Taxpayers Win as Appeals Court Rejects Licensing of Tax Preparers

Published February 11, 2014

The District of Columbia Circuit Court of Appeals in February ruled the Internal Revenue Service has no legal authority to impose a nationwide licensing scheme on tax-return preparers.

The decision affirms a January 2013 ruling by U.S. District Court Judge James E. Boasberg, which struck down the IRS’s new regulations as unlawful. Both courts rejected the agency’s claim tax-preparer licensure was authorized by an obscure 1884 statute governing the representatives of Civil War soldiers seeking compensation for dead horses.

“This is a major victory for tax preparers—and taxpayers—nationwide,” said Dan Alban of the Institute for Justice, the lead attorney for the three independent tax preparers who filed the suit. “The court found that Congress never gave the IRS the power to license tax preparers, and the IRS cannot give itself that authority.”

The Court held, “If we were to accept the IRS’s interpretation of [the statute], 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.”

IRS Targeted Hundreds of Thousands

More than 350,000 tax-return preparers would have been hampered by the regulations. The burden would have fallen most heavily on independent tax preparers and consumers, putting tens of thousands of mom-and-pop preparers out of business and increasing the cost of tax-return preparation for millions of taxpayers.

“My customers—not the IRS—should be the ones who get to choose who prepares their taxes,” said Sabina Loving, an independent tax preparer from Chicago and the lead plaintiff in the case. “I have a right to earn an honest living without getting permission from the IRS.”

The court ruled “[t]he IRS may not unilaterally expand its authority through such an expansive, atextual, and ahistorical reading of [the statute].”

‘Regs Were Economic Protectionism’

“These regulations were classic economic protectionism,” said IJ Senior Attorney Scott Bullock. “Licensing tax preparers would have benefitted powerful industry insiders at the expense of entrepreneurs and consumers.”

The Economist magazine explained the new IRS regulations “threaten to crush . . . small, local” tax preparers and were “likely to push mom and pop into another line of work.” The Wall Street Journal agreed, noting, “Big-foot tax preparers like H&R Block and Jackson Hewitt lobbied for the regulation and have been explicit in hoping it will squeeze lower-priced competition.”

The drafting of the regulations was overseen by former H&R Block CEO Mark Ernst, and several financial analysts concluded they would benefit the company.

“Administrative agency overreach threatens the economic liberty rights of entrepreneurs,” said Institute President and General Counsel William Mellor. “This precedent ensures that agencies must follow the law and cannot exceed the power given to them by Congress.” As the Court noted, “‘fox-in-the-henhouse syndrome is to be avoided . . . by taking seriously, and applying rigorously, in all cases, statutory limits on agencies’ authority.'”