IRS Needs More Consistent Approach to Tax Preparer User Fees

The IRS’s proposed and interim final regulations reducing preparer tax identification number, or PTIN, user fee charges from $11 to $10 presents itself decision as good news. But that interpretation misses something important.

The agency’s approach to user fees—especially those targeting tax professionals—is incoherent, impenetrable, and indefensible.

There is no discernable standard for a “special benefit” that would require a user fee, and too many hidden cost calculations. And in these interim regulations, the IRS shoulders preparers with staffing costs that strain credulity. Comments on the proposed regulations are due Oct. 30.

The IRS is allowed to charge user fees for PTINs through guidance that agency heads are allowed to “prescribe regulations establishing the charge for a service or thing of value provided by the agency.” In 2019’s Montrois v. United States, the US Court of Appeals for the District of Columbia Circuit reversed an 2017 ruling in Steele v. United States, which found the IRS lacked authority to charge a PTIN user fee.

This leads to two important questions:

Is “special benefit” consistently determined? As the interim regulations remind us, “Under OMB Circular A-25, federal agencies that provide services that confer benefits on identifiable recipients are to establish user fees that recover the full cost of providing the service.”

In this case, the IRS asserts it charges a user fee because the PTINs “provide tax return preparers a specific benefit by allowing them to provide an identifying number that is not a Social Security number on returns and claims for refund.”

A section devoted to user fees in the IRS’s internal revenue manuals mentions a “special benefit” that includes, among other things, something that “enables the beneficiary to obtain more immediate or substantial gains or values than those given to the general public” or “is performed at the request of or for the convenience of the recipient.”

Yet the IRS doesn’t assess a user fee for, among others, for Individual Taxpayer Identification Numbers (ITINs), Electronic Filing Identification Numbers (EFINs), Identity Protection Personal Identification Numbers (IP PINs), or Centralized Authorization File (CAF) numbers.

While I’m not suggesting the agency should charge user fees in these cases, the question remains why some identifying numbers that appear to confer benefits and/or provide a Social Security number alternative aren’t assessed user fees.

Further, the IRS declines to charge a user fee for its annual filing season program even though its website goes so far as to outline the program’s special benefits. Perhaps one could be forgiven for concluding the IRS approach to user fees is “vibes” based, when it is just as likely an explanation as anything else.

Why doesn’t the IRS show its work? The agency concedes in the proposed regulations that it had its proverbial wings clipped on remand in a 2023 ruling, also named Steele v. United States, which held that the agency had for seven fiscal years (2011–17) overcharged for PTIN fees to the extent they were based on five proscribed categories.

The IRS says it limits recovering direct staffing costs to those related to “compliance activities of investigating ghost preparers; handling complaints regarding the improper use of a PTIN” including the use of a comprised PTIN, or a PTIN obtained through identity theft; and composing the data to refer complaints to other IRS business units.

The IRS claims direct and indirect costs for PTIN-related support activities and maintaining the PTIN database will consume $17.5 million of salary and benefits, plus more than $11 million of overhead, for a total of some $26.8 million over three years, or an average of $9.5 million annually.

A $9.5 million annual budget for such a limited scope of work is eyebrow-raising, especially since the IRS separately bills a third-party contractor for “the issuance, renewal spend, and maintenance of PTINs, such as processing applications and operating a call center.”

Key Takeaways

While the judiciary has blessed a PTIN user fee, it hasn’t done so for the IRS’s calculation of those fees.

Steele (2023) reminds the IRS that when a court determines a fee from the Independent Offices Appropriations Act was excessive “because it charged for unallowable activities, the extent and expense of which are in dispute, the proper remedy is to remand the agency to show its work and set a new fee within the bounds of what the law allows.”

Further, the Internal Revenue Manual calls for avoiding fees that “increase enforcement costs, reduce voluntary compliance or otherwise create difficulties in achieving the IRS’s mission.”

It isn’t too much to ask the agency to be consistent when assessing user fees and to show its work when it chooses to do so. Now would be a good time to start.

If we’re in the business of protecting our clients from IRS’s caprices, then surely we should protect ourselves from the same. We shouldn’t accept an asymmetric world in which IRS demands we follow rules and show our work but refuses to do the same itself.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Bob Kerr is principal of Kerr Consulting LLC, a tax administration and tax policy advising and consulting firm.

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