Written by John Ams
A three-judge panel of the U.S. Court of Appeals for the District of Columbia this morning heard the IRS appeal of the District Court decision that the IRS does not have the authority to regulate tax return preparers. NSA Executive Vice President John Ams attended the hearing and has the following observations:
First, the IRS could not have drawn a worse three-judge panel since each of the judges is a Republican appointed by President Ronald Reagan. Prior decisions by each of the three judges indicate they are unlikely to find IRS regulatory authority unless they can be directed to wording in a statute clearly giving IRS that authority. Sure enough, the first question at the hearing was, “Did Congress empower the IRS to regulate tax return preparers?”
Of course, the IRS at the hearing argued that it has broad congressional authority to write tax code rules. The attorneys for Loving, et al, responded that there is no such authority in the statute. Which is it? We have set out the text of the relevant statute, 31 USC §330, below:
(a) Subject to section 500 of title 5, the Secretary of the Treasury may—
(1) regulate the practice of representatives of persons before the Department of the Treasury; and
(2) before admitting a representative to practice, require that the representative demonstrate—
(A) good character;
(B) good reputation;
(C) necessary qualifications to enable the representative to provide to persons valuable service; and
(D) competency to advise and assist persons in presenting their cases.
In order to determine what is or is not permissible under the statutory language, the court is expected to apply the well-known Chevron test, first enunciated in Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984)). Chevron review entails a two-step inquiry. The first step asks whether “the intent of Congress is clear” – that is, “whether Congress has directly spoken to the precise question at issue.” If the intent of Congress is clear, that is the end of the matter. However, if the statute is silent or ambiguous with respect to the specific issue, the reviewing court must proceed to step two, asking whether the agency’s interpretation “is based on a permissible construction of the statute.”
In an effort to apply the first step of the Chevron test to the statute above, the judges this morning first asked the IRS whether there is any statute defining “practice” as that term is used in (a)(1) above. After some discussion, the IRS attorney had to concede there is no language in a statute, case law, or even public discourse defining practice before the IRS.
The panel of judges then asked whether it is the IRS position that it has always had the authority to regulate preparers. The response was yes, since this would be regulating the practice of representatives of persons before the Department of Treasury. One of the members of the panel, Judge David Sentelle, was openly skeptical of the IRS view that it has had such authority for 130 years but has only recently chosen to exercise that authority.
The IRS seemed to struggle in responding to two follow up questions:
1. If the Congress has already given IRS the authority to regulate preparers, then why would it have been necessary or even useful for bills to be introduced in a number of prior Congres
ses giving the IRS the explicit authority to regulate preparers? Do the bills infer that such authority is currently lacking?
The IRS response was simply to state that (a)(1) above already provides the authority, a response that the judges seemed disinclined to accept.
2. If a preparer is a “representative of persons before the Department of the Treasury” in (a)(l), then why is it not necessary for such representatives to have a power of attorney?
The IRS response basically was that (a)(1) provided regulatory authority that the IRS could – or could not – exercise as it deemed necessary. By contrast, the attorney for Loving responded that this illustrated the difference between the compliance function and the tax controversy function. The tax return preparation function was part of compliance and, at that point, the preparer is merely providing a service. The service is assisting the taxpayer in preparing a return that the taxpayer must sign and submit to the IRS. It is only when the IRS disputes the return and a tax controversy arises that the preparer or other professional may provide a representation function. It is this representation, according to Loving, that is subject to (a)(1) and for which the IRS may require a representative to have all four of the qualities listed in (a)(2).
At the end of the hearing, we and other observers were left with the definite impression the judges did not believe the statute unambiguously gives the IRS the authority to regulate preparers. Rather, we questioned whether the judges believe the statute is unambiguous in not granting the IRS that authority.
The Court is expected to take several months to announce a decision, and it may even be sometime in 2014 before there is a resolution. Meanwhile, we are left to wonder whether any of the IRS’s arguments are sufficient to convince the Appeals Court panel to overturn the lower court ruling in favor of Loving. At this writing, it does not seem so.
Oral Argument Recording 9/24
Executive Vice President
National Society of Accountants