de facto mandatory. In the wake of [the previous court ruling], that is impermissible."

Sources