A federal court has found the IRS overcharged tax preparers for their required preparer identification numbers (PTINs) from 2011 to 2017 and ordered the IRS to refund any fees that exceeded the agency’s expenses. The decision on Steele v. U.S., No. 1:14-cv-01523 (D.D.C. 2023), marks the second time the U.S. District Court for the District of Columbia has addressed the issue, ruling in 2017 that the IRS must refund all PTIN fees paid during those years, but that ruling was overturned on appeal. The decision is dated Jan. 23, but was not released until Feb. 21.
The court’s decision appears to end a long-running legal saga that began in 2017 when the district court granted summary judgment to the plaintiffs in a class action lawsuit, which claimed the access fees the IRS charged for PTIN registrations and renewals should be refunded because the agency lacked the legal authority to impose them. The IRS made PTINs mandatory for tax preparers in 2011 and began charging a fee to obtain and renew one.
While the court told the IRS to “determine the appropriate refund” by making reasonable estimates of what the agency was lawfully allowed to charge for PTIN fees imposed from 2011 to 2017, it does not lay out a timeline or a mechanism for the refunds. It also does not address the question of whether or not the IRS will owe interest on the refunded amount. Finally, the decision does not call for a refund of fees paid after 2017.
Fees charged vs. IRS’s costs
The IRS charged preparers a $50 fee for a new PTIN along with a $14.25 vendor fee for the 2011 through 2015 fiscal years, and $50 for a renewal with a $13 vendor fee. During litigation, the government conceded that it should only have charged $17 for the 2011 through 2013 fiscal years and $37.25 for 2014 and 2015.
After conducting a review of its costs, in 2016, the IRS began charging a $33 PTIN renewal fee and a $14 vendor fee for first-time registrants, and a $33 fee with a $13.25 vendor fee for renewals. In 2017, the IRS began charging a $33 for a renewal and a $17 vendor fee. The government said it should have charged $38 for new registrants and $37.25 for renewals during 2016, and $41 for all preparers in 2017. The current fee is $30.75.
Previous decision overturned on appeal
In its 2017 ruling in the case, the district court found that the Internal Revenue Code authorized the IRS to require the use of PTINs, but that the Independent Offices Appropriations Act (IOAA) barred the agency from charging any fees for issuing them. The court said agencies could only charge for items that constitute a service or thing of value, and the PTIN registration and renewal fees did not qualify. The court also said the IRS was barred from charging the fees going forward.
That decision was overturned by the U.S. Court of Appeals for the D.C. Circuit in 2019. The D.C. Circuit found that the PTIN system was a service that provided return preparers with a private benefit. Specifically, it protects the confidentiality of their personal information. Therefore, it found that the IRS could impose a fee to recoup the costs of generating PTINs and maintaining its database.
After overturning the lower court’s decision, the D.C. circuit sent the case back to the district court to reconsider the issue in light of the appeals court’s finding.
Fee must directly benefit preparers
Addressing the case for a second time, the district court found the PTIN and vendor fees charged by the IRS from 2011 through 2017 were excessive to the extent they included amounts spent on activities that were insufficiently related to the provision of a private benefit to preparers. It explained that PTIN-related activities, such as professional designation checks, only benefit the IRS and general public.
Ultimately, the determination of which support costs are allowed comes down to the portion of the IRS’s costs that went to support the provision of PTINs and the maintenance of the PTIN database that benefited preparers, and not the general activities of the agency’s Return Preparer Office, the court said.
Non-fee years not addressed
Under the district court’s 2017 decision, the IRS could not collect the PTIN and vendor fee beginning in 2018. It was only allowed to begin collecting it again in 2021 when the D.C. circuit overruled the district court decision. As a result, no fee was collected during the 2018 through 2020 fiscal years. The IRS asked the district court if it could withhold the fees it would have charged for those years from the refunded amounts.
However, the district court said it could find no examples of cases where a defendant was allowed to offset an award with a sum that it could have charged if not for an injunction that was later invalidated. The district court then declined to address the question of whether the IRS could claw back the foregone fees from 2018 through 2020 using other means, finding the question to be beyond the scope of the case before it.
Information included in this article is accurate as of the publish date. This post is not reflective of tax law changes or IRS guidance that may have occurred after the date of publishing. All taxpayer circumstances are different, and NATP recommends contacting research services if you have specific questions about your clients’ tax situations.