Empire Strikes Back:IRS Announces It Seeks to Continue Limiting Competition, Extracting Millions From Tax Preparers 

J. Justin Wilson
J. Justin Wilson · January 24, 2013

Arlington, Va.—In a motion filed late yesterday in federal court, the IRS asked a federal judge to suspend his ruling on the IRS’s unlawful tax-preparer licensing scheme, even though nothing grants the IRS the power to impose the regulations. The agency seeks to keep the regulations in place so that it can continue extracting $4 million each month from tax preparers.

Last Friday, U.S. District Judge James Boasberg declared the IRS’s new “registered tax return preparer” regulations unlawful in Loving v. IRS, and issued an injunction to end the practice immediately. The IRS has now filed a motion to suspend the injunction while it appeals the decision, despite the judge’s clear ruling that Congress never gave the IRS the authority to license tax preparers, and the IRS cannot give itself that authority.

The IRS’s legal brief in support of its motion admits that the agency has already received “over $100 million” in user fees from tax preparers, while only spending about $50 million to implement the regulations. Meanwhile, the IRS objects to spending the much smaller sum of $238,000 simply to notify tax preparers of the judge’s ruling in this case. The IRS also expresses concern that thousands of tax preparers might “demand refunds” and the government may face “class action lawsuits.” But lifting the injunction would do nothing to prevent such lawsuits, and would allow even more preparers to become ensnared in the IRS’s costly regulatory regime, potentially exposing the government to additional liability.

“This motion reveals that, rather than protecting the public interest, these regulations are really about collecting money for the IRS and enriching special interests by using government force to protect them from competition,” said Dan Alban, an attorney at the Institute for Justice (IJ), which represents the three independent tax-preparer plaintiffs challenging the regulations. “We will oppose the IRS’s groundless attempt to continue its unlawful licensing scheme, and will continue to fight to protect the rights of our clients and tens of thousands of independent preparers nationwide.”

The IRS also argued that a stay should be issued because tax-industry insiders have voiced concerns about the ruling, citing a press release from Intuit (makers of TurboTax) expressing “disappointment” in the ruling. But TurboTax is not subject to the regulations, and would benefit from competitors having to bear the cost of complying with the requirements.

“That the IRS would mistake the interests of industry insiders for the interests of consumers highlights the protectionist nature of these regulations,” said Scott Bullock, a senior attorney at IJ. “Large tax-preparation firms and professional trade organizations lobbied for these 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 agreed, noting: “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.” The drafting of the regulations was overseen by former H&R Block CEO Mark Ernst, and several financial analysts have concluded they benefit the company.

The IRS also claimed it would be “irreparably harmed” by the court’s injunction because it would have to “find[] other positions for the 167 Service employees currently working on the return preparer project.” But this would seem to be a boon more than a harm, since the IRS just last week complained that it is badly understaffed in an attempt to excuse serious customer-service problems identified in a December Government Accounting Office (GAO) report. The report found that average IRS telephone-call response times had risen to a five-year high of 17 minutes, and only 68 percent of callers even got through to an IRS representative. The agency also failed to respond to 40 percent of the correspondence it received within 45 days.

The Institute for Justice is the nation’s law firm for liberty. For over 20 years IJ has been a leading legal advocate for the rights of entrepreneurs. For more on IJ’s lawsuit against the IRS, please visit www.ij.org/IRS.