The Good Guys Fight Back (Again)

by Pejman Yousefzadeh on March 18, 2012

So, the IRS has decided in its infinite wisdom that it would be a good idea to force independent tax preparers to do the following:

  • Pay a yearly registration fee;
  • Take competency exams;
  • Complete 15 hours of IRS-approved continuing education every year; and
  • Participate in mandatory fingerprinting sessions.

All of this is part and parcel of an effort by the IRS to engage in regulatory capture. Naturally, big tax preparation shops are delighted with the new rules, since while they can comply with them fairly easily, the smaller shops cannot. And that means that it will be easier to drive the smaller shops out of business–which is exactly what the big firms want to do.

The good people at the Institute for Justice have decided that they are not going to let this stand. So they are suing the IRS.

This is, of course, an excellent and worthy project. Ilya Shapiro explains why:

. . . as others have already noted, one of the architects of this licensing scheme is Mark Ernst, former CEO of H&R Block. These protectionist regulations were even cited by UBS as a reason to buy H&R Block stock, on the grounds that they will “add barriers to entry (or continuation) for small preparers.”

In defending the need for these regulations, IRS Commissioner Douglas Shulman’s most insightful explanation was that “in most states you need a license to cut someone’s hair.” This statement undoubtedly caught IJ’s attention because that “merry band of litigators” has devoted itself to fighting such senseless and corrupt regulations (including in hair salons).

But these regulations are not just misguided and corrupt.  They are, as IJ’s complaint contends, simply beyond the IRS’s regulatory authority. The IRS claims the power to regulate tax return preparers under 31 U.S.C. § 330. But that statute only authorizes the IRS to regulate “the practice of representatives of persons,” and tax return preparers do not represent persons before the IRS and do not “practice” in the sense that lawyers do when they appear before a court. Taxpayers are only “represented” when they authorize someone to act on their behalf before the IRS in an exam, controversy, or litigation setting. This is especially clear in light of the statute’s plain purpose, which is to ensure that such representatives have the “competency to advise and assist persons in presenting their cases” (emphasis added).

Moreover, under the IRS’s expansive reading of the law, which puts under the agency’s purvey “all matters” connected with a “presentation” to the IRS, anyone who advises another about the tax aspects of a particular transaction could theoretically be guilty of unauthorized practice before the IRS. Congress clearly meant no such thing. In fact, Congress specifically amended 31 U.S.C. § 330 to allow the IRS to regulate the provision of written advice that the IRS “determines as having a potential for tax avoidance or evasion.” Such additional authority would be unnecessary under the IRS’s broad reading of the original statute.

Here’s wishing the Institute for Justice success in its suit against the IRS. They are clearly on the side of the angels here. That’s not hard to achieve when you are fighting the IRS, of course, but it is important to note just the same.

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