Tax season opens today, and three independent tax preparers represented by the Institute for Justice (IJ) have filed a response in federal court to the IRS’s last-ditch attempt to impose an unlawful licensing scheme on tax preparers. The agency asked the court to lift an injunction entered against it on January 18 after it lost in federal court, claiming that it would suffer a variety of unsupported and implausible harms if the court did not suspend its ruling. IJ’s brief, filed late yesterday, audits the IRS’s claims of “irreparable harm,” finding that the agency exaggerated its claim of financial harm by 2,000 percent and consistently exaggerated and inflated other figures.
On January 18, 2013, a federal judge struck down the IRS’s scheme to license tax preparers, saying the agency had never been given authority by Congress. The ruling came from a lawsuit, Loving v. IRS, filed by IJ and three independent tax preparers. The IRS responded to the judge’s ruling with a motion making several misleading claims and unsettling arguments, including inflating the monetary cost of the ruling to the agency by over 2,000 percent and arguing that the IRS’s licensing scheme is a cash cow the agency must be permitted to milk for all it is worth.
“The IRS has repeatedly and grossly misrepresented how the court’s ruling in this case will affect this tax season, tax payers and the IRS itself,” said Dan Alban, an attorney at the Institute for Justice. “The sky is not falling. The judge’s timely ruling preserved the historical status quo that tax preparers have never been licensed by the federal government. The IRS wildly inflates its numbers and now it knows what it feels like to be on the wrong side of an audit.”
In its request for the injunction to be lifted, the IRS inexplicably argues that turning off some of its computers is an “irreparable harm,” and so is transferring 167 employees to a different department, even though the IRS also says it is badly understaffed.
In its legal brief and supporting declaration, the IRS grouped together the “registered tax return preparer” (RTRP) regulations that were struck down on January 18 with other regulations relating to a tax preparer identification number, or PTIN, that were not affected by the lawsuit. The agency claimed the court’s ruling would cost it $4,000,000 per month in lost revenue, when in fact 95 percent of those funds were from the unaffected PTIN regulations, and only $192,697 in revenue would be lost due to the RTRP regulations being struck down, a 2,000 percent exaggeration.
“But even taken at face value, the IRS’s arguments are truly appalling,” said Dan Alban. “The IRS told the court that their licensing scheme is a cash cow, and the agency must be permitted to continue milking hapless tax preparers, despite a federal court declaring their scheme unlawful.”
The IRS also failed to inform the court that, 15 days before the court’s ruling, the IRS announced it would delay enforcement of a key component of the licensing scheme by one year. Thus, the IRS’s argument that the ruling will harm the agency is completely undercut by its own actions. In addition, after the ruling the IRS announced that it would stop enforcing its PTIN regulations, even though they were never challenged by the lawsuit or affected by the court ruling. The IRS then complained to the court that without the PTIN regulations the agency would be harmed, apparently attempting to link the lawsuit and court ruling to the IRS’s non-related actions.
The IRS further argued that the court should overturn its ruling because tax-industry insiders have voiced concerns, citing a press release from Intuit (the makers of TurboTax) expressing “disappointment” in the ruling. But TurboTax is not subject to the regulations, and would benefit from competitors having to bear the cost of complying with the requirements.
“That the IRS would mistake the interests of industry insiders for the interests of consumers highlights the protectionist nature of their licensing scheme,” said Scott Bullock, a senior attorney at IJ. “Large tax-preparation firms and professional trade organizations lobbied for these regulations to reduce competition by putting independent preparers out of business.”
The Economist explained that the IRS’s licensing regulations “threaten to crush . . . small, local” tax preparers and are “likely to push mom and pop into another line of work.” The Wall Street Journal agreed, noting: “Cheering the new regulations are big tax preparers like H&R Block, who are only too happy to see the feds swoop in to put their mom-and-pop seasonal competitors out of business.” The drafting of the regulations was overseen by former H&R Block CEO Mark Ernst, and several financial analysts have concluded they benefit the company.