The U.S. Internal Revenue Service said it will appeal a court’s ruling that it lacks the power to license tax preparers, a decision that might affect as many as 700,000 people who work on clients’ returns.

Immediately discontinuing the agency’s tax preparer oversight program “would result in a substantial disruption to tax administration,” the IRS said in a court filing accompanying a request to lift a court order barring it from regulating return preparers during its appeal.

U.S District Judge James Boasberg in Washington invalidated the program Jan. 18, ruling in a lawsuit filed by three tax preparers.

The agency’s licensing program affects from 600,000 to 700,000 preparers “who are responsible for a substantial number of the more than 80 million returns filed each year,” the agency said.

The IRS suspended its regulation of tax-return preparers after a federal court ruling said the agency lacked authority, removing a tax-compliance tool that was years in the making.

With the tax-filing season starting January 30, hundreds of thousands of return preparers won’t have to register with the federal government, pass a competency test or meet continuing-education requirements. The court decision undercuts work that persuaded the IRS to impose the rules to protect filers, said Nina Olson, the national taxpayer advocate whose office is an independent organization within the agency.

“Taxpayers are going to go into filing season without preparers who are prepared,” Olson said in an interview yesterday. “This is a consumer protection regulatory scheme.”

Boasberg, picked for his post by President Barack Obama, wrote that the IRS overstepped its authority by relying on an 1884 law that allowed it to regulate people presenting cases before the Treasury Department.

“Filing a tax return would never, in normal usage, be described as ‘presenting a case,’” he wrote. “At the time of filing, the taxpayer has no dispute with the IRS; there is no case to present.”

The IRS responded yesterday by suspending the program. The 15-hour annual continuing-education requirement started in 2012 and the testing requirement was taking effect this year.

‘Further Action’

“The Internal Revenue Service, working with the Department of Justice, continues to have confidence in the scope of its authority to administer this program,” the agency said in a statement on its website after the judge's ruling. “It is considering how best to address the court’s order and will take further action shortly.”

Representative Charles Boustany of Louisiana, chairman of a subcommittee that oversees the IRS, said he’ll ask the IRS about its certainty that the program was legal and about whether tax preparers will get their fees refunded.

Boustany, a Republican, said the return-preparer program had “some merit,” though it would be premature to discuss whether Congress would provide authority if the court ruling stands.

Imposing Standards

The rules were designed to impose standards on hundreds of thousands of return preparers who aren’t certified public accountants, attorneys or enrolled agents already licensed to practice before the IRS. The idea, promoted by former Commissioner Douglas Shulman, was to require minimum qualifications and help the agency combat tax fraud.

“What’s sad is a lot of taxpayer money has been spent on this thing and it was done without statutory bases,” said Allen Buckley, an Atlanta attorney who helped the plaintiffs with their briefs. “Fortunately, justice was done here and our system worked.”

Olson said she will advise taxpayers to ask “vigorous questions” of their return preparers about their qualifications. Low-income households are particularly vulnerable to incompetent or unscrupulous tax preparers who offer the promise of large refunds, she said.

Improving Compliance

Supporters of IRS regulation of return preparers include Robert Kerr, senior director for government relations at the National Association of Enrolled Agents. He said the agency, which audits about 1 percent of individual returns, could improve compliance with tax laws through such regulation.

The biggest problem with the rules was the burden they imposed on smaller tax-preparation companies, said Hazel Bayers, co-owner of Small Business Financial Services in Keysville, Virginia, about 180 miles southwest of Washington.

The required classes included information on estates and corporations that she didn’t need, because her business consists of preparing returns for about 100 individuals and farmers. And, Bayers said, the fees added to her overhead costs and made her contemplate retiring after 25 years.

“They’re going to find more and more things to charge you on, so it’s going to be fee after fee after fee,” she said.

Accountants and tax-preparation companies such as H&R Block Inc. and Intuit Inc. supported the rules.

Intuit ‘Disappointed’

Intuit, which makes TurboTax, was “disappointed” by the ruling, Dan Maurer, senior vice president and general manager of the consumer tax group, said in a statement.

“We were all waiting for the result,” said John Ams, executive vice president of the National Society of Accountants in Alexandria, Virginia, and a member of an IRS advisory board. “We were all aware of it. I think even the IRS was surprised because there was no hearing.”

The suit challenging the regulations was filed by return preparers, who were assisted by the libertarian-leaning Institute for Justice.

The conventional wisdom would be that the IRS would appeal and seek to block the court order from taking effect during that process, Kerr said.

“It ain’t over ’til it’s over,” he said. “I certainly don’t believe it’s over yet.”

The case is Loving v. Internal Revenue Service, 12- cv-00385, U.S. District Court, District of Columbia (Washington).