Last week in AICPA v IRS the DC District Court ruled in favor of the IRS in the latest round of the AICPA’s fight to dismantle the IRS’s Annual Filing Season Program. As some of you may recall, the Annual Filing Season Program (AFSP) was the IRS’s reaction to losing in its efforts to impose on unlicensed preparers a mandatory testing and education regime in Loving v IRS. Rather than force unlicensed preparers to take an entrance test and take continuing education, the IRS now allows preparers to opt in, with the benefit that those who sign on appear in an online searchable database of preparers. The AFSP also imposes a cost to those who do not opt in; they are not permitted to engage in limited representation of the clients whose returns the IRS audits.
Last year the DC Court of Appeals, reversing the District Court, held that the AICPA had standing to bring the suit challenging the AFSP. After the case was remanded to the District Court and prior to that court getting to the heart of the merits argument, IRS filed another motion to dismiss, this time not on constitutional standing grounds (where it lost on appeal). Instead, IRS argued that the case should be dismissed because AICPA was not within a zone of interests that Congress sought to protect. In last week’s opinion, the District Court held that while AICPA had standing to bring the suit the suit should be dismissed because AICPA was not within the zone of interests protected by 31 U.S.C. § 330(a) (dealing with regulating practice before Treasury and conditioning practice upon qualifications) and 31 U.S.C. § 330 (b) (comprising of penalties and rules for the disbarment of practitioners).
In this post I will briefly discuss the zone of interests issue and also address some of the procedural implications of the opinion, including how the opinion foreshadows other challenges to the AFSP.
The AICPA is Not in the Zone of Interests
As last week’s opinion discusses, the zone of interests question is not a constitutional standing question (though it is similar); instead, “it is a ‘statutory question’ that asks ‘whether ‘a legislatively conferred cause of action encompasses a particular plaintiff’s claim.’ Mendoza v. Perez, 754 F.3d 1002, 1016 (D.C. Cir. 2014). Likely for this reason, satisfaction of the zone-of-interests test is no longer a “jurisdictional requirement” and is instead “a merits issue.” Crossroads Grassroots, 788 F.3d at 319 (citations omitted).
Was AICPA within the class of persons Congress sought to protect with 31 U.S.C. § 330(a) and (b)? The court said no. The upshot of the opinion is that AICPA brought this suit because it felt that the Annual Program would threaten its members’ market share; worried that the public would view the Annual Filing Season as a credential that would draw consumers from CPAs during tax season, the AICPA sought to stop the program:
AICPA’s objective here, as it relates to its competitive injury, is to “remov[e] the AFS Rule’s spurious credential from the marketplace.” Opp. at 2; see id. at 3 (“[A]s competitors of unenrolled preparers, AICPA members’ interests” consist of, inter alia, “ensuring that their hard- won qualifications are not diluted by the Rule’s unlawful credential.”). Digging deeper, however, its interest relates to “maximizing . . . profits, apparently by avoiding competition with” unenrolled preparers in the market for tax services. See Liquid Carbonic Indus. Corp. v. F.E.R.C., 29 F.3d 697, 705 (D.C. Cir. 1994).
That, according to the District Court ran counter to the protective purpose of 31 USC § 330, which Congress enacted in the mid-19th Century as a means to protect Civil War veterans against unscrupulous agents:
On the surface, it seems difficult to square AICPA’s interest in dismantling the IRS’s program with Congress’s goal of safeguarding consumers. In creating the AFS Program, the IRS aimed to improve unenrolled preparers’ knowledge of federal tax law, thereby “protecting taxpayers from preparer errors.” Rev. Proc. 2014-42, § 2. This objective appears closely aligned with Congress’s goal of ensuring taxpayers are provided “valuable service.” 31 U.S.C. § 330(a)(2)(C). AICPA does not impugn the IRS’s motive in creating the program or otherwise argue that, apart from the risk of “consumer confusion” – i.e., that consumers might confuse a more-qualified but higher-priced CPA with a less-qualified but cheaper unenrolled preparer – the AFS program does not flow logically from Congress’s objective of protecting consumers. Rather, it seeks to eliminate the Program notwithstanding its potential benefit to consumers precisely because the program’s “‘government-backed credential’” renders “unenrolled preparers . . . ‘better able to compete against other credentialed preparers,’ ‘uncredentialed employees of [AICPA] members,’ and ‘CPAs and their firms.’” Opp. at 10 (quoting AICPA II, 804 F.3d at 1197-98).
The zone of interests test is more nuanced than this snapshot provides, and I leave to those who wish to dig deeper to read the opinion itself as well as Ed Zollar’s excellent write up of the case and that issue in Federal Tax Developments.
Not the Final Word on Challenges to the IRS Program
In addition to providing a roadmap on the zone of interests test, the opinion itself is worth a careful read for its suggestion that other parties may in fact have a beef with IRS even if the AICPA does not. To that end, while Judge Boasberg, the judge who wrote the district court Loving opinions, carefully recounts the history of IRS efforts to regulate preparers, he also offers a not so subtle critique of the IRS’s decision to use a Revenue Procedure to promulgate the AFSP. He does so by reminding that he issued a clarifying opinion after IRS lost in Loving. There he rejected IRS’s request for a stay of the injunction pending appeal, though he noted that IRS might choose to keep in place some of the apparatus of its licensing regime as “it is possible that some preparers may wish to take the exam or continuing education even if not required to. Such voluntarily obtained credentials might distinguish them from other preparers.” He notes that “[p]erhaps taking this clarification to heart, the IRS decided to retain much of the rule’s infrastructure, but did so by relying on tax preparers’ willingness to voluntarily participate.”
While referring to the IRS’s possibly taking his advice, this opinion also discusses that IRS put this process in place in a revenue procedure, “albeit without notice and comment.” The IRS use of revenue procedures to carry the hefty weight of meaningful rules is something we have discussed before; as is the IRS penchant for getting rules in place without formal notice and comment (see Dan Hemel’s post earlier this week for the Chamber of Commerce challenge to Treasury’s inversion regs, for example).
More from the opinion and the hint to other challengers:
A final word. While AICPA does not have a cause of action under the APA to bring this suit, the Court has little reason to doubt that there may be other challengers who could satisfy the rather undemanding strictures of the zone-of-interests test. “The same claim may be viable in the hands of one challenger and not in those of another that, for example, has interests that make it less than a reliable private attorney general to litigate the issue of the public interest in the . . . case.” HWTC IV, 885 F.2d at 925-26 (citations and quotation marks omitted). Given the points raised in the merits briefing, which the Court now has no occasion to consider, Defendant may wish to ensure that its Program was properly promulgated before a suitable party mounts its own challenge. (emphasis added)
A few years ago I wrote an article explaining why I thought it was important for IRS to seek greater input especially on rules that have a significant impact on those whose interests are not typically represented through trade associations or lobbying groups. In writing the article, I drew upon a deep literature in administrative law that discusses the pros and cons of requiring agencies to more closely adhere to the requirements to use the notice and comment procedure to promulgate rules. I am no zealot on these issues, and while it has been a while since I deeply waded in those waters I am sympathetic to those who feel IRS should more meaningfully and systematically engage with those whose perspective would improve the quality of the rules the IRS issues. As an added benefit it would also likely engender greater acceptance of the rules from those who may not necessarily like the outcome but who feel that their voice was heard. (I do recognize that before IRS did come up with its ill-fated mandatory testing and education program that the courts invalidated IRS did seek input in the form of hearings and an informal comment period).
We likely have not seen the last of the challenges to the IRS Annual Filing Season Program; nor have we seen the last procedural challenge to the issuance of rules. While this round is a nice IRS victory, Judge Boasberg’s opinion is perhaps a reminder that IRS ignores strict adherence to some administrative law norms at its peril.