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IRS Defends its Argument to Regulate Tax Preparers

"I hate to beat a dead horse, especially one from the Civil War era," said Justice Department Tax Division lawyer Gilbert Rothenberg while attempting to defend the Obama administration's effort to regulate the tax return preparation business for the first time in U.S. history. The administration's case was based largely on a 19th century law dealing with horses lost or killed in the Civil War.

After the Civil War, many Americans brought war loss claims against the U.S. government, typically for dead or missing horses and, like in any capitalistic society, an industry of agents emerged who would press war loss claims for a percentage of the claim collected. It didn't take long for claim values to become fraudulently inflated.

In response to this fraud, the government began regulating intermediaries. Those who were not removed from the industry became certified as "enrolled agents," a title still used today by people who represent clients in matters before the IRS.

Fast-forward to 2013, the IRS is attempting to argue that tax return preparers represent their clients in the same way that enrolled agents do, therefore, the agency is able to regulate them.

However, the Institute for Justice, a libertarian advocacy law firm, disagrees.

"Preparing a tax return is not a representative act," said Dan Alba, an attorney for the institute. "Congress never gave the IRS authority to regulate tax preparers."

The case could mean big change for the industry, which includes the monstrous H&R Block Inc. and several thousand other mom-and-pop firms.

A decision from the judges is still months away.

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