Tax Preparers Defeat IRS Power Grab at the D.C. Circuit

In January 2013, a federal district court judge ruled in favor of IJ and three independent tax preparers, striking down the requirement that tax preparers had to get permission from the IRS before they could work. The IRS then appealed.

This February, just a few weeks into tax season, IJ once again defeated the IRS, securing a major victory for economic liberty and meaningful limits on the power of administrative agencies. A three-judge panel of the D.C. Circuit Court of Appeals ruled unanimously that the IRS did not have the statutory authority to unilaterally impose the sweeping nationwide licensing scheme on tax preparers. Under these new regulations, the court explained, “the IRS would be empowered for the first time to regulate hundreds of thousands of individuals in the multi-billion dollar tax-preparation industry. Yet nothing in the statute’s text or the legislative record contemplates that vast expansion of the IRS’s authority.” As a result, the court firmly rejected this regulatory overreach by one of the most feared federal agencies. Celebrating the victory were IJ clients Sabina Loving of Chicago, Elmer Kilian of Eagle, Wis., and John Gambino of Hoboken, N.J., along with tens of thousands of other independent tax preparers who would have had to get permission from the IRS to continue preparing tax returns for paying clients. The costs of the new licensing regulations would have either forced them out of business altogether or compelled them to substantially increase their prices, making them less competitive with large tax-preparation firms. Taxpayers also have good reason to celebrate the ruling: The new licensing scheme was expected to dramatically reduce competition in the industry and raise prices for tax-preparation services. Fortunately, under this ruling, taxpayers—not the IRS—will continue to get to decide who prepares their taxes.

Unsurprisingly, large tax-preparation firms such as H&R Block and Jackson-Hewitt lobbied for the costly new rules, which were also supported by industry insiders such as the American Institute of CPAs and tax software producers such as Intuit (makers of TurboTax). All stood to benefit from the burdensome regulations, which The Economist noted, “threaten to crush . . . small, local” tax preparers and are “likely to push mom and pop into another line of work.”

Determined to shut down this protectionist power grab, IJ filed suit on behalf of Sabina, Elmer and John in March 2012, explaining that Congress never gave the IRS the authority to license tax preparers and the IRS cannot give itself that power. In response, the agency made the shocking claim that it was authorized to license tax preparers under an obscure 1884 statute governing the representatives of Civil War soldiers seeking compensation for dead horses. That law predated not only the modern income tax, but the IRS itself.

The D.C. Circuit rejected the IRS’s arguments, finding six different reasons why the agency’s interpretation of the 1884 statute was both “foreclosed” by the text of the statute and “unreasonable in light of the statute’s text, history, structure, and context.” As a result, the court concluded that “[t]he IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading” of the statute.

IJ’s victory establishes important precedent against regulatory overreach by administrative agencies, which often threatens the economic liberty of entrepreneurs.

As this issue of Liberty & Law went to print, the IRS could still request a rehearing or petition the U.S. Supreme Court for review. If it does, we’ll be there to once again stop this power grab.

Dan Alban is an IJ attorney.