First-Round Win in IJ vs. the IRS

April 1, 2013

In 2011, the IRS imposed a burdensome licensing scheme that benefited powerful industry insiders while harming hundreds of thousands of tax preparers across the country and the tens of millions of taxpayers who rely on them to prepare their taxes. In January, U.S. District Court Judge James E. Boasberg issued a ruling putting a stop to this unlawful power grab by the IRS.

The court ruled that Congress never gave the IRS the authority to license tax preparers, and the IRS cannot give itself that power. The court also enjoined the IRS from enforcing its new licensing scheme for tax preparers, which was poised to put tens of thousands of tax preparers out of business.

IJ teamed up with three independent tax preparers to challenge this scheme: Sabina Loving of Chicago; John Gambino of Hoboken, N.J.; and Elmer Kilian of Eagle, Wisc.

In addition to taking on one of the most powerful government agencies, these small, independent tax preparers were also up against formidable industry insiders. Large tax-preparation firms and professional trade organizations lobbied for the licensing regulations to reduce competition by putting independent preparers out of business.

The Economist explained that the new IRS regulations “threaten to crush . . . small, local” tax preparers and are “likely to push mom and pop into another line of work.” The Wall Street Journal editorialized: “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.” Tellingly, the drafting of the IRS licensing regulations was overseen by former H&R Block CEO Mark Ernst, and several financial analysts have concluded that the regulations would benefit the company by reducing competition.

The IRS had claimed for years that it did not have the authority to license tax preparers. Over the past eight years, eight bills have been introduced in Congress that would have given the IRS this authority, but none of these bills has ever passed or even gotten out of committee. Apparently growing frustrated, the IRS did something that is all too common among government agencies: It just assumed the power for itself without any statutory authority. But, as Judge Boasberg noted in his decision, under our system of law, “statutory text is king.” This decision will serve as an important precedent for reining in federal agencies operating without lawful authority.

Not surprisingly, the IRS was none too pleased with the court’s decision and immediately tried to stop its enforcement. The agency filed for a stay of the court’s injunction, but the judge denied the request, rightly asking, “Why should tax-return preparers continue to pay into a system the Court has found unlawful?”

Refusing to lift the injunction, Judge Boasberg ruled that no tax-return preparer may be required to pay testing or continuing education fees or to complete any testing or continuing education while the injunction is in place. He noted, however, that “some preparers may wish to take the exam or continuing education even if not required to. Such voluntarily obtained credentials might distinguish them from other preparers.”

But this reasonable, completely voluntary certification system is not acceptable to the IRS. The agency has appealed the decision to the federal appellate court in D.C. and has also asked that court to allow it to continue to impose its licensing scheme on tax preparers while the court considers the appeal. IJ will continue to fight for Sabina, John, Elmer and the tens of thousands of other independent tax preparers providing a valuable, affordable choice for consumers nationwide.

Dan Alban is an IJ attorney.

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