IRS Celebrates Anniversary of Unlawful Power Grab

Arlington, Va.—The IRS is celebrating the three-year anniversary of its campaign to seize regulatory power without congressional authority. But the IRS’s unlawful licensing scheme is no cause for celebration, and now they are answering for this abuse of power in federal court.

In a press release issued yesterday, the IRS noted that its tax return preparer initiative began on June 4, 2009—not as the result of congressional authorization to implement new regulations, but simply at the behest of IRS Commissioner Douglas Shulman. As part of this initiative, the IRS imposed an unlawful licensing scheme on an estimated 350,000 tax preparers, benefitting powerful tax industry insiders while harming tens of millions of taxpayers.

As a result, on March 13, 2012, three independent tax preparers joined forces with the Institute for Justice to file a federal lawsuit against the IRS in the U.S. District Court for the District of Columbia. In an answer filed on Monday, the IRS admitted that tax preparers could pay over $1,000 in annual fees to the IRS just to satisfy the continuing education requirement imposed by this new licensing scheme.

There has been a groundswell of opposition to the IRS power grab—and support for IJ’s lawsuit—from countless tax preparers across the nation, in scores of private communications to IJ as well as comments posted on articles in tax industry publications, such as Accounting Today and the TaxWorks blog, run by tax software vendor TaxWorks.

“We have been overwhelmed by the outpouring of support we’ve received from independent tax preparers across the country, many of whom have asked to join the lawsuit,” said IJ attorney Dan Alban. “While we do not need additional plaintiffs at this time, we understand that this lawsuit is closely watched by many tax preparers who are concerned about their future livelihood, and we plan to move this case forward expeditiously to protect their right to earn an honest living.”

The Economist noted that these new IRS regulations “threaten to crush . . . small, local competitors” and are “likely to push mom and pop into another line of work.” Unfortunately, this has already proved true: numerous independent tax preparers have publicly announced that they plan to retire rather than comply with these onerous new regulations, thus reducing competition for tax preparation.

As one tax preparer explained: “The new IRS preparer requirements have little to do with knowledge of the tax code, expertise or competence. Rather, the IRS simply seeks control over who can . . . receive pay for doing tax returns. These requirements erect new barriers to entry into the tax-prep industry, which heretofore has been open and competitive.”

These barriers to entry have proven unpopular and tax preparers have been slow to comply with the regulations. Although the licensing scheme applies to an estimated 350,000 tax preparers, less than 5,000 preparers have so far taken the required government exam, despite the IRS’s repeated urging.

“This is all about government control. Nothing more. The Bar Association, AICPA and Enrolled agents, all organized, were able to exempt themselves and their employees and welcomed the regulations,” said another tax preparer.

Unsurprisingly, big tax preparation firms, such as H&R Block and Jackson Hewitt, support the licensing scheme.As 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.”