WASHINGTON, Jan 18 (Reuters) - A federal judge on Friday ruled that the U.S. Internal Revenue Service does not have the authority to regulate non-professionals who prepare tax returns, throwing into doubt an attempt to bring order to a free-wheeling industry.
The decision from the U.S. District Court for the District of Columbia affects about 715,000 tax-return preparers who are not attorneys or accountants.
Regulating those preparers was a top priority for former IRS Commissioner Doug Shulman before he stepped down in November.
An IRS spokesman had no immediate comment late on Friday.
Shulman in 2009 called for an IRS effort to root out tax preparation fraud. The IRS Return Preparer Initiative began in 2011. It requires tax preparers to register with the IRS. It also requires preparers, especially those without other professional credentials, to pass competency tests and take classes to maintain their IRS registration.
The agency requested $35 million from Congress for the program in President Barack Obama's fiscal 2013 budget.
The government could choose to appeal the court's decision.
In March 2012, three independent tax preparers and the Institute for Justice, a civil-liberties advocacy group, challenged the program's legal authority. They a c cused the IRS of enforcing the requirements without congressional approval.
The IRS said a law dating to 1884 gave it that authority, but the court disagreed.
"With an invalid regulatory regime on the IRS's side of the scale and a threat to plaintiff's livelihood on the other, the balance of hardships tips strongly in favor of plaintiffs," wrote Judge James Boasberg.
The IRS wants to weed out dishonest tax preparers who can abuse their access to clients' sensitive financial data in any number of ways. Before the IRS launched its program, there was no federal oversight of the tax preparation industry.
The case is Sabina Loving, et al, v. Internal Revenue Service, U.S. District Court for the District of Columbia, No. 12-cv-385. (Reporting by Patrick Temple-West; Editing by David Ingram, Kevin Drawbaugh and Bob Burgdorfer)