AICPA Files Suit Challenging “Voluntary” Program for Tax Return Preparers

July 30, 2014

The American Institute of CPAs (AICPA) has been a steadfast supporter of the Internal Revenue Service’s (IRS) overall goals of enhancing compliance by tax return preparers and elevating ethical conduct.  However, the IRS’s new rule regulating tax return preparers is an unlawful exercise of government power.

AICPA President and CEO Barry Melancon, CPA, CGMA, said in a statement, “By implementing a purportedly ‘voluntary’ program that is mandatory in effect, the rule is an end-run around Loving v. IRS, a federal court ruling which struck down the IRS’s earlier attempt to regulate tax return preparers.  The IRS simply does not have the authority to proceed with the new rule.  By doubling the number of categories of tax return preparers to eight, the rule will also confuse consumers.  Worse yet, the new rule will do nothing to address the problem of unethical or fraudulent tax return preparers – which should be a top priority.”

As a result, the AICPA on July 15 filed suit in federal court in an effort to stop the rule, which is unlawful for the following reasons:

  • The IRS cannot identify a clear, specific statutory basis for its new rule.  Consequently, under the Administrative Procedure Act (APA), it may not implement the rule.   See 5 U.S.C. § 706(2)(C)
  • The IRS has not complied with the APA notice and comment requirements.  That failure renders the new rule unlawful.
  • The rule contravenes the D.C. Circuit’s recent opinion in Loving v. IRS.  In Loving, the court struck down the IRS’s prior attempt to regulate tax return preparers, holding the IRS lacked statutory authority for the rule. 
  • The IRS has not complied with the Paperwork Reduction Act, which requires the IRS to obtain approval from the Director of Office of Management and Budget before collecting the information needed to verify a tax return preparer’s qualifications.
  • The IRS has not complied with Executive Order 12,866, which requires the IRS to obtain approval from the Office of Information and Regulatory Affairs before issuing the new rule, because the new rule is “a significant regulatory action” having “an annual effect on the economy of $100 million or more.” 
  • The new rule is arbitrary and capricious.  The rule will also confuse consumers and does not reflect adequate consideration of the evidence before the IRS.  The IRS also failed to consider alternatives.

The AICPA believes that the IRS should withdraw the new rule, consult with stakeholders and use the tools and data already at its disposal to monitor unethical return preparers.  At a minimum, the IRS must conduct a legitimate notice-and-comment rulemaking process before proceeding. 

The lawsuit follows repeated requests from the AICPA for the IRS to either seek public comment on its proposed program or to consider alternatives.  The AICPA sent the IRS two letters expressing its concerns.  In a June 24 letter, AICPA  Chairman of the Board Bill Balhoff, CPA, CGMA, CFF and President and CEO Barry Melancon, CPA, CGMA commented that the program “would cause significant legal problems that may ultimately frustrate the IRS’s goals, confuse the public and lead to litigation.”

For more information about the lawsuit, read the July 15 Journal of Accountancy article.