Can the IRS create powers for itself?

Powers based on the "Horse Act of 1884"? So far, the judge says "no":

IRS Beats A Dead Horse, Argues For Regulations At Appeals Court

Does the Internal Revenue Service have the right to regulate tax preparers?

[...]

The crux of the plaintiffs’ argument is this: Congress never gave the IRS the authority to license tax preparers, and the IRS can’t give itself that power.

U.S. District Court Judge James E. Boasberg agreed. In January 2013, he issued an opinion that would bar the IRS from regulating tax preparers, days before the new tax season officially opened for business. You can read the opinion here (downloads as a pdf).

The IRS appealed that decision and here we are, eight months later, back in court.

Oral arguments in the case were colorful, often punctuated by queries from the judges and occasionally, a joke or two. During arguments, the judges appeared skeptical of the IRS’ reliance on an 1884 statute, the “Enabling Act of 1884,” also referred to as the “Horse Act of 1884″ as sufficient authority to regulate tax preparers. The statute was the result of a post-Civil War concern about the abuse of the claim process for the value of dead horses and lost property during the war. To stem the tide of abuse, Congress granted the Secretary of the Treasury the authority to regulate the admission of agents representing claimants before the Treasury Department (the rise of the modern day Enrolled Agents), and to penalize those who failed to comply with the regulations. The Treasury published guidance for those agents – and that guidance is what eventually evolved into Circular 230. If that name rings a bell, you might have seen “Circular 230 language” at the bottom of attorney and tax professional emails.

The IRS argues that the law still allows for regulation of tax preparers. The statute predates the modern income Tax Code which was codified in 1913. Much has changed since – including Congress’ apparent reluctance to pass any laws granting the IRS specific authority to regulate preparers.

The amount of time that passed from the 1884 case and now didn’t go without notice in front of the panel. Consider this brief exchange between Justice Department Tax Division lawyer Gilbert Rothenberg and the panel:

Panel: That’s how many years?
Rothenberg: That’s about a century.
Judge: And then after a century, Treasury suddenly decides these words empower us to do this…?

Another exchange revolved around two simple conjunctions: “and” and “or.” Under the law, there are four criteria to be considered an agent. The statute uses the word “and” to connect the four but, as argued by Rothenberger, the IRS believes that “and” could also mean “or.” The panel didn’t seem convinced.

[...]

Shortly after the amicus brief in support of the plaintiffs was filed, I called up one of the parties, Joe Kristan, to ask him about his participation. Kristan is a CPA and authors the informative and entertaining Tax Update Blog. He doesn’t have an actual dog in this fight: CPAs are exempt from most of the regulations. So why, I asked, was he involved? He offered a laundry list of reasons: it’s bad law, bad policy and bad for the consumer.

In addition to the arguments cited by the plaintiffs that the IRS doesn’t have the authority to regulate tax preparers – and Congress has never stepped in to give them that power – Kristan has concerns about handing over even more power to the agency. Using an analogy from my profession, Kristan compared the law to giving the prosecutors the right to regulate defense attorneys.

During our call, we both agreed that there are bad tax preparers out there but Kristan used that fact to seize upon one of the main criticisms of the IRS scheme: there are ways of dealing with bad acts and these regulations won’t keep the bad preparers honest. It doesn’t, for example, deal with the issue of fraud in the industry. And, he says, those who can manipulate the system will now have the equivalent of a “seal of approval” from IRS, giving consumers a false sense of security.

But what about those education requirements and the competency exams? Kristan shrugs off the notion that some testing keeps taxpayers safe, saying that the test is a “literacy test, not a competency test.” He does believe that tax professionals should keep their credentials up and their skills sharp but feels that should be voluntary. The real problem with tax compliance issues, he says, simply won’t be resolved through more regulation. [...]

I believe the appeal by the IRS is still pending. But if it should fail (and IMO, that seems likely), congress is poised to give the increase in powers to the IRS: House bill would give IRS authority to regulate tax pros.

This link about the Horse Act of 1884 is interesting. It explains how it eventually lead to the creation of the designation of "Enrolled Agent".

Also see:

IRS' 'dead horse' tax preparer regulation argument doesn't appear to move federal appeals court