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AICPA loses challenge to IRS return preparer program

American Institute of Certified Public Accountants v. IRS, (DC Dist Col 8/3/2016) 118 AFTR 2d ¶ 2016-5089

A district court, on remand from the Court of Appeals for the District of Colombia, has rejected the American Institute of Certified Public Accountants (AICPA)’s challenge to IRS’s Annual Filing Season Program (AFSP). The AICPA brought its challenge on the grounds that the program would cause it competitive injury, and the court said that the challenge failed the “zone-of-interests” test, a judicial doctrine.

Background—the AFSP. In IR 2014-75 (see Weekly Alert ¶  33  07/03/2014), IRS announced a voluntary education program, the AFSP, for unenrolled return preparers that would go into effect for the upcoming filing season. It also announced that it would publish a directory of preparers that would include persons who completed the program including persons with recognized credentials.

In Rev Proc 2014-42, 2014-29 IRB 192 (see Weekly Alert ¶  26  07/03/2014) and IR 2015-123 (Weekly Alert ¶  21  11/05/2015), IRS provided more detailed procedures on the AFSP and explained how it was designed to encourage tax return preparers who are not attorneys, CPAs, or enrolled agents (EAs) to complete continuing education (CE) courses for the purpose of increasing their knowledge of the law relevant to federal tax returns.

Background—relevant law. The judicially promulgated “zone-of-interests” test asks whether a legislatively conferred cause of action encompasses a particular plaintiff’s claim. ( Mendoza v. Perez, (CA Dist Col 2014) 754 F.3d 1002 )

5 USC 702, which is part of the Administrative Procedure Act, provides a cause of action for persons “aggrieved by agency action within the meaning of a relevant statute.”

31 USC 330(a) gives the Treasury Secretary, subject to certain conditions not relevant here, authority to “(1) regulate the practice of representatives of persons before the Department of the Treasury; and (2) before admitting a representative to practice, require that the representative demonstrate— (A) good character; (B) good reputation; (C) necessary qualifications to enable the representative to provide to persons valuable service; and (D) competency to advise and assist persons in presenting their cases.

Case history. In 2014, the AICPA brought suit against IRS claiming that IRS lacks statutory authority to implement the AFSP, acted arbitrarily and capriciously in adopting it, and failed to engage in required notice and comment rulemaking. It sought to enjoin the implementation of the AFSP. Its suit was brought under 5 USC 702.

In American Institute of Certified Public Accountants v. IRS, (DC Dist Col 2014) 114 AFTR 2d 2014-6451114 AFTR 2d 2014-6451, a district court held that the AICPA did not have standing for its suit.

Thereafter, the District of Columbia Circuit Court reversed and remanded the district court case and held that the AICPA has standing and that therefore its case could proceed. Specifically, the Court said that the AICPA has “competitor standing,” i.e., that it showed that the AFSP would result in an actual or imminent increase in competition that would likely cause an injury to AICPA members. (American Institute of Certified Public Accountants v. IRS, (CA Dist Col 2015) 116 AFTR 2d 2015-6628)

That Court gave passing mention to an issue raised by IRS for the first time on appeal – namely, that AICPA’s “grievance does not arguably fall within the zone of interests protected or regulated by the statutory provision it invokes.” But because “IRS never presented this argument to the district court,” the D.C. Circuit declined to address it.

On remand, IRS filed a motion arguing that the AICPA falls outside of the zone of interests regulated by 31 USC 330(a).

AICPA’s argument fails. The court ruled that the AICPA failed the “zone of interests” test and, therefore, did not grant AICPA an order enjoining the implementation of the AFSP.

The court said that, in construing 5 USC 702, the Supreme Court has concluded that Congress intended to require “that a plaintiff’s grievance must arguably fall within the zone of interests protected or regulated by the statutory provision…invoked in the suit.” ( Bennett v. Spear, (S Ct 1997) 520 U.S. 162 ) Here, the court said that the AICPA failed that test because the grievance felt by its members pertains to an interest that is neither regulated nor protected by the “relevant statute,” 31 USC 330(a) .

The court quickly decided that AICPA members have not suffered any injury as parties “regulated by” the AFSP.

The court then said that is was therefore left to grapple with whether AICPA’s “members’ interests as competitors against unenrolled preparers fall squarely within the zone of interests… protected by 31 USC 330(a).” Citing Scheduled Airlines Traffic Offices, Inc. v. Dep’t of Def., (CA Dist Col 1996) 87 F.3d 1356, it said that, “A party may demonstrate this in one of two ways: [1] if it is among those [who] Congress expressly or directly indicated were the intended beneficiaries of a statute…or [2] if [the AICPA] is a “suitable challenger” to enforce the statute—that is, if its interests are sufficiently congruent with those of the intended beneficiaries that the litigants are not more likely to frustrate than to further…statutory objectives.”

As to the first Scheduled Airlines prong, the AICPA did not contend that it is an intended beneficiary of the statute. So the court only had to decide whether it was a “suitable challenger,” a question that must be answered in two parts. First, the court must determine Congress’s “implicit purpose” in enacting 31 USC 330(a) and what interests it was designed to protect. Second, it must determine whether the AICPA’s “interests are so marginally related to or inconsistent with those purposes that it cannot reasonably be assumed that Congress intended to permit the suit.”

Pointing to the fact that “not a single word in the text of [31 USC 330(a)] even hints at the notion that Congress had in mind any protection of the interests of service providers,” the fact that the AICPA did not point the court to any other provision of the Internal Revenue Code that would make such intent clear, and the text of 31 USC 330(a) itself, the court concluded that 31 USC 330(a)’s purpose is protecting consumers in the tax-services marketplace.

The court said that its next step was therefore determining whether AICPA’s interest in avoiding intensified competition as a result of the AFSP was congruent with Congress’s consumer protection purpose when it enacted 31 USC 330(a), and concluded that it was not.

The court said that, on the surface, it seems difficult to square AICPA’s interest in dismantling IRS’s program with Congress’s goal of safeguarding consumers. In creating the AFSP, IRS aimed to improve unenrolled preparers’ knowledge of federal tax law, thereby “protecting taxpayers from preparer errors.” (Rev Proc 2014-42, Sec. 2) This objective appears closely aligned with Congress’s goal of ensuring taxpayers are provided “valuable service.” (See 31 USC 330(a)(2)(C), above) AICPA did not impugn IRS’s motive in creating the program or otherwise argue that the AFSP does not flow logically from Congress’s objective of protecting consumers. Rather, it sought to eliminate the program, notwithstanding its potential benefit to consumers, precisely because the program renders unenrolled preparers better able to compete.

However, the AICPA cited a series of Supreme Court cases, including Air Courier Conference of America v. American Postal Workers Union AFL-CIO, (S Ct 1991) 498 U.S. 517 and Clarke v. Securities Industry Association, (S Ct 1987) 479 U.S. 388, in which it said that the Court appeared to broadly proclaim that competitors (like AICPA) of entities regulated by unlawful agency action (ostensibly, unenrolled preparers) are generally suitable challengers.

The court here said that it goes without saying that those cases do not stand for the proposition that all competitors of regulated parties perforce come under the zone of interests of any underlying statute. In Clarke, the competitor-plaintiff was an association representing the securities industry, the regulator was the Comptroller of the Currency, and the regulated party consisted of national banks. The plaintiff was dissatisfied with the Comptroller’s decision to loosen restrictions on banks’ ability to offer discount brokerage services, which had the effect of allowing banks to compete for those services in a space that had historically been free from such competition. The Clarke court concluded that the plaintiff fell within the “zone of interests” of the National Bank Act and could thus argue that the Comptroller’s decision contravened language in that statute that it believed should keep banks out of the interstate discount-brokerage market.

The circumstances here were different. 31 USC 330(a) is not an entry-restriction statute. IRS simply lacks any authority under that provision to regulate tax-preparation services, meaning that unenrolled preparers, enrolled agents, attorneys, and CPAs are all free to prepare taxes for compensation. In other words, the only thing the statute has to say about the tax preparation market is that IRS has no business regulating it, meaning anyone can compete in that space. There is therefore no statutory requirement that, if duly enforced, would prevent an unenrolled preparer “from offering its services and competing in a broader market” served by CPAs. AICPA therefore could not reasonably contend that its suit, if allowed to proceed, “would enforce a statutory demarcation dividing” the services it provides from those rendered by unenrolled preparers.

And, the court said, while AICPA does not have a cause of action under the APA to bring this suit, the court has little reason to doubt that there may be other challengers who could satisfy the rather undemanding strictures of the zone-of-interests test.

References: For IRS’s Annual Filing Season Program, see FTC 2d/FIN ¶  T-10907.1; TaxDesk ¶  821,021.1; TG ¶  70010.