By Maria M. Pirrone, CPA, and Benjamin R. Silliman, EdD, of St. John’s University

Due to an increase in the number of fraudulent tax returns, the U.S. Treasury Department implemented a few years ago a requirement that paid preparers must register and obtain a Preparer Tax Identification Number (PTIN). Additionally, a paid tax return preparer was required to successfully complete a competency test and perform other requirements, including a background check and continuing education.

In February 2014, the D.C. Circuit Court of Appeals ruled against the IRS in its attempt to require testing and continuing education of tax preparers. The court ruled that the IRS had no legal authority to impose a nationwide licensing scheme on tax return preparers. In July of that year, the IRS established the Annual Filing Season Program. Unlike previous effort, this program was voluntary. The purpose was to encourage unenrolled tax preparers to voluntarily increase their understanding of federal taxation. The program offers preparers who, among other things, complete required continuing education, pass an exam, and subject themselves to portions of Circular 230, a “Record of Completion,” which is an official notice they completed a program. In addition, the IRS lists participating preparers in its online “Directory of Federal Tax Preparers.” According to IRS Commissioner John Koskinen, the program allows participants to stand out from the competition by giving them a recognizable record of completion that they can show their clients.

This initiative, however, has triggered litigation over the scope of the authority of the IRS. The American Institute of Certified Public Accountants (AICPA), for one, has challenged the program.

The AICPA alleges that, in adopting the program, the agency acted arbitrarily and capriciously and failed to comply with required notice and comment procedures when it implemented the rule through a revenue procedure. AICPA argued that the rule is an “illegitimate exercise of government power” and the IRS cited no authority for the implementation of the program.

Anticipating a standing challenge, AICPA alleges that the program harms its members in three ways:

• By confusing consumers and causing competitive harm
• By imposing regulatory burdens on unenrolled preparers that some of the institute’s members employ
• By increasing the regulatory burden on institute members

The IRS filed a motion to dismiss on standing grounds, arguing that the program caused no harm because it was entirely voluntary. The district court granted the motion to dismiss, but the AICPA appealed to the D.C. Court of Appeals.

The Court of Appeals explained that associations have representational standing if at least one of their members has standing to sue in her or his own right, the interests the association seeks to protect are germane to its purpose, and neither the claim asserted nor the relief requested requires the participation of an individual member in the lawsuit. The IRS challenged the first of the three requirements.

The court opined: “Here, the institute's members will face intensified competition as a result of the challenged government action. Specifically, participating unenrolled preparers will gain a credential and a listing in the government directory. The Institute alleges that this will ‘dilute the value of a CPA’s credential in the market for tax-return-preparer services’ and permit unenrolled preparers to more effectively compete with and take business away from presumably higher-priced CPAs.” The court believed that the IRS program was clearly intended to offer competitive benefits to those unenrolled preparers who participate in the program.

The IRS argued that the program would help unenrolled preparers compete only with other unaffiliated unenrolled preparers who decline to participate, not with the CPAs and CPA firms that comprise AICPA's membership. The institute responded with two arguments:

• Consumers will be confused about the meaning of the Record of Completion, believing either that it conveys IRS endorsement of the preparer or that it represents a superior credential to a CPA license.
• Even if the program causes no confusion, it still causes competitive harm by “diluting the value of a CPA’s credential in the market for tax-return-preparer services” and by making it more difficult for unenrolled preparers employed by the Institute’s members to secure business.

The court agreed that the program harmed its members competitively, even if it causes no confusion. The AICPA alleged that unenrolled preparers are part of the same tax return preparation market as its member’s, citing the report of the IRS stating that 60 percent of tax return preparers are unenrolled preparers. The court agreed with the contention that “unenrolled preparers with government-backed credentials will be better able to compete against other credentialed preparers, and especially against uncredentialed employees of Institute members.” It also noted, “Nor do we see anything speculative or attenuated about the allegation that CPAs and their firms are more likely to lose business to an unenrolled preparer with a Record of Completion and a listing in the government directory than to an unenrolled preparer with no credentials at all.”

The IRS argued that AICPA members will face no increased competition from unenrolled preparers because both the program itself and Circular 230 restrict how preparers can use their Records of Completion to solicit business. The court pointed out that they can tell their clients they received the Record of Completion.

The D.C. Circuit reversed the District Court, remanding the case for further consideration.

It is apparent that there is a need for regulation of the tax preparer industry. However, at the present time there is no solution in light of the pending lawsuit filed by the AICPA to halt the voluntary program unveiled by the IRS. As litigation continues, solutions seem distant, if at all possible. The next step might require the intervention of Congress.

Maria M. Pirrone, CPA, is assistant professor at St. John’s University in Queens, N.Y. She can be reached at pirronem@stjohns.edu.

Benjamin R. Silliman, EdD, is associate professor at St. John’s University. He can be reached at sillimab@stjohns.edu.