Annette Nellen
Annette Nellen

Regulating all return preparers: Back to the drawing board

Why did IRS’s program to regulate all return preparers hit a brick wall in February?

March 13, 2014
by Annette Nellen, Esq., CPA

On Feb. 11, the D.C. Circuit Court of Appeals affirmed the district court’s decision that the IRS lacks statutory authority for a key part of the program it rolled out in 2010 to regulate paid return preparers (Loving, No. 13-5061 (D.C. Cir. 2/11/14), aff’g No. 1:12-cv-00385 (D.D.C. 1/18/13)). This decision is a significant blow to the IRS’s plan to require perhaps up to 350,000 preparers to become registered tax return preparers (RTRPs). This article provides a brief background leading up to the litigation, a summary of the decision, and possible next steps for the IRS.

Background on preparer regulation

In 2010, the IRS rolled out a program to regulate all paid return preparers. This came after a year of focused study and information gathering on the topic, culminating in a 57-page IRS report that included recommendations (IRS Publication 4832, Return Preparer Review (Dec. 2009)). This topic had been floating around for many years before, however. The National Taxpayer Advocate’s (NTA) Report to Congress for 2002 and 2003 included the following recommendations:

  • 2002: “[T]hat Congress enact a registration, examination, certification, and enforcement program for Federal Tax Return Preparers” (2002 Report, pp. 216–230).
  • 2003: “[T]o impose an effective oversight and penalty regime for return preparers and others associated with the commercial tax preparation sector” (2003 Report, pp. 271–301).

The IRS plan requires all “tax return preparers” to pay an annual registration fee and obtain a preparer tax identification number (PTIN). Under the original plan, preparers who are not attorneys, CPAs, enrolled agents, or supervised/nonsigning preparers would have had to pass an exam and obtain a minimum of 15 hours of continuing education annually. Once a preparer passed the exam and satisfied the compliance and suitability checks, the preparer would become an RTRP (Notice 2011-80 and Circular 230, §10.3(f)).

Testing to become an RTRP began in November 2011. Affected preparers were required to pass the test by the end of 2013 to remain eligible to prepare returns (IR-2011-111 (11/22/11)). In January 2013, however, testing ended when the district court enjoined the IRS from enforcing the testing and continuing education portions of its plan (IRS website—Registered Tax Return Preparer Test Refunds). IRS data as of Jan. 3, 2013, indicated that approximately 53,000 preparers had already become RTRPs before testing was terminated (see IRS data below; after the injunction, the IRS removed the RTRP statistics from its website).

During 2011, the National Taxpayer Advocate estimates that about 54% of returns were prepared by unregulated paid preparers. [NTA, 2013 Annual Report to Congress, pp. 61–62.]

The Loving litigation

Three individuals who were required to become RTRPs to continue to prepare tax returns challenged the IRS plan. They argued that Section 330 of Title 31—the statute the IRS had used as the legal basis for its plan—was not broad enough to cover individuals who only prepare returns and do not represent taxpayers before the IRS in collection or examination matters. The relevant statutory language follows:

  • §330. Practice Before the Department
    • (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.

The regulations originally issued under this provision are the long-standing Circular 230, Regulations Governing Practice Before the Internal Revenue Service (31 C.F.R. Part 10). Before being amended to cover RTRPs, Circular 230 applied to attorneys, CPAs, enrolled agents, and a few other specified categories.

The following language of Section 330(a) was examined in the Loving case: (1) “practice of representatives,” and (2) “presenting their cases.” The preparers argued that preparing returns does not involve representation or presenting a case.

The Court of Appeals made six points in holding for the preparers.

  • Preparers are not representatives or agents as they have no legal authority to act on a taxpayer’s behalf.
  • Preparing a return does not constitute practice before the IRS or presenting a case; these terms instead relate to assisting a taxpayer to resolve an issue raised by the IRS or with an examination of the return. Also, items (A) through (D) in Section 330(a)(2) are not alternative requirements as evident from use of the word “and” rather than “or.”
  • Section 330, as originally enacted in 1884, stated that the “Secretary of the Treasury may prescribe rules and regulations governing the recognition of agents, attorneys, or other persons representing claimants before his Department.” This was modified in 1982 to the shorter “may regulate the practice of representatives of persons before the Department.” This was not intended to be a substantive change. Per the Appeals Court, “[T]he statute contemplates representation in a contested proceeding, not simply assistance in preparing a tax return” (Loving, slip op. at 13).
  • Congressional actions of recent years to modify Code penalty provisions imply that Congress did not view Section 330 as covering all return preparers. Per the court, the “broader statutory framework” encompasses not only Section 330 but also the Code. Thus, there would be no need to revise penalties under the Code if Treasury already had authority to impose various penalties on improper behavior of all preparers.
  • Citing the Supreme Court, “[C]ourts should not lightly presume congressional intent to implicitly delegate decisions of major economic or political significance to agencies.… [N]othing in the statute’s text or the legislative record contemplates that vast expansion of the IRS’s authority” to regulate hundreds of thousands of preparers (slip op. at 15).
  • Before 2011, the IRS had never acted to regulate all return preparers and had even made various statements that return preparation did not constitute practice before the IRS. While it is not one of the examples the court noted, the NTA’s 2003 Annual Report to Congress observed that current practice allows a sanctioned attorney, CPA, or enrolled agent to continue to prepare returns for compensation (page 274, footnote 12).

Possible next steps for the IRS

The Loving decision ends a significant piece of the IRS’s program to regulate all return preparers. Possible next steps to restore the IRS’s original plan include (1) pursuing a legislative solution or (2) creating a voluntary registration system with enticements to encourage participation.

Legislation: The IRS can encourage Congress to modify 31 U.S.C. Section 330(a) to address the concerns raised in the Loving case. The discussion draft of administrative reforms released by the Senate Finance Committee in November 2013 includes possible language (Section 19) for modifying 31 U.S.C. Section 330(a)(2)(D) to read, … “competency to advise and assist persons in presenting their cases and in preparing and filing their tax returns.”

The following legislation has also been proposed:

  • H.R. 1570 (113th Congress) proposes to add a new subsection to Section 330 to allow for regulation of preparers “who do not practice as representatives of persons before the Department of the Treasury.”
  • S. 1219 (110th Congress) proposed to change Section 330(a)(1) to read “… regulate the practice of representatives (including compensated preparers of Federal tax returns, documents, and other submissions) of persons before the Department of the Treasury.”
  • H.R. 5716 (110th Congress) and S. 3215 (111th Congress) proposed language changes to Section 330(a)(1) similar to that of S. 1219. All three bills also called for testing and continuing education, among other changes.

Voluntary program: The NTA’s 2013 Annual Report to Congress provides a plan for a voluntary system. It would “offer unenrolled preparers the opportunity to earn a voluntary examination and continuing education certificate.” Additional elements of this approach include no longer allowing unenrolled preparers to represent clients before the IRS even though they prepared the return and not allowing them to be the third-party designee on Form 1040 (see details in the 2013 report, pp. 61–74).

Additional considerations for the IRS

How many preparers? The decision in the Loving case means that IRS cannot regulate the large group of preparers who were expected to become RTRPs. How many preparers are in this group is unclear.

  • The NTA’s 2003 Annual Report to Congress estimated that between 300,000 and 600,000 of “the 1.2 million known tax return preparers” were not regulated (Report, page 270).
  • In June 2011, the IRS estimated that between 600,000 and 700,000 return preparers would need to become RTRPs (76 Fed. Reg. 32,299).
  • IRS statistics as of March 3, 2014, indicate that approximately 670,000 individuals have a current PTIN, including attorneys, CPAs, and enrolled agents.
  • Per the NTA’s 2013 Annual Report to Congress: “IRS records show about one million returns as paid preparer returns that did not have a [PTIN] match in the Return Preparers and Providers Database.” (Report, page 62)

Test passers: As noted earlier, at least 53,519 individuals passed the RTRP test. Can the IRS do anything to enable these individuals to call themselves RTRPs? This might be a starting point for a voluntary system until and if changes are made to 31 U.S.C. Section 330.

Past actions: Will the IRS need to refund the testing fee to those who took the RTRP test? Will the IRS need to reverse disciplinary actions taken against some unenrolled preparers?

Looking forward

The IRS has a great deal of resources and time invested in the preparer regulation system it rolled out in 2010. The Loving decision is a significant setback. Yet, because there is still a desire for improved compliance, odds are high that the IRS will introduce a revised preparer regulation system in the near future.


  • Loving: court of appeals decision (No. 13-5061; 2/11/14), district court decision (Civil Action No. 12-385; 1/18/13), and order (2/1/13; clarifying that the PTIN system can remain (per Code Sec. 6109(a)(4)) but testing and continuing education cannot be required.
  • Author’s articles and links on return preparer regulation.
  • IRS links to regulations and rulings on return preparers.
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Annette Nellen, Esq., CPA, is a tax professor and director of the MST Program at San José State University. She is an active member of the tax sections of the AICPA, ABA, and California State Bar. She is a member of the AICPA Tax Executive Committee and Tax Reform Task Force. She has several reports on tax policy and reform and a blog.