Brittany Montrois v. United States

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued May 11, 2018 Decided March 1, 2019
No. 17-5204
BRITTANY MONTROIS, CLASS OF MORE THAN 700,000
SIMILARLY SITUATED INDIVIDUALS AND BUSINESSES, ET AL.,
APPELLEES
v.
UNITED STATES OF AMERICA,
APPELLANT
Appeal from the United States District Court
for the District of Columbia
(No. 1:14-cv-01523)
Gilbert S. Rothenberg, Attorney, U.S. Department of
Justice, argued the cause for appellant. With him on the briefs
were Jessie K. Liu, U.S. Attorney, and Richard Farber and
Norah E. Bringer, Attorneys.
Jonathan E. Taylor argued the cause for appellees. With
him on the brief were Deepak Gupta, William H. Narwold,
Allen Buckley, Louis Bograd, and Christopher S. Rizek.
Elizabeth S. Smith entered an appearance.
Allen Buckley was on the supplemental brief for plaintiffs-
appellees.
1
Before: GARLAND, Chief Judge, and SRINIVASAN and
MILLETT, Circuit Judges.
Opinion for the Court filed by Circuit Judge SRINIVASAN.
SRINIVASAN, Circuit Judge: Tax-return preparers are
persons who prepare clients’ tax returns for compensation.
Internal Revenue Service regulations require preparers to
obtain from the agency (and renew annually) a unique
identifying number known as a Preparer Tax Identification
Number, or PTIN. Preparers must list that PTIN on any return
they prepare.
In 2010, the IRS began charging tax-return preparers a fee
to obtain and renew PTINs. The fee is designed to recoup the
costs to the agency of issuing and maintaining a database of
PTINs. As authority to exact the PTIN fee, the IRS relies on
the Independent Offices Appropriations Act, which allows
federal agencies to charge fees for services in certain
conditions. 31 U.S.C. § 9701.
A group of tax-return preparers filed a class action lawsuit
challenging the PTIN fee. They argued that the IRS lacks
authority under the Independent Offices Appropriations Act to
charge them for obtaining (and renewing) PTINs and that the
IRS’s decision to charge the fee was arbitrary and capricious.
The district court ruled in favor of the preparers, concluding
that the IRS lacks statutory authority to charge the fee. The
court issued an injunction barring the IRS from charging the
PTIN fee and ordered the agency to refund previously collected
fees.
We conclude that the IRS acted within its authority under
the Independent Offices Appropriations Act in charging tax-
return preparers a fee to obtain and renew PTINs. We further
2
conclude that the IRS’s decision to charge the fee was not
arbitrary and capricious. We thus vacate the judgment of the
district court and remand for further proceedings, including an
assessment of whether the amount of the PTIN fee
unreasonably exceeds the costs to the IRS to issue and maintain
PTINs.
I.
A.
The Internal Revenue Code defines a tax-return preparer
as “any person who prepares for compensation” a federal
income tax return or claim for refund. I.R.C. § 7701(36)(A).
The Code establishes no professional constraints on who may
act as a tax-return preparer, with the result that preparers range
from uncredentialed persons to attorneys and certified public
accountants. See Internal Revenue Service, Return Preparer
Review 8–9 (December 2009), https://www.irs.gov/pub/irs-
utl/54419l09.pdf. As of 2009, “a majority of U.S.
taxpayers . . . rel[ied] on tax return preparers to assist them in
meeting their federal tax filing obligations.” Id. at 7.
In 1976, Congress enabled the IRS to require a preparer to
list an identifying number on any return she prepared, and
Congress specified that the identifying number would be the
preparer’s social security number. See Tax Reform Act of
1976, Pub. L. No. 94-455, § 1203(d), 90 Stat. 1520, 1691.
Congress also imposed monetary penalties on preparers in
certain circumstances for understating a taxpayer’s liability or
failing to list certain information on a return. I.R.C. §§ 6694,
6695. In addition, Congress gave the Department of Justice
authority (in consultation with the IRS) to seek an injunction
preventing tax-return preparers from engaging in unlawful
conduct. I.R.C. § 7407.
3
In 1998, Congress, acting out of concern that
“inappropriate use might be made of a preparer’s social
security number,” S. Rep. No. 105-174, at 106 (1998), allowed
the IRS to permit or require preparers to list a different
identifying number on returns they prepared. I.R.C. § 6109(a),
(d); see Internal Revenue Service Restructuring and Reform
Act of 1998, Pub. L. No. 105-206, § 3710, 112 Stat. 685, 779.
The IRS subsequently issued regulations allowing—but not
requiring—preparers to obtain from the agency a unique
Preparer Tax Identification Number (PTIN) and to list that
PTIN, instead of a social security number, on any return they
prepared. Furnishing Identifying Number of Income Tax
Return Preparer, 64 Fed. Reg. 43,910 (Aug. 12, 1999) (codified
at 26 C.F.R. pt. 1).
By 2009, the IRS had become concerned that many
taxpayers were being “poorly served by some tax return
preparers” due to preparers’ inadequate education and training
as well as deficiencies in the agency’s compliance regime.
Return Preparer Review 6; see id. at 33–37. Seeking to
improve matters, the IRS issued three sets of regulations in
2010 and 2011.
First, the IRS sought to establish a credentialing and
registration regime for tax-return preparers. It did so by
requiring otherwise uncredentialed preparers—that is,
preparers who are neither attorneys nor certified public
accountants—to become “registered tax return preparers.”
Regulations Governing Practice Before the Internal Revenue
Service, 76 Fed. Reg. 32,286, 32,286–87 (June 3, 2011). To
become a registered tax-return preparer, a person would need
to undergo a background check, pass a competency exam, and
satisfy continuing education requirements. Id. at 32,287.
 4
Second, the IRS required preparers to obtain a PTIN and
renew it annually. Furnishing Identifying Number of Tax
Return Preparer, 75 Fed. Reg. 60,309, 60,309–10 (Sept. 30,
2010). According to the agency, the “requirement to use a
PTIN will allow the IRS to better identify tax return preparers,
centralize information, and effectively administer the rules
relating to tax return preparers.” Id. at 60,309. The IRS further
noted that the PTIN requirement would benefit “tax return
preparers and help maintain the confidentiality of [their]
SSNs.” Id.
Third, the IRS decided it would charge tax-return
preparers a fee of roughly $50 (plus a vendor fee) to obtain and
renew a PTIN. The agency explained the fee would cover the
costs of “the development and maintenance of the IRS
information technology system” associated with the PTINs, as
well as the costs of “the personnel, administrative, and
management support needed to evaluate and address tax
compliance issues, investigate and address conduct and
suitability issues, and otherwise support and enforce the
programs that require individuals to apply for or renew a
PTIN.” User Fees Relating to Enrollment and Preparer Tax
Identification Numbers, 75 Fed. Reg. 60,316, 60,316, 60,319
(Sept. 30, 2010).
B.
A group of tax-return preparers challenged the first set of
regulations described above: the registered-tax return preparer
system establishing a registration and credentialing system for
preparers. The plaintiffs argued that the IRS lacks authority
under the Internal Revenue Code to establish a licensing
system for tax-return preparers.
5
Our court agreed and invalidated the registered tax-return
preparer regulations. Loving v. IRS, 742 F.3d 1013 (D.C. Cir.
2014). Because our invalidation of the registered-tax return
program meant that there was no longer an
agency-administered credentialing scheme in effect, our
decision in Loving had the effect of reinstating a regime in
which anyone who wishes to prepare tax returns for others can
do so as long as she obtains a PTIN (and pays the associated
fee), without needing to satisfy any credential requirements.
Id. at 1021–22.
In 2014, after we issued our decision in Loving, several
tax-return preparers initiated the action now before us in this
appeal. The preparers challenge the lawfulness of the IRS’s
assessment of a fee for providing them a PTIN. They argue
that the PTIN fee is contrary to the Independent Offices
Appropriations Act and is arbitrary and capricious.
While the case was pending before the district court, the
IRS reduced the amount of the PTIN fee from $50 to $33 (not
including a vendor fee). Preparer Tax Identification Number
(PTIN) User Fee Update, 81 Fed. Reg. 52,766, 52,766 (Aug.
10, 2016). The IRS adjusted the PTIN fee in the wake of our
decision in Loving. A portion of the original PTIN fee was to
have been used to pay the costs of the registered tax-return
preparer program invalidated in Loving, and the IRS reduced
the amount of the PTIN fee to cover the costs of those portions
of the PTIN program that remained in effect after Loving. Id.
The district court, after certifying a plaintiffs’ class of tax-
return preparers, granted summary judgment in the preparers’
favor in relevant part. The court upheld the IRS’s requirement
that preparers obtain a PTIN. But the court invalidated the
PTIN fee charged by the IRS on the ground that the fee violates
6
the Independent Offices Appropriations Act. Steele v. United
States, 260 F. Supp. 3d 52 (D.D.C. 2017).
The court reasoned in part that, for an assessment to
qualify as a fee under that Act as opposed to an unauthorized
general tax, the assessment must relate to a specific benefit
conferred to an identifiable set of users. But here, the court
emphasized, essentially any person can obtain a PTIN after
Loving invalidated the PTIN eligibility criteria, such that the
PTIN program, in the court’s view, could no longer be said to
benefit a particular set of individuals rather than the public in
general. Id. at 67. The court also rejected the IRS’s argument
that the PTIN fee could be sustained based on an interest in
protecting tax-return preparers’ social security numbers. The
court believed that the agency had not adequately raised or
explained that rationale when it issued the rule establishing the
fee. Id.
The IRS now appeals.
II.
Before addressing the merits of the IRS’s arguments, we
first assess whether the district court had jurisdiction over this
case. We must assure ourselves of the existence of jurisdiction
even though no party argues it is lacking. See Steel Co. v.
Citizens for a Better Env’t, 523 U.S. 83, 94–95 (1998).
The specific question we confront is whether the
jurisdictional exhaustion requirement applicable to suits for
refunds under the Internal Revenue Code obligated the tax-
return preparers to pursue their claims with the IRS before
filing suit in federal court. See I.R.C. § 7422. We conclude
that the exhaustion requirement is inapplicable in the
circumstances of this case.
7
The exhaustion provision states that “[n]o suit or
proceeding shall be maintained in any court for the recovery of
any internal revenue tax alleged to have been erroneously or
illegally assessed or collected, or of any penalty claimed to
have been collected without authority, or of any sum alleged to
have been excessive or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed with the
Secretary” of the Treasury. I.R.C. § 7422(a). Neither party
believes that provision pertains to this case, and their belief is
correct.
We understand § 7422(a)’s exhaustion requirement to
pertain to actions seeking a refund of any “tax,” “penalty,” or
“sum” collected under the Internal Revenue Code. The PTIN
fee, by contrast, was established under the Independent Offices
Appropriations Act, a statute that lies outside the Internal
Revenue Code and that generally applies to all federal
agencies. The tax-return preparers correspondingly bring their
claims in this case under the general provisions of the
Administrative Procedure Act, not under any refund provision
in the Internal Revenue Code.
Our understanding of the scope of § 7422(a)’s exhaustion
requirement is grounded in the provision’s terms. In cases
seeking “recovery of any . . . tax alleged to have been
erroneously or illegally assessed or collected,” the language of
the provision limits its application to refund requests involving
“internal revenue” taxes, id.—that is, those taxes collected
under the Internal Revenue Code. Cf. Horizon Coal Corp. v.
United States, 43 F.3d 234, 240 (6th Cir. 1994) (per curiam)
(“[T]he dictates of § 7422(a) apply only to taxes imposed
pursuant to Title 26.”) And while the provision applies not
just to “internal revenue taxes,” but also to “any penalty” or
“any sum” alleged to have been unlawfully or wrongfully
collected, I.R.C. § 7422(a), we believe that, just as the
8
provision applies only to “internal revenue” taxes, it also
pertains only to a “penalty” or “sum” that is collected under the
Internal Revenue Code. That would encompass, for instance,
penalties levied on a tax-return preparer for understating a
client’s liability on a tax return. See id. § 6694.
The conclusion that § 7422(a)’s exhaustion requirement
applies only to penalties and sums assessed under the Internal
Revenue Code follows from the recognition that the
government imposes various taxes pursuant to authority
outside the Code. See Horizon Coal Corp., 43 F.3d at 236–37
(describing the reclamation fee imposed on coal mine operators
under the Surface Mining Control and Reclamation Act of
1977, 30 U.S.C. § 1232, as a tax). In that light, a reading of the
exhaustion provision that would apply only to “internal
revenue taxes” but would extend to any “penalty” or “sum” at
all (beyond the context of the Internal Revenue Code) would
lead to anomalous results: it would mean that a taxpayer who
wishes to challenge both a non–Title 26 tax and an associated
penalty would be required to exhaust her penalty refund
request, but not her related tax refund request, before filing suit.
We do not understand Congress to have intended to require that
sort of splitting of claims.
Relatedly, § 7422(a)’s exhaustion requirement calls for
claims to be presented initially to the “Secretary,” i.e., the
Secretary of the Treasury. And it would make little sense to
understand Congress to have required payers of penalties and
sums unrelated to the Internal Revenue Code (and, in many
cases, imposed by entities other than the IRS) to nonetheless
seek a refund from the Secretary of the Treasury. See Horizon
Coal Corp., 43 F.3d at 240. We thus conclude that § 7422(a)
is not meant to reach the claims in this case.
9
That result coheres with the context and purpose of the
provision. With claims challenging the collection of taxes or
penalties assessed under the Internal Revenue Code, the IRS
can correct any errors through its own administrative
processes. But the IRS reports that it has no such
administrative process to examine the lawfulness of its PTIN
fee and to correct any errors associated with collecting that fee.
Requiring the tax-return preparers to present their claims first
to the IRS thus would neither promote efficient resolution of
their claims nor serve § 7422(a)’s goal of “prevent[ing]
surprise” and “giv[ing] adequate notice to the Service of the
nature of the claim and the specific facts upon which it is
predicated, thereby permitting an administrative investigation
and determination,” Computervision Corp. v. United States,
445 F.3d 1355, 1363 (Fed. Cir. 2006) (internal quotation marks
omitted).
For those reasons, we conclude that § 7422(a) did not
require the tax-return preparers to submit their claims to the
IRS before bringing this action in federal court.
III.
On the merits, the tax-return preparers contend that the
PTIN fee is unlawful for two distinct reasons. First, they argue
(and the district court agreed) that the Independent Offices
Appropriations Act does not provide statutory authority for the
fee. Second, they contend that the IRS’s decision to impose the
fee was arbitrary and capricious. We disagree on both counts.
A.
We first consider whether the IRS had authority under the
Independent Offices Appropriations Act to charge tax-return
preparers a fee to obtain and renew a PTIN. The Independent
10
Offices Appropriations Act helps federal agencies recover the
costs of services provided to beneficiaries. See Nat’l Cable Tel.
Ass’n, Inc. v. United States, 415 U.S. 336, 337 n.1 (1974).
Under the Act, the “head of each agency . . . may prescribe
regulations establishing the charge for a service or thing of
value provided by the agency.” 31 U.S.C. § 9701(b).
The Supreme Court considered the Act in companion
decisions issued on the same day in 1974. Fed. Power Comm’n
v. New England Power Co., 415 U.S. 345 (1974); Nat’l Cable,
415 U.S. 336. The Court “construe[d] the Act to cover only
‘fees’ and not ‘taxes.’” New England Power, 415 U.S. at 349.
That is because “[t]axation is a legislative function, and
Congress . . . is the sole organ for levying taxes.” Nat’l Cable,
415 U.S. at 340. The Court explained that fees, as opposed to
taxes, are imposed on identifiable recipients of particular
government services. Id. at 340–41; New England Power, 415
U.S. at 349. The Court thus understood the Act to give
agencies authority to impose a “reasonable charge” on an
“identifiable recipient for a measurable unit or amount of
Government service or property from which [the recipient]
derives a special benefit.” New England Power, 415 U.S. at
349 (quoting OMB Circular No. A-25 (Sept. 23, 1959)).
The Act, that is, enables an agency to impose a fee only
for “a service that confers a specific benefit upon an
identifiable beneficiary.” Engine Mfrs. Ass’n v. EPA, 20 F.3d
1177, 1180 (D.C. Cir. 1994). To justify a fee under the Act,
then, an agency must show (i) that it provides some kind of
service in exchange for the fee, (ii) that the service yields a
specific benefit, and (iii) that the benefit is conferred upon
identifiable individuals. Id.; see Seafarers Int’l Union of N.
Am. v. U.S. Coast Guard, 81 F.3d 179, 184–85 (D.C. Cir.
1996). Here, the PTIN fee satisfies those conditions.
11
1.
We first assess whether the IRS provides a service in
exchange for the PTIN fee. We conclude it does: the service
of providing tax-return preparers a PTIN. In particular, the IRS
generates a unique identifying number for each tax-return
preparer and maintains a database of those PTINs, enabling
preparers to use those numbers in place of their social security
numbers on tax returns. The IRS devotes personnel and
resources to managing the PTIN application and renewal
process and developing and maintaining the database of PTINs.
The provision of a PTIN, and the associated functions,
constitute the provision of a service.
The tax-return preparers question how robust a service the
IRS undertakes when it provides them a PTIN. As they point
out, before our decision in Loving invalidated the registered
tax-return preparer regulations, the activities the IRS undertook
in connection with PTINs were more substantial. That now-
invalidated regime called for the agency to administer
competency tests and continuing-education requirements for
preparers. 76 Fed. Reg. at 32,287. After Loving, the IRS no
longer performs those functions. Instead, the agency’s PTIN-
related services are now confined to generating and
maintaining a database of PTINs. Preparer Tax Identification
Number (PTIN) User Fee Update, 80 Fed. Reg. 66,792, 66,794
(Oct. 30, 2015).
Those functions, although a slimmed-down version of the
PTIN-related services afforded by the agency before Loving,
still constitute the provision of a service. To the extent the tax-
return preparers believe that the amount of the PTIN fee is out
of step with the narrowed scope of remaining PTIN-related
functions, those concerns pertain to the reasonableness of the
fee, not to whether a fee can be assessed in the first place. See
12
Seafarers, 81 F.3d at 185–86. There may be force to the tax-
return preparers’ claim that the fee amount is excessive, but no
court has yet considered that claim, and the preparers can press
the matter in the proceedings on remand.
2.
Having determined that the IRS provides a service—the
provision of a PTIN—in exchange for the challenged fee, we
next consider whether that service affords a specific benefit.
We conclude it does: the PTIN helps protect tax-return
preparers’ identities by allowing them to list a number on
returns other than their social security number.
The service provided in exchange for a fee assessed under
the Independent Offices Appropriations Act must confer a
“specific benefit” on the charged party, Engine Mfrs. Ass’n, 20
F.3d at 1180—i.e., a “special benefit . . . above and beyond that
which accrues to the public at large,” Ayuda, Inc. v. Attorney
Gen., 848 F.2d 1297, 1301 (D.C. Cir. 1988). That
understanding comes from the Supreme Court’s construction
of the Act as authorizing fees rather than taxes, with the former
assessed against those specifically benefitting from a particular
service and the latter imposed for the benefit of the general
public. See Nat’l Cable, 415 U.S. at 340–41.
In contending that the “specific benefit” requirement is
met here, the IRS reasons in part that agency regulations
require tax-return preparers to obtain a PTIN in order to prepare
tax returns for compensation, and “[t]he ability to prepare tax
returns . . . for compensation is a special benefit.” 80 Fed. Reg.
at 66,794. The tax-return preparers respond that, in light of
Loving’s conclusion that the IRS lacks statutory authority to
establish a licensing scheme for preparers, the PTIN fee cannot
be justified as offsetting the costs of administering a licensing
13
regime. Nor, the tax-return preparers argue, can the agency
simply create an obligation to obtain a PTIN that is untethered
to any underlying licensing system, and then treat satisfaction
of that agency-invented requirement as a specific benefit for
which a fee may be assessed. See Seafarers, 81 F.3d at 186
(“[A]n agency is not free to add extra licensing procedures and
then charge a user fee merely because the agency has general
authority to regulate in a particular area.”); Cent. & S. Motor
Freight Tariff Ass’n v. United States, 777 F.2d 722, 729 (D.C.
Cir. 1985) (“To be legally cognizable, the private benefit must
be predicated upon something other than the mere fact of
regulation . . . .”).
We need not resolve whether satisfying the
agency-imposed requirement to obtain a PTIN, standing alone,
could qualify as a specific benefit for which the agency may
levy a fee. That is because the PTIN requirement is supported
by an additional justification advanced by the IRS, one that we
find adequate to support the assessment of a PTIN fee: the
protection of the confidentiality of tax-return preparers’ social
security numbers. See 75 Fed. Reg. at 60,309; 80 Fed. Reg. at
66,793. And not only does that confidentiality-protection
justification independently support assessment of a PTIN fee,
but the permissible amount of the fee would remain the same
regardless of whether it is justified based on that rationale or
instead based on the need to satisfy the agency-imposed
requirement to obtain a PTIN. In either case, the IRS would
need to construct and maintain a PTIN database and provide a
PTIN to each tax-return preparer, and it could permissibly
recover the costs associated with those functions through the
PTIN fee, see Nat’l Cable Television Ass’n v. FCC, 554 F.2d
1094, 1107 (D.C. Cir. 1976).
We thus can rest on the confidentiality-protection rationale
alone as conferring a specific benefit for which a PTIN fee may
14
be assessed. The confidentiality advantages associated with
the PTIN requirement readily qualify as a specific benefit:
without protection of their social security numbers, preparers
would face greater risks of identity theft.
The tax-return preparers argue that the IRS cannot rely on
the protection of confidential information as a benefit justifying
the PTIN fee. They reason that the agency did not specifically
invoke the confidentiality concern when it issued the PTIN
regulation and thus may not lean on that justification now. See
SEC v. Chenery Corp., 332 U.S. 194, 196 (1947). We
conclude, however, that the IRS adequately relied on the
confidentiality protections afforded by PTINs when issuing the
PTIN regulations.
The IRS’s concern with maintaining the confidentiality of
preparers’ social security numbers runs throughout the
regulatory history of the PTIN requirement and fee. When
proposing the PTIN regulations in 2010, the IRS decided to
require all tax-return preparers to use a single identifying
number so that it could “better collect and track data on . . .
preparers.” User Fees Relating to Enrollment and Preparer Tax
Identification Numbers, 75 Fed. Reg. 43,110, 43,110 (July 23,
2010). The IRS at that point faced a choice: it could use the
preparers’ social security numbers, or it could instead use
PTINs (which many preparers by then had obtained). The
agency chose to mandate the use of PTINs.
In opting to require the use of PTINs in 2010, the IRS
explained that they provide “an alternative to using the tax
return preparers’ social security numbers.” Id. When issuing
its final PTIN regulations later that year, the IRS specifically
noted the “identity protection currently provided by PTINs,”
75 Fed. Reg. at 60,318, and explained that the regulations
would benefit “tax return preparers and help maintain the
15
confidentiality of SSNs,” 75 Fed. Reg. at 60,309. The IRS’s
view is consistent with the concern animating Congress’s grant
of authority to the IRS to mandate the use of PTINs: “that
inappropriate use might be made of a preparer’s social security
number” under the pre-PTIN scheme. S. Rep. No. 105-174, at
106. And when the IRS reissued the PTIN fee regulations in
2015 after our decision in Loving invalidated the registered tax-
return preparer program, the agency again explained that
“[r]equiring the use of PTINs . . . benefits tax return preparers
by allowing them to provide an identifying number on the
return that is not an SSN.” 80 Fed. Reg. at 66,793.
The tax-return preparers submit that those various
statements by the IRS should not count because they appear in
the regulatory commentary addressed to the agency’s
underlying requirement that preparers obtain a PTIN, not in the
agency’s explanation of the fee for providing a PTIN. But the
IRS noted “the identity protection currently provided by
PTINs” in the portion of the 2010 regulatory commentary
addressed to the PTIN fee, not the portion generally discussing
the PTIN requirement. See 75 Fed. Reg. at 60,318. And in any
event, the IRS’s explanation of the PTIN requirement bears
directly on the specific benefit conferred in exchange for the
PTIN fee. After all, the specific-benefit question concerns
what benefit, if any, the PTIN affords to preparers. And when
the IRS observed that a “benefit[]” of the PTIN is that it allows
preparers to “provide an identifying number on the return that
is not an SSN,” 80 Fed. Reg. at 66,793, the agency necessarily
conveyed that a benefit preparers receive in exchange for the
PTIN fee is the ability to provide a number “that is not an
SSN,” id.
The tax-return preparers question the extent to which the
PTIN requirement in fact helps protect preparers’ confidential
information. In their view, because the IRS already allowed
16
preparers to omit their social security numbers on the copy of
returns provided to the taxpayer, the replacement of social
security numbers with PTINs affords no additional protection
of preparers’ confidential information.
Congress, however, believed otherwise. When Congress
in 1998 amended the Internal Revenue Code to allow the IRS
to mandate the use of PTINs, the IRS had been allowing
preparers to omit their social security numbers from the
taxpayers’ returns for over twenty years. See Rev. Rul. 78-317,
1978-2 C.B. 335. Notwithstanding the longtime availability of
that option, Congress authorized the IRS to require PTINs
based on concerns “that inappropriate use might be made of a
preparer’s social security number.” S. Rep. No. 105-174, at
106.
Nor did the option to omit social security numbers on the
taxpayer’s copy of a return mitigate preparers’ concerns about
the exposure of their confidential information. After the IRS
in 2010 proposed mandating the use of PTINs, Furnishing
Identifying Number of Tax Return Preparer, 75 Fed. Reg.
14,539 (Mar. 26, 2010), several groups of tax-return preparers
submitted comments supporting the change due to concerns
about protecting the confidentiality of preparers’ social
security numbers. H&R Block, which in 2010 was the “largest
employer of tax return preparers (approximately 120,000),”
supported the IRS’s proposal to mandate PTINs because PTINs
“protect the confidentiality of SSNs.” H&R Block, Comment
Letter on Proposed Rule Furnishing Identifying Number of Tax
Return Preparer, at 1, 6 (Apr. 21, 2010),
https://www.regulations.gov/document?D=IRS-2010-0009-
0127. The Ohio Society of Certified Public Accountants,
representing 23,000 members, likewise approved of the IRS’s
proposal because “the use of the PTIN as a preparer identifier
will minimize confidentiality concerns related to what could
17
have been an alternative: the use of preparer social security
numbers.” Ohio Society of CPAs, Comment Letter on
Proposed Rule Furnishing Identifying Number of Tax Return
Preparer, at 1 (Apr. 26, 2010),
https://www.regulations.gov/document?D=IRS-2010-0009-
0193. The IRS reasonably agreed with those preparers—and
with Congress—that PTINs would help to protect preparers’
confidential information.
The tax-return preparers next argue that, even if
confidentiality concerns could justify assessing a fee for
initially providing a PTIN, those concerns cannot justify the
IRS’s fee to renew that number annually. We are unpersuaded.
The IRS not only provides a PTIN upon an initial application
but also maintains a database that allows preparers to continue
using their PTINs in subsequent years. The renewal fee, then,
pertains to the agency’s continuing efforts in that regard.
To be sure, the tax-return preparers might question
whether the amount of the renewal fee bears an adequate
relationship to the continuing costs incurred by the IRS to
maintain the PTIN database. But those concerns pertain to the
amount of the fee, not the antecedent question of whether the
fee generally lies within the IRS’s statutory authority under the
Independent Offices Appropriations Act. On remand, the
district court is free to consider arguments concerning the
alleged excessiveness of the fee, including whether the renewal
fee is “reasonably related” to the “costs which the agency
actually incurs” in providing the service, Nat’l Cable
Television Ass’n, 554 F.2d at 1107, and “the value of the
service to the recipient,” Cent. & S. Motor, 777 F.2d at 729.
For purposes of the issue we consider at this stage of the
proceedings, though, it is enough for us to conclude that the
PTIN requirement specifically benefits tax-return preparers by
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helping to protect the confidentiality of their personal
information.
3.
Finally, we address whether the IRS provides the service
and associated benefit—i.e., the provision of PTINs and the
resulting protection of confidential personal information—to
“identifiable recipients” rather than to the public at large.
Seafarers, 81 F.3d at 184. We think it does. Tax-return
preparers as a group qualify as identifiable recipients for
purposes of justifying a fee assessed under the Independent
Offices Appropriations Act.
The tax-return preparers submit that, because essentially
anyone can obtain a PTIN after our decision in Loving, the
service and benefit associated with the PTIN extend to the
public at large rather than only to specific, identifiable
recipients. It does not matter, though, that the service and
benefit are theoretically available to the general public. What
matters is that the service is provided to, and the corresponding
benefit is received by, the specific group of persons who in fact
pay the fee.
That understanding draws support from the Supreme
Court’s identification of passports as an example of a service
for which an agency can appropriately charge a fee under the
Act. See New England Power, 415 U.S. at 349 n.3. Although
passports are generally available to the entire citizenry, the Act,
as understood by the Supreme Court, enables the State
Department to charge a fee to the particular persons who apply
for a passport because the service undertaken to process
passport applications benefits those persons. See id. The same
is true of those persons who, in exchange for paying a fee,
obtain and renew a PTIN. And because the IRS charges only
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those who receive the benefit of a PTIN, the specific benefit
supporting the fee extends only to identifiable individuals
rather than the public writ large. See id. at 349.
In sum, the IRS acted within its statutory authority under
the Independent Offices Appropriations Act in charging tax-
return preparers a fee to obtain and renew PTINs.
B.
We next address whether the IRS’s decision to assess a
PTIN fee was arbitrary and capricious. See 5 U.S.C.
§ 706(2)(A). An agency generally must “give adequate reasons
for its decisions,” and the requirement to give a “satisfactory
explanation for its actions” is “satisfied when the agency’s
explanation is clear enough that its path may reasonably be
discerned.” Encino Motorcars, LLC v. Navarro, 136 S. Ct.
2117, 2125 (2016).
The tax-return preparers principally contend that the IRS’s
account of its reasons for imposing a PTIN fee does not survive
our decision in Loving. In the preparers’ view, the IRS
provided no reasoned justification for the fee separate from
justifications that can no longer support the fee after Loving.
The preparers emphasize that the 2010 regulations originally
establishing the PTIN fee stated that the fee would pay for the
registered tax-return preparer program, which Loving later
invalidated. See 75 Fed. Reg. at 43,111.
We conclude that the IRS sufficiently rooted its decision
to assess a PTIN fee in justifications independent of those
rejected in Loving. When the IRS reissued the PTIN fee
regulations after Loving, it explained that PTINs would benefit
preparers by protecting their confidential information and
would improve tax compliance and administration. 80 Fed.
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Reg. at 66,793. Loving did not cast doubt on those
justifications, which are independent of the registered tax-
return preparer program we considered and invalidated there.
With specific regard to assessing a fee for providing a
PTIN, the IRS explained that generating PTINs and
maintaining a database of PTINs cost substantial sums, and
that, in its view, those costs were more appropriately recouped
from preparers who obtain a PTIN than from the general
public. See id. at 66,793–94. Those costs, as explained, can be
recovered through the PTIN fee. See supra at 13. And the IRS
noted that it incurred costs associated with providing PTINs
beyond the costs of the services invalidated in Loving, and that
it was reducing the fee to account for the elimination of those
functions deemed beyond its authority in Loving. See 80 Fed.
Reg. at 66,794.
It is true that the IRS’s accounting in the regulatory
materials of the services paid for by the PTIN fee generally
describes certain functions that, depending on their precise
scope, could be seen to raise questions about whether they
range beyond the IRS’s authority after Loving—e.g.,
“background checks,” “professional designation checks,” and
“compliance and IRS complaint activities.” 80 Fed. Reg. at
66,794. But the IRS also explained that the fee is “based on
direct costs of the PTIN program, which include staffing and
contract-related costs for activities, processes, and procedures
related to the electronic and paper registration and renewal
submissions.” Id. That explanation survives Loving because,
as the district court held, the IRS’s requirement that preparers
obtain and renew a PTIN survives Loving. See Steele, 260 F.
Supp. 3d at 62–63.
The tax-return preparers’ concerns that the justifications
for the PTIN fee might encompass functions deemed in Loving
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to fall outside the IRS’s regulatory authority can be addressed
on remand, when the district court examines whether the
amount of the fee is reasonable and consistent with the
Independent Offices Appropriations Act. But aside from
questions to be considered on remand about whether the
amount of the PTIN fee impermissibly encompasses functions
falling outside the IRS’s statutory authority, the IRS’s decision
to charge a fee at all was adequately grounded in services lying
within its authority, and thus was not arbitrary and capricious.
* * * * *
For the foregoing reasons, we vacate the judgment of the
district court and remand the case for further proceedings.
It is so ordered.