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Tax preparer regulation: IRS trots out Horse Act argument

Earlier this year, a federal court held that the IRS had exceeded its authority in trying to impose new regulations on professional tax preparers. As we discussed in our February 1 post, the court's ruling threw the new regulations into a state of limbo while the IRS appealed the ruling.

That appeal has been working its way through the judicial system. Last week, a federal appeals court held a hearing at which the U.S. Justice Department presented its argument.

And that argument was, by all accounts, a curious one. It relied heavily on a little-known federal law from 1884 called the Horse Act.

Congress passed the Horse Act after the Civil War in order to regulate an industry that had sprung up regarding war-loss claims. Agents would pursue these claims on behalf of others for a percentage of what they could collect. Not surprisingly, many of these agents tended to inflate the value of the original claims in order to maximize their fees.

Congress responded to this with the Horse Act, which imposed a regulatory framework on these agents. Agents who met the requirements were considered "enrolled agents." And that term is still in use today to refer to people who represent others in dealing with the IRS.

The IRS contends, then, that its tax preparer regulations are essentially an extension of authority it already has under the Horse Act.

It remains to be seen, however, whether the appeals court will accept this reasoning. Arguably the type of representation that tax preparers provide -- preparing and filing tax returns for a fee -- does not rise to the level of representation envisioned by the Horse Act.

Source: Reuters, "IRS rides 1884 'dead horse' law to defense of tax preparer rules," Patrick Temple-West, September 24, 2013

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