* IRS backs away from crackdown after court ruling
* Many preparers were complying with new IRS rules
By Patrick Temple-West and Kim Dixon
WASHINGTON, Jan 22 The tax return preparation
industry was thrown into disarray on Tuesday when the U.S.
Internal Revenue Service rescinded new registration and training
rules affecting up to 700,000 tax return preparers.
The tax-collection agency backed away from its new program,
meant to crack down on unscrupulous preparers, after a court
decision on Friday barred the IRS from enforcing tax return
In complying with the court's permanent injunction, the IRS
said nonprofessional tax return preparers "are not currently
required" to register with the agency, pass a competency test or
take continuing education classes to do tax returns.
"I'm just picking my jaw off the ground," said Jeff Trinca,
a Washington lobbyist who represents some tax preparers, adding
that the suspension of the IRS program could put billions of
dollars in tax returns at renewed risk of being mishandled.
"This isn't chicken feed, this is dramatic," Trinca said.
The government can appeal the decision, written by Judge
James Boasberg for the U.S. District Court for the District of
Columbia, who was nominated by President Barack Obama in 2010.
The IRS "continues to have confidence in the scope of its
authority to administer this program," the agency said in a
statement. "It is considering how best to address the court's
order and will take further action shortly."
The IRS said lawyers, accountants and other licensed tax
return professionals must still meet the regulatory requirements
related to their certifications.
The IRS rules were criticized by some because of the new
fees they slapped on practitioners, but broadly supported as a
way to regulate a free-wheeling industry and fight tax refund
Thousands of independent "mom and pop" operators, as well as
employees for tax return companies H&R Block Inc and
Jackson Hewitt Tax Service Inc were complying with
the IRS rules.
"It is quite a mess," Mark Steber, chief tax officer at
Jackson Hewitt, told Reuters in the wake of the court ruling.
About a quarter of the roughly 140 million individual tax
returns filed annually are done with help from a
non-professional tax preparer, said Gil Luria, an analyst with
investment firm Wedbush Securities.
The court ruling could hurt institutional tax-preparation
providers such as H&R Block and Jackson Hewitt by reopening the
market to small competitors that the IRS program had been
expected to squeeze out, said Luria, who covers the industry.
Under the IRS requirements, preparers had 2 1/2 hours to
finish a 120-question competency test that cost $116. They also
had to take 15 hours of continuing-education classes annually.
About 55,000 individuals have already passed the test, said
Chuck McCabe, chief executive of the Income Tax School in
Richmond, Virginia. Some of these individuals will seek a refund
from the IRS for their test fee, he said.
If the court decision is not reversed on appeal "it could be
a real can of worms," McCabe said.
Regulating tax preparers was a top priority for former IRS
Commissioner Doug Shulman before he stepped down in November.
Shulman called in 2009 for an IRS effort to root out tax
preparation fraud. The return preparer initiative began in 2011.
Shulman, now a guest scholar at the Brookings Institution,
could not be reached for comment.
In March 2012, three independent tax preparers and the
Institute for Justice, a conservative civil-liberties advocacy
group, challenged the program's legal authority. They accused
the IRS of enforcing the requirements without congressional
The IRS said a law dating to 1884 gave it that authority,
but the court disagreed and halted the agency's initiative.
The IRS wants to weed out dishonest tax preparers who can
abuse their access to clients' sensitive financial information.
Tax refund fraud soared in the years leading up to the
regulations as Congress passed new tax credits refundable for
The IRS prevented $6.1 billion of tax refund fraud in 2012,
according to the agency.