Government Asks Court to Suspend Injunction in Return Preparer Regs Case

In support of this request, the Defendants submit the attached Memorandum in Support, Declaration of Carol A. Campbell, and Proposed Orders.

WHEREFORE, the Defendants request that the Court enter one of the attached Proposed Orders suspending the injunction entered on January 18, 2013.

DATED: January 23, 2013

The Court's injunction has far-reaching negative implications not only for the Service, but also for the public. Although the Court of Appeals may subsequently overturn that injunction, the Defendants and the public will nonetheless suffer irreparable harm if it remains in place during the pendency of the appeal. The Defendants, therefore, request that the Court suspend the injunction during the appeal pursuant to Fed. R. Civ. P. 62(c). In the alternative, the Court should suspend the injunction for at least 14 days to allow the Defendants to seek relief from the Court of Appeals.

A. The Defendants Have a Reasonable Likelihood of Prevailing on Appeal.

Recognizing the difficulty of asking a district court to determine whether its decision is likely to be overturned, the D.C. Circuit has held that a court can grant a Rule 62(c) motion without finding "that ultimate success by the movant is a mathematical probability, and indeed [ ] may grant a stay even though its own approach may be contrary to the movant's view of the merits." Citizens For Responsibility And Ethics in Washington v. Office of Admin., 593 F.Supp.2d at 160 (quoting Holiday Tours, Inc., 559 F.2d at 843) (internal quotations omitted). Accordingly, if the balance of the other factors favors suspending an injunction, this remedy is appropriate so long as "a serious legal question is presented"; under those circumstances, "[t]here is substantial equity, and need for judicial protection, whether or not movant has shown a mathematical probability of success." Id. (quoting Holiday Tours, Inc., 559 F.2d at 844) (internal quotations omitted).

The Court essentially gave two reasons for rejecting the Defendants' position that the Service is authorized to regulate return preparers. First, the Court concluded that the Service cannot regulate return preparers pursuant to its inherent authority because 31 U.S.C. § 330 governs the Service's authority to regulate those who practice before it. (Opinion, 9 (Docket No. 22).) Second, the Court concluded that although section 330 authorizes the Service to regulate those who practice before it at the examination and appeals stages, section 330 does not authorize the Service to regulate those whose only activity before it is return preparation. (Id., 10.) The Court's decision addressed a purely legal question, and the Defendants' appeal will, therefore, be decided de novo. See Wyeth Holdings Corp. v. Sebelius, 603 F.3d 1291, 1296 (D.C.Cir. 2010).

Without simply rehashing the arguments made at summary judgment, the Court of Appeals could reasonably disagree with this Court's reasoning.

For example:

As the Court noted, the Defendants' return preparer program is far-reaching, impacting between 600,000 and 700,000 preparers who are responsible for a substantial number of the more than 80 million returns filed each year. (Opinion, 5, 19.) The Service has worked for over two years to implement that program, and it has established more than 250 testing centers in each of the fifty states, the District of Columbia, and territories such as Puerto Rico and Guam. (Campbell Decl., ¶ 8); http://www.irs.gov/Tax-Professionals/Registered-Tax-Return-Preparer-Test-and-Special-Enrollment-Examination-Test-Center-Locations.

Over 700,000 return preparers have registered with the Service, nearly 100,000 return preparers have registered to take the test, and the Service has received over $100 million in registration and competency testing user fees. (Id., ¶¶ 7, 8, 10.) If history is any indication, the Service will have received almost $4 million more in user fees this month alone. (Id., ¶ 10.) To date, the Service has spent over $50 million to get the program up and running. (Id.)

Immediately discontinuing the program would result in a substantial disruption to tax administration. (Id., ¶¶ 5, 11-16.) Thousands of return preparers who have already submitted their user fees would demand refunds, and the United States would likely face numerous lawsuits -- including class action lawsuits. (See id., ¶ 12.) In addition, thousands of return preparers would undoubtedly continue studying for and attempting to take tests, and the Service would have to undertake an extensive and costly outreach program to attempt to notify those return preparers who have already registered and received a preparer identification number. (See id., ¶ 13.) Standing alone, that aspect of shutting down the program would cost at least $238,000 and does not include the costs associated with modifying or breaching vendor contracts, shutting down computer systems, and finding other positions for the 167 Service employees currently working on the return preparer project. (Id., ¶¶ 10, 12-13.) All these actions -- and taxpayer funds -- would be wasted if the Court of Appeals subsequently overturned this Court's decision and reinstated the return preparer program. Indeed, the Service would then have to enter into new contracts, develop new systems, etc. (Id., ¶ 14.) To describe such efforts as wasteful, inefficient, and irreparably harmful would be an understatement. (See id., ¶ 5.)

C. The Plaintiffs Will Not Be Substantially Harmed by a Suspension of the Injunction.

Despite the sworn declarations of two of the three Plaintiffs that they would likely close their businesses rather than comply with the new requirements, their attorney recently indicated in an interview with Forbes.com that "all of the Plaintiffs in the matter had already submitted their PTIN (preparer identification numbers) and had planned to continue preparing returns this season." Kelly Phillips Erb, Attorney Who Bested IRS In Tax Preparer Regulation Case Speaks Out, FORBES, Jan. 22, 2013, http://www.forbes.com/sites/kellyphillipserb/2013/01/22/attorney-who-bested-irs-in-tax-preparer-regulation-case-speaks-out/. ⁴ Moreover, Internal Revenue Service Notice 2011-6 already permits Plaintiffs to prepare returns until December 31, 2013, without passing the competency examination or becoming registered return preparers. Accordingly, suspending the injunction would not substantially harm the Plaintiffs during the foreseeable life of the appeal.

D. Suspension of the Injunction Would Serve the Public Interest.

The D.C. Circuit has shown a willingness to suspend injunctions against the implementation of initiatives that benefit the public interest. See Nat'l Family Planning and Reproductive Health Ass'n, Inc. v. Sullivan, 979 F.2d 227, 230 (D.C.Cir.1992) (staying injunction against certain doctor-patient counseling). As discussed in Section I.B., above, not suspending the injunction would cause irreparable harm to the Service and the public fisc. As such, a suspension is in the public interest. Indeed, irrespective of these costs, the administrative record shows overwhelming public support for the new regulations, and concerns have already been voiced about the impact of the Court's injunction on the public.⁵

In addition, one of the primary purposes of the return preparer scheme is to protect the public. See 76 Fed. Reg. 32,286 (program was implemented "to ensure uniform and high ethical standards of conduct for all tax return preparers"); (Campbell Decl., ¶ 14). As the Electronic Tax Administration Advisory Committee ("ETAAC") recently reported to Congress, the registration requirement addresses such problems as "lack of accountability, no professional training, and limited experience to outright preparer fraud." ETAAC ANNUAL REPORT TO CONGRESS, June 2012, www.irs.gov/pub/irs-pdf/p3415.pdf. And the program does more than just ensure accurate returns and accountable preparers; it also helps to prevent, combat, and resolve identify theft, an area of major public concern. (Campbell Decl., ¶ 17.)

Given that the return filing season commences on January 30, 2013 -- approximately one week away -- massive confusion is also sure to result if the injunction is not suspended. (Id., ¶ 11, 14, 15.) Such confusion will not be limited to return preparers unsure of their obligations, either; the public, which has repeatedly been told that return preparers can register with the Service and take a test to demonstrate their competency, will also be confused when informed by return preparers that these standards have been cast aside. (Id., ¶ 14, 15.) Accordingly, a suspension of the Court's injunction for the duration of the Defendants' appeal would serve the public interest.

DATED: January 23, 2013

² At the very least, the Court of Appeals could reasonably find that section 330 is ambiguous and defer to the Service's interpretation. (See Opinion, 9 ("Plaintiffs offer no independent argument for why, if the statute is ambiguous, the IRS's interpretation would be 'arbitrary and capricious in substance, or manifestly contrary to the statute' under Chevron step two.").)

³ The Court also found that 26 U.S.C. § 6103(k)(5) supports its interpretation of section 330. (Id., 15-16.) Specifically, section 6103(k)(5) allows the Service to disclose violations of sections 6694, 6695, and 7216 to state and local agencies but makes no mention of section 330. (Id.) However, the Court of Appeals could reasonably find that there was no need to mention section 330 because final disciplinary sanctions under section 330 are already publicly available. See http://www.irs.gov/Tax-Professionals/Enrolled-Agents/Announcements-of-Disciplinary-Sanctions.

⁴ (But see Killian Decl., ¶¶ 14-15 (Docket No. 12-3) (indicating that he would rather close his business than raise his fees); Gambino Decl., ¶ 17 (indicating that he objects to the new requirements on moral and economic grounds and would rather close his business than comply).)

⁵ (See Defs.' Memo. in Support of Summary Judgment, 6, 19 (various aspects of the program received approval rates between 88 and 98 percent)); e.g., Saabira Chaudhuri, Intuit 'Disappointed' in Decision Preventing IRS From Regulation Nonprofessional Preparers, FOX BUSINESS, Jan. 22, 2013, http://www.foxbusiness.com/technology/2013/01/22/intuit-disappointed-in-decision-preventing-irs-from-regulating-nonprofessional/#_methods=onPlusOne%2C_ready%2C_close%2C_open%2C_resizeMe%2C_renderstart%2Concircled&id=I0_1358895768502&parent=http%3A%2F%2Fwww.foxbusiness.com.

1. I am the Director of the Return Preparer Office within the Internal Revenue Service ("Service").

2. My responsibilities include the executive management and oversight of one of the offices that administers the regulations governing practice before the Service (reprinted as "Treasury Department Circular No. 230"), including acting on applications to practice before the Service and administering competency testing and continuing education.

3. These aspects of my duties require knowledge and an understanding of the registered tax return preparer regulatory program covered by this Court's Order dated January 18, 2013 ("the Order").

4. After being notified of the Order, I directed that all reasonable efforts be undertaken to comply with the terms of the Order. I also consulted with other Service executives and employees who are involved in the registered tax return preparer regulatory program, as well as with the attorneys in the Department of Justice and Service's Office of Chief Counsel, about its consequences for the Service.

5. I conclude that the Service will be irreparably injured absent a stay of the Order pending an appeal and final resolution of this lawsuit. The basis for my conclusion is set forth in paragraphs 6-17 of this declaration.

6. The Service's implementation of the registered tax return preparer regulatory program has been ongoing since 2010. Since that time, the Service has invested an enormous amount of time, money, and other resources to establish a registration system, minimum competency examination, and continuing education model, along with accompanying enforcement measures.

7. The Service began implementing the online preparer tax identification number ("PTIN") application process with the assistance of a contractual vendor for all tax return preparers, including attorneys, certified public accountants, and enrolled agents, in 2010. In 2012, over 744,000 tax return preparers registered with the Service. Ongoing activities in implementing the PTIN application for registered tax return preparers include, among others, reviewing the application, conducting tax compliance and suitability checks, running a call center to answer any questions, providing communications and customer support, and developing internal computer systems.

8. The Service began implementing the registered tax return preparer competency examination with the assistance of a contractual vendor in 2011. Since November 2011, almost 99,000 preparers have scheduled appointments to take the registered tax return preparer test. There are over 250 testing centers across the United States and its territories. Ongoing activities in implementing the examination include drafting and reviewing the questions, setting up test sites, scheduling and proctoring examinations, running a call center to answer any questions, providing communications and customer support, and collecting the user fee to take the competency examination.

9. The Service began implementing the continuing education program in 2011. In 2012, the Service approved 642 continuing education providers who offered 18,000 courses for purposes of the continuing education program. Ongoing activities in implementing the continuing education program include approving continuing education providers who are authorized to offer continuing education.

10. There are 167 Service employees, including 119 user fee funded positions, supporting the return preparer program, and also providing preparer assistance, complaint referrals, compliance and enforcement oversight, and a multitude of other services in support of tax practitioners and other stakeholders. The total monetary costs spent by the Service on the return preparer program generally through the end of calendar year 2012 was approximately $54,317,115. On average, the Service has received approximately $3,689,489 in PTIN user fees (from September 2010) and $192,697 in competency testing user fees (from December 2011) each month. The combined PTIN user fee and competency testing user fees through the end of calendar year 2012 exceeded $105,810,000.

11. The 2013 filing season for 2012 individual income tax returns begins on January 30, 2013. The Service has made considerable efforts, expended significant resources, and made substantial progress in explaining the new registered tax return preparer regulatory program requirements and applicable timeframes to the tax return preparer community through published guidance, consistent messaging, and outreach efforts. Many tax return preparers have previously made arrangements to take the competency examination, which can include making travel arrangements and taking preparatory classes. Many tax return preparers have also previously made arrangements to comply with continuing education requirements. Similarly, continuing education providers have spent considerable resources in setting up their courses. Absent a stay, there will be confusion and uncertainty among tax return preparers regarding their responsibilities and obligations.

12. Irreparable harm will result from the Service's efforts to halt the registered tax return preparer regulatory program pending appeal. The Service will be forced to completely shutdown the IT systems associated with the PTIN application and renewal program. The Service will also be forced to completely shut down competency examination testing over 250 testing centers. As a result, this will require the Service to incur costs associated with the modification or breach of its contract with several of its contractual vendors. The Service will have to allocate resources and spend funds to address requests for refunds of various user fees, in addition to incurring costs and expending resources associated with litigation related to these fees. In addition, the Service will incur costs associated with modifying and updating numerous websites that provide information regarding the registered tax return preparer regulatory program. All of these changes may require significant database reprogramming that would have to be reversed if the Order is reversed on appeal.

13. The Service will incur further costs and be irreparably harmed by the adverse impact the Order will have on its ongoing compliance and enforcement efforts regarding the registered tax return preparer regulatory program. The Service will have to notify all tax return preparers that the registered tax return preparer regulatory program can no longer be enforced. Sending information to every tax return preparer with a PTIN to inform them of the Order would cost the Service $238,000 at a minimum. Service employees working on the registered tax return preparer regulatory program will have to be reassigned. The Service has already expended substantial resources to train these employees on the registered tax return preparer regulatory program and will have to expend more resources to retrain these employees absent a stay of the Order.

14. If the Order is not stayed, but the Service is ultimately successful on appeal, the Service will have to incur substantial costs to restart the tax return preparer regulatory program. The cost and time involved in securing any necessary contracts with vendors will be included in these restart costs. Restarting the program after shutdown will also involve significant public outreach efforts and costs since there will likely be public confusion resulting from a shutdown and restart of the program.

15. The taxpaying public will also be adversely impacted if the Order is not stayed. The taxpaying public is likely to be confused about the requirements for tax return preparers during the imminent filing season commencing January 30th. The Service made substantial education and outreach efforts to inform the unlicensed preparers of the new requirements for tax return preparers and has addressed in many public forums the goals of the registered tax return preparer regulatory program and the importance of that program to taxpayers. A sudden and immediate change in the credentialing and expected competency levels for tax return preparers will disrupt and impair tax administration.

16. The registered tax return preparer regulatory program at issue in this case was established after a comprehensive review, the Return Preparer Review, that included substantial input from the tax return preparer community. The results of the Return Preparer Review demonstrated the necessity to address the problem of inaccurate returns prepared by tax return preparers. The Return Preparer Review highlighted other reports that concluded a significant percentage of tax return preparers failed to perform basic due diligence or took positions that the tax return preparer knew were not supportable. A principal objective of the registered tax return preparer regulatory regime was to protect the public from the injury caused by incompetent or disreputable tax return preparers. The Service estimates that fraud, abuse, and error relating to the earned income tax credit costs the taxpaying public about $13 billion annually; almost two-thirds of all returns claiming the earned income tax credit are prepared by tax return preparers. Furthermore, since the beginning of fiscal year 2010, over 500 tax return preparers have been criminally prosecuted by the Department of Justice based on referrals made by the Service. Without a stay of the Order, the Service will lose the substantial value added to its compliance and enforcement efforts by the registered tax return preparer regulatory program.

17. Identity theft, which also includes theft by unauthorized tax return preparers, is also a major problem for the Service. The registered tax return preparer regulatory program assists in preventing, combating, and resolving the adverse effects resulting from identify theft perpetrated by unscrupulous individuals who file unauthorized returns for others with stolen information, or information from former clients. On the preventive side, the registered tax return preparer regulatory program requires that registered tax return preparers have a PTIN and, accordingly, permit the Service to identify and track the returns prepared by registered tax return preparers. The registered tax return preparer regulatory program also requires registered tax return preparers to pass a suitability check (including a criminal record check), preventing criminals from legally filing tax returns for others. The regulations also permit the Service to discipline a registered tax return preparer who has engaged in fraudulent conduct, including identity theft. Without a stay of the Order, the protection afforded by the registered tax return preparer regulatory program is lost.

I declare under penalty of perjury that the foregoing is true and correct.

Executed on the 23rd day of January 2013, in Washington, D.C.