Three small independent tax-return preparers won a significant victory on May 13 against the IRS and big government when the time period for the IRS to appeal an adverse court decision to the U.S. Supreme Court expired.
The U.S. Court of Appeals for the District of Columbia had ruled in February that the IRS could not impose expensive licensing requirements based on an 1884 statute—the Horse Act, a law originally intended to govern individuals making claims on behalf of Civil War veterans to the Treasury Department for “horses and other property lost in the military service.” The IRS did not appeal the decision.
In 2011, the IRS suddenly issued a regulation requiring tax-return preparers to pass a certification exam, pay annual fees, and complete at least 15 hours of continuing education courses each year. The IRS claimed that its authority for these regulations was the Horse Act of 1884 (31 U.S.C. §330), which regulates “the practice of representatives before the Department of the Treasury.” This new regulation would have affected upwards of 350,000 tax-return preparers, most of whom are small business people such as the three preparers who filed this suit, according to the Institute for Justice, which represented them in the litigation.
The court, however, disagreed with the IRS’s interpretation of the law, holding that neither the legislative history nor the text of the statute supported the IRS. Neither did the IRS’s own prior history, since the IRS had told Congress on repeated occasions that it did not have the legislative authority to regulate tax-return preparers. As the court said, the IRS is certainly “free to change (or refine) its interpretation of a statute it administers,” but its interpretation “must be consistent with the statute.” And in the 127 years that the Horse Act had been in place prior to the new regulation being issued, the IRS’s consistent interpretation of the statute was that it did not provide the IRS the authority to regulate individuals who help prepare income tax returns.
This was particularly true because the term representative in the Horse Act—a law passed almost 30 years before the federal government was even given the constitutional authority to levy an income tax—traditionally refers to agents with the authority to bind a taxpayer and who represent the taxpayer in adversarial proceedings before the Treasury Department and the IRS. Preparing a tax return is not an “adversarial” proceeding, and other regulations of the IRS specifically prohibit tax-return preparers from acting on behalf of taxpayers without getting their power of attorney. As the court said, a “tax-return preparer certainly assists the taxpayer, but the tax-return preparer does not represent the taxpayer.”
The court also pointed out that Congress has passed a number of provisions that specifically target and regulate tax-return preparers, yet here the IRS was trying to implement its own regulatory regime by “virtue of its heretofore undiscovered carte blanche grant of authority.” This regulation would essentially gut what Congress had already done, and all of “Congress’s statutory amendment would have been unnecessary.”
According to Scott Bullock of the Institute for Justice, these “regulations were classic economic protectionism.” Their “burden would have fallen on small entrepreneurs and consumers, while powerful industry insiders stood to reap the benefits of decreased competition.” He predicts that as a result of this court decision, taxpayers will “enjoy lower prices for tax-preparation services as more preparers compete for their business.”
But this case also demonstrates the constant grasping for more power that seems inherent in federal agencies and the huge and growing administrative state that exists today. The IRS tried to use a Civil War–era statute intended to deal with compensation claims for dead horses to expand its authority and bypass Congress. This time, three brave individuals, a conservative legal foundation, and a federal court defeated one of the most powerful—and dangerous—federal agencies.