“Enrolled agents” are tax specialists authorized by the IRS to represent taxpayers in tax disputes in many of the same ways as tax attorneys and CPAs. To obtain an “enrolled agent” designation, an applicant must pass an IRS competency examination. Earlier this month, the IRS issued a regulation massively increasing the user fee applicants must pay to take the examination. Under the new regulation, applicants must pay two fees for each portion of the three-part examination–(1) an $81 fee imposed by the IRS for each portion of the examination, and (2) a $100+ fee for each portion imposed by the contractor retained by the IRS to administer the examination. Combined, applicants will now be required to pay fees of $243 (previous fee was $33) to the IRS and over $300 to the contractor to take the required exams.
Not surprisingly, enrolled agents have opposed the proposed increase throughout the rulemaking process and must now decide whether to challenge the new regulation in the courts—the route successfully pursued by tax return preparers opposed to an IRS registration and licensing scheme. See Steele v. United States and Loving v. United States. A challenge by enrolled agents to the regulation could follow two primary paths. They can argue that the IRS does not have legal authority to license and regulate enrolled agents under 31 U.S.C. Sec. 330—an avenue that enrolled agents have not previously pursued. Alternatively, they can argue that the amount of the user fee imposed by the IRS upon applicants is unlawfully excessive.
The legality of a “user fee” like the IRS examination fee is governed by 31 U.S.C. Sec. 9701. That statute authorizes agencies to impose user fees to recover the cost of services they provide which confer special benefits on identifiable recipients which are not available to the general public. The case law authorizes agencies like the IRS to impose fees tied to the agency’s actual costs, but prohibits larger fees which can be used to fund other agency activity like public education or consumer protection. (The theory underlying these cases is that a larger fee employed to fund other agency activities would constitute a “tax” imposed by an agency—a violation of the constitutional limitation of the taxing power to Congress.) Were enrolled agents to pursue this avenue, the legal issue which would be presented is whether the IRS can demonstrate that its fee is not excessive.
During the rulemaking process, the IRS attempted to justify the fee increase by reference to its internal cost estimates for the enrolled agent examination. The IRS identified three principal components to the cost estimates—(1) an estimate of the IRS employee time which was devoted to the enrolled agent examination, (2) the direct cost of the employee labor, employee benefits, and a 68% overhead factor, and (3) the cost of conducting background checks on the contractor hired by IRS to administer the examination. The reasonableness of the IRS cost estimates, like most cost accounting estimates, can be debated. And, past experience leads this blogger to suspect that elements of these estimates could be inflated to include costs not directly related to the enrolled agent examination and that these estimates would provide fertile ground for judicial review of the new regulation.
The question is whether enrolled agents will pursue such a challenge.