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Loving v. Internal Revenue Service

United States District Court, District of Columbia

January 18, 2013

Sabina LOVING, et al., Plaintiffs,
v.
INTERNAL REVENUE SERVICE, et al., Defendants.

Opinion Denying Stay Feb. 1, 2013.

Page 68

Daniel L. Alban, Scott G. Bullock, Institute for Justice, Arlington, VA, for Plaintiffs.

Joseph E. Hunsader, U.S. Department of Justice, Washington, DC, for Defendants.

MEMORANDUM OPINION

JAMES E. BOASBERG, District Judge.

To close a gap in the federal oversight of tax professionals, in 2011 the Internal Revenue

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Service began regulating hundreds of thousands of non-attorney, non-CPA tax-return preparers who prepare and file tax returns for compensation. The new regulations require each such preparer to pass a qualifying exam, pay an annual application fee, and take fifteen hours of continuing-education courses each year. Agency action, however, requires statutory authority. The IRS interpreted an 1884 statute as enabling these new regulations. That statute allows the IRS to regulate " representatives" who " practice" before it. Believing that tax-return preparers are not covered under the statute, and thus cannot be so regulated, Plaintiffs— three independent tax-return preparers— brought this suit. Plaintiffs and the Government have now cross-moved for summary judgment. Concluding that the statute's text and context unambiguously foreclose the IRS's interpretation, the Court will grant Plaintiffs' Motion.

I. Background

A. Statutory and Regulatory Framework

This case turns on whether certain tax-return preparers are representatives who practice before the IRS, and thus are properly subject to the new IRS regulations. (Preparers who are attorneys, CPAs, enrolled agents, or enrolled actuaries are otherwise regulated by the IRS and thus have no bone to pick with the new regulations. See 31 C.F.R. § 10.3 (2009).) Before probing that question, however, it helps to know something about the IRS adjudication process. The Court therefore begins by outlining how the IRS resolves disputes about tax liability, then moves to the statutes and regulations at issue in this case.

1. Process for Adjudicating Federal Income Taxes

" The Internal Revenue Service is a bureau of the Department of the Treasury under the immediate direction of the Commissioner of Internal Revenue." 26 C.F.R. § 601.101(a); see also 26 U.S.C. § 7803(a) (Commissioner of Internal Revenue is part of Treasury Department with duties and powers assigned by Treasury Secretary). Taxpayers can progress through three stages of interaction with the IRS: assessment and collection, examination, and appeals.

First up is assessment and collection. Our federal tax system " is basically one of self-assessment" in which each taxpayer must compute the tax due, file a return showing " facts upon which tax liability may be determined and assessed," and pay the tax due. 26 C.F.R. § 601.103(a). After such a filing (or a failure to file), the Government performs an " assessment" — that is, " the calculation or recording of a tax liability." United States v. Galletti, 541 U.S. 114, 122, 124 S.Ct. 1548, 158 L.Ed.2d 279 (2004); see 26 U.S.C. §§ 6201-6204. " In most cases, the Secretary accepts the self-assessment and simply records the liability of the taxpayer.... [W]here the Secretary rejects the self-assessment of the taxpayer or discovers that the taxpayer has failed to file a return, the Secretary calculates the proper amount of liability and records it in the Government's books." Galletti, 541 U.S. at 122, 124 S.Ct. 1548. After an assessment, the IRS collects unpaid taxes. See 26 C.F.R. § 601.104(c)(1); see also 26 U.S.C. §§ 6301-6306.

Next, for some lucky taxpayers, comes the IRS audit, known in tax jargon as an " examination." See 26 C.F.R. §§ 601.103(b), 601.105(a). The IRS may conduct the examination by mail or by in-person interviews, and it will sometimes visit a taxpayer's home or business to examine his books and records. See 26 C.F.R. § 601.105(b). " During the examination

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of a return a taxpayer may be represented before the examiner by an attorney, certified public accountant, or other representative." 26 C.F.R. § 601.105(b)(1); see also 26 U.S.C. § 7521(b)(2) (during a taxpayer interview, taxpayer may suspend questioning to consult with " an attorney, certified public accountant, enrolled agent, enrolled actuary, or any other person permitted to represent the taxpayer before the Internal Revenue Service" ).

Last, if the taxpayer and the IRS still disagree, the taxpayer can request an in-person conference with an IRS " Appeals office." See 26 C.F.R. §§ 601.103(b), (c)(1), 601.106. While " [p]roceedings before Appeals are informal," taxpayers may " designate a qualified representative to act for them." 26 C.F.R. § 601.106(c). (The taxpayer may then pursue appeals outside the IRS in the U.S. Tax Court, the U.S. Claims Court, or a federal district court. See 26 C.F.R. § 601.103(c)(2)-(3).)

2. Statutory and Regulatory Scheme

With that framework in mind, the Court now outlines the statutory and regulatory scheme at play in this case. Under 31 U.S.C. § 330, originally enacted in 1884, the Treasury Secretary has authority to regulate people who practice before the Treasury Department.[1] As the IRS is a bureau of the Treasury Department, see 26 C.F.R. § 601.101(a), this statute covers practice before the IRS as well. This is so even though the casual student of history knows that the Sixteenth Amendment authorizing the modern federal income tax was not ratified until 1913. In full, the first two subsections of § 330 currently provide:

(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.
(b) After notice and opportunity for a proceeding, the Secretary may suspend or disbar from practice before the Department, or censure, a representative who—
(1) is incompetent;
(2) is disreputable;
(3) violates regulations prescribed under this section; or

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(4) with intent to defraud, willfully and knowingly misleads or threatens the person being represented or a prospective person to be represented.
The Secretary may impose a monetary penalty on any representative described in the preceding sentence. If the representative was acting on behalf of an employer or any firm or other entity in connection with the conduct giving rise to such penalty, the Secretary may impose a monetary penalty on such employer, firm, or entity if it knew, or reasonably should have known, of such conduct. Such penalty shall not exceed the gross income derived (or to be derived) from the conduct giving rise to the penalty and may be in addition to, or in lieu of, any suspension, disbarment, or censure of the representative.

Using this statutory authority, the Secretary publishes regulations governing practice before the IRS in the Code of Federal Regulations, Title 31, part 10. The Treasury reprints those regulations under the name " Treasury Department Circular No. 230." The meat of Circular 230 is a long list of duties and restrictions relating to practice before the IRS, giving content to statutory terms like " incompetent" and " disreputable." See 31 C.F.R. §§ 10.20-.38. Circular 230 also lays out sanctions and sets the rules for disciplinary proceedings. See 31 C.F.R. §§ 10.50-.82. These regulations have long applied to attorneys, CPAs, and a handful of other specified tax professionals. See 31 C.F.R. § 10.3 (2009).

In 2011, the IRS extended the reach of Circular 230 by bringing tax-return preparers under its coverage. See Regulations Governing Practice Before the Internal Revenue Service, 76 Fed.Reg. 32,286 (June 3, 2011) (final rule) (" the Rule" ); see also Regulations Governing Practice Before the Internal Revenue Service, 75 Fed.Reg. 51,713 (Aug. 23, 2010) (proposed rule). Although technically promulgated by the Treasury Department, this Opinion will usually attribute the new Rule to the IRS. Under the Rule, a tax-return preparer is a person who " prepares for compensation, or who employs one or more persons to prepare for compensation, all or a substantial portion of any return of tax or any claim for refund of tax under the Internal Revenue Code." 26 C.F.R. § 301.7701-15(a); accord 26 U.S.C. § 7701(a)(36); see 31 C.F.R. § 10.2(a)(8) (" Tax return preparer means any individual within the meaning of section 7701(a)(36) and 26 CFR 301.7701-15." ) (emphasis in original). The IRS estimated that the new Rule sweeps in 600,000 to 700,000 new tax-return preparers who were previously unregulated at the federal level. See 76 Fed.Reg. at 32,299.

" Practice" as a tax-return preparer for the most part (and for our purposes) " is limited to preparing and signing tax returns and claims for refund, and other documents for submission to the Internal Revenue Service." 31 C.F.R. § 10.3(f)(2). (In addition, if the IRS audits a tax return that the preparer signed, the preparer may represent the taxpayer during the examination. See 31 C.F.R. § 10.3(f)(3). Plaintiffs raise no objection to the IRS using such additional practice as a basis for regulation.) The Rule thus encompasses those preparers whose only " appearance" before ...


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