D.C. Circuit upholds IRS unenrolled tax preparer program
The Court of Appeals for the D.C. Circuit held in American Institute of Certified Public Accountants v. Internal Revenue Service, No. 16-5256 (D.C. Cir. 8/14/18), that the AICPA had standing to challenge the IRS’s voluntary Annual Filing Season Program (the Program). However, the court held for the IRS on the merits, allowing the Service to continue the Program, which had already gone into effect while AICPA’s challenge was pending.
Rejecting the AICPA’s arguments to the contrary, the court unanimously held that the program was within the statutory authority delegated to the IRS, and held over a dissenting opinion that Revenue Procedure 2014-42, which established the Program was an interpretive rule, so the IRS did not violate the Administrative Procedure Act (APA) by failing to follow notice-and-comment rulemaking procedures in promulgating it.
Participants in the Program, which is open to all tax preparers but is designed for unenrolled preparers, are given a “Record of Completion” annually after they obtain a preparer tax identification number, complete certain education and testing requirements, and agree to be subject to the requirements for practicing before the IRS in Subpart B and Section 10.51 of Circular 230, Regulations Governing Practice Before the Internal Revenue Service (slip op. at 4). They are also permitted limited representation rights, meaning they can represent clients whose returns they prepared and signed before the IRS during an audit, a right that was previously available to any unenrolled tax preparer. Participation in the Program is voluntary.
The IRS established the Program in Rev. Proc. 2014-42, which it issued without a notice-and-comment period. The Program was a response to the invalidation of an earlier attempt to regulate unenrolled tax return preparers, introduced in 2011, called the Registered Tax Return Preparer program. That program was challenged and ultimately determined to be invalid because the IRS lacked statutory authority to regulate unenrolled tax return preparers under 31 U.S.C. 330(b).
The AICPA challenged the Program in the D.C. District Court, asserting the IRS’s adoption of the Program in Rev. Proc. 2014-42 exceeded the IRS’s statutory authority and violated the APA. The district court dismissed the case, saying that the AICPA lacked constitutional standing. The D.C. Circuit reversed and remanded the case to the district court. On remand, the IRS argued that the AICPA lacked statutory standing because it did not come within the zone of interests protected or regulated by the relevant statute. The district court entered judgment on the pleadings for the IRS and dismissed the case for lack of statutory standing, and the AICPA again appealed.
The D.C. Circuit reversed the lower court’s holding that the AICPA lacked standing to challenge the IRS program, explaining that the AICPA’s members have both constitutional and statutory standing because they employ unenrolled preparers and the Program increases the supervisory burdens on AICPA members with respect to those employees.
Having found that the AICPA had standing, the D.C. Circuit determined it was appropriate for it to decide the merits of the case. The AICPA argued that the Program is beyond the statutory authority delegated to the Treasury and hence to the IRS. The D.C. Circuit found that, on the contrary, the Program was within the IRS’s statutory authority under 31 U.S.C. Section 330(a) and Sec. 7803(a)(2)(A).
The AICPA also argued that the Rev. Proc. 2014-42 is a legislative rule rather than an interpretive rule and therefore had to be adopted through notice-and-comment rulemaking pursuant to the APA. The D.C. Circuit disagreed, over a dissenting opinion, finding that an agency action constitutes a legislative rule only if the agency action binds private parties or the agency itself with the “force of law.” According to the majority opinion on this issue, the revenue procedure and the Program “do not bind unenrolled preparers at all” so the rule was not a legislative rule subject to the APA requirements. The court rejected the AICPA’s arguments that the rule was legislative because it limited unenrolled tax preparers’ right to represent taxpayers before the IRS, a right that itself had been conferred through notice-and comment-rulemaking.
Thus, the D.C. Circuit held that the AICPA had standing to sue but the IRS prevailed on the merits of the case. Accordingly, it remanded the case to the district court for the purpose of entering judgment for the IRS.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.
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