Challenging the New IRS PTIN Fee

By Stuart J.  Bassin


Last week brought the latest twist in the continuing effort by the IRS to impose an annual fee upon the roughly 800,000 attorneys, accountants, and other tax professionals who prepare tax returns for the American public.  On July 15, 2020, the IRS published T.D. 9903 in the Federal Register, a decision document finalizing new regulations (“Decision Document”) requiring tax return preparers to obtain a Preparer Tax identification Number (PTIN) which must appear upon the returns they prepare for their clients and imposing an annual  user fee which return preparers must pay to the IRS to obtain the required PTIN.  

              To summarize, the legal debate over IRS regulation of the tax return preparation industry has been winding through the courts for over a decade (and is likely to continue well into the current decade).  Initially, the IRS instituted a broad program of return preparer regulation, including continuing education requirements and competency testing.  The program would be managed by a new IRS Return Preparer Office (“RPO”), which would be funded by an annual PTIN fee imposed upon return preparers.  When several return preparers challenged the IRS program, the DC Circuit determined that the IRS lacked statutory authority to regulate return preparers and invalidated the IRS regulations.  (Subsequent legislative efforts to grant such regulatory authority to the IRS have been stillborn.)  Soon thereafter, a class action was filed in federal district court seeking disgorgement of the approximately $250 million the IRS had collected from return preparers over the years in violation of the law governing user fees.  That litigation is back in district court after the DC Circuit ruled that the IRS could charge a fee to recover the costs of issuing PTINs, but not for costs incurred by the IRS for the RPO’s other activities.

              The DC Circuit has decided several cases dealing with the allocation issue regarding the allowable user fees, which will be decided in the remand.  That authority requires the IRS to isolate its costs of issuing PTINs from other expenditures made by the RPO and to impose a PTIN fee which recovered those costs (and nothing more).  In addition, the IRS must create a reviewable record demonstrating how it determined the costs it seeks to recover. 

              In the new regulation, the IRS re-imposed an annual PTIN fee upon return preparers (collectively, about $17 million annually) to recover the agency’s cost of issuing PTINs and authorizes the private vendor which actually issues PTINs on behalf of the IRS.  During the rulemaking process, The Bassin Law Firm and several dozen others submitted comments criticizing the new fee and the IRS’s methodology for determining the amount of the fee.  Stu Bassin also testified at the public hearing conducted by the IRS on the proposed fee, raising many of the same concerns.

              Stu’s comments and testimony raised two principal points.  He noted that PTINs are issued by a private vendor on behalf of the IRS under a no cost contract; the vendor collects an additional fee from preparers when they apply for a PTIN.  (Return preparers know that the application process involves completion of a simple on-line form and that a PTIN is issued moments after the applicant submits the form without any apparent involvement by the IRS).   So, the only costs incurred by the IRS involve monitoring contract performance by the vendor and those specific costs are not identified in the decision document.  Challenging the accounting mumbo-jumbo recited in the Decision Document, yhe comments identified eight specific questions regarding the IRS methodology for determining the recoverable costs.  None of these questions were addressed in the Decision Document; instead the IRS made vague references to unspecified cost centers and unexplained allocations of costs within those cost centers. 

              Stu’s other comments identified a range of activities conducted by the nearly 200 IRS employees working in the Return Preparer Office which involve matters far removed from monitoring vendor compliance with the contract for issuance of PTINs.   For example, a recent critical report by the Treasury Inspector General for Tax Administration indicated that the RPO was involved in diverse activities such as regulating actuaries and developing a broad consumer protection program—possibly desirable activities, but not activities which the IRS can fund with a mandatory PTIN fee.  The Decision Document makes no effort to explain how the IRS segregated the costs of these activities from the costs of monitoring the vendor’s contract for PTIN issuance, stating only that the law does not require such an explanation and repeating the agency’s naked conclusion that the IRS properly computed its costs.

              Where does that leave us today.  The litigation involving the PTIN fees for prior years is proceeding (although the COVID pandemic has slowed its development).  The IRS will begin collecting the new PTIN fee in the fall.  And, it does not require a crystal ball to predict that some enterprising lawyer will file a new class action soon thereafter challenging the new PTIN fee.  Perhaps even this lawyer? 

              Copies of the Decision Document, The Bassin Law Firm’s comments, and recent coverage from the tax press are below.

Tax Notes article quoting Stu Bassin

IRS Sticks to Plan

Stu Bassin's Formal Regulatory Comments on Proposed Fees