Federal Court Stops IRS from Regulating Nonprofessional Tax Preparers

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On Friday, the U.S. District Court for the District of Columbia granted nonprofessional tax preparers a permanent injunction stopping the 2011 IRS tax return preparer regulatory program in its tracks.

The regulatory program had been launched by the U.S. Internal Revenue Service to regulate the thousands of non-professional tax return preparers, but the injunction raises questions about the multi-million dollar enforcement program and its future.

IRS Commissioner Doug Shulman, who stepped down in November, had called for the IRS effort to weed out tax preparation fraud. The regulations launched by Shulman requires tax preparers to register with the IRS under the provisions of the IRS Return Preparer Initiative, which started in 2011.

  

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The regulations also required tax return preparers, in particular those without professional credentials, to sit for competency tests and classes to maintain their registration with the IRS. President Obama’s fiscal 2013 budget has already awarded federal contracts for the program, which requested $35 million from the Congress.

The new ruling could affect up to 700,000 tax return preparers in the country.

In March 2012, the Institute for Justice, along with three independent tax preparers challenged the legal authority of the IRS initiative, and alleged that the IRS was enforcing the regulations without required approval from the Congress. But the IRS said that a law dating from 1884 provided it the authority.

However, while issuing the permanent injunction, the federal court observed, “With an invalid regulatory regime on the IRS’s side of the scale and a threat to plaintiff’s livelihood on the other, the balance of hardships tips strongly in favor of plaintiffs.”

The case is Sabina Loving, et al, v. Internal Revenue Service, U.S. District Court for the District of Columbia, No. 12-cv-385.