IJ Sues the IRS

By Dan Alban

Should taxpayers or the IRS decide who prepares their taxes? Under new regulations that represent an unprecedented and unlawful power grab, the IRS now seeks to control whom you may hire to prepare your tax returns.

The IRS recently imposed a sweeping new licensing scheme that requires tax preparers—who have always had the freedom to prepare returns for anyone who sought out their services—to secure permission from the IRS to make a living preparing taxes. This move would not only endanger the ability of tax preparers to fully serve their clients’ best interests (making them beholden to the IRS for their very livelihood), but it may drive many preparers out of business altogether.

These new licensing regulations require every paid tax return preparer—except for attorneys, CPAs and several categories of “enrolled agents” who wield enough political influence to have themselves exempted—to become a “registered tax return preparer” by taking and passing an IRS competency examination and paying fees. Registered tax return preparers must renew their registration each year by completing 15 hours of annual continuing education credits and paying renewal fees. They must also submit to any written or oral examination demanded by the IRS, as well as a “tax compliance check and suitability check” at the IRS’s discretion.

This new licensing scheme disproportionately burdens independent tax return preparers. Large tax preparation firms supported these regulations, and powerful interest groups like the American Institute of CPAs successfully lobbied for a special exemption that excludes preparers who are “supervised” by a CPA, attorney or enrolled agent. As the editorial board of The Wall Street Journal explained: “Cheering the new regulations are big tax preparers like H&R Block, who are only too happy to see the feds swoop in to put their mom-and-pop seasonal competitors out of business.”

Congress never gave the IRS the authority to license tax preparers, and the IRS cannot give itself that power. That is why the Institute for Justice has joined with three independent tax preparers to bring a lawsuit in federal court challenging the IRS’s statutory authority to impose these regulations on them and other entrepreneurial tax preparers across the nation.

IJ represents Sabina Loving, who worked for a decade as an accountant for banks and financial service companies. With the assistance of the IJ Clinic on Entrepreneurship at the University of Chicago Law School, she recently opened Loving Tax Services to serve the residents of an impoverished neighborhood on the South Side of Chicago, many of whom are low-income.

IJ also represents Elmer Kilian, a retiree and Korean War veteran who has prepared taxes for more than 30 years on his kitchen table in the small town of Eagle, Wisc. Like so many other independent tax preparers nationwide, Elmer offers an affordable, personal alternative to larger tax preparation companies.

IJ’s third client is John Gambino, an MIT-educated Certified Financial Planner and investment advisor from Hoboken, N.J., who offers tax preparation services as a convenience for his clients and has done so since 2004.

Sabina, Elmer and John are all standing up to the IRS for their economic liberty—their right to earn an honest living free from unreasonable and irrational government intrusion. Each will be harmed by the time and cost of complying with this new licensing scheme. Elmer and John will be forced to shut down, while Sabina will have to raise her prices, making it more difficult for her to compete with large tax preparation companies. She would also like to hire and supervise other tax preparers at her business so that she can serve more low-income customers, but she is not a CPA, an attorney or an enrolled agent, so she does not qualify for the supervisory exemption lobbied for by special interest groups.

This lawsuit continues IJ’s long tradition of fighting for the economic liberty of entrepreneurs against regulations that do little more than expand government power and protect politically powerful groups from competition. Tax preparers like Sabina, Elmer and John have a right to earn a living without getting permission from the IRS. A win for them will be a win for the estimated 350,000 tax return preparers nationwide who will be subject to these regulations and to the tens of millions of taxpayer customers they serve each year.

Dan Alban is an IJ attorney.