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Update-IRS Issues: Not Political

As Roger Russell quoted Roger Harris, the former chair of the IRS Advisory Council in Russell’s August 2013 article in Accounting Today, “there is a danger of an over-reaction to the IRS scandals”, with budgets being cut even further. Based on a recent post in a National Society of Accountants (NSA) newsletter, on July 17, the House Appropriations Committee voted 27-21 to approve a bill that cuts IRS funding by 24% compared to the previous year and places new restrictions on the agency.  Voting was split down party lines, with Republicans pushing to further punish the IRS over past indiscretions, noting that, with record projected federal revenues in the upcoming fiscal year, the agency shouldn’t need more funding to operate efficiently.  Frankly, I tend to agree with the Republicans thoughts; however, the funds needed to operate will not be found automatically.  The government’s, including th IRS’s, method of acocunting, otherwise known as “fund accounting” “has been the government way for eons” and “ending fund accounting will not be like waving a magic wand”.  You don’t just move from “protecting” your budget to “bringing down a profit” overnight; however, the process has to begin somewhere: this just might be a good place to start.

In another recent post to the NSA newsletter, on September 24, a three-judge panel of the U.S. Court of Appeals for the District of Columbia heard the IRS appeal of the District Court’s decision that the IRS does not have the authority to regulate tax preparers.  Based on NSA Executive Vice President John Adams assessment of the proceedings, things couldn’t have gone much worse for the IRS.  Getting a little “into-the-weeds” here, as with the original hearing, the court appeared to be applying the “Chevron Test”, involving a two-step inquiry, whereby first the IRS needed to enunciate “whether Congress has directly spoken to the precise question at issue”, and if not, then establishing that the regulation in question is “based on a permissable construction of the statute”.  To satisfy the first part, the IRS had to identify that the intent of Congress is clear, i.e., that there is a statute defining “practice” before the IRS.  As in the first case, the attorneys for the IRS couldn’t identify a “statute” defining “practice” before the IRS, which then led the reviewing court to step two in the Chevron process.  Sitting in the gallery, John Adams felt that the IRS attorneys, in trying to satisfy step 2 of Chevron, left one of the judges, Judge David Sentelle, openly skeptical that the agency “has had such authority to regulate preparers for the past 130 years but has only recently chosen to exercise that authority”.  In John Adams opinion, it appeared the three judge panel were siding with the Loving attorneys representation that preparation of the tax return “was a part of compliance”, and that the preparer “is assisting the taxpayer in preparing a return” which the taxpayer then must sign and submit to the agency.  The Loving attorneys also establishd, and the judges appeared to be convinced that “it is only when the IRS disputes the return and a tax controversy arises that the preparer or other professional may provide a representation” or “presenting a case” before the IRS.  The NSA stated that the Court is expected to take several months to announce a decision, possibly being early 2014 before there is a resolution, but that the NSA has been left to wonder whether any of the agency’s arguments were sufficient to convince the Appeals Court panel to overturn the lower court’s ruling in favor of Loving.  My contention here is that the preparing of a tax return has many different options to choose from as to the best methods of presenting the tax payer’s position for its particular tax situation to the IRS.  In my opinion, this makes the preparer out to be “presenting a case”, as the preparer decides which avenue he or she wants to use in preparing the return and presenting it to the IRS, with the taxpayer’s and the preparer’s signatures attached.  I guess there will be more to come on this in the future, with the ultimate resolution A LONG way off, if the court decides against the IRS and it is left up to Congress to come up with specific legislation addressing the issue.