Montrois v. United States

916 F.3d 1056

Brittany MONTROIS, Class of More than 700,000 Similarly Situated Individuals and Businesses, et al., Appellees

v.UNITED STATES of America, Appellant

No. 17-5204

United States Court of Appeals, District of Columbia Circuit.

Argued May 11, 2018

Decided March 1, 2019

Gilbert S. Rothenberg, Attorney, U.S. Department of Justice, argued the cause for appellant. With him on the briefs were Jessie K. Liu, U.S. Attorney, and Richard Farber and Norah E. Bringer, Attorneys.

Jonathan E. Taylor argued the cause for appellees. With him on the brief were Deepak Gupta, Washington, DC, William H. Narwold, Hartford, CT, Allen Buckley, Atlanta, GA, Louis Bograd, and Christopher S. Rizek. Elizabeth S. Smith, Washington, DC, entered an appearance.

Allen Buckley, Atlanta, GA, was on the supplemental brief for plaintiffs-appellees.

Before: Garland, Chief Judge, and Srinivasan and Millett, Circuit Judges.

Srinivasan, Circuit Judge:

Tax-return preparers are persons who prepare clients' tax returns for compensation. Internal Revenue Service regulations require preparers to obtain from the agency (and renew annually) a unique identifying number known as a Preparer Tax Identification Number, or PTIN. Preparers must list that PTIN on any return they prepare.

In 2010, the IRS began charging tax-return preparers a fee to obtain and renew PTINs. The fee is designed to recoup the costs to the agency of issuing and maintaining a database of PTINs. As authority to exact the PTIN fee, the IRS relies on the Independent Offices Appropriations Act, which allows federal agencies to charge fees for services in certain conditions. 31 U.S.C. § 9701.

A group of tax-return preparers filed a class action lawsuit challenging the PTIN fee. They argued that the IRS lacks authority under the Independent Offices Appropriations Act to charge them for obtaining (and renewing) PTINs and that the IRS's decision to charge the fee was arbitrary and capricious. The district court ruled in favor of the preparers, concluding that the IRS lacks statutory authority to charge the fee. The court issued an injunction barring the IRS from charging the PTIN fee and ordered the agency to refund previously collected fees.

We conclude that the IRS acted within its authority under the Independent Offices Appropriations Act in charging tax-return preparers a fee to obtain and renew PTINs. We further conclude that the IRS's decision to charge the fee was not arbitrary and capricious. We thus vacate the judgment of the district court and remand for further proceedings, including an assessment of whether the amount of the PTIN fee unreasonably exceeds the costs to the IRS to issue and maintain PTINs.

I.

A.

The Internal Revenue Code defines a tax-return preparer as "any person who prepares for compensation" a federal income tax return or claim for refund. I.R.C. § 7701(36)(A). The Code establishes no professional constraints on who may act as a tax-return preparer, with the result that preparers range from uncredentialed persons to attorneys and certified public accountants. See Internal Revenue Service, Return Preparer Review 8–9 (December 2009), https://www.irs.gov/pub/irsutl/54419l09.pdf. As of 2009, "a majority of U.S. taxpayers ... rel[ied] on tax return preparers to assist them in meeting their federal tax filing obligations." Id. at 7.

In 1976, Congress enabled the IRS to require a preparer to list an identifying number on any return she prepared, and Congress specified that the identifying number would be the preparer's social security number. See Tax Reform Act of 1976, Pub. L. No. 94-455, § 1203(d), 90 Stat. 1520, 1691. Congress also imposed monetary penalties on preparers in certain circumstances for understating a taxpayer's liability or failing to list certain information on a return. I.R.C. §§ 6694, 6695. In addition, Congress gave the Department of Justice authority (in consultation with the IRS) to seek an injunction preventing tax-return preparers from engaging in unlawful conduct. I.R.C. § 7407.

In 1998, Congress, acting out of concern that "inappropriate use might be made of a preparer's social security number," S. Rep. No. 105-174, at 106 (1998), allowed the IRS to permit or require preparers to list a different identifying number on returns they prepared. I.R.C. § 6109(a), (d) ; see Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. No. 105-206, § 3710, 112 Stat. 685, 779. The IRS subsequently issued regulations allowing—but not requiring—preparers to obtain from the agency a unique Preparer Tax Identification Number (PTIN) and to list that PTIN, instead of a social security number, on any return they prepared. Furnishing Identifying Number of Income Tax Return Preparer, 64 Fed. Reg. 43,910 (Aug. 12, 1999) (codified at 26 C.F.R. pt. 1).

By 2009, the IRS had become concerned that many taxpayers were being "poorly served by some tax return preparers" due to preparers' inadequate education and training as well as deficiencies in the agency's compliance regime. Return Preparer Review 6; see id. at 33–37. Seeking to improve matters, the IRS issued three sets of regulations in 2010 and 2011.

First , the IRS sought to establish a credentialing and registration regime for tax-return preparers. It did so by requiring otherwise uncredentialed preparers—that is, preparers who are neither attorneys nor certified public accountants—to become "registered tax return preparers." Regulations Governing Practice Before the Internal Revenue Service, 76 Fed. Reg. 32,286, 32,286 –87 (June 3, 2011). To become a registered tax-return preparer, a person would need to undergo a background check, pass a competency exam, and satisfy continuing education requirements. Id. at 32,287.

Second , the IRS required preparers to obtain a PTIN and renew it annually. Furnishing Identifying Number of Tax Return Preparer, 75 Fed. Reg. 60,309, 60,309 –10 (Sept. 30, 2010). According to the agency, the "requirement to use a PTIN will allow the IRS to better identify tax return preparers, centralize information, and effectively administer the rules relating to tax return preparers." Id. at 60,309. The IRS further noted that the PTIN requirement would benefit "tax return preparers and help maintain the confidentiality of [their] SSNs." Id.

Third , the IRS decided it would charge tax-return preparers a fee of roughly $50 (plus a vendor fee) to obtain and renew a PTIN. The agency explained the fee would cover the costs of "the development and maintenance of the IRS information technology system" associated with the PTINs, as well as the costs of "the personnel, administrative, and management support needed to evaluate and address tax compliance issues, investigate and address conduct and suitability issues, and otherwise support and enforce the programs that require individuals to apply for or renew a PTIN." User Fees Relating to Enrollment and Preparer Tax Identification Numbers, 75 Fed. Reg. 60,316, 60,316, 60,319 (Sept. 30, 2010).

B.

A group of tax-return preparers challenged the first set of regulations described above: the registered-tax return preparer system establishing a registration and credentialing system for preparers. The plaintiffs argued that the IRS lacks authority under the Internal Revenue Code to establish a licensing system for tax-return preparers.

Our court agreed and invalidated the registered tax-return preparer regulations. Loving v. IRS , 742 F.3d 1013 (D.C. Cir. 2014). Because our invalidation of the registered-tax return program meant that there was no longer an agency-administered credentialing scheme in effect, our decision in Loving had the effect of reinstating a regime in which anyone who wishes to prepare tax returns for others can do so as long as she obtains a PTIN (and pays the associated fee), without needing to satisfy any credential requirements. Id. at 1021–22.

In 2014, after we issued our decision in Loving , several tax-return preparers initiated the action now before us in this appeal. The preparers challenge the lawfulness of the IRS's assessment of a fee for providing them a PTIN. They argue that the PTIN fee is contrary to the Independent Offices Appropriations Act and is arbitrary and capricious.

While the case was pending before the district court, the IRS reduced the amount of the PTIN fee from $50 to $33 (not including a vendor fee). Preparer Tax Identification Number (PTIN) User Fee Update, 81 Fed. Reg. 52,766, 52,766 (Aug. 10, 2016). The IRS adjusted the PTIN fee in the wake of our decision in Loving . A portion of the original PTIN fee was to have been used to pay the costs of the registered tax-return preparer program invalidated in Loving , and the IRS reduced the amount of the PTIN fee to cover the costs of those portions of the PTIN program that remained in effect after Loving . Id.

The district court, after certifying a plaintiffs' class of tax-return preparers, granted summary judgment in the preparers' favor in relevant part. The court upheld the IRS's requirement that preparers obtain a PTIN. But the court invalidated the PTIN fee charged by the IRS on the ground that the fee violates the Independent Offices Appropriations Act. Steele v. United States , 260 F.Supp.3d 52 (D.D.C. 2017).

The court reasoned in part that, for an assessment to qualify as a fee under that Act as opposed to an unauthorized general tax, the assessment must relate to a specific benefit conferred to an identifiable set of users. But here, the court emphasized, essentially any person can obtain a PTIN after Loving invalidated the PTIN eligibility criteria, such that the PTIN program, in the court's view, could no longer be said to benefit a particular set of individuals rather than the public in general. Id. at 67. The court also rejected the IRS's argument that the PTIN fee could be sustained based on an interest in protecting tax-return preparers' social security numbers. The court believed that the agency had not adequately raised or explained that rationale when...