Yesterday, the D.C. Circuit unanimously held in Loving v. IRS, that the IRS lacks statutory authority to regulate tax-return preparers. See our previous coverage here. In its February 11 decision, the court characterized the IRS’s interpretation as “atextual and ahistorical,” and, more humorously, as a large elephant trying to emerge from a small mousehole.
In 2011, the IRS for the first time attempted to regulate tax-return preparers, issuing regulations requiring that paid tax-return preparers pass an initial certification, pay annual fees, and complete at least 15 hours of continuing education courses each year. The IRS estimated that the regulations would apply to between 600,000 and 700,000 tax-return preparers. Before 2011, the IRS had never taken the position that it had the authority to regulate tax-return preparers. According to the D.C. Circuit panel (Kavanaugh, Sentelle, and Williams): “In light of the text, history, structure, and context of the statute, it becomes apparent that the IRS never before adopted its current interpretation for a reason: It is incorrect.”
The IRS claimed that 31 U.S.C. § 330 provided statutory authority for the regulations. That statute authorizes the IRS to “regulate the practice of representatives of persons before the Department of Treasury.” 31 U.S.C. § 330(a)(1). The D.C. Circuit cited the familiar two-step Chevron standard of review: (1) is the statute ambiguous, and (2) if so, is the agency’s interpretation reasonable. The court of appeals concluded that the “IRS’s interpretation fails at Chevron step 1 because it is foreclosed by the statute,” and, in any event, “would also fail at Chevron step 2 because it is unreasonable in light of the statute’s text, history, structure, and context.” The court of appeals cited six reasons foreclosing the IRS’s interpretation of the statute:
First, the D.C. Circuit concluded that the term “representative” generally is understood to refer to an agent with authority to bind others. “Put simply, tax-return preparers are not agents. They do not possess legal authority to act on the taxpayer’s behalf.” Second, the preparation of a tax return does not constitute “practice . . . before the Department of the Treasury.” “Practice before” an agency generally implies an investigation, adversarial hearing, or other adjudicative proceeding. Moreover, a related section of the statute allows the Secretary of the Treasury to require that a representative admitted to practice before the agency demonstrate four qualities, one of which is “competency to advise and assist persons in presenting their cases.” 31 U.S.C. § 330(a)(2). Filing a tax return is not understood in ordinary usage to be “presenting a case.” Third, the original version of the statute, enacted in 1884, referred to “agents, attorneys, or other persons representing claimants before [the] Department.” The court of appeals concluded that this original language clearly would not encompass tax return preparers. When the statute was recodified in 1982, the phrase, “agents, attorneys, or other persons representing claimants” was simplified to “representatives of persons,” but the language change expressly was not intended to effect a substantive change. Fourth, the IRS’s interpretation is inconsistent with the “broader statutory framework,” in which Congress has enacted a number of statutes specifically directed at tax-return preparers and imposing civil penalties. Those statutes would not have been necessary, the court reasoned, if the IRS had authority to regulate tax-return prepares. Fifth, if Congress had intended to confer such broad regulatory authority upon the IRS, allowing it to regulate “hundreds of thousands of individuals in the multi-billion dollar tax-preparation industry,” the statute would have been clearer. Referring to the statutory language, the court of appeals concluded: “we are confident that the enacting Congress did not intend to grow such a large elephant in such a small mousehole.” Sixth, the court noted that the IRS in the past had made statements and issued guidance indicating that it did not believe it had authority to regulate tax-return preparers. The court found it “rather telling that the IRS had never before maintained that it possessed this authority.”
The decision ends with the court of appeals noting that new legislation would be needed to allow the IRS to regulate tax-return preparers.
Given that the membership of the D.C. Circuit has recently expanded to include three additional judges, the government might believe that it is worthwhile to seek rehearing en banc before the full court. A petition for rehearing would be due on March 28. If the government does not seek rehearing, a petition for certiorari would be due on May 12. Whether it pursues the litigation further or not, the government can be expected to seek new legislation that would give the IRS the regulatory authority that the court of appeals refused to find.
The D.C. Circuit (Rogers, Tatel, and Brown, JJ.) has denied the government’s request for a stay of the district court’s injunction of the new registration regime for paid tax-return preparers. The court did not give an elaborate explanation, simply stating that “[a]ppellants have not satisfied the stringent requirements for a stay pending appeal.” Thus, the court did not indicate whether the government fell short because its motion was not sufficiently convincing that the district court was likely to be reversed on the merits or because it did not make a sufficiently compelling case of irreparable harm.
In any case, it is now likely that the government will not be able to implement the regulatory scheme in full at this time, but will remain bound by the injunction until the D.C. Circuit rules on the merits of its appeal in due course (and, of course, even after that if it is unable to persuade the D.C. Circuit to reverse). The government does still have the option of asking the Supreme Court to stay the district court’s order pending resolution of the appeal in the court of appeals. It is unusual for the government to ask the Court for that kind of relief, and for the Court to grant it, but pursuing that route remains a possibility if the government feels strongly enough about the adverse consequences of leaving the injunction in place for the time being.
Yesterday, in Loving v. IRS (the subject of a recent post), the Government filed its reply brief in support of its motion to stay the district court’s injunction of the new registration regime for paid tax-return preparers. With respect to its likelihood of success on the merits, the Government argued the ambiguity of the statute authorizing Treasury to “regulate the practice of representatives of persons before” it. With respect to the threat of irreparable harm, the Government argued that the injunction risked delaying the implementation of the regulatory regime until the 2015 return-preparation season and that the problem of unregulated return preparers represents a “major public concern.”
Government Seeks Appellate Stay of Order Enjoining Enforcement of New Registration Regime for Paid Tax Return Preparers
The Government has appealed to the D.C. Circuit from the district court decision enjoining the IRS from enforcing its new registration regime for paid tax return preparers. Loving v. IRS, D.C. Cir. No. 13-5061. The Government has also asked the court of appeals to stay the decision pending appeal, after the district court declined to grant a stay. The Government’s stay motion recites that, the appeal has not yet been authorized by the Solicitor General’s office, but that, if the appeal is authorized, the Government intends to file its opening brief in March and to move for an expedited oral argument.
To recap the district court’s decision: In 2011, the Treasury Department promulgated regulations that extended Circular 230 (the regulations that govern practice before the IRS) to non-attorney, non-CPA tax-return preparers who prepare and file tax returns for compensation. Under the new regulations, tax-return preparers must register before they can practice before the IRS, and they are deemed to practice before the IRS even if their only function is to prepare and submit tax returns. In order to register initially, tax return preparers must pass a qualification exam and pay a fee. To maintain their registration each year, they must pay a fee and take at least fifteen hours of continuing education courses. The IRS estimated that the new regulation sweeps in 600,000 to 700,000 new tax return preparers who were previously unregulated at the federal level.
Three tax return preparers who were not previously regulated by Circular 230 brought suit challenging the 2011 regulations and seeking declaratory and injunctive relief. In January 2013, the U.S. District Court for the District of Columbia (Boasberg, J.) granted the plaintiffs’ motion for summary judgment. The court recognized that, under Mayo Foundation, the two-step analysis of Chevron should be applied to determine the validity of the regulations. The court explained, however, that “the battle here will be fought and won on Chevron step one” because “Plaintiffs offer no independent argument for why, if the statute is ambiguous, the IRS’s interpretation would be ‘arbitrary or capricious . . .’ under Chevron step two.” Focusing in this way on the unambiguous statutory text, the court held that the Treasury Department lacked statutory authority to issue the regulations.
The court rejected the Government’s argument that the agency had inherent authority to regulate those who practice before it, because a statute (31 U.S.C. § 330) specifically defined the scope of the Treasury Department’s authority. Under that statute, the Treasury Department is authorized to “regulate the practice of representatives of persons before the Department of Treasury.” The district court held that, although the statute did not define “the practice of representatives,” the surrounding statutory text made clear that Congress used “practice” to refer to “advising and assisting persons in presenting their case,” not simply preparing returns. Turning to provisions in the Internal Revenue Code that regulate tax return preparers, the court reasoned that Congress could not have intended § 330 to be the authority for regulating tax return preparers because “statutes scattered across Title 26 of the U.S. Code create a careful, regimented schedule of penalties for misdeeds by tax-return preparers.” The court rejected the Government’s resort to policy arguments. “In the land of statutory interpretation, statutory text is king.” Holding that the new regulations were ultra vires, the court enjoined the IRS from enforcing the registration regime.
In the motion for a stay pending appeal filed with the district court, the Government argued that the injunction substantially disrupted the IRS’s tax administration and that shutting down the program would be costly and complex. The district court was not persuaded, concluding that “[t]hese harms, to the extent they exist are hardly irreparable, and some cannot even be traced to the injunction.”
The Government’s stay motion in the court of appeals, filed February 25, argues that “[f]ailure to grant the stay will work a substantial and irreparable harm to the Government and the taxpaying public, crippling the Government’s efforts to ensure that individuals who prepare tax returns for others are both competent and ethical.” According to the Government’s brief, the “IRS estimates that fraud, abuse, and errors cost the taxpaying public billions of dollars annually.” In their March 8 response, the Plaintiffs/Appellees argue that the Government failed to establish any imminent irreparable harm traceable to the injunction, noting that even the Government acknowledged that most of the alleged harms would not occur until 2014. The tax return preparers also emphasize that the injunction merely preserves the historical status quo.