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Steele v. United States

United States District Court, District of Columbia

June 1, 2017

ADAM STEELE, et al., Plaintiffs,
v.
UNITED STATES OF AMERICA, Defendant.

          MEMORANDUM OPINION

          Royce C. Lamberth United States District Judge.

         I. INTRODUCTION

         Plaintiffs bring this class action against the United States to challenge regulations promulgated by the Treasury Department and the Internal Revenue Service requiring tax return preparers to obtain and pay fees for preparer tax identification numbers (PTINs). Both parties have moved for partial summary judgment on the first issue raised in plaintiffs' lawsuit: whether Treasury and the IRS have the authority to require that all tax return preparers obtain and pay for a PTIN.[1] For the reasons stated below, the Court finds that although the IRS has the authority to require the use of PTINs, it does not have the authority to charge fees for issuing PTINs. The Court will grant in part and deny in part both parties' summary judgment motions.

         II. BACKGROUND

         This case revolves around a group of 2010-2011 regulations promulgated by the Treasury Department and the IRS regarding tax return preparers. As explained fully below, the regulations imposed certain requirements for becoming a tax return preparer, including obtaining a specific PTIN and paying a user fee for obtaining such PTIN. Plaintiffs argue that the government lacks legal authority to require PTINs and PTIN fees, and alternatively, that the fee imposed is excessive and impermissible. They seek a declaratory judgment that Treasury and the IRS lack legal authority to charge these fees or that the fees charged are excessive, and for the return or refund of all fees previously collected or for the return and refund of the excessive fees. In 2016, this Court certified the proposed class of “all individuals and entities who have paid an initial and/or renewal fee for a PTIN, excluding Allen Buckley, Allen Buckley LLC, and Christopher Rizek.” See Steele v. United States, 159 F.Supp.3d 73, 88 (D.D.C. 2016); Steele v. United States, 200 F.Supp.3d 217, 227 (D.D.C. 2016).

         A. Statutory and Regulatory Framework

         Each year, every American is required to submit a tax return to the IRS. Given the complexity of the tax code, it is unsurprising that many people hire others-tax return preparers- to prepare their returns for them. Some tax return preparers have credentials, such as CPAs and attorneys, but others are known as uncredentialed tax return preparers. Before 2010, anyone could file a tax return on behalf of someone else, credentialed or not. In 2010, however, the IRS, attempting to regulate both credentialed and uncredentialed tax return preparers, promulgated new regulations. The regulations established a new “registered tax return preparer” designation, requiring individuals other than attorneys and CPAs to: “(1) [p]ass a one-time competency exam, (2) pass a suitability check, and (3) obtain a PTIN (and pay the amount provided in the PTIN User Fee regulations).” Regulations Governing Practice Before the Internal Revenue Service, 76 Fed. Reg. 32286, 32287 (June 11, 2011); 26 C.F.R. § 301.7701-15 (defining “tax return preparer”); 31 C.F.R. § 10.4(c) (describing the requirements to become a registered tax return preparer); 31 C.F.R. § 10.3(f) (stating that registered tax return preparers may practice before the IRS); 31 C.F.R. § 10.5(b) (stating that fees may be charged for becoming a registered tax return preparer); 26 C.F.R. § 1.6109-2(d) (“Beginning after December 31, 2010, all tax return preparers must have a preparer tax identification number or other prescribed identifying number that was applied for and received at the time and in the manner, including the payment of a user fee, as may be prescribed by the Internal Revenue Service.”). The regulations also imposed renewal and continuing education requirements. Regulations Governing Practice Before the Internal Revenue Service, 76 Fed. Reg. at 32287; 31 C.F.R. § 10.6. As statutory authority for these regulations, the IRS relied on a provision of the U.S. Code which states 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.” 31 U.S.C. § 330(a).

         In support of its conclusion that such regulations were necessary, the IRS pointed to the prevalence of the use of tax return preparers but the lack of consistent oversight, and specifically found that

[t]he tax system is best served by tax return preparers who are ethical, provide good service, and are qualified. . . . As such, the IRS recognizes the need to apply a uniform set of rules to offer taxpayers some assurance that their tax returns are prepared completely and accurately. Increasing the completeness and accuracy of returns would necessarily lead to increased compliance with tax obligations by taxpayers.

         Regulations Governing Practice Before the Internal Revenue Service, 76 Fed. Reg. at 32294. Thus, “[t]he primary benefit anticipated from these regulations is that they will improve the accuracy, completeness, and timeliness of tax returns prepared by tax return preparers.” Id. The IRS later specifically identified two overarching objectives of the new regulations: “The first overarching objective is to provide some assurance to taxpayers that a tax return was prepared by an individual who has passed a minimum competency examination to practice before the IRS as a tax return preparer, has undergone certain suitability checks, and is subject to enforceable rules of practice. The second overarching objective is to further the interests of tax administration by improving the accuracy of tax returns and claims for refund and by increasing overall tax compliance.” Furnishing Identifying Number of Tax Return Preparer, 75 Fed. Reg. 60309, 60310 (Sept. 30, 2010).

         A statutory provision-in effect prior to the new regulations-requires that “[a]ny return or claim for refund prepared by a tax return preparer shall bear such identifying number for securing proper identification of such preparer, his employer, or both, as may be prescribed.” 26 U.S.C. § 6109(a)(4). The statute explains that an individual's social security number “shall, except as shall otherwise be specified under regulations of the Secretary, be used as the identifying number.” Id. § 6109(d). The regulations, however, required, for the first time, that “tax return preparers must obtain and exclusively use the [PTIN] in forms, instructions, or other guidance, rather than a social security number (SSN), as the identifying number to be included with the tax return preparer's signature on a tax return or claim for refund.” Furnishing Identifying Number of Tax Return Preparer, 75 Fed. Reg. at 60309; 26 C.F.R. § 1.6109-2(d). As justification for the requirement that preparers must obtain and use a PTIN, the IRS repeatedly cited to the need to identify individuals involved in preparing a tax return for others so as to aid their ability to oversee such individuals “and to administer requirements intended to ensure that tax return preparers are competent, trained, and conform to rules of practice.” Furnishing Identifying Number of Tax Return Preparer, 75 Fed. Reg. at 60310, 60313. The IRS further explained the need for the exclusive use of PTINs, as opposed to both PTINs and social security numbers, arguing that “[m]andating a single type of identifying number for all tax return preparers and assigning a prescribed identifying number to registered tax return preparers is critical to effective oversight.” Id. at 60313. Specifically, “[e]stablishing a single, prescribed identifying number for tax return preparers will enable the IRS to accurately identify tax return preparers, match preparers with the tax returns and claims for refund they prepare, and better administer the tax laws with respect to tax return preparers and their clients.” Id. at 60314. The IRS also briefly mentioned that the regulations requiring the use of a PTINs would “help maintain the confidentiality of SSNs.” Id. at 60309.

         The regulations also imposed a user fee requirement for obtaining a PTIN. See User Fees Relating to Enrollment and Preparer Tax Identification Numbers, 75 Fed. Reg. 60316 (Sept. 30, 2010); 26 C.F.R. § 300.13. As authority for requiring these fees, the IRS relied on the Independent Offices Appropriations Act of 1952 (“IOAA”). See User Fees Relating to Enrollment and Preparer Tax Identification Numbers, 75 Fed. Reg. at 60317. The IOAA provides that agencies “may prescribe regulations establishing the charge for a service or thing of value provided by the agency.” 31 U.S.C. § 9701(b). The IRS stated that a PTIN is a “service or thing of value” because without a PTIN “a tax return preparer could not receive compensation for preparing all or substantially all of a federal tax return or claim for refund, ” and “[b]ecause only attorneys, certified public accountants, enrolled agents, and registered tax return preparers are eligible to obtain a PTIN, only a subset of the general public is entitled to a PTIN and the special benefit of receiving compensation for the preparation of a return that it confers.” User Fees Relating to Enrollment and Preparer Tax Identification Numbers, 75 Fed. Reg. at 60317.

         B. Prior Caselaw Interpreting the Tax Return Preparer Regulations

         In 2014, the D.C. Circuit addressed the regulations regarding the exam and education requirements, asking “whether the IRS's statutory authority to ‘regulate the practice of representatives of persons before the Department of the Treasury' [under 31 U.S.C. § 330] encompasses authority to regulate tax-return preparers.” Loving v. I.R.S., 742 F.3d 1013, 1015 (D.C. Cir. 2014). Considering the meaning of the terms “representatives” and “practice . . . before the Department of the Treasury, ” the history of Section 330, the broader statutory framework, the nature and scope of authority being claimed by the IRS, and the IRS's past approach to the statute, the Circuit found that the IRS's interpretation of Section 330 was unreasonable and failed under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984). Id. at 1016-22. The court concluded that “the IRS's statutory authority under Section 330 cannot be stretched so broadly as to encompass authority to regulate tax-return preparers, ” and invalidated the regulations requiring competency testing and continuing education. Id. at 1015. Thus, after Loving, the only part of the new regulatory scheme that remains is the PTIN requirement and the attendant PTIN fee requirement.

         The only other cases regarding these regulations that have been litigated have taken place in the Northern District of Georgia (and subsequently the Eleventh Circuit), and all were decided prior to the D.C. Circuit's Loving opinion. First, in Brannen v. United States, plaintiffs sought “to prevent charges of user fees under 31 U.S.C. § 9701 for the right to receive an identification number necessary to file tax returns on behalf of others for compensation and to recover amounts paid as such fees.” Brannen v. United States, No. 4:11-CV-0135-HLM, 2011 WL 8245026, at *1 (N.D.Ga. Aug. 26, 2011). After concluding that the authority to charge a user fee for a PTIN stemmed from 31 U.S.C. § 9701, and finding that the complaint failed to contain allegations to state a claim that the amount of the fee was inappropriate under § 9701, the Brannen court rejected the argument that “the imposition of the PTIN fee is an unauthorized attempt on the part of the Secretary of the Treasury to license tax return preparers.” Id. at *5. It found that “Congress specifically authorized the Secretary of the Treasury to create regulations requiring tax return preparers to identify themselves, by means of identifying numbers, on tax returns and refund claims that they prepare” in 26 U.S.C. § 6109 and therefore the Secretary of the Treasury did not exceed his authority by issuing regulations requiring the use of PTINs. Id. It then found that the PTIN fee requirement was authorized by Section 9701 because PTINs provide a benefit to tax return preparers: “The provision of a PTIN confers a special benefit on tax return preparers, who otherwise would not be permitted to prepare tax returns and refund claims on behalf of others in exchange for compensation.” Id. at *6.

         The Brannen decision was affirmed on appeal. See Brannen v. United States, 682 F.3d 1316 (11th Cir. 2012). The Eleventh Circuit held that the PTIN user fees are permissible under Section 9701:

[A] tax return preparer cannot prepare tax returns for others for compensation without having the required identifying number. And because § 6109(a)(4) expressly authorizes the Secretary to assign such numbers, a person cannot prepare tax returns for another for compensation unless that person obtains from the Secretary the required identifying number. For this reason, when the Secretary assigns the identifying number (the preparer tax identification number or “PTIN”), the Secretary is conferring a special benefit upon the recipient, i.e., the privilege of preparing tax returns for others for compensation.

Id. at 1319.

         Approximately eighteen months after the Brannen decision, and after the Loving district court decision, the Northern District of Georgia considered “whether 26 U.S.C. § 6109(a)(4) permits the United States Treasury Department to issue regulations that assess user fees as well as annual renewal fees associated with PTIN assigned to those who prepare tax forms for compensation” and “whether the annual renewal fee assessed for renewing one's PTIN number is either arbitrary and capricious or excessive.” Buckley v. United States, No. 1:13-CV-1701, 2013 WL 7121182, at *1 (N.D.Ga. Dec. 4, 2013). Agreeing with Brannen, the Buckley court found that the imposition of PTIN user fees was authorized and that the fee confers a special benefit on tax return preparers. Id. at *1-2. The court then found Loving-which at the time was still a district court decision-inapplicable because it “reviewed the competency testing and continuing education requirements for return preparers, ” which were not at issue in Buckley. Id. at *2. It concluded that “the Loving case specifically held that Congress authorized the PTIN scheme via a different statutory authority ...


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