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Voluntary IRS certification scheme does not violate APA

Addressing a long-simmering controversy over the U.S. Internal Revenue Service's authority to regulate tax preparers, the U.S. Court of Appeals for the District of Columbia held August 14 that the American Institute of Certified Public Accountants (AICPA) does have standing to challenge a voluntary IRS certification scheme for tax preparers, but that the program does not violate the Administrative Procedures Act as the organization charged.

(American Institute of Certified Public Accountants v. Internal Revenue Serv.) .

The case stemmed from the IRS’s adoption of a sweeping rule in 2011 that would have regulated all tax preparers for the first time. The rule was intended to address perceived problems in the market for tax preparation services.

That rule was challenged and the bulk of the rule was enjoined in 2013 and 2014. The IRS then established a voluntary scheme to recognize certain tax preparers known as “unenrolled preparers,” as distinguished from “enrolled” preparers, so the unenrolled preparers would have a limited right to represent taxpayers in IRS audits of tax returns.

The AICPA brought suit, challenging the IRS’s authority to conduct the program. The organization argued its members suffer harm as competitors because the IRS program created a new credential that confuses consumers and causes them to patronize unenrolled preparers instead of licensed CPAs. (The National Association of State Boards of Accountancy (NASBA) submitted a brief as amicus curiae in support of neither the IRS nor the AICPA.)

The suit hit a roadblock when the district court found the AICPA did not have standing to sue because it did not come within the necessary “zone of interests” protected by statute. “The competitive-harm-by-brand dilution injury is . . . the only relevant ‘grievance’ for determining whether [the AICPA] satisfies the zone- of interests test,” that court said (AICPA III, 199 F. Supp. 3d at 64.)

On appeal, the IRS no longer disputed that the AICPA had constitutional standing base upon its competitive injury. But the agency said AICPA could not establish statutory standing because neither it nor its members are regulated or protected by the applicable statute.

The Court of Appeals disagreed with the IRS, finding that the IRS program increases the supervisory responsibility and hence the potential liability faced by members of the AICPA. “It is clear that a member of the AICPA incurs a supervisory burden that confers both constitutional and statutory standing,” the court stated.

But the court did side with the IRS on the merits of the AICPA’s lawsuit charging that the IRS did not follow proper procedure in adopting its program and should have followed notice-and-comment rulemaking procedures in promulgating it.

Among other reasons that AICPA claim was incorrect, the court said: the IRS properly considered and addressed the AICPA’s comment that the program would create a public database of provider credentials that could confuse taxpayers.

The court remanded the case to the district court for the purpose of entering judgment for the IRS.