Tax preparer regulation update: IRS argues its case in court, New York issues rules to implement it at state level

September 24, 2013

The Internal Revenue Service is having its day in court, telling a federal judge today why the tax agency should be able to test and otherwise regulate paid tax return preparers.


Lady JusticeIt's the next phase in the feds' fight  against three independent tax preparers who
earlier this year won a key ruling that invalidated IRS plans to
impose mandatory testing and continuing education requirements on Registered Tax
Return Preparers, or RTRPs.


A decision by the U.S. Court of Appeals for the D.C. Circuit, which today is hearing oral arguments for and against the IRS plan, isn't expected for months.

The judges will take into account the presentations by IRS attorneys and the libertarian Institute for Justice representing the plaintiffs, as well as the two sides' myriad legal briefs. Supporting documents to be reviewed by the panel also include amicus
briefs from supporters
of both sides.

New York tax officials, however, aren't waiting for the federal lawsuit to wend its way through the system. 

First the federal case: In case you've forgotten, tax preparers Sabina Loving of Chicago, John Gambino of Hoboken, N.J., and
Elmer Kilian of Eagle, Wis. filed suit against the IRS.

The trio objected to not only the Registered Tax Return Preparer program, part of the IRS effort to effort to stem the tide of what the agency says are ill-prepared tax returns, but also IRS efforts to regulate RTRPs by requiring them to take continuing tax education courses and pass competency exams.


Loving et al argued that the IRS was acting beyond its authorized statutory scope in imposing what they called onerous regulations. 

U.S. District Judge James E. Boasberg of Washington, D.C., sided with the tax preparers.

While the judge later clarified his ruling, noting that the IRS still can require professionals who fill out tax returns to obtain preparer tax identification numbers, or PTINs, Boasberg stopped the IRS' tax competency testing program.

Today's hearing is the next step in the IRS' effort to reinstate the testing system.

The court's ultimate decision will have a
big impact on the tax return prepreparation industry, which has grown over the years as the tax code has become more complicated.

During the 2012 fiscal year (Oct. 1, 2011 to Sept. 30, 2012), more than 144.6 million returns were filed electronically, according to the IRS 2012 Data Book, with paid preparers submitting more than 75 million of those documents.

The numbers no doubt are higher for the calendar year — remember that around 10 million taxpayers each year get an extension until Oct. 15 to file their returns — and when old-fashioned paper 1040s that are snail mailed are taken into account.

And this year, some health care reform provisions no doubt will send even more filers to tax professionals' offices.

New York state tax mind: New Yorkers are not known for their patience, so it's no surprise that the Emplire State's tax officials decided to move ahead on expanded tax preparer regulation on their own.

The New York State Department of Taxation and Finance has proposed amendments to its Personal Income Tax Regulations and Procedural Regulations that would increase its regulation of tax return preparers.

The state currently requires tax return preparers to register. Under the new rules, expected to take effect by the end of November, New York also would:

  • Impose minimum standards on who can become a tax return preparer,
  • Institute a continuing education requirement, and
  • Require paid preparers to take a competency exam.

I know the IRS is sooooo jealous right now.

New York enacted paid tax preparer registration in 2009. The state's latest effort to get tougher on preparers is prompted in part by a 2011 Department of Taxation and Finance task force report that found "serious problems within the tax preparer industry and the impact of these problems on consumers of tax preparation and related services."

With its new tax pro standards, New York will join California, Oregon and Maryland in imposing minimum qualification requirements, testing and continuing education courses for paid tax preparers.

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