Former IRS Commissioners File Brief With D.C. Circuit in Preparer Oversight Case

Pursuant to Federal Rule of Appellate Procedure 29(c), amici curiae Former Commissioners of Internal Revenue state that no counsel for a party authored this brief in whole or in part, and no counsel or party made a monetary contribution intended to fund the preparation or submission of this brief. No person other than amici curiae or their counsel made a monetary contribution to its preparation or submission.

Pursuant to Circuit Rule 29(d), amici curiae certify that no other brief of which they are aware addresses the complexity of the Internal Revenue Code and its role in facilitating government assistance programs. To the best of the knowledge of amici curiae, there will be one other amicus brief in support of Defendants-Appellants, but it will not overlap with the arguments presented herein. The National Consumer Law Center and the National Community Tax Coalition will submit a brief largely addressing problems with certain paid income tax return preparers. In light of the different issues addressed by these briefs, amici curiae certify that filing a joint brief is not practicable and that it is necessary to submit separate briefs.

(B) Rulings Under Review. References to the rulings under review appear in the Brief for the Defendants-Appellants.

(C) Related Cases. To the best of their knowledge, counsel for the amici curiae are not aware of any previous or pending related cases.

                          TABLE OF CONTENTS

      Former Commissioner                Service as Commissioner

The amici curiae take no position regarding whether the manner in which the Treasury has chosen to regulate tax return preparers is advisable, but they strongly disagree with the District Court's view that Congress has not empowered Treasury to do so.

Contrary to the District Court's opinion, preparing and filing a tax return is indeed the presentation of a case, in which taxpayers pursue a wide variety of financial claims against the Treasury. Most significantly, Congress has decided to administer an increasingly wide variety of government assistance programs through the federal income tax system, including assistance for low income families, health care, education, and homebuyers. In each instance, preparing and filing a tax return is the sole means by which taxpayers are able to present to Treasury their qualification for these programs and to obtain the financial assistance intended by Congress.

The IRS is able to administer tens of millions of claims for government financial assistance each year with little or no dispute only because the tax return provides such an efficient and safe mechanism for handling these cases. In this manner, the advice and assistance to taxpayers provided by tax return preparers responsible for preparing the taxpayers' returns make them "representatives" of the taxpayers subject to potential regulation under 31 U.S.C. § 330.

The relationship between these public policy goals and the tax system was most recently highlighted in the Supreme Court's decision confirming the constitutionality of various portions of the Affordable Care Act.² In that case, the Court, in an opinion by Chief Justice Roberts, explained that, even though the penalty for failure to purchase health insurance was enacted "to shape decisions about whether to buy health insurance," it was nevertheless a tax, and accordingly Congress's attempt to shape health care decisions was justified under its taxing power.³

Congress's willingness to use its taxing power to effectuate public policies in areas such as health care has fundamentally changed the roles of the tax return and tax return preparers. Tax return prepares now find themselves on the front line of administering these programs. They must counsel taxpayers about issues such as the decision to buy health insurance, explain to taxpayers how those decisions affect their claims against or liabilities to the government, and then represent taxpayers by asserting these claims through the taxpayers' tax returns.

Perhaps the most important manifestation of Congress's use of the Internal Revenue Code to administer public policy programs is the increasingly frequent enactment of "refundable" tax credits. A "refundable" tax credit is treated as an overpayment of tax by the taxpayer.⁴ Thus, if the taxpayer owes no tax, the taxpayer will receive a cash payment -- in the form of a tax refund equal to the amount of the credit -- as if the taxpayer had paid tax when none was owed.⁵ In this way, refundable tax credits delink the financial assistance Congress intended to provide from the taxpayer's actual tax liability, but permit the intended financial assistance to be administered by the tax system through the preparation and filing of tax returns.

Refundable tax credits are generally codified in sections 31-37 of the Internal Revenue Code and include credits such as:

• The earned income credit (§ 32);

• The child tax credit (made partially refundable under § 24(d)(1));

• The health insurance cost credit (§ 35);

• The first-time homebuyer credit (§ 36);

• The making work pay credit (§ 36A); and

• The adoption expense credit (§ 36C, re-codified as § 23).

In 2012, the IRS processed over 146 million individual income tax returns.⁶ Of those, over 82% (over 120 million) resulted in the government paying a tax refund.⁷ By comparison, in February 2013, the Social Security Administration paid benefits to just over 62 million recipients.⁸ Thus, in 2013 the number of individuals receiving a tax refund is likely to be twice as large as the number of individuals receiving a social security payment.

The total amount of tax refunds paid in 2012 exceeded $322 billion, for an average refund of $2,673 per individual income tax return claiming a refund.⁹ A large percentage of the total amount refunded is attributable to excess wage withholding, for which the employee claims a refundable credit under section 31 of the Internal Revenue Code. In addition to excess wage withholding, the earned income credits paid in 2012 totaled nearly $54 billion, and the child tax credits totaled over $22 billion. The amounts paid for just these two refundable credits total approximately $76 billion, which exceeds the $70 billion budget in 2012 for all mandatory payments of veterans' benefits.¹⁰

As illustrated by these figures, the tax system is one of the key avenues by which the government makes disbursements to individuals in order to effectuate a variety of public policy goals. The refundable tax credit enables Congress to provide these benefits through the tax system even when the recipient has no actual tax liability. Thus, the tax return preparer is not merely calculating tax liability; he or she is very often representing the taxpayer by preparing the return establishing the taxpayer's eligibility to receive the benefits provided by these public policy programs.

Financial assistance programs administered through the income tax system are also therefore self-assessed, meaning that preparing and filing a tax return is the sole mechanism by which otherwise eligible individuals can assert and obtain the benefits Congress intended to provide to them. Without a properly filed tax return, eligible individuals simply have no claim or case against the government. In this way, each taxpayer claiming a tax refund is similar to an individual who files for disability benefits, workers' compensation, veterans' benefits, or other financial assistance administered outside the tax system.

Although 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, the IRS nevertheless must review and act on each of them. A vigorous annual IRS audit of every return would be prohibitively expensive to the fisc, and inconsistent with our democratic system. But the absence of a contested tax proceeding for every taxpayer for every year does not change the critical fact that a tax return makes a case for the taxpayer's financial claim against the government. Indeed, the lack of a contested proceeding reinforces the idea that the tax system depends on the expertise and good faith of those who prepare tax returns, including paid preparers.

Consider, for example, the earned income credit, for which there were $54 billion in claims paid to over 23 million taxpayers in 2012.¹³ A taxpayer seeking the benefit of the earned income credit must complete a tax return claiming that credit. The rules governing that credit are sufficiently complex that the IRS has prepared a 62-page publication explaining how it is done.¹⁴ In addition, the IRS maintains a series of webpages devoted to calculating earned income credit claims.¹⁵ Although the IRS webpages advertise that claiming the credit is "easier than ever," it also suggests that taxpayers gather the following information before endeavoring to determine their eligibility:

• Your valid driver's license or other photo id card.

• Social security cards or a Social Security number (SSN) verification letter for all persons listed on the return.

• Birth dates for all persons listed on return.

• A copy of last year's federal and state return.

• All income statements: Forms W-2 and 1099, Social Security, unemployment, and other statements, such as pensions, stocks, interest and any documents showing taxes withheld. If self-employed or your own or run a business, bring records of all your income.

• All records of expenses, such as tuition, mortgage interest, or real state taxes. If self-employed or you own or run a business, bring records of all your expenses.

• A copy of last year's state and federal returns, if on hand. Bank routing numbers and account numbers to direct deposit any re

• Dependent child care information: name and address of who you paid and either the caretaker's SSN or other tax identification number.

• Both spouses to sign forms to e-file your joint tax return.¹⁶

The IRS website and publications regarding the earned income credit are put in place because the statute enacting the earned income credit is the picture of complexity. The entire text of 26 U.S.C. § 32 is attached hereto as Appendix A. Most tax professionals cannot understand the statutory provisions relating to the earned income credit without detailed and focused study. And the IRS website dealing with the earned income credit repeatedly encourages taxpayers to seek assistance from a tax professional in determining their eligibility for the refundable credit.

Although the earned income credit is perhaps the most noteworthy example, other tax provisions, whether relating to refundable credits or otherwise, present equal complexities. For example, the attached Appendix B is the full statutory text of the recently enacted health insurance premium tax credit. 26 U.S.C. § 36B. The statute itself is a tangle of technical rules, laced with jargon, acronyms, and tax-speak. Yet, at its core, the statute is intended to provide eligible individuals with a government disbursement equal to over 70% of their health insurance costs, at an estimated cost to the Treasury over $107 billion from 2014 to 2019.¹⁸ And taxpayers desiring this health insurance subsidy must navigate this complexity and self-report their eligibility though the tax system.

In addition, scrupulous tax return preparers help guard against fraud against both taxpayers and the government. By way of example, a 2010 report by the Treasury Inspector General for Tax Administration ("TIGTA") highlighted potential fraud related to the first-time homebuyer tax credit.¹⁹ In that report, TIGTA identified 4,608 incarcerated individuals who had attempted to claim the first-time homebuyer credit.²⁰ TIGTA analyzed a sample of 715 prisoners from that group, and found that 174 of the claims had been prepared by paid tax return preparers, and 241 of the claims had been paid, totaling more than $1.7 million.²¹ As illustrated by the TIGTA report, issues affecting only a tiny fraction of a percentage of the claims handled by the IRS may result in millions of dollars of fraudulent claims being paid. The IRS often must leverage the scruples and competence of taxpayers and, more importantly, tax return preparers, to ensure that these claims are properly self-assessed and self-reported in the first instance.

As noted by the District Court, the tax laws currently provide a mechanism for enjoining bad tax return preparers such as those who file fraudulent claims for first-time homebuyer credits.²² For example, the Department of Justice recently obtained an injunction²³ against employees of a company that, according to the complaint, claimed to be the fourth largest tax return preparation company in the United States.²⁴ But injunctive relief is available only once the bad acts have occurred and been discovered, and often involves lengthy litigation. Moreover, barring bad tax return preparers from striking again is wholly consistent with the Treasury Department's authority to regulate commercial tax return preparers in ways reasonable designed to prevent these bad acts from happening in the first instance.

The manner in which tax return preparers assist taxpayers in how to pursue their claims aligns with the history giving rise to Treasury's authority to regulate representatives under 31 U.S.C. § 330. That section was enacted on July 4, 1884, to address the disreputable conduct of claims agents assisting soldiers seeking pensions, back pay, and various other government benefits.²⁵ The modern counterpart is that benefit claims are pursued through a submission of a tax return to the IRS. A different approach was used in 1884, but in both cases Congress granted to the Treasury Department the authority to regulate representatives who assist those making the claims. Treasury's decision to exercise that authority over tax return preparers is a natural outgrowth of Congress's increasingly frequent use of the federal income tax system to accomplish non-tax policy objectives by delivering the benefits of Federal financial assistance programs to a wide variety of individuals and families.

Consistent with the Supreme Court's view of a self-assessed and self-reported tax system discussed above, a taxpayer's return must self-assess and self-report "with such uniformity, completeness, and arrangement that the physical task of handling and verifying returns may be readily accomplished."²⁶ For all but a tiny fraction of taxpayers, the annual tax return is the only opportunity for taxpayers to present to the Treasury their eligibility for the benefits Congress chose to administer through the Internal Revenue Code. Given the overwhelming complexity of many of those provisions, it would be all but impossible for taxpayers to properly claim their eligibility on their tax returns, or for the IRS to accurately evaluate and act on those claims, without extensive advice and assistance from a tax return preparer to present each taxpayer's case for why he or she is entitled to the benefits claimed on the tax return.

DATED: April 5, 2013

²Nat'l Fed'n of Indep. Bus. v. Sebelius, 132 S. Ct. 2566 (2012).

³Id. at 2596.

⁴ 26 U.S.C. § 6401(b)(1).

⁵See Sorenson v. Sec'y of Treasury, 475 U.S. 851, 855 (1986) ("An individual who is entitled to [a refundable credit] that exceeds the amount of tax he owes thereby receives the difference as if he had overpaid his tax in that amount.").

⁶ Internal Revenue Service, Data Book, 2012, Tbl.3 at 6 (Pub. 55B Mar. 2013), available at http://www.irs.gov/pub/irs-soi/12databk.pdf.

⁷Id. Tbl.7 at 17.

⁸ U.S. Social Security Administration, Monthly Statistical Snapshot, Tbl.1 (Feb. 2013), available at htp://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/index.html?number.

⁹ Internal Revenue Service, Data Book, 2012, Tbl.8 at 19 (Pub. 55B Mar. 2013), available at http://www.irs.gov/pub/irs-soi/12databk.pdf.

¹⁰ Press Release, U.S. Department of Veteran's Affairs, VA Announces Budget Request for 2012 (Feb. 14, 2011), available at http://www.va.gov/opa/pressrel/pressrelease.cfm?id=2054.

¹¹See, e.g., Rev. Proc. 2008-21, 2008-1 C.B. 657 (requiring a tax return prior to sending $600 economic stimulus payments in 2008).

¹²Commissioner v. Lane-Wells Co., 321 U.S. 219, 223 (1944) (emphasis added).

¹³ Internal Revenue Service, Data Book, 2012, Tbls.7-8 at 17-19 (Pub. 55B Mar. 2013), available at http://www.irs.gov/pub/irs-soi/12databk.pdf.

¹⁴ Internal Revenue Service, Earned Income Credit (Pub. 596), available at http://www.irs.gov/pub/irs-pdf/p596.pdf.

¹⁵ Internal Revenue Service, EITC Home Page, http://www.irs.gov/Individuals/EITC-Home-Page--It's-easier-than-ever-to-find-out-if-you-qualify-for-EITC (last visited Apr. 5, 2013).

¹⁶ Internal Revenue Service, Be Prepared to Get the EITC You Earned, http://www.irs.gov/Individuals/Be-Prepared-To-Get-The-EITC-You-Earned (last visited Apr. 5, 2013).

¹⁷ Internal Revenue Service, Qualifying Child Rules, http://www.irs.gov/Individuals/Qualifying-Child-Rules (last visited Apr. 5, 2013).

¹⁸ Letter from the Congressional Budget Office to the Honorable Nancy Pelosi, at Tbl.2 (Mar. 20, 2010), available at http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/113xx/doc11379/amendreconprop.pdf.

¹⁹ Department of the Treasury, Additional Steps Are Needed to Prevent and Recover Erroneous Claims for the First-Time Homebuyer Credit (Reference No. 2010-41-069 June 17, 2010), available at http://www.treasury.gov/tigta/auditreports/2010reports/201041069fr.pdf.

²⁰Id. at 4.

²¹Id.

²²See JA 25-27 (citing 26 U.S.C. §§ 7407 and 7408).

²³ Order, United States v. Franklin, Civ. No. 1:12-cv-394 (S. Ind. Jan. 28, 2013), ECF No. 79.

²⁴ Complaint, United States v. Franklin, Civ. No. 1:12-cv-394 (S. Ind. Mar. 28, 2011), ECF No. 1.

²⁵ George M. Morris, Growth and Regulation of Treasury Bar, 8 A.B.A. J. 742, 742-43 (1922).

²⁶Commissioner v. Lane-Wells Co., 321 U.S. 219, 223 (1944) (emphasis added).

²⁷ JA 20.