Steele v. United States

657 F.Supp.3d 23

Adam STEELE, Brittany Montrois, and Joseph Henchman,on behalf of themselves and all others similarly situated, Plaintiffs, v. UNITED STATES of America, Defendant.

Case No. 1:14-cv-1523-RCL

United States District Court, District of Columbia

Filed February 21, 2023

Signed January 23, 2023

Allen Buckley, Pro Hac Vice, Law Offices of Allen Buckley, Atlanta, GA, Christopher S. Rizek, Caplin & Drysdale, Chartered, Washington, DC, Elizabeth S. Smith, Nathan David Finch, Motley Rice, LLC, Washington, DC, Deepak Gupta, Gupta Wessler PLLC, Washington, DC, William H. Narwold, Pro Hac Vice, 1 Corporate Center, Hartford, CT, Charlotte Eleanor Loper, Pro Hac Vice, Motley Rice, Mt. Pleasant, SC, Ebony Bobbitt, Pro Hac Vice, Mount Pleasant, SC, for Plaintiff Brittany Montrois.

Allen Buckley, Pro Hac Vice, Law Offices of Allen Buckley, Atlanta, GA, Christopher S. Rizek, Caplin & Drysdale, Chartered, Washington, DC, Elizabeth S. Smith, Nathan David Finch, Motley Rice, LLC, Washington, DC, Deepak Gupta, Gupta Wessler PLLC, Washington, DC, Meghan S.B. Oliver, Pro Hac Vice, Charlotte Eleanor Loper, Pro Hac Vice, Motley Rice, LLC, Mt. Pleasant, SC, William H. Narwold, Pro Hac Vice, 1 Corporate Center, Hartford, CT, Ebony Bobbitt, Pro Hac Vice, Mount Pleasant, SC, for Plaintiff Adam Steele.

Allen Buckley, Pro Hac Vice, Law Offices of Allen Buckley, Atlanta, GA, William H. Narwold, Pro Hac Vice, 1 Corporate Center, Hartford, CT, Charlotte Eleanor Loper, Pro Hac Vice, Motley Rice, Mt. Pleasant, SC, Ebony Bobbitt, Pro Hac Vice, Mount Pleasant, SC, Elizabeth S. Smith, Motley Rice, LLC, Washington, DC, for Plaintiff Joseph Henchman.

Christopher James Williamson, Joseph A. Sergi, Stephanie Ann Sasarak, Joseph E. Hunsader, Emily Katherine Miller, Vassiliki Eliza Economides, Benton Thomas Morton, U.S. Department of Justice, Tax Division, Washington, DC, for Defendant.

MEMORANDUM OPINION

Royce C. Lamberth, United States District Judge

This case concerns the Internal Revenue Service's ("IRS" or "the agency") assessment of fees to income tax return preparers for its issuance and renewal of Preparer Tax Identification Numbers ("PTINs"). Plaintiffs, a class of return preparers, sued the United States for declaratory, injunctive, and monetary relief in this Court, arguing that the IRS lacked authority under the Independent Offices Appropriations Act ("IOAA"), 31 U.S.C. § 9701, to charge those fees. This Court agreed, granted summary judgment to plaintiffs, and enjoined the IRS from continuing to assess fees for PTIN registrations and renewals. Steele v. United States ("Steele I"), 260 F. Supp. 3d 52, 63-67 (D.D.C. 2017). On appeal, however, the Circuit vacated this Court's judgment, holding that that statute indeed authorized PTIN fees, and remanded for consideration of whether the fee amounts were excessive. Montrois v. United States, 916 F.3d 1056, 1062-68 (D.C. Cir. 2019).

Before the Court on remand are the parties' cross-motions for summary judgment, ECF Nos. 173, 175. Plaintiffs argue that many of the expenses used to justify the amount of the PTIN fees are unnecessary to the maintenance of the PTIN system and therefore those fees are excessive in violation of the IOAA. The government moves only for partial summary judgment, conceding that the IRS unlawfully included certain expenses in its PTIN fee calculations but maintaining that the agency was within its authority to include others. The government further argues that it is entitled to an offset to its liability for sums it could have charged in fees while it was enjoined by this Court from assessing them. For the reasons that follow, the Court will GRANT in part and DENY in part plaintiffs' motion, GRANT in part and DENY in part the government's motion, and REMAND to the IRS to determine an appropriate refund for the class in a manner consistent with the IOAA.

I. BACKGROUND

A. Statutory and Regulatory Background

Both this Court and the Circuit have set out the statutory and regulatory background of this case extensively in prior opinions. See Steele I, 260 F. Supp. 3d at 56-58; Montrois, 916 F.3d at 1058-60; Steele v. United States ("Steele III"), No. 14-cv-1523-RCL, 2020 WL 7123100, at *1-2 (D.D.C. Dec. 4, 2020). Accordingly, the Court will summarize that background here only as necessary to resolve the pending cross-motions for summary judgment.

The Internal Revenue Code defines a "tax return preparer" as "any person who prepares for compensation, or who employs one or more persons to prepare for compensation, any return of" or "claim for refund of" federal income taxes. 26 U.S.C. § 7701(a)(36)(A). While the Code does not set professional standards or licensing requirements for return preparers, Congress enacted a statute in 1976 authorizing the IRS to require them to list their social security numbers for identification purposes on returns they prepared. See Tax Reform Act of 1976, Pub. L. No. 94-455, § 1203(d), 90 Stat. 1520, 1691.

In 1998, Congress amended that statute to authorize the IRS to permit return preparers to list a separate identification number issued by the agency instead of a social security number. 26 U.S.C. § 6109(a), (d). The IRS promulgated an implementing regulation the following year creating the PTIN program and allowing, but not requiring, return preparers to list the PTINs it issued in lieu of a social security number on returns. Furnishing Identifying Number of Income Tax Return Preparer, 64 Fed. Reg. 43,910 (Aug. 12, 1999) (codified at 26 C.F.R. pt. 1).

In 2010 and 2011, the IRS issued a series of regulations expanding its regulatory reach over return preparers. As a part of that effort, the IRS created a mandatory credentialing process for preparers who are not attorneys or certified public accountants, including a background check, a competency exam, and ongoing education requirements. See Regulations Governing Practice Before the Internal Revenue Service, 76 Fed. Reg. 32,286, 32,286-87 (June 3, 2011). The IRS also expanded the PTIN program, retooled it as a broader information-gathering system regarding preparers, made obtaining and renewing PTINs mandatory for preparers, and began charging a fee to obtain and renew one. See Furnishing Identifying Number of Tax Return Preparer, 75 Fed. Reg. 60,309, 60,309-10 (Sept. 30, 2010); User Fees Relating to Enrollment and Preparer Tax Identification Numbers, 75 Fed. Reg. 60,316, 60,316, 60,319 (Sept. 30, 2010).

To support the expanded program, the IRS organized a new Return Preparer Office ("RPO") with multiple departments, including, as relevant here, the Suitability Department, the Compliance Department, and various departments providing support to the entire office. The Suitability Department "was responsible for checking personal tax compliance, checking professional designation, matching prisoner lists, checking compliance of Enrolled Agents [ ] and Enrolled Retirement Plan Agents [ ], checking compliance with the Annual Filing Season Program [ ], Former Employee EA Enrollment Applications, and matching Specially Designated Nationals [ ] lists." Pls.' Statement of Undisputed Material Facts ("PSUMF") ¶ 81, ECF No. 177-30 (internal quotation marks and citation omitted); Def.'s Resp. to PSUMF ("DRPSUMF") ¶ 81, ECF No. 184-1. The Compliance Department performed data analytics regarding compliance with PTIN reporting requirements, investigated so-called "ghost preparers" who failed to use a PTIN or used someone else's PTIN or an invalid number, and processed disciplinary referrals of preparers. PSUMF ¶¶ 82-85; DRPSUMF ¶¶ 82-85.

After the IRS implemented its new return preparer regulations, a group of return preparers sued the IRS, arguing that its new preparer credentialing process was unlawful because the statute that the agency used to justify it, 31 U.S.C. § 330, regarding persons practicing before the IRS, did not reach return preparers. See Loving v. IRS, 742 F.3d 1013, 1015-16 (D.C. Cir. 2014). The District Court granted summary judgment to the plaintiffs, invalidating the credentialing requirement, and the Circuit affirmed. Id. at 1021-22. Loving thus invalidated many of the RPO activities that the PTIN fees funded. However, it left undisturbed the regulations requiring all return preparers to obtain and renew PTINs and to pay a fee for doing so.

B. The IRS's PTIN fee calculations

The following is a summary of the PTIN and vendor fees that the IRS charged return preparers between Fiscal Year ("FY") 2011 and 2017 and from FY 2021 to the present,¹ as well as the various cost models that the IRS used to set those amounts.

1. Fees based on the 2010 Cost Model

In 2010, the IRS completed a Cost Model estimating that the annual PTIN registration and renewal fee should be set at $50, the amount that the agency would ultimately charge from the new PTIN system's implementation in FY 2011 through 2015. Def.'s Statement of Undisputed Material Facts ("DSUMF") ¶¶ 66, 71-73, ECF No. 173-2; Pls.' Resp. to DSUMF ("PRDSUMF") ¶¶ 66, 71-73, ECF No. 187-2. The government summarizes the activities whose expected costs the IRS used to reach that number as follows:

• Communications & Customer Support

• IT Development & Implementation

• Program Compliance (Professional Designation Checks (PDC), Personal Tax Compliance (PTC), Criminal Background Checks (CBC), and administrative support)

• Management and supervisory costs (entitled OPR/PMO Operations Support)

• Foreign Preparer Processing

DSUMF ¶ 64; see 2010 Cost Model, Ex. 13 to Defs.' Mot. for S.J., ECF No. 174-8. Plaintiffs add, and the government does not dispute, that the "Program Compliance" component "also included 'Verify[ing] Return Preparers' Self-Reported Tax Compliance,' 'Develop[ing] processes for Identifying and Treating Return Preparers Filing w/o PTIN or Incorrect PTIN,' and 'Verify[ing] Return Preparers' Self Certified Continuing Education.' " PRDSUMF ¶ 64 (alterations in original) (quoting Ex. U to Pls.' Mot. for S.J. at 5, ECF No. 176-21); see PSUMF ¶ 34; ...