Tax Foundation, Individuals File Amici Brief in Preparer Oversight Case

B. Rulings under review. References to the rulings at issue appear in the Brief for the Appellants.

C. Related cases. To the best of his knowledge, counsel for amici curiae is not aware of any previous or pending related cases in this court.

                          TABLE OF CONTENTS

Ronda Gordon

Ronda Gordon is a tax-return preparer in Vancouver, Washington. She has been preparing returns for 23 years. For many years, Ms. Gordon worked in an accounting firm. For the last 13 years, she has been self-employed, preparing tax returns in her home. She does not advertise, instead obtaining clients through word-of-mouth referrals. She is the parent of an adult handicapped child, who lives with her and for whose care she is responsible. Many of Ms. Gordon's clients are low-income individuals with handicapped children. Ms. Gordon prepares approximately one hundred federal income tax returns each year. She is not an attorney, CPA, or Enrolled Agent, and thus is subject to the regulations. Because her fees are modest (less than half what is charged by accounting firms in her area) and because the cost to comply with the regulations is substantial compared to the total fees she earns each year, it was necessary for her to increase her charges this year because of the cost of complying with the regulations' continuing education requirements, and it would be necessary for her to increase her charges further next year, if the district court decision is not upheld, because of the cost of complying with the testing requirement. Because of the composition of Ms. Gordon's client base, these fee increases are a burden to her clients.

In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, and the direct adverse effects on her and on her clients, Ms. Gordon objects to the regulations because they are unnecessary, since, in Ms. Gordon's experience, most tax return preparers to whom the regulations apply are competent and conscientious; and because the regulations are not targeted to the problems they are intended to address but instead are broadly applicable to many situations where no problems exist.

Dennis Tafelski

Dennis Tafelski is a retired former IRS employee residing in Summerfield, Florida, who in recent years has prepared approximately ten to fifteen individual income tax returns each year for other retirees. Mr. Tafelski worked for the IRS for 33 years, starting in 1973 and retiring in 2006. Mr. Tafelski held various positions during his time with the IRS, including Internal Revenue Agent, Examination Group Manager, and Appeals Officer. Mr. Tafelski prepares returns in his home and does not advertise his services, instead obtaining clients through word-of-mouth referrals. Mr. Tafelski is not an attorney, CPA, or Enrolled Agent, and thus would be subject to the regulations if he continued preparing federal income tax returns. Because of the cost and compliance burden imposed by the regulations, Mr. Tafelski concluded it is not worthwhile for him to continue preparing returns, because of the small number of returns he prepares and the modest fees he charges. If the district court's decision were upheld, Mr. Tafelski would resume preparing returns.

Based on his longstanding and extensive experience working for the IRS and his experience in preparing returns, Mr. Tafelski has a number of objections to the regulations. In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, and the direct effects of the regulations on him, Mr. Tafelski objects to the regulations because they will result in substantially increased tax-return preparation fees for the types of retired individuals for whom Mr. Tafelski has prepared returns; because they contain no exemption for low-volume preparers such as himself; because the regulations' exemption for attorneys and CPAs is unwarranted because of the normal absence of tax-specific continuing education requirements for attorneys and CPAs; and because the IRS has seldom made use of its existing statutorily authorized tools for regulating tax-return preparers, such as the tax-return preparer penalty.

Jason Dinesen

Jason Dinesen is an Enrolled Agent located in Indianola, Iowa. He began preparing tax returns in 2009. He owns and operates a business that provides a variety of tax services for individuals and small businesses, including tax-return preparation. He also maintains a tax blog, dinesentax.com. As an Enrolled Agent, Mr. Dinesen is not directly affected by the regulations. Nevertheless, Mr. Dinesen believes the regulations would have an indirect adverse effect on his business (and on Enrolled Agents generally) because the Registered Tax Return Preparer designation created by the regulations would have the effect of diminishing the value of the Enrolled Agent designation in the market for tax-preparation services, largely because the number of Registered Tax Return Preparers would be substantially greater than the number of Enrolled Agents.

Christine Engel

Christine Engel has been a CPA since 1981. Ms. Engel currently works in a small accounting firm in Tucson, Arizona. Throughout her career, she has specialized in federal income tax work. Currently, she reviews approximately 500 federal income tax returns each year and spends 90 percent of her time on tax work during tax season. During the rest of the year, Ms. Engel spends the majority of her time on federal income tax work, including representing taxpayers in connection with IRS examinations of their income tax returns, before the IRS Appeals Office, and in connection with a variety of other interactions between taxpayers and the IRS. In addition, Ms. Engel presents seminars to other tax professionals on the preparation of federal income tax returns. Currently, Ms. Engel presents approximately ten to twelve such seminars each year. In previous years, she presented as many as 60 such seminars each year.

As a CPA, Ms. Engel is not directly affected by the regulations. Nevertheless, based on her longstanding and extensive experience in tax practice, Ms. Engel has a number of objections to these regulations. In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, Ms. Engel objects to the regulations because they will reduce the availability of low-cost tax-preparation services for taxpayers for whom higher-cost services will be a financial burden; because, in Ms. Engel's experience, the tax-return preparers directly affected by the regulations are generally competent and conscientious; because the regulations are unlikely to eliminate or deter unscrupulous preparers; and because the regulations are likely to create a more adversarial relationship between the IRS and preparers.

Russell Fox

Russell Fox has been an Enrolled Agent since 2003, and a tax professional since 2000. He is located in Las Vegas, Nevada. He is co-owner of Clayton Financial and Tax LLC. Before founding the predecessor of this business in 1999, he had a 17-year career in finance and accounting. His firm provides the full range of tax services for its clients: tax-return preparation, representation in dealing with the IRS, and consulting. His firm's clients consist primarily of professional gamblers and small business owners. During the current tax season his firm will have prepared approximately 800 to 900 tax returns. He also maintains a tax blog, taxabletalk.com.

As an Enrolled Agent, Mr. Fox is not directly affected by the regulations. Nevertheless, based on his extensive experience in tax practice, he has a number of objections to the regulations. In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, Mr. Fox objects to the regulations because the IRS already has ample statutorily authorized tools to apply against incompetent or unscrupulous tax-return preparers; because the regulations will not be effective in eliminating incompetent or unscrupulous tax-return preparers; because they will give a tacit stamp of approval to preparers who are not competent; because they will have the effect of driving many low-volume tax-return preparers out of business, thereby increasing the cost of tax-return preparation services for the clients of those preparers; and because administering the regulations will require scarce IRS resources that could be better used for other purposes, such as combatting identity theft.

Joe Kristan

Joe Kristan has been a CPA since 1984. He is located in Des Moines, Iowa. He is a shareholder in Roth & Company, P.C., an accounting firm with approximately 35 employees, and helped found this firm in 1990. Mr. Kristan practices exclusively in tax matters, including tax-return preparation, primarily for businesses, as well as tax planning and consulting. His clients include closely-held businesses and community banks. Since 2001, Mr. Kristan has maintained his firm's tax blog, taxupdateblog.com. He frequently teaches at tax schools and is an author of articles on tax issues for technical and general publications.

As a CPA, Mr. Kristan is not directly affected by the regulations. Nevertheless, based on his longstanding and extensive experience in tax practice, Mr. Kristan has a number of objections to these regulations. In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, Mr. Kristan objects to the regulations because they will reduce options for consumers of tax-preparation services by driving many low-volume but competent and conscientious tax-return preparers out of business because of the cost of compliance with the regulations; will increase the compliance cost and burden on low-volume tax-return preparers that remain in business; will increase the cost of tax preparation services without increasing the value of those services; will prompt some low-income individuals to resort to tax-return preparers who will evade compliance with the regulations; will prompt some low-income individuals to prepare their own returns, rather than using paid preparers, resulting in less accurate returns; will prompt some low-income individuals to cease filing altogether; will adversely affect Enrolled Agents by diminishing the value of their Enrolled Agent designation; and will likely ultimately be extended to CPAs, attorneys, and Enrolled Agents.

Richard Schiveley

Richard Schiveley has been a CPA for over forty years. He has been a sole practitioner since 1971. He is located in Reno, Nevada. He currently works exclusively on federal income tax matters and currently prepares approximately forty federal income tax returns each year. Mr. Schiveley also does tax planning and tax consultation work.

Because Mr. Schiveley is a CPA, he is not directly affected by the regulations. Nevertheless, based on his longstanding and extensive experience in tax practice, Mr. Schiveley has a number of objections to the regulations. In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, Mr. Schiveley objects to the regulations because they are unnecessary because of the ample specific statutory authority to regulate income tax-return preparers the IRS already possesses under a number of provisions of the Internal Revenue Code, such as the tax-return preparer penalties in 26 U.S.C. §§ 6694 and 6695, among others; and because they impose a substantial compliance burden on tax-return preparers that are small businesses.

The Tax Foundation

The Tax Foundation is a section 501(c)(3) non-partisan, non-profit research institution founded in 1937 to educate the public on tax policy. Based in Washington, D.C., its economic and policy analysis is guided by the principles of sound tax policy: simplicity, neutrality, transparency, and stability. While the Tax Foundation is not directly affected by the regulations, the Tax Foundation promotes transparency in tax regulation enactment and strong oversight of the IRS and believes the regulations undermine these goals. In addition to the defects in the regulations described by the district court, the plaintiffs-appellees, and this brief, the Tax Foundation believes the costs of the regulations substantially exceed potential benefits.

Amici believe the district court was correct to hold the regulations invalid under Chevron step one and endorse the plaintiffs-appellees' arguments in support of the district court's holding. However, because this Court's Rule 29(a) provides that an amicus curiae brief should not repeat legal arguments made by the party the amicus is supporting, this brief will not focus primarily on whether the district court was correct in its Chevron step one holding.

This brief will instead focus primarily on additional reasons the regulations are invalid and why the district court should accordingly be affirmed even if this Court rejects its Chevron step one holding. First, however, this brief will address the argument made by amici former Commissioners that preparing a tax return is equivalent to "presenting a case."

Section 330's reference to "advis[ing] and assist[ing] persons in presenting their cases" refers to presenting cases to an administrative agency (the Treasury Department). Nevertheless, the more usual context for "presenting cases," especially in 1884, is presenting cases in court, and the phrase "presenting their cases" should accordingly be interpreted consistently with the meaning of "presenting cases" in court. Moreover, the activities involved in presenting cases to an administrative agency are similar to the activities involved in presenting cases in court.

Presenting cases to either a court or an administrative agency requires the formulation and presentation of factual evidence and legal arguments, in writing and in person, to support the position of the party represented. Presenting a case encompasses not only the party's affirmative case but also the formulation and presentation of responses, on factual and legal issues, in writing and in person, to questions or objections regarding the party's affirmative case.

Preparing a tax return involves none of these activities. Preparing a tax return instead involves merely the presentation of conclusions regarding the various items that should be reported on the return. A tax return presents neither factual evidence nor legal arguments supporting the conclusions reflected in the amounts on the return. Consequently, a tax-return preparer is clearly not engaged in the combination of written and in-person formulation and presentation of factual evidence, legal arguments, and responses to questions and objections that characterizes presenting a case either in court or to an administrative agency.

Amici former Commissioners contend that preparing a tax return involves "advis[ing] and assist[ing] persons in presenting their cases" because "Congress has decided to administer a wide variety of government assistance programs through the federal income tax system" and because "preparing and filing a tax return is the sole means by which taxpayers are able to present to Treasury their qualification for these programs." Brief of Amici Former Commissioners at2. There are several flaws in this position.

First, the brief of amici former Commissioners shows the amount of total tax refunds paid in 2012 attributable to the two government assistance programs for which amici former Commissioners present totals, $76 billion, was less than 25 percent of the total tax refunds of $322 billion paid that year. Id. at 6-7. As amici former Commissioners acknowledge, "[a] large percentage of the total amount refunded is attributable to excess wage withholding." Id. at 6. Refunds attributable to excess wage withholding are clearly not attributable to the "government assistance programs" on which amici former Commissioners rely for their contention that preparing tax returns constitutes "presenting cases."

Moreover, amici former Commissioners also acknowledge that "only a tiny fraction of the 120 million claims for refund filed against the Treasury will result in any sort of contested administrative or judicial proceeding." Id. at 8. As the district court noted, "[a]t the time of filing, the taxpayer has no dispute with the IRS; there is no 'case' to present."

Amici former Commissioners likewise do not address the considerations demonstrating that "presenting a case" in normal usage encompasses written and in-person presentation of factual evidence and legal arguments. As discussed above, preparing a tax return includes none of those activities.

Amici former Commissioners focus only on returns claiming a refund. However, the regulations are not limited to the preparation of returns claiming a refund but also apply to returns showing an amount of tax not yet paid. The contention by amici former Commissioners that preparing a refund claim is equivalent to "presenting a case" is not only erroneous on its own terms, but also clearly does not support the conclusion that preparing a tax return that does not claim a refund is equivalent to "presenting a case." The repeated references to "claimants" in the original 1884 version of section 330 confirm that income tax returns, which may or may not claim a refund, are not covered by section 330.

The preambles to the proposed and final regulations suggest that tax-return preparers, in preparing a return, advise and assist taxpayers:

Even if it were correct that tax-return preparers ordinarily advise and assist taxpayers by preparing tax returns, that is not equivalent to advising and assisting in "presenting a case," as discussed above. For the same reasons, even for returns claiming a refund, advising and assisting in presenting a claim is not equivalent to advising and assisting in "presenting a case." Moreover, the original 1884 version of section 330 repeatedly referred to "claimants" but nevertheless referred to "the presentation of their cases," not to "the presentation of their claims," thereby leaving no doubt that "the presentation of a case" is not the same thing as "the presentation of a claim."

Moreover, while the preambles' description of the relationship between a tax-return preparer and a taxpayer may sometimes be accurate, in many cases this description is not accurate, because there is no personal contact between the tax-return preparer and the taxpayer. Instead, the taxpayer simply delivers a file to a clerical worker in a tax-preparation office, who then gives the file to one of the office's tax-return preparers based on the preparer's availability rather than the preparer's familiarity with the particular taxpayer's situation.

In such circumstances, which are much more common than those described in the preambles, there is no advice given by the preparer to the taxpayer, no identification for the taxpayer of items or issues for which the law is unclear, and no informing of the taxpayer of the benefits or risks of positions taken on the return. The preparer simply prepares the return and passes it on for review, and the taxpayer later receives the completed return. This process is clearly not "advising" and "assisting" of any sort, much less advising and assisting in "presenting a case."

Although plaintiffs-appellees did not rely on the arbitrary and capricious standard in the district court, nevertheless, the conclusion the regulations are invalid under this standard provides a proper alternative basis for affirming the district court if this Court concludes the district court was incorrect in its Chevron step one holding. See, e.g., SEC v. Chenery Corp., 318 U.S. 80, 88 (1943) (restating "the settled rule that, in reviewing the decision of a lower court, it must be affirmed if the result is correct 'although the lower court relied upon a wrong ground or gave a wrong reason'"). In addition, as discussed below, the district court specifically identified one reason why the regulations violated the arbitrary and capricious standard.

The arbitrary and capricious standard will be discussed first because this standard not only operates independently of Chevron but also overlaps considerably with Chevron step two. This overlap is another reason why the arbitrary and capricious standard provides a basis for affirming the district court, because of the plaintiffs-appellees' alternative reliance on Chevron step two.

A. The regulations violate the arbitrary and capricious standard.

The APA arbitrary and capricious standard provides:

Motor Vehicle Manufacturers Association v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29 (1983), elaborated on this standard. At the time an agency makes a decision, the agency must "articulate a satisfactory explanation for its action." Id. at 43. The explanation must be "sufficient to enable [a court] to conclude that the [decision] was the product of reasoned decisionmaking." Id. at 52. The agency must consider alternative approaches and explain why it rejected those alternatives. See id. at 48. "[T]he courts may not accept appellate counsel's post hoc rationalizations for agency action. . . . [A]n agency's action must be upheld, if at all, on the basis articulated by the agency itself." Id. at 50 (citations omitted).

The agency decision primarily at issue here is the IRS's conclusion that section 330 authorizes the IRS to regulate tax return preparers. Because the IRS did not provide the explanation State Farm requires for this conclusion, the arbitrary and capricious standard was violated, regardless of whether the government provides such an explanation in litigating this case, because "the courts may not accept appellate counsel's post hoc rationalizations for agency action." This requirement that the agency, not appellate counsel, must provide a sufficient explanation encompasses issues of statutory interpretation. See, e.g., Northern Air Cargo v. United States Postal Service, 674 F.3d 852, 860 (D.C. Cir. 2012).

The preambles to both the proposed and final regulations identify a study conducted by the IRS and reported in Publication 4832 as the source of the IRS decision to issue the regulations. See 75 Fed. Reg. at 51714; JA 66-67. The discussion in Publication 4832 of the IRS's authority is a single paragraph:

This single paragraph clearly is not the reasoned explanation State Farm requires. This paragraph simply states the conclusion that section 330 authorizes the IRS to regulate tax return preparers, without providing any reasoning supporting that conclusion.

The references to section 330 in the preambles to the proposed and final regulations are equally inadequate. The preamble to the proposed regulations contains only three substantive references to section 330:

The preamble contains no explanation of the reasoning supporting the conclusion that "[t]he legal basis for these requirements is contained in section 330 of title 31." The preamble to the final regulations contains the same references to section 330 as the first two references in the preamble to the proposed regulations, but not the third, and contains no other explanation of how the IRS concluded section 330 gives the IRS the authority to issue the regulations. See JA 66, 78.

These references to section 330 in Publication 4832 and the preambles clearly do not satisfy State Farm's requirement that the agency must "articulate a satisfactory explanation for its action." The IRS's failure to provide any satisfactory explanation of the reasoning supporting its conclusion that section 330 authorizes the regulations represents a clear violation of the APA's arbitrary and capricious standard.

B. The IRS's failure to explain its reasoning represents a policy choice.

The lack of explanation in the preambles is not surprising in light of the instructions the IRS provides to IRS personnel in the Internal Revenue Manual on drafting regulations and their preambles:

The instruction that "[i]t is not necessary to justify the rules that are being proposed or adopted or alternatives that were considered" is directly at variance with the requirements of the APA arbitrary and capricious standard, as explained in State Farm. Thus, violations of the reasoned-explanation requirement represent a policy choice by the IRS.

This section of the I.R.M. is dated September 30, 2011, but the language quoted was identical in the previous version of this section, dated August 11, 2004. Thus, this instruction was in effect when both the proposed and final regulations were issued.

C. The IRS's failure to explain its reasoning cannot be excused on the basis that its "path" can be "discerned."

State Farm's statement that "[w]e will, however, 'uphold a decision of less than ideal clarity if the agency's path may reasonably be discerned,'" 463 U.S. at 43, cannot apply here, since very different possible "paths" have been "discerned" by the government and by amici former Commissioners.

In the district court and in its opening brief in this Court, the government contended the IRS conclusion that section 330 authorizes the regulations should be upheld because "the practice of representatives of persons before the Department of the Treasury" referred to in section 330 should not be interpreted as being limited to "advis[ing] and assist[ing] persons in presenting their cases." In contrast, amici former Commissioners contend the position that section 330 authorizes the regulations should be upheld on the very different ground that preparing tax returns should be considered as "advis[ing] and assist[ing] persons in presenting their cases."

These are two mutually exclusive potential paths to a conclusion that section 330 authorizes the regulations. The fact that the government has "discerned" one path, while amici former Commissioners have "discerned" the other path, should, without regard to the merits of either potential path, leave no doubt that it is not correct here to say that "the agency's path may reasonably be discerned."

D. The IRS's unexplained change of position on section 330 also violated the APA.

The district court identified an additional reason why the IRS violated the arbitrary and capricious standard, and this provides another alternative basis for affirming the district court. Discussing "whether the IRS has changed its interpretation of § 330 over time," JA 29, the district court concluded "Plaintiffs seem to be correct that the new Rule contradicts previous interpretations of § 330." Id. The district court also stated "the Court could find no explanation for the IRS's flip-flop in the new Rule," after quoting the statement in National Cable & Telecommunications Association v. Brand X Internet Services, 545 U.S. 967, 981 (2005), that "[u]nexplained inconsistency is . . . a reason for holding an interpretation to be an arbitrary and capricious change from agency practice under the Administrative Procedure Act." JA 29. See also, e.g., Honeywell International, Inc. v. NRC, 628 F.3d 568, 579 (D.C. Cir. 2010). While the district court did not rely on this point, the district court's discussion of this point nevertheless provides another alternative basis for affirming the district court.

E. Other defects in reasoning and explanation also violate the arbitrary and capricious standard.

The IRS violated the APA's arbitrary and capricious standard in issuing the regulations in additional ways beyond those described above. For example, the IRS engaged in a flawed cost/benefit analysis under Executive Order 12866 in rejecting alternative approaches. The IRS ignored the increased costs to consumers of tax-return preparation services in making this analysis.

The preambles to both the proposed and final regulations contain sections presenting the analysis required by Executive Order 12866. See 75 Fed. Reg. at 51718-25; JA 73-78. While agency compliance with Executive Order 12866 is not subject to judicial review, nevertheless, these sections of the preambles are relevant in determining whether the IRS violated the APA's arbitrary and capricious standard. Cf., e.g., Thompson v. Clark, 741 F.2d 401, 405 (D.C. Cir. 1984) ("if data in the regulatory flexibility analysis -- or data anywhere else in the rulemaking record -- demonstrates that the rule constitutes such an unreasonable assessment of social costs and benefits as to be arbitrary and capricious, 5 U.S.C. § 706(2)(A), the rule cannot stand") (Scalia, J.) (decided before compliance with Regulatory Flexibility Act was subjected to judicial review).

The Executive Order 12866 analysis is particularly relevant because it is only there that the preambles present any discussion of the reasons for adopting the regulations (excluding the authority issue) that could possibly satisfy the arbitrary and capricious standard. See 75 Fed. Reg. at 51718-20; JA 74-75. Moreover, it is only there that the preambles present the discussion of alternatives considered and rejected that State Farm requires. See 75 Fed. Reg. at 51724-25; JA 77-78.

These sections discuss the costs anticipated from the regulations. See 75 Fed. Reg. at 51720-24; JA 75-77. Moreover, the discussion of the alternatives considered and rejected addresses the relative costs and benefits of these alternatives. The significant flaw in these discussions of costs and benefits is that the universe of costs discussed is strikingly incomplete. The costs considered include only the costs to tax return preparers, the costs to providers of continuing education, and the costs to the government.

Conspicuously absent from this discussion is the cost to consumers of tax-preparation services that will result from the additional costs imposed on tax-return preparers. Because the cost to consumers was not considered, there was likewise no consideration of whether that cost is likely to outweigh whatever benefits to consumers may result from the imposition of these requirements. The IRS's failure to consider the cost to consumers "demonstrates that the rule constitutes such an unreasonable assessment of social costs and benefits as to be arbitrary and capricious." Thompson v. Clark, supra, 741 F.2d at 405.

Moreover, the cost to consumers is not the only relevant consideration completely omitted in Publication 4832 and the preambles to the proposed and final regulations. An additional relevant but omitted consideration is why the various specific statutory tools in the Internal Revenue Code authorizing the IRS to penalize tax-return preparers, see JA 22-23, 25-26, would not have been sufficient to achieve the goals of the regulations. In this regard, the IRS also failed to discuss why any possible additional authority the regulations might give the IRS to penalize tax-return preparers, beyond the specific statutory authority in the Internal Revenue Code, would be sufficient to warrant the costs imposed by the regulations.

F. The regulations violate Chevron step two for the same reasons they violate the APA.

The regulations violate Chevron step two for the same reasons they violate the arbitrary and capricious standard, because Chevron step two and the arbitrary and capricious standard impose equivalent requirements. See, e.g., General Instrument Corp. v. FCC, 213 F.3d 724, 732 (D.C. Cir. 2000); Shays v. FEC, 528 F.3d 914, 924 (D.C. Cir. 2008); Judulang v. Holder, 132 S. Ct. 476, 483n.7 (2011); Village of Barrington v. Surface Transportation Board, 636 F.3d 650, 660 (D.C. Cir. 2011) (Chevron deference applies "only if the agency has offered a reasoned explanation").

G. The regulations also violate the arbitrary and capricious standard by violating the Regulatory Flexibility Act.

The regulations also violate the Regulatory Flexibility Act, 5 U.S.C. §§ 601 to 612, because, contrary to the requirements of the Act, the IRS failed to consider alternative approaches that would treat small businesses differently than larger entities. The Act imposes procedural requirements for issuing regulations, including the preparation of an initial regulatory flexibility analysis, see 5 U.S.C. § 603(a), and a final regulatory flexibility analysis, see 5 U.S.C. § 604(a). The IRS prepared both an initial regulatory flexibility analysis and a final regulatory flexibility analysis. See 75 Fed. Reg. at 51725-26; JA 78-80.

"The Regulatory Flexibility Act makes the interests of small businesses a 'relevant factor'" in applying the State Farm requirement that an agency decision must be "based on 'consideration of the relevant factors.'" National Telephone Cooperative Association v. FCC, 563 F.3d 536, 540 (D.C. Cir. 2009). Thus, a violation of the Regulatory Flexibility Act is also a violation of the arbitrary and capricious standard.

The final IRS regulatory flexibility analysis acknowledges the regulations affect many small businesses. "The IRS estimates that approximately seventy to eighty percent of the individuals subject to these regulations are paid preparers operating as or employed by small entities." JA 78-79. Plaintiffs-appellees in this case (as well as two of the amici, Ronda Gordon and Dennis Tafelski) are not only unquestionably the types of small business whose interests the Regulatory Flexibility Act protects but are also directly affected by the regulations. See, e.g., Aeronautical Repair Station Association, Inc. v. FAA, 494 F.3d 161, 175-77 (D.C. Cir. 2007).

The final regulatory flexibility analysis must explain how the agency has minimized the impact on small business:

The initial regulatory flexibility analysis is not subject to judicial review, see, e.g., Allied Local and Regional Manufacturers Caucus v. EPA, 215 F.3d 61, 79 (D.C. Cir. 2000), but judicial review of the final regulatory flexibility analysis should consider the initial regulatory flexibility analysis. Cf. id. at 79 n.18. The requirement that the final regulatory flexibility analysis must explain the reasons for selecting the alternative chosen and for rejecting other alternatives must be read in light of the requirements for the initial regulatory flexibility analysis:

Section 604(a)(6), when read in the context of section 603(c), makes clear that an agency must consider alternatives that treat small businesses differently than other entities. Both the initial IRS regulatory flexibility analysis and the final IRS regulatory flexibility analysis show the IRS violated the Regulatory Flexibility Act by failing to consider any alternatives that treated small businesses differently than larger entities.

The initial regulatory flexibility analysis lists three alternatives to the approach adopted. See 75 Fed. Reg. at 51726. The final regulatory flexibility analysis repeats these three alternatives and adds one additional alternative. See JA 79. However, none of these alternatives would have imposed different requirements on small business than those imposed on larger entities. The IRS attempted to justify the result: "[T]he regulations do not subject small entities to requirements that are not also applicable to large entities covered by the regulations." JA 80. This statement demonstrates how little the IRS understands the Regulatory Flexibility Act.

Compliance with the Regulatory Flexibility Act requires only a "reasonable, good-faith effort" by the agency. United States Cellular Corporation v. FCC, 254 F.3d 78, 88 (D.C. Cir. 2001). The IRS fell far short of that standard here, and by doing so also violated the APA's arbitrary and capricious standard.

Publication 4832 describes the process the IRS used to obtain public input prior to issuing the proposed regulations. Id. at 25-32. That process included issuing Notice 2009-60, 2009-2 C.B. 181, requesting comments on IRS regulation of tax-return preparers. Publication 4832at 30-32. "The IRS received more than 500 comments in response to this solicitation." Id. at 31. "Highlights from an IRS analysis of the responses include" percentages of comments favoring specific regulatory steps. Id. For example, "90 percent of the individuals who commented on education and testing favor minimum education or testing requirements for paid tax return preparers." Id. See also id. at 2.

Publication 4832 includes "findings and recommendations." See id. at 32-41. The percentages of comments favoring specific regulatory steps are repeatedly cited prominently in the description of the recommendations. See, e.g., id. at 33, 34, 36. The executive summary states: "After consideration of the input provided through the public comment process, the IRS believes" the recommendations should be adopted. Id. at 2. Thus, Publication 4832 clearly suggests the recommendations were based on the "IRS analysis" of the public comments received.

The preambles to the proposed and final regulations make clear that the regulations were derived from Publication 4832's recommendations. See, e.g., 75 Fed. Reg. at 51714; JA 66-67. Moreover, both preambles repeat Publication 4832's list of percentages of commenters favoring specific regulatory steps. See 75 Fed. Reg. at 51719; JA 74.

Thus, in issuing the regulations, the IRS clearly relied on the "IRS analysis" of comments responding to Notice 2009-60 that calculated percentages of comments favoring particular regulatory steps. However, the IRS did not make this analysis available to the public for review and comment in the rulemaking process. If an agency relies on studies, including staff reports, in issuing regulations, failure to make those studies available to the public for review and comment as part of the rulemaking process violates the APA's notice and comment requirements. See, e.g., American Radio Relay League, Inc. v. FCC, 524 F.3d 227, 236 (D.C. Cir. 2008).

The IRS's failure to make available the IRS analysis of comments responding to Notice 2009-60 clearly comes within this principle. Moreover, the IRS's failure to disclose this analysis was prejudicial to commenters on the proposed regulations. For example, while Publication 4832 states over 500 comments were submitted, it does not specify the number of comments that addressed each specific regulatory step on which Publication 4832 provides percentages favoring each step. Disclosure of this information is relevant in evaluating the IRS's claim that the comments overwhelmingly favored the regulatory steps adopted in the regulations. Moreover, Publication 4832 states that "90 percent of the individuals who commented on education and testing favor minimum education or testing requirements for paid tax return preparers" (emphasis added), but neither Publication 4832 nor the preambles identify the percentage of commenters favoring the imposition of both minimum education and testing requirements, much less the combination of all the requirements imposed by the regulations.

DATED: May 24, 2013