IRS Rides 1884 ‘Dead Horse’ Law to Defend New Regulations

October 11, 2013 — Leave a comment

In 2011, more than 78 million Americans paid someone to prepare their tax returns. The industry posted an estimated revenue this past year of $9.4 billion. With proposed IRS regulations, these numbers will probably see a decline, and you might be soon limited in who you can visit to receive tax return assistance.

In early 2012, the IRS put forth regulations requiring tax preparers to register with the IRS, to pass a competency exam, to pay an annual fee, and to meet certain education requirements.

The regulations do not affect all tax preparers; it will exempt Certified Public Accountants (CPAs), Attorneys, and Enrolled Agents (EAs) who already have their own industry competency requirements.

However, the tax preparation industry disputes the agency’s ability to impose these regulations, and now the Obama administration and IRS are pushing their fight through the federal court system.

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The agency cites an “1884 dead horse law” to validate the proposed regulations. The IRS roots its argument in the fact that this federal statute predates the modern income Tax Code, which Congress codified in 1913.

A post-Civil War industry emerged of agents who would claim war losses for a fee, and usually, these agents collected a percentage of that claim. Soon, claim values were being fraudulently calculated higher.

To curb these agents’ abuse of the system, Congress gave the Secretary of the Treasury authority to control the admission of these agents representing claimants, the rise of the modern-day Enrolled Agents. Those who did not comply with the regulations faced penalties.

The Treasury Department published guidance for those agents, and the language became known as “Circular 230.” Does this sound familiar? You can find the “Circular 230” language often at the bottom of attorney and tax professional emails.

The new regulations mean that the “real burden of complying with the new regulations hit independent tax preparers and small businesses disproportionately – those who, under the new rules, must meet the criteria for a new IRS designation, a Registered Tax Return Preparer (RTRP).” Without that designation, a preparer may not work.

At an appellate court hearing on a challenge brought by libertarian lawyers challenging the administration, Justice Department Tax Division lawyer Gilbert Rothenberg said: “I hate to beat a dead horse, especially one from the Civil War era.”

Three independent tax preparers, Sabing Loving, John Gambino, and Elmer Kilian, believed that the IRS overstepped its boundaries, and they decided to file suit. The crux of the plaintiffs’ argument was that: “Congress never gave the IRS the authority to license tax preparers, and the IRS can’t give itself that power.”

Jeffrey Katz, managing partner at JD Katz, P.C., has also compared the law to “giving prisoners the keys to a prison.”

In January 2013, U.S. District Court Judge James E. Boasberg sided with the plaintiffs in barring the IRS from regulating tax return preparers. The IRS appealed the decision, and now the case finds itself in court again.

The case has broad implications for the industry, so tax preparation companies, such as H&R Block, will be closely watching these proceedings.

As for now, the judges have not given a clear sign of how they will rule; however, they do question why the IRS cites an 1884 law to regulate tax preparers today. Stay tuned to our Joy of Tax Law for updates.

JDKatz: Attorney's At Law

JDKatz, P.C. is a full-service law firm focused on tax lawbusiness and transactional lawestate planning and elder law. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys, or visit http://www.jdkatz.com.

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