IRS rides 1884 'dead horse' law to defense of tax preparer rules

By Patrick Temple-West

WASHINGTON (Reuters) - The Obama administration on Tuesday defended its effort to regulate the tax return preparation business for the first time in U.S. history, basing its case largely on a 19th century law dealing with horses lost or killed in the Civil War.

At an appellate court hearing on a challenge brought by libertarian lawyers challenging the administration, Justice Department Tax Division lawyer Gilbert Rothenberg said: "I hate to beat a dead horse, especially one from the Civil War era."

But he explained that the administration sees the "Horse Act of 1884" as providing ample authority for the U.S. Internal Revenue Service to regulate the tens of thousands of preparers who fill out millions of Americans' federal tax returns.

A three-judge panel of the U.S. Court of Appeals for the District of Columbia Circuit heard the administration's argument. Rothenberg said the IRS should be allowed to force tax return preparers - who are now unregulated - to pass a competency test and take annual continuing education classes.

But the Institute for Justice, a libertarian advocacy law firm, disagreed.

"Congress never gave the IRS authority to regulate tax preparers," said Dan Alban, an attorney for the institute.

The case has broad implications for the industry, which includes H&R Block Inc, a few mid-tier companies and thousands of tiny, mom-and-pop firms.

A decision from the judges is still months away. In oral arguments, the judges - all appointed by Republican presidents - gave no clear sign of how they will rule, yea or neigh.

But they did question why the IRS was citing an 1884 law to justify trying to police tax return preparers in 2013.

LEGAL REPRESENTATION AT ISSUE

After the Civil War, many Americans brought war loss claims against the U.S. government, often for dead or missing horses.

A post-war industry emerged of agents who would press war loss claims for a fee, usually a percentage of the claim collected. Soon, claim values were being fraudulently inflated.

In response, the government started regulating these intermediaries, barring unscrupulous ones and certifying honest ones as "enrolled agents," a title that is still used today by people who represent clients in matters before the IRS.

The IRS is arguing that tax return preparers represent their customers in much the same way that enrolled agents do, so the agency should be able to expand regulation to include preparers.

But the Institute for Justice is arguing that tax return preparers do not carry out the same level of representation, but rather merely provide a paid service for clients.

"Preparing a tax return is not a representative act," Alban said. "It is performing a service, certainly, but there's no representation."

More than 78 million Americans in 2011 paid someone to prepare their tax returns. The industry posted estimated revenue this year of $9.4 billion.

The Institute sued in March 2012 to block the IRS's regulations and won a district court ruling in January halting parts of the agency's program. The IRS appealed.

KOCHS HELPED FUND CHALLENGER

Based in Arlington, Va., the institute litigates over issues such as private school vouchers and eminent domain. It was begun in 1991 with funding from wealthy industrialists and conservative activists David and Charles Koch.

Sabina Loving, a Chicago tax preparer, is the lead plaintiff in the case. She was not present at the oral arguments.

Some of the tax experts who attended said the judges seemed skeptical of the IRS's argument. "Clearly, they were leaning toward Loving," said Don Williamson, a tax accountant and executive director of American University's Kogod Tax Center.

"It looks like a good day for Mr. Alban," said Robert Kerr, senior director of government relations for the National Association of Enrolled Agents, a tax-preparers trade group.

Kathryn Keneally, head of the Justice Department tax division, declined to comment on the oral arguments while leaving the court room.

The case is Sabina Loving et al v. Internal Revenue Service, U.S. Court of Appeals for the District of Columbia Circuit, No. 13-5061.

(Editing by Kevin Drawbaugh and Leslie Gevirtz)

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NSA reportedly broke privacy rules thousands of times

The National Security Agency has overstepped its authority and broken privacy rules thousands of times every year since being given new surveillance powers by Congress in 2008, The Washington Post reported, citing an internal audit and other secret documents.

The documents, which the Post claims it received earlier this summer from NSA leaker Edward Snowden, detail how the controversial agency has crossed the line many times over in its collection of massive amounts of data from around the world.

Despite repeated claims by officials that the NSA does not spy on Americans, the Post reports that the bulk of the infractions involved improper surveillance of Americans or foreign targets in the U.S. Some of the infractions were inadvertent, caused by typographical errors resulting in U.S. calls or emails being intercepted. Others were more serious.

The Post reported that the most significant violations included the unauthorized use of information on more than 3,000 Americans and green-card holders. In another incident, the Post reported that a “large number” of calls from Washington were intercepted in 2008 after the Washington area code 202 was confused with the code 20, which is the code for dialing to Egypt.

In total, an NSA audit from May 2012 reportedly found 2,776 incidents in the prior 12 months of improper collection and handling of communications.

In another case, the special court that oversees the NSA did not learn about a new collection method until it had been underway for months. The court ruled the method unconstitutional, according to the Post.

"NSA’s foreign intelligence collection activities are continually audited and overseen internally and externally,” an NSA official told Fox News late Thursday. “When NSA makes a mistake in carrying out its foreign intelligence mission, the agency reports the issue internally and to federal overseers -- and aggressively gets to the bottom of it."

In a statement to the Post, the NSA said it tries to identify problems "at the earliest possible moment, implement mitigation measures wherever possible and drive the numbers down."

"We're a human-run agency operating in a complex environment with a number of different regulatory regimes, so at times we find ourselves on the wrong side of the line," a senior NSA official told the newspaper.

The details shed light on the errors and violations in the NSA collection efforts that administration officials so far have addressed only in broad terms.

When the intelligence community made key documents public in late July about the nature of the NSA collection effort, one document said that "there have been a number of technical compliance problems and human implementation errors" in programs that collect both bulk phone and email records. 

The document did not reveal much more, other than to state that no "intentional or bad-faith violations" were found. The document said only that the missteps resulted in the "automated tools operating in a manner that was not completely consistent with the specific terms of the court's order."

The Post story showed infractions were widespread. The report said despite the sharp growth in oversight staff, infractions increased through 2011 and early 2012. It was not clear whether the trend continued after that.

President Obama recently vowed to provide more transparency and oversight in the process, but has not bowed to calls to fundamentally change the surveillance programs. Some in Congress, like Rep. Peter King, R-N.Y., and leaders of the congressional intelligence committees, have described the collection efforts as critical to national security. Others say they have gone too far and run the risk of infringing on Americans’ right to privacy.

A separate Washington Post report on Thursday also said the chief judge of the Foreign Intelligence Surveillance Court acknowledged that its ability to provide oversight of the spying programs is limited.

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