2 Loving v. IRS, 917 F. Supp.2d 67 (D.D.C. 2013). 3 See, e.g., Lawrence B. Gibbs, Loving v. IRS: Treasury s

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1 VIEWPOINTS tax notes Loving and the End of RTRPs By Donald T. Williamson and James S. Gale Donald T. Williamson is a professor of taxation and the Howard S. Dvorkin Faculty Fellow at American University, where he serves as executive director of the Kogod Tax Center, a research and advocacy institute focused on tax issues affecting small business and Donald T. Williamson middle-income earners. James S. Gale is a professor of accounting at Northern Virginia Community College. With its decision in Loving v. IRS, the D.C. Circuit has permanently terminated the Service s registered tax return preparer program and made James S. Gale clear that otherwise unlicensed preparers can only be regulated if it is specifically authorized by congressional legislation. Finding no less than six reasons for affirming the district court s injunction prohibiting mandatory registration, testing, and continuing education requirements for tax return preparers who are not attorneys, CPAs, or enrolled agents, the authors conclude that regardless of the policy merits calling for the regulation of return preparers, the court s reasoning is unassailable, and that the Supreme Court is unlikely to grant certiorari. That leaves congressional action as the only remedy to reduce fraud and incompetence in the tax return preparation industry. 1 Dkt (D.C. Cir. 2014). On February 11, 2014 surprising no one who observed the case s oral argument the D.C. Circuit held in Loving v. IRS that the Service had no legal authority to impose a nationwide licensing scheme on tax return preparers who are not attorneys, CPAs, or enrolled agents. 1 The decision affirms a January 2013 district court decision granting a declaratory judgment that Treasury lacked statutory authority to issue the regulations. 2 While the decision disappoints many who believe the tax return preparation industry requires nationwide standards of practice, 3 the case demonstrates the limits of the Chevron 4 standards for deciding whether an agency has statutory authority to create a regulatory scheme. 5 This article analyzes the court s opinion and regrettably concludes that the decision is technically correct regardless of the compelling policy considerations for regulation of paid return preparers. In light of the unanimous opinion, the authors believe that unless the government thinks the Supreme Court will revisit Chevron and Brand X, 6 it would be well advised not to appeal, and to instead seek specific congressional authority to regulate return preparers. Background In 2011, after an exhaustive study, 7 the IRS issued regulations regarding unlicensed tax return preparers. 8 The goal of those regulations was to address the serious errors and outright fraud committed by incompetent or unscrupulous tax return preparers, and the loss of billions of tax dollars to the government. The regulations amendments to Circular 230 required that otherwise unlicensed tax return preparers register with the IRS, pass an examination on basic tax law, and attend at least 15 hours of continuing education each year. 9 As statutory authority for the new regulation, the IRS relied upon 2 Loving v. IRS, 917 F. Supp.2d 67 (D.D.C. 2013). 3 See, e.g., Lawrence B. Gibbs, Loving v. IRS: Treasury s Authority to Regulate Tax Return Preparers, Tax Notes, Oct. 21, 2013, p. 331; Nina Olson, More Than a Mere Preparer: Loving and Return Preparation, Tax Notes, May 13, 2013, p. 767; Brief of Amici Curiae of Former Commissioners of Internal Revenue in Support of Defendant-Appellants, Loving v. IRS (Apr. 5, 2013). 4 Chevron U.S.A. Inc. v. Natural Res. Def. Council Inc., 467 U.S. 837 (1984). The district court subsequently clarified that the injunction did not extend to prohibiting the IRS from requiring all preparers to obtain preparer tax identification numbers. 5 See 76 F.R. 32,286 for the regulation at issue that would have revised Circular 230 to include registered tax return preparers. 6 National Cable & Telecommunications Association et al. v. Brand X Internet Services, 546 U.S. 967 (2005). 7 See IRS Publication 4812, Return Preparer Review (Dec. 2009). 8 Reg. section ; 31 C.F.R. Part T.D TAX NOTES, April 21,

2 31 U.S.C. section 330, originally enacted in 1884, authorizing Treasury to regulate the practice of representatives before the agency. Specifically, the statute provides that 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. With the support and representation of the Institute for Justice, a nonprofit libertarian public interest law firm, Sabina Loving, Elmer Kilian, and Giovanni Gambino all unlicensed individuals preparing tax returns for low-income individuals, operating part time, or performing tax compliance as an ancillary activity in connection with other financial services filed suit in the U.S. District Court for the District of Columbia seeking injunctive relief, claiming the IRS had exceeded its authority to govern practice before the Treasury Department. Both sides sought summary judgment. District Court s Chevron Analysis As required by the Supreme Court, the district court applied the traditional two-step analysis of Chevron for finding whether an agency has gone too far in interpreting a statute. In Chevron the Supreme Court declared the following standard of deference that courts must give to regulations: When a court reviews an agency s construction of the statute which it administers, it is confronted with two questions. First, always, is the question 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; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute as would be necessary in the absence of an administrative interpretation. Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency s answer is based on a permissible construction of the statute. If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute. Sometimes the legislative delegation to an agency on a particular question is implicit, rather than, explicit. In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of any agency. 10 If a court finds that congressional intent regarding the words of a statute is unambiguous, it will not defer to a contrary agency interpretation. However, if the statute is ambiguous, the court will defer to regulations unless they are arbitrary, capricious or manifestly contrary to the statute. In measuring those two steps, the Chevron Court directed that a statute s legislative history be consulted to determine its meaning: The judiciary is the final authority on issues of statutory construction, and must reject administrative constructions which are contrary to clear, congressional intent... If a court, employing traditional tools of statutory construction, ascertains that Congress had an intention on the precise question at issue, that intention is the law, and must be given effect. 11 [Emphasis supplied.] The district court in Loving concluded that the statute was unambiguous and held that Treasury had exceeded its authority by expanding Circular 230 to cover all tax return preparers. Consequently, the court granted a declaratory judgment to the plaintiffs and permanently enjoined the IRS from establishing rules governing unlicensed preparers. 12 Circuit Court s Analysis Against the background and record from the district court, the D.C. Circuit tellingly began its opinion by noting that it wasn t until years after section 330 s enactment that Treasury 10 Chevron U.S.A. Inc. v. Natural Res. Def. Council Inc., 467 U.S. 837, (1984). 11 Id. 467 U.S. at 864, n.9 (citations omitted). 12 For an analysis of the district court s opinion, see Donald T. Williamson and James S. Gale, RTRPs and Their Practice Before the IRS, Tax Notes, Apr. 8, 2013, p TAX NOTES, April 21, 2014

3 first interpreted that its authority extends to regulation of all tax return preparers, rather than just attorneys, CPAs, and enrolled agents. 13 Similar to the district court, the D.C. Circuit declared the main question in the case was: whether the IRS s statutory authority to regulate the practice of representatives of persons before the Department of the Treasury encompasses authority to regulate tax-return preparers....under Chevron, we must accept an agency s authoritative interpretation of an ambiguous statutory provision if the agency s interpretation is reasonable....in determining whether a statute is ambiguous and in ultimately determining whether the agency s interpretation is permissible or instead is foreclosed by the statute, we must employ all the tools of statutory interpretation, including text, structure, purpose, and legislative history....[t]he question a court faces when confronted with an agency s interpretation of a statute it administers is always, simply, whether the agency has stayed within the bounds of its statutory authority. [Citations and italics omitted.] Applying the Chevron standard, the court affirmed the district court s decision for the following six reasons: 1. Meaning of representative. Citing dictionary definitions, 14 the court held that the term representative traditionally and commonly means an agent with authority to bind someone else. In the context of the use of the term in section 330, tax return preparers do not possess any legal authority to act on behalf of the taxpayer. 15 The authority to represent taxpayers before the IRS only exists where the tax return preparer obtains a power of attorney. 16 For example, ordinarily taxpayers sign their own 13 Attorneys and CPAs are granted specific rights to represent a client under 5 U.S.C. section 500(a) and (c). Circular 230 section 10.3(6) authorizes enrolled agents to practice before the IRS to the same extent as attorneys and CPAs, subjecting them to the same duties and restrictions imposed on attorneys and CPAs by Circular See Oxford English Dictionary 660 (2d ed. 1989); Black s Law Dictionary 1416 (9th ed.); and Ballentine s Law Dictionary 1096 (3d ed. 1969). 15 Page 2 of Form 1040 permits an individual to check a box authorizing the IRS to contact the return s preparer to answer questions that may arise during processing of the return. However, this assignment to the preparer does not authorize the preparer to bind the taxpayer to any matter discussed with the IRS. 16 See reg. section (a) and IRS Form 2848, Power of Attorney and Declaration of Representative. return, but they can assign signature authority to the return preparer with a specific grant. The court conceded that Congress does not always adopt the general meaning of a term such as representative, but there was no evidence to the contrary in the statute at issue. While a tax return preparer may assist a taxpayer in preparation of his return, the court found that the preparer does not represent the taxpayer in the legal sense. 2. Meaning of practice before the Treasury. The court conceded that the preparation of tax returns and other documents for submission to the IRS could be considered practice of sorts if the preparer provided advice or made judgment calls about the taxpayer s liability. But the court pointed out that is not the kind of practice referred to in section 330 that addresses practice...before the Department of the Treasury. In that context, practice before an agency ordinarily refers to activities conducted in connection with an investigation, adversarial hearing or other adjudicative proceeding, a very different activity than the preparation and filing of a tax return. While the IRS often redetermines the amount reported on a return, it is not until a tax return is formally selected for audit or the taxpayer appeals an adjustment of the tax by the IRS that a taxpayer might designate a representative to act for him or her in negotiating a settlement to the matter. Therefore, for a third party to practice before the IRS, there must be some controversy between the IRS and the taxpayer about which the taxpayer seeks professional assistance to resolve. A preparer is not practicing before the IRS when he or she simply assists in the preparation of a client s return over which no dispute has yet arisen. The court underscored that conclusion by reference to section 330(a)(2)(D) that states as a requirement to practice before Treasury, the individual demonstrate competency to advise and assist persons in presenting their cases. Agreeing with the district court, the circuit court said that filing a tax return would never, in normal usage, be described as presenting a case because at the time of the return s filing there is no dispute with the IRS that is, there is no case. In short, the court found section 330(a)(2)(D) to make sense only when the representative is assisting or advising taxpayers under IRS examination or otherwise seeking affirmative review from the IRS redetermination of a tax. In fact, the IRS effectively conceded that a tax return is not a case, arguing that section 330(a)(2)(D) is only an alternative criterion individuals need to meet to be admitted to practice before Treasury. Noting the word and, not or, is used after section 330(a)(2)(C) when listing the requirements TAX NOTES, April 21,

4 17 Act of July 7, 1884, Ch. 324, section 3, 23 Stat. 258 (1884). 18 See H.R. Rep. No. 651, 97th Cong. 2d Sess. 19 (1982). 19 See supra note 17, at Ch See supra note 17. for admission to practice, the court found that all of the requirements of paragraphs (A)-(D) must be met. While subparagraphs (A)-(D) overlap to some degree, that did not indicate that they were alternative standards, but rather the use of the word and after subparagraph (C) indicates that each of the requirements, including the requirement of competency to assist and advise persons in presenting cases, must be independently met for determining whom Treasury may regulate. Finally, the court also noted that the original language of section 330, enacted in 1884 and recodified in 1982, with the intent to do so without substantial change, 17 used the word otherwise rather than and in listing the same criteria of section 330(a)(2), further demonstrating that each of the requirements of subparagraphs (A)-(D) must be met Legislative history of section 330. The 1884 statute on which section 330 is based arose in connection with individuals seeking payment for the use of their horses and other property lost during the Civil War. The statute read: The Secretary of the Treasury may prescribe rules and regulations governing the recognition of agents, attorneys, or other persons representing claimants before this Department, and may require of such persons, agents and attorneys, before being recognized as representatives of claimants, that they shall show that they are of good character and in good repute, possessed of the necessary qualifications to enable them to render such claimants valuable service, and otherwise competent to advise and assist such claimants in presentation of their cases. 19 The court held that because Congress used the terms agents, attorneys, claimants, otherwise, and presentation of their cases originally, and in the 1982 recodification, stating that no change was intended in the meaning of those words 20 it intended that the statute regulate only representatives in contested cases, not individuals preparing tax returns. 4. Statutory framework. The court also upheld the reasoning of the district court that because Congress enacted several provisions directed specifically at the behavior of return preparers for example, sections 6694, 6695, and 6713 it did not intend section 330 to cover the conduct of all tax return preparers. While conceding that the enactments of targeted statutes regulating tax return preparers are not dispositive for interpreting the reach of the earlier enacted section 330, the circuit court was influenced by the fact that the enactment of specific rules aimed at return preparers would be unnecessary if Congress believed the penalties in section 330 for incompetent or disreputable conduct extended to every person who prepares a return for compensation. 5. Scope of legislative authority. Citing the Supreme Court in FDA v. Brown & Williamson 21 for the principle that courts should not permit agencies to make major economic decisions without authority from a statute or its legislative history, the court held that Congress could not have intended section 330 to encompass such a vast expansion of IRS authority without evidence of that intent directly expressed in the statute or its legislative history. The court stated Congress did not intend to grow such a large elephant in such a small mouse hole. 6. IRS s past approach to section 330. Until 2011, the IRS never alleged or even suggested section 330 granted authority to regulate return preparers. 22 In fact, in 2005 testimony to Congress, the head of the IRS Criminal Investigation division declared that tax return preparers may not represent individuals before the IRS. 23 At the same hearing, the national taxpayer advocate declared the IRS had no authority to license preparers. 24 Also, the 2009 guidance document describing who may practice before the IRS stated just preparing a tax return [or] furnishing information at the request of the IRS...isnot practice before the IRS. 25 Those past declarations illustrated to the court that until very recently the IRS had never believed it possessed the authority under section 330 to regulate all individuals who prepare tax returns. Based on those six considerations, the court concluded that the regulations failed the Chevron step one test, and that the statute unambiguously foreclosed the IRS s interpretation. The court s opinion reflects its view that the judiciary should look to congressional intent and the precise wording of a statute in applying the Chevron ambiguity standard for measuring judicial deference to a regulation. In U.S. 120, 133 (2000). 22 Former 31 C.F.R section 10(c) provided that neither the preparation of a tax return nor the appearance of an individual as a witness for the taxpayer or the individual s furnishing of information to the IRS constitutes practice before the IRS. 23 Fraud in Income Tax Preparation: Hearing Before the Subcommittee on Oversight of the House Committee on Ways and Means, 109th Cong. (2005) (testimony of Nancy Jardini). 24 Id. (testimony of Nina Olson). 25 IRS Publication 947, Practice Before the IRS and Power of Attorney, at 2 (Apr. 2009). 4 TAX NOTES, April 21, 2014

5 short, the D.C. Circuit saw no overriding policy reason to interpret a 19th century statute to take into account the circumstances of the 21st century, believing that is the role of the legislature. Perhaps more activist judges would have embraced the government s policy arguments and found ambiguity in section 330. Although the opinion could have ended with the conclusion regarding Chevron step one, the court stated that the IRS s interpretation also failed step two, finding it unreasonable in light of section 330 s text, history, structure, and context. Therefore, regardless of the merit of the policy calling for regulation of tax return preparers, the court found that the IRS exceeded its authority, and that only through specific congressional delegation may all tax return preparers be subject to IRS regulation. What s Next? Although there may be merit to the policy arguments that the IRS should be allowed to require unlicensed tax return preparers to register, pass a qualifying examination, and take professional education classes, the courts have turned a blind eye to those arguments by simply applying the Chevron tests to the words of section 330 and its past administration by the IRS. The IRS has declined to seek review, which was expected after new IRS Commissioner John Koskinen seemed to waive a surrender flag when he indicated the service would be open to offering certification to tax return preparers on a voluntary basis. 26 It is unsettling to associate the regulatory attempt by the IRS with President Obama s statement that he will take executive action in some areas if Congress refuses to act, but the current and past administrations have repeatedly requested that Congress enact legislation regulating all tax return 26 See IRS Commissioner Sees Further Appeals on Tax Preparer Lawsuit as Unlikely, Accounting Today (Feb. 21, 2014). preparers. 27 For example, the Taxpayer Protection and Assistance Act of 2007 proposed the following language change to section 330: Section 330 (a)(1) of title 31, United States Code, to be amended by inserting (including preparers of federal tax returns, documents and other submissions) after representatives. It is unknown why those proposals have consistently died in committee or why the IRS decided to move ahead with its own registration program when its authority to do so was so unclear. In any event, while it is now clear the existing statute is insufficient, most practitioners and others in the return preparation industry endorse the merits of the policy, and the administration should again pursue congressional legislation. Thus, the administration s green book for fiscal year 2015 proposes that there be explicit authority to regulate all paid preparers, 28 and the Senate Finance Committee has already held a hearing on the matter. 29 Conclusion Federal standards that govern who may prepare a tax return for a fee are long overdue. The Loving decision makes clear that the judiciary will not permit the IRS (or other agencies) to accomplish desirable goals through regulatory fiat without legislative authority. Nevertheless, establishing a registered tax return preparer category in Circular 230 remains necessary to assure the public that those advising and assisting in the preparation of tax returns are competent and ethical. After Loving, only congressional action can provide that assurance. 27 See, e.g., Low Income Taxpayer Protection Act of 2001 (S. 802), section 2 and most recently, the Taxpayer Bill of Rights Act of 2012 (S. 3355). 28 See General Explanation of the Administration s Fiscal Year 2015 Revenue Proposals, Department of the Treasury, March 2014, at page Protecting Taxpayers From Incompetent and Unethical Return Preparers, Committee on Finance, April 8, TAX NOTES, April 21,