Tax Preparers Achieve Final Victory Over IRS Licensing Scheme

Published May 15, 2014

The victory of three independent tax-return preparers over the IRS became final in May, after the agency declined to file a petition seeking review from the U.S. Supreme Court.

The lapse of the deadline marks the conclusion of a two-year battle over whether the IRS had the authority under the “Horse Act” of 1884—a statute passed to govern compensation claims for dead horses brought on behalf of Civil War veterans—to impose a nationwide licensing scheme on tax preparers.

“This brings finality to a major victory for independent tax preparers—and taxpayers—nationwide,” said Dan Alban of the Institute for Justice, lead attorney for the three preparers who filed the suit. “Four federal judges sitting on two different courts have all agreed that Congress never gave the IRS the power to license tax preparers, and an agency cannot just give itself such licensing authority. By not filing a petition for certiorari, the IRS has wisely chosen not to ride this horse law any further.”

By arguing Congress gave the IRS the authority to impose licensing requirements on income tax preparers under a statute enacted in 1884, the IRS claimed a power that would have been granted nearly 30 years before the income tax was enacted and the IRS was created — and before professional tax preparers existed.

Aimed to Help Industry Insiders

If the licensing scheme had not been struck down, some 350,000 tax-return preparers would have been burdened by the new regulations, much to the benefit of entrenched special interests.

“These regulations were classic economic protectionism,” said IJ Senior Attorney Scott Bullock. “The burden would have fallen on small entrepreneurs and consumers, while powerful industry insiders stood to reap the benefits of decreased competition. Instead, taxpayers will enjoy lower prices for tax-preparation services as more preparers compete for their business.”

This case arose when the IRS, following several failures to secure congressional authorization, unilaterally imposed sweeping new regulations requiring all tax-return preparers to obtain a license and submit to ongoing, mandatory IRS-approved education.

Courts Slap Down Power Grab

Three independent tax preparers—Sabina Loving of Chicago, Ill., Elmer Kilian of Eagle, Wis., and John Gambino of Hoboken, N.J.—filed suit in March 2012 in the U.S. District Court for D.C.. They argued the IRS exceeded the scope of its authority by attempting to enact the regulations without Congress’s approval. U.S. District Court Judge James E. Boasberg agreed, and struck down the regulations as unlawful in January 2013.

In February of this year, a three-judge panel of the D.C. Circuit Court of Appeals upheld the district court opinion, ruling, “The IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of [the statute.]” The case is Loving v. IRS.