UserFees

A Loophole of Its Own: How the IRS
Defies Congress With User Fees
by John Myrick
Perhaps inspired by reviewing the tax returns of
some of this country’s inexplicably profitable busi-
nesses, the IRS has gotten into the entrepreneurial
spirit. It has started charging user fees for its services
— and at exorbitant prices (up to $218,600 per trans-
action).
But wait, what services could the IRS charge for?
Isn’t its business to determine how much money the
government wants from you and then to take it?
Yes. But a questionable product isn’t a problem
when you’ve got motivated customers.
The advantage the IRS has over some other
government user fee experiences — such as na-
tional parks that charge for admission — is that its
customers generally have no real choice but to use
the service. Why would anyone pay a user fee on
top of a tax bill if there were an equally good
alternative for meeting the requirements of law?
User fees have proven to be a nice revenue
generator for the IRS, and they have increased
substantially over the past 10 years. There is no
reason to expect that trend to reverse. The IRS needs
money because Congress won’t give it enough, and
the IRS has the full authority to charge user fees and
spend the revenue however it wants, with very few
strings attached. There’s no incentive for it to do
otherwise — except perhaps new legislation or
rebukes from the courts, both of which may be
coming soon — so for now, all signs point to fees
growing rather than diminishing.
A. Exploding User Fees
Congress has been loudly and enthusiastically
tightening the purse strings on the IRS since Repub-
licans regained a majority in the House. In fiscal
2010 Congress appropriated $12.15 billion for the
IRS. That fell to $10.95 billion in fiscal 2015 and
rebounded slightly to $11.2 billion in fiscal 2016.1
Somewhat quietly, in response to the reduced
appropriations, the IRS has increased its user fee
revenue by 35 percent from its fiscal 2010 level ($290
million) to $391 million in fiscal 2015.2 In fiscal 2016
the IRS expects to collect about $422 million.3
Spending of that user fee revenue has been even
more feverish — the IRS plans to spend $509
million in fiscal 2016. Yes, that’s more than it
expects to collect. Before 2011, when user fees were
mainly reserved to pay for unexpected expenses
like the flooding of the IRS building that occurred in
2006, the IRS had built up a reserve in fee revenue.
The carryover balance reached a high of $327 mil-
lion at the end of fiscal 2011. Since then the IRS has
been eating into its fund, and the balance is pro-
jected to fall to $93 million by the end of fiscal 2016.
The IRS has had the authority to charge user fees
since the 1950s; however, at that time, all fees col-
lected were simply deposited into the Treasury Gen-
eral Fund — the same place taxes typically go —
which meant they provided no extra financial ben-
efit to the agency. In 1995 Congress passed a law
allowing the IRS to keep in its own Miscellaneous
Retained Fees Fund up to $119 million of the fee
revenue, which by and large it could spend however
it chose.4 In 2005 Congress removed the cap, autho-
rizing the IRS to keep all fees first imposed after
September 30, 1994 — including portions of fees that
have been increased since that date.5
As shown in the figure above, the 2005 removal
of the fee limit started an upward trend in collec-
tions.
1
Taxpayer Advocate Service (TAS), ‘‘National Taxpayer Ad-
vocate Annual Report to Congress, 2015’’ (Dec. 31, 2015).
2
William Hoffman, ‘‘Taxpayer Advocate Warns of Class
System for Taxpayers,’’ Tax Notes, Jan. 11, 2016, p. 143.
3
Government Accountability Office, ‘‘IRS Could Improve
Presentation of Budget Data in Its Congressional Justification,’’
GAO-16-695 (July 2016).
4
P.L. 103-329. See GAO-16-695, supra note 3.
5
P.L. 109-115.
John Myrick
John Myrick is the
deputy editor of Tax Notes.
His column takes a second
look at some of the more
unique, provocative, and
noteworthy stories covered
by Tax Analysts reporters.
In this column, Myrick
describes how the IRS is gen-
erating revenue through
user fees to make up for re-
duced appropriations from
Congress.
tax notes™
GRIST FOR THE MILL
TAX NOTES, October 3, 2016 111
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The most dramatic recent fee increase is in the
prefiling agreement (PFA) program. The IRS has
increased the cost of a PFA request from $50,000 (its
2014 level) to $218,600 for requests submitted be-
ginning in 2017.6 Before 2007 the price of a request
ranged from $1,000 to $10,000, depending on the
taxpayer’s assets.7
The cost of a traditional letter ruling has more
than doubled over the past five years.8 At the
beginning of 2012, the cost was $14,000.9 That fee is
now $28,300.10
The fee for requests for competent authority
assistance in which the taxpayer asks for discretion-
ary limitation on benefits relief has increased from
$27,500 (its 2015 level) to $37,000 for requests filed
on or after September 30, 2016.11
The fee to request an advance pricing agreement
increased from $50,000 to $60,000.12 According to an
IRS spokesperson, that price will continue to rise.
The IRS traditionally charged about 50 percent of
the cost of providing the APA service, but by 2020
the IRS plans to increase the fee to 100 percent of the
cost.13
B. How Fees Are Made
The primary, general authority for user fees
comes from the Independent Offices Appropria-
tions Act of 1952 (IOAA).14 The IOAA authorizes
federal agencies to charge fees when they provide
any ‘‘service or thing of value.’’ Under the statute,
the fees must be fair and based on the costs to the
government, the value of the service or thing to the
recipient, the public policy or interest served, and
other relevant facts.
Federal policy — as set forth by the Office of
Management and Budget in Circular A-25 — is for
agencies to set user fees at the full cost of the service
provided, which includes the direct and indirect
costs of personnel, overhead, and collection. How-
ever, agencies can ask the OMB for a waiver to
charge less than full cost.15
Some IRS user fees derive from specific statutes
rather than the IOAA. The statutes usually also
provide guidance on how the fees should be deter-
mined. Those statutes include section 7528, which
authorizes fees for letter rulings and determination
letters, and section 6103(p), which authorizes
charges for the reproduction of returns and the
6
Rev. Proc. 2016-30, 2016-21 IRB 981; and Andrew Velarde,
‘‘Budget Squeeze Means More Increases in User Fees,’’ Tax
Notes, May 16, 2016, p. 883.
7
Rev. Proc. 2005-12, 2005-1 C.B. 311; and Amy S. Elliott,
‘‘Prefiling Agreements Get More Expensive Under New Proce-
dures,’’ Tax Notes, May 9, 2016, p. 730.
8
Elliott, ‘‘Letter Ruling Fees Have More Than Doubled in 4
Years,’’ Tax Notes, Mar. 30, 2015, p. 1585.
9
Rev. Proc. 2012-1, 2012-1 IRB 1.
10
Rev. Proc. 2016-1, 2016-1 IRB 1.
11
Rev. Proc. 2015-40, 2015-35 IRB 236; and Kristen A. Parillo,
‘‘Final APA, Competent Authority Guidance Increases User
Fees,’’ Tax Notes, Aug. 17, 2015, p. 729.
12
Rev. Proc. 2015-41, 2015-35 IRB 263.
13
Parillo, supra note 11.
14
Codified as 31 U.S.C. section 9701.
15
TAS, supra note 1, at 15.
IRS User Fee Revenue
1995: Congress
allowed IRS to keep
some user fees
2006: Congress
removed limit on
fees IRS could keep
2010: IRS user fee
collection continues
to rise as Congress
cuts IRS appropriation$400
$200
MillionsofDollars
Fiscal
1995
Fiscal
1997
Fiscal
1999
Fiscal
2001
Fiscal
2003
Fiscal
2005
Fiscal
2007
Fiscal
2009
Fiscal
2011
Fiscal
2013
Fiscal
2015
Installment
Agreements
TE/GE —
Rulings, etc.
Income
Verification
Other
Preparer
Registration
$202 million
$61 million
$50 million
$40 million
$37 million
Source: TAS, “National Taxpayer Advocate Annual Report to Congress, 2015: Most Serious Problem.”
COMMENTARY / GRIST FOR THE MILL
112 TAX NOTES, October 3, 2016

disclosure of return information, such as the income
verification express service (IVES). Mortgage lend-
ers and other financial entities use IVES transcripts
to verify the income of loan applicants. Although
the fee is only $2, it generates a lot of revenue. In
2012, when the fee was $2.25, it was the second
largest contributor to IRS fee revenue, generating
$40 million, or 14 percent of total fees collected.
Despite the government’s full cost directive in
Circular A-25, until recently, the IRS chose to set
many of its user fees at a level below estimated cost
to make the services more broadly available to
taxpayers.16 Since the congressional budget cuts
began in 2010, however, the IRS has been increasing
many fees to full cost unless there is a compelling
reason not to, such as when the services are pro-
vided to low-income taxpayers.
The resulting steep increases have led some
practitioners to push back and call for more trans-
parency regarding how government expenses are
calculated — or to ask courts to declare the fees
invalid.
The IRS does not fully disclose to the public what
factors it considers in setting fees.17 In a November
2011 report by the Government Accountability Of-
fice, the GAO said that at least ‘‘for the IRS’s smaller
user fee programs, we found that data or assump-
tions used in cost estimates were not always well
documented or understood by officials.’’18 The Tax-
payer Advocate Service (TAS) has also called for
increased transparency, asking the IRS to ‘‘publish
its user fee analysis and address any comments
from internal and external stakeholders before
adopting or increasing a fee.’’19
The IRS usually reviews its user fees every two
years, but it does not publish those review docu-
ments.20 As described by the GAO report, the fee
review process involves the IRS CFO’s office work-
ing with business divisions and program offices to
develop cost estimates for particular services and
thereby establish fees.21 In 2014, with the impetus to
find new user fees and increase existing ones, the
IRS added an extra, out-of-cycle fee review.22
The Internal Revenue Manual lists the factors the
IRS looks for in deciding whether to impose new
fees for services or activities:
1. the user fee activity must be voluntary and
requested by the taxpayer;
2. the benefit must be ‘‘identifiable’’ to a spe-
cific taxpayer;
3. the cost of administering the fee cannot be a
substantial amount of the fee; and
4. the fee’s effect on low-income taxpayers
must be considered.23
We may soon get some insight into the fee-setting
process. The National Association of Enrolled
Agents (NAEA) has made a Freedom of Informa-
tion Act request regarding the calculation of the fee
for the exam that prospective enrolled agents must
take, after the IRS increased it from $11 to $99.24 At
the hearing on the request, Robert Kerr, senior
director of government relations at the NAEA,
described his concern as follows:
The increasing cost is $88 per part. IRS antici-
pates 20,000 parts administered per year. The
total increase in revenue to the Agency is $1.76
million annually. So let’s generously assume
that the background check increase of $270,000
is simply passed-on fees from elsewhere. That
leaves nearly $1.5 million in revenue or
roughly 15 additional full-time equivalent em-
ployees. We can’t imagine that IRS requires an
office the size of NAEA’s entire staff to meet
the three increased costs and the five costs that
were omitted from the initial cost estimate. We
would like to know what IRS is doing with a
rough equivalent of 15 GS-12 and GS-13 staff,
and we do not. We are not alone, however. No
one outside the Agency knows. And we’re not
even sure who inside the Agency knows.25
C. The Ghost of Congress Past
With Congress’s recent attempts to squeeze the
IRS, it seems odd that lawmakers would have given
the agency the freedom to raise its own revenue. Of
course, the landmark fee legislation came in 1952,
with the enactment of the IOAA, and in 2005, when
Congress authorized the IRS to keep and spend all
new fees imposed beginning in October 1994. Be-
cause the IRS can generally choose how it wants to
spend its retained fee revenue — it does not have to
get congressional approval on how to use those
16
Velarde, supra note 6.
17
18
GAO, ‘‘User Fees: Additional Guidance and Documenta-
tion Could Further Strengthen IRS’s Biennial Review of Fees,’’
GAO-12-193, at 17 (Nov. 2011).
19
Id. at 14.
20
Internal Revenue Manual section 1.32.19.19.
21
GAO-12-193, supra note 18, at 17.
22
23
IRM section 1.32.19.20.
24
REG-134122-15. By the way, there’s a user fee for submit-
ting FOIA requests. 5 U.S.C. section 552(a)(4)(A).
25
Transcript of public hearing on REG-134122-15, at 3 (Feb.
25, 2016). See Hoffman, ‘‘NAEA Requests OMB Exception to
Exam User Fee,’’ Tax Notes, Feb. 29, 2016, p. 987.

funds — it has spent the money precisely in areas
where Congress is reducing appropriations.26
Congress has asked the IRS to focus on taxpayer
services and make cuts in other areas.27 Congress
allocates its appropriations to four categories of IRS
spending, which the IRS cannot then redistribute.
The biggest victims of the reduced funding have
been enforcement and operations support. Appro-
priations for taxpayer services have actually in-
creased slightly from fiscal 2010 ($2.28 billion)28 to
fiscal 2016 ($2.41 billion).29
With its user fee revenue, however, the IRS has
gone in the opposite direction, shifting its spending
away from taxpayer services ($129 million in fiscal
2011 to $45 million in fiscal 2015) and toward
operations support ($54 million in fiscal 2011 to
$393 million in fiscal 2015).30
Of course, that legal defiance has not gone unno-
ticed.31 There have been efforts by Republicans in
Congress to eliminate IRS discretion over how it
spends its user fee funds and divert the fees back to
the Treasury General Fund. The IRS Oversight
While Eliminating Spending Act of 2016,32 intro-
duced in March by House Ways and Means Com-
mittee member Jason Smith, R-Mo., would prohibit
the IRS from spending any fee revenue until spe-
cifically authorized by an appropriations act.33
But for now, the IRS can continue doing what the
law allows, even if lawmakers are not completely
happy about it. Granted, when lawmakers set IRS
funding levels, they take into account how much
the IRS expects to collect in user fees and how it
plans to allocate those funds. But other than pre-
emptively lowering allocations or enacting new
legislation, Congress can’t then control the IRS’s
user fee spending.
D. Good Service Is Expensive
Before Congress decries the IRS too much over
the rogue use of fees, lawmakers should consider
giving the agency fewer new assignments. Three of
the top targets of IRS user fee spending involve the
implementation of relatively new legislation. In
fiscal 2016, of the $509 million in user fee funds the
IRS plans to spend, $204 million will go to imple-
menting the Affordable Care Act, $62 million to
implementing the Foreign Account Tax Compliance
Act, and $30 million to implementing the Achieving
a Better Life Experience Act, all of which were
enacted after 2009. Of the $1.6 billion the IRS spent
implementing the ACA between fiscal 2010 and
fiscal 2015, 29 percent of the funds came from user
fee revenue.34
One of the interesting revelations of the IRS’s
move to a full cost policy for user fees is that it puts
a rough price tag on what the IRS believes its
services actually cost. Many are pretty pricey — at
least from the perspective of your everyday tax-
payer. That, in turn, sheds light on the difficult
decisions the agency must make in dealing with
budget shortfalls.
For example, in the letter ruling program, if it
legitimately costs the government $28,300 each time
it examines a taxpayer issue and writes up a ruling,
it’s apparent why the IRS might want to set some
limits on taxpayer access to the program. Expensive
services that at least theoretically benefit only a
small group of taxpayers would seemingly suffer
the most in an era of budget cuts, as opposed to
more broadly based programs such as general guid-
ance and litigation support.35
But many taxpayer issues require an upfront,
personalized determination from the IRS. Organi-
zations that seek tax-exempt status, for example,
must first submit an application to the IRS and get
its blessing. If the IRS doesn’t want to expend a lot
of resources providing those services, it must come
up with an alternative. Many times the answer has
been to resort to automatic procedures or to let
taxpayers simply check a box and choose their own
tax treatment.
Regarding the issue of applying for tax-exempt
status, the IRS in 2014 developed a streamlined
process for organizations that meet specific limits
on gross receipts and assets. It made the process
easier and cut down on the information those
organizations have to provide — and consequently
on the analysis the agency has to pay its staff to
perform.
One result of this streamlined procedure has
been a drop in the user fee for the application, from
$400 to $275.36 Because the procedure is simpler for
26
The IRS must get approval of its user fee spending plan
from Treasury and the OMB. GAO, supra note 3.
27
28
Treasury, ‘‘FY 2011 Budget in Brief,’’ at 65 (Feb. 2010).
29
GAO-16-695, supra note 3.
30
Id.
31
See majority staff report of the House Ways and Means
Committee, ‘‘Doing Less With Less: IRS’s Spending Decisions
Harm Taxpayers’’ (Apr. 22, 2015) (criticizing the IRS for shifting
user fee spending away from customer service and toward other
purposes).
32
H.R. 4885.
33
Hoffman, ‘‘Professionals Differ on Bill Restricting IRS User
Fees,’’ Tax Notes, Apr. 11, 2016, p. 186.
34
GAO-16-695, supra note 3.
35
Elliott, supra note 8.
36
Rev. Proc. 2016-32, 2016-22 IRB 1019.

the IRS, it’s faster and less costly to administer, and
the agency has been able to clear the backlog in
claims.37
However, according to critics, the trade-off has
been a reduction in IRS oversight, which increases
the possibility that unqualified filers will gain sec-
tion 501(c)(3) status. Before the simplified approach
was implemented, the approval rate for applicable
organizations was 77 percent. Following the
change, that rate rose to 95 percent, as of December
2015.38
E. User Fee Shell Game
IRS revenue from user fees generally does not
fund the services for which they’re charged. For
example, the Office of Chief Counsel retains none of
the fees for the letter rulings it prepares. Most fees
go to either the IRS Miscellaneous Retained Fees
Fund or the Treasury General Fund, depending on
when the fee was created and which statute autho-
rizes it.
That discrepancy between which services charge
fees and which ones benefit from the revenue
undermines a primary argument for allowing fees
— that specific government programs have an
ascertainable value and can be paid for by the
people who choose to use them. Fees that can be
used for any purpose look a lot like income from tax
revenue, which funds the government’s general
checking account. If nothing else, the optics are bad.
People don’t pay the barber for the mechanic to fix
their car. Why should offer in compromise fees fund
the implementation of the ACA?
One way to sidestep the discrepancy would be to
say that money is fungible. If the IRS needs $10x to
operate and it receives $8x in congressional appro-
priations and $2x in user fees, it doesn’t really
matter how the IRS applies the user fee revenue —
the funds remain crucial to the overall IRS budget.
Thus, if the programs most vulnerable to budget
shortfalls are the ones charging fees, those pro-
grams benefit from the additional revenue, even if
they don’t directly receive it.
However, that argument reveals something
about what user fees really are — just another
source of revenue. In fact, applied in the opposite
direction, the argument cuts against the significance
of tying user fee revenue to the programs that
charge them. In the above example, the IRS receives
$8x in appropriations from Congress but needs $10x
to fund all services adequately. Suppose it raises an
additional $2x through user fees but can spend the
funds only on the services that charge them. The
IRS still wins because it can apply the remaining
$8x to meet its other needs — which should now be
only $8x following the application of the fee rev-
enue.39
The TAS has even gone as far as to compare the
OIC fee to a tax shelter or accounting gimmick.
When a taxpayer makes an offer to settle a delin-
quent tax debt, the fee is factored into the determi-
nation of what the taxpayer can afford to pay. That
reduces how much the taxpayer can pay in back
taxes, thus shifting some money to the IRS — in the
form of a fee — that otherwise would have gone to
the treasury.40
Thus, even if we can select specific IRS services
that are expensive, are important, and have identi-
fiable beneficiaries, the question to answer first is
whether the IRS should be allowed to impose fees
to raise its own revenue and, next, whether it
should have the authority to increase those fees
whenever it needs additional funding.
Raising revenue through fees should be a policy
choice rather than an accident of necessity and
forgotten legislation. The same questions of fairness
and progressivity should apply to the imposition of
fees that (should) apply to other government meth-
ods of extracting money from the public.
One problem with user fees is that they can be
very regressive.41 Most IRS user fee revenue comes
from installment agreements,42 which are used by
taxpayers who cannot otherwise pay their tax bills
in full and are trying to regain compliance. That
means taxpayers who have trouble paying their
ordinary tax bills are the ones who are in large part
charged with filling the IRS user fee pot to fund
new mandates from Congress.
On the other extreme, fees for services like letter
rulings have become so expensive that only rela-
tively wealthy taxpayers can afford them. That
raises the specter of a government that will provide
elite-level service only to those who have the re-
sources to pay for the privilege.43
Without going too far into questions of fairness,
it’s enough to say that decisions about user fees
should be the product of specific analysis and
debate, not happenstance. If the IRS continues to
press the limits of its authority to create new user
37
Fred Stokeld, ‘‘User Fee for EO Short Form Reduced,’’ Tax
Notes, June 6, 2016, p. 1333.
38
Hoffman, ‘‘Taxpayer Advocate Warns of Class System for
Taxpayers,’’ Tax Notes, Jan. 11, 2016, p. 143.
39
This assumes that the fee-charging programs are not gen-
erating fees that exceed what the services cost.
40
41
GAO, ‘‘Federal User Fees: A Design Guide,’’ GAO-08-
386SP (May 2008).
42
In fiscal 2010, installment agreements accounted for 68
percent of IRS retained fees. GAO-12-193, supra note 18.
43
See Hoffman, supra note 38.

fees and increase the cost of existing ones, it should
be because we prefer the IRS to have that revenue-
raising power.
Note that although I have framed user fees fairly
negatively, many people support them as a policy
choice and believe they should be more widely
applied — probably in conjunction with a reduction
in other taxes. One example would be conservative
groups that see user fees as a steppingstone toward
replacing income taxes with consumption taxes.44
F. Are User Fees a Tax?
The above discussion raises the issue of whether
fees give the IRS its own administrative tax system.
Are fees actually distinct from taxes? For legal
purposes, to escape questions of delegating the
authority to tax, the answer is supposed to be yes.
The harder part is pinning down the reasoning that
gets you there.
From a taxpayer’s perspective, any time the IRS
asks you for money, it’s for either a tax or something
related, and the difference isn’t all that relevant.
Both add to your overall burden of tax compliance.
The government, of course, does care about the
distinction. The labeling issue has come up in the
courts many times because of the different require-
ments and consequences associated with the vari-
ous government exactions such as fees, taxes, and
penalties. But despite the frequent litigation, defin-
ing the terms remains philosophically challenging
because the distinctions are a matter of degree and
the categories can overlap.
Painted with a broad brush, both taxes and fees
are exactions the government charges the public to
fund its services. The nuance comes in determining
who bears the incidence of the charge, how the
charge is calculated, and whether taxpayers have a
choice in paying it. Here’s one way to distinguish
the two:
• User fees are charges assessed on specific ben-
eficiaries who make a voluntary request for
goods or services provided by the federal
government above and beyond what is nor-
mally provided to the public. The fees are
generally based on the cost of the service or
good provided, although a fee can exceed that
cost.
• Taxes arise from the government’s sovereign
power to raise revenue and are not necessarily
related to any specific benefit. Unlike user fees,
taxes are generally imposed to raise revenue to
fund benefits for the general public, such as the
national defense.45
Those distinctions seem most apt when compar-
ing, for example, the $2 user fee for an IVES
transcript with the income tax, which is not based
on the cost of a specific service but on one’s ability
to pay.
However, the differences break down if you poke
at them. The tax family tree is big and has a lot of
branches. An excise tax is different from an income
tax, which is different from a VAT, which is different
from a tariff. All those taxes also involve different
incidence, different manners of collection, and dif-
ferent justifications for imposition. When consider-
ing the variety within the tax family, distinguishing
fees becomes more difficult.
According to Justice Stephen G. Breyer, rather
than thinking of two wholly separate families, fees
and taxes, it is better to consider them as ‘‘a
spectrum with a paradigmatic tax at one end and a
paradigmatic fee at the other.’’46
But let’s take a look at some of the characteristics
mentioned above, shake the branches a bit, and see
what comes out.
1. Voluntariness. The IRM cites the voluntary na-
ture of an IRS service as a factor in whether to
charge a fee: ‘‘The IRS does not charge taxpayers for
special services that they do not request.’’47
According to the Tax Foundation, many states
have abandoned voluntariness as a factor in distin-
guishing between fees and taxes.48 And rightly so.
Paying taxes is not something most people do
voluntarily — outside a legal mandate to do so —
and thus any choice on how to meet those compli-
ance burdens will be illusory, at least to some
degree.
For example, tax return preparers must include a
preparer tax identification number on every return
and other refund claim they submit to the IRS. To
obtain that PTIN, the preparers must pay a fee, first
to apply for it and then each ensuing year to renew
44
See Jasper L. Cummings, Jr., ‘‘Meandering From Income to
Consumption Taxes Via User Fees,’’ Tax Notes, Aug. 29, 2016, p.
1241.
45
This definition is primarily drawn from GAO-12-193, supra
note 18, but it also adds elements from Joseph Henchman,
‘‘How Is the Money Used? Cases Distinguishing Taxes and
Fees,’’ State Tax Notes, May 20, 2013, p. 619. Henchman would
object to the voluntary requirement of the user fee. To him the
distinction comes down to the primary purpose of the exaction:
The primary purpose of fees is to recoup the cost of a service,
and the primary purpose of taxes is to raise revenue. For a good
overview of some other definitions, see Cummings, supra note
44.
46
San Juan Cellular Telephone Co. v. Public Service Commission of
Puerto Rico, 967 F.2d 683 (1st Cir. 1992).
47
IRM section 1.32.19.20.
48
Henchman, supra note 45.

it (although the identifying numbers themselves do
not change from year to year).
Preparers could choose not to obtain a PTIN, but
that would expose them to potential penalties un-
der section 6695(c) for failure to provide one — $50
per return and up to $25,000 per year. Further,
section 7407 authorizes the government to seek an
injunction requiring the preparer to include a PTIN
on future returns or to bar the preparer from
continuing in that line of work.
Thus, assuming the penalty would apply, the
true alternatives for the tax return preparer are a $50
fee or a $25,000 penalty. It’s fair to say that that’s not
a good choice.
Other IRS fees don’t subscribe so fully to the
twist-your-arm definition of voluntariness, but they
do apply to services that are an important and
regular part of practice. For example, the IRS has
recently increased the fee for rulings for so-called
9100 relief under reg. section 301.9100, which pro-
vides administrative relief for specific missed elec-
tions. The process has become so routine — and the
alternative so unpalatable — that there is often ‘‘no
choice in the matter’’ but to seek it, according to
Mark Schneider of Deloitte Tax LLP.49
Also, voluntariness is not the exclusive province
of user fees. There are many examples of taxpayer
choice regarding the timing and selection of differ-
ent tax regimes — from the check-the-box entity
rules, to the various rulings blessing specific merg-
ers and acquisitions, to the assortment of methods
for deferring income and accelerating the recogni-
tion of losses.
2. Specific benefit. The IRM says fees should be
imposed only when the benefit of the service is
‘‘identifiable to a specific taxpayer.’’ There are two
problems with that: (1) sometimes it’s unclear what
the benefit actually is to the taxpayer, other than
avoiding noncompliance; and (2) often the benefits
spill over to other taxpayers.
Coming back to PTINs, return preparers are
required to include those numbers on returns they
submit to the IRS. Thus, obtaining one from the IRS
is not so much a benefit as it is a necessity for people
in that profession. Before 2010 the IRS provided
PTINs for free, and before that preparers simply
used their Social Security numbers. PTINs likely
help reduce identity theft, compared with the use of
SSNs, but it should not be considered a special
concession of the government to allow taxpayers to
comply with the law without being exposed to
unnecessary risks.
Services such as PFAs, which allow taxpayers to
agree with the IRS in advance about the tax treat-
ment of specific transactions, are often an overall
better use of resources than the alternative — which
involves taxpayers making their best guess about a
transaction’s tax treatment and then eventually
hashing it out with the IRS in an audit and maybe
the courts. Both the PFA and the audit require
personalized service from the IRS and end in an
agreed-on tax treatment, but only the PFA, despite
often being the better alternative, carries a hefty
price tag. George A. Hani of Miller & Chevalier
Chtd. said:
Really [PFAs are] long-term resource savers.
[They allow the IRS to] look at something
today because it is closer in time to the trans-
action, the people, the documents. So [it will]
be more efficient in examination of the issue
rather than wait three to four years [for it] to
come up on audit.50
So what exactly is the specific benefit of PFAs
that’s worth charging for? Is it that they provide a
shortcut around an otherwise more difficult and
expensive audit process? That is a little like charg-
ing a fee to allow people to cut the line at the
Department of Motor Vehicles. Although PFAs pro-
vide a benefit, it’s only because they remedy a
problem the government created.
The second problem with the specific benefit
requirement is that the benefits of some services are
not limited to the taxpayers who use them. For
example, with letter rulings, although the benefit
applies mostly to the taxpayer who can rely on the
IRS’s ruling and can plan accordingly, the benefit
also spills over to the IRS and to taxpayers more
generally. For one thing, although letter rulings may
not be relied on as precedent by other taxpayers,
they indicate the IRS’s views on how specific mat-
ters should be treated, giving the tax community a
better chance to plan correctly and avoid audits,
which are expensive for both taxpayers and the
government. Further, rulings bring to the IRS’s
attention some of the issues that are floating around
in the transactional market and thereby help the IRS
develop broader guidance such as revenue rulings
and regulations.51
The related challenge in identifying which spe-
cific benefits to charge for is identifying which
specific benefits not to charge for. This creates a
‘‘fence’’ problem in that services of similar complex-
ity may be expensive for one taxpayer but free or
cheap for a different taxpayer. Depending on which
pasture you’re in, you could get relatively unfair
treatment.
49
50
Velarde, supra note 6.
51
Id.

For example, the IRS has identified several types
of questions that qualify for reduced letter ruling
fees. Because the IRS views those issues as routine
or simple, its attorneys spend less time resolving
them, and the rulings therefore cost the government
less. However, taxpayers who need the response to
an otherwise simple question — but one that is not
listed as qualifying for a reduced fee — still have to
pay full price. The American Institute of CPAs
recently raised that complaint regarding letter rul-
ing requests to treat late S elections as timely or to
waive inadvertently ineffective S elections or inad-
vertent terminations. Those requests are subject to
the full $28,300 fee, even though the AICPA believes
they are no more complex than many questions that
qualify for the reduced rate.52
3. Fees versus excise taxes. Of the various members
of the tax family, excise taxes may be the closest
relative to user fees. Excise taxes are charges tacked
onto the sale of particular goods or services. One
rationale for imposing excise taxes is to discourage
people from buying specific products — excise
taxes on cigarettes are a good example. But the
other rationale is to tailor the tax to specific con-
sumers — that is, to levy the tax only on those who
choose to pay for that service or good, just like with
user fees.
Sometimes the revenue generated from excise
taxes is earmarked for a fund that pays for related
government services. There is a federal excise tax
imposed on the sale of gasoline — a flat fee of 18.4
cents per gallon. Many consumers don’t notice it
because it is built into the price, like a lot of excise
taxes. The revenue from the gas tax is earmarked for
the Highway Trust Fund, which pays for surface
transportation spending, such as building and re-
pairing roads and bridges.53 Thus, the tax targets
the people who spend a lot of money on gas and
who thus presumably also spend a lot of time
driving on roads and bridges. That’s the idea.
Because of the similarities between excise taxes
and user fees, the OMB says they should not both
be charged for the same activity. In the words of
Circular A-25, ‘‘Excise taxes are another means of
charging specific beneficiaries for the Government
services they receive. New user charges should not
be proposed in cases where an excise tax currently
finances the Government services that benefit spe-
cific individuals.’’
Excise taxes have been distinguished from fees in
terms of their purpose, that is, whether they are
charged for revenue (excise taxes) or to recover the
cost of a service (user fees), and in how they are
calculated — fees should be based on the cost of the
service provided, whereas excise taxes should be
limited only by what’s politically feasible to impose.
But those are thin differences. Using the gas tax to
pay for highways is more along the lines of recov-
ering costs than is using letter fee revenue to fund
the implementation of FATCA and the ACA. And
capping fees at the cost of services doesn’t seem to
be a big limitation based on the recent fee hikes by
the IRS. While government services remain very
expensive to provide, setting an upper limit of ‘‘full
cost’’ still allows for a broad range of fee pricing.
Excise taxes are also generally imposed on goods
or services the government might not own or
provide. The gas tax, for example, can be collected
from transactions between two nongovernment
parties. User fees, by nature, must involve the
provision of a government good or service. But that
difference doesn’t always hold, as indicated by
Circular A-25. Sometimes excise taxes and user fees
could both apply to the same good or service. In
that case, the government must generally pick one
or the other.
4. Squelching sin versus recouping cost. Excise
taxes are often intended to discourage the use of a
particular good or service or to impose an extra cost
on those who undertake activities seen as especially
dangerous. In that role, they’re sometimes referred
to as sin taxes.54 For example, there are excise taxes
on the use of tanning beds and on the sale of
alcohol, tobacco, firearms, and ammunition. On the
campaign trail, Democratic presidential nominee
Hillary Clinton expressed her support for an excise
tax on soda passed in Philadelphia earlier this
year.55
User fees can also be imposed to discourage or
regulate use,56 but that generally isn’t the stated
reason for charging them, at least for the IRS.
Neither the IRM nor Circular A-25 requires the
agency, when introducing new fees, to consider
how the increased cost might discourage the use of
the services. According to the TAS, the IRS some-
times estimates the impact of fees on demand for
52
Joseph DiSciullo, ‘‘AICPA Seeks Reduced User Fees for S
Corporation Letter Rulings,’’ Tax Notes, May 30, 2016, p. 1203.
53
Stephen K. Cooper and Hoffman, ‘‘Congress Passes High-
way Bill With Tax Debt, Passport Offsets,’’ Tax Notes, Dec. 7,
2015, p. 1219. The gas tax revenue is deposited in the Treasury
General Fund, and an equivalent amount is then transferred to
the Highway Trust Fund.
54
See Joseph J. Thorndike, ‘‘Don’t Believe the Hype: Excise
Taxes Are About Revenue,’’ Tax Notes, Jan. 12, 2015, p. 179.
55
Paul C. Barton, ‘‘Does Clinton’s Soda Stance Violate Her
Tax Pledge?’’ Tax Notes, May 2, 2016, p. 602.
56
See Clayton P. Gillette and Thomas D. Hopkins, ‘‘Federal
User Fees: A Legal and Economic Analysis,’’ 67 B.U. L. Rev. 795
(1987).

services, such as in its biennial reviews, but that
analysis is performed only after the fees are im-
posed or increased.57
The hope that user fees can help recoup the cost
of services must be balanced with the deterrent
effect that any fee or tax will have in raising the
price for consumers.
As discussed previously, the cost of PFAs is
undergoing a dramatic increase, from a maximum
of $10,000 in 2007 to $218,600 in 2017, even though
PFAs are arguably more efficient than the potential
alternative of conducting audits after the fact. Ac-
cording to the TAS report, the Large Business and
International Division opposed the increase in the
PFA fee, arguing that it could deter taxpayers from
participating in the program, which enhances com-
pliance and provides certainty to taxpayers.58
One way to deal with the deterrent effect would
be to charge for the disfavored of two alternative
paths. Thus, for the PFA, why not charge for the
audit instead of the upfront agreement? Audits
require the IRS to spend significant resources bat-
tling with a single taxpayer to resolve payment
disputes. If the IRS believes its limited resources are
best spent on efforts that benefit the largest number
of taxpayers while incurring the lowest cost, audits
should be avoided whenever possible.
Charging user fees for audits would fail the
‘‘voluntary’’ requirement in the IRM, but as has
been discussed, voluntariness only loosely applies
to any compliance efforts that taxpayers undertake.
Taxpayers can ‘‘choose’’ not to participate in audits
just like return preparers can choose not to obtain a
PTIN — their freedom of choice simply comes with
a large mandatory bill. Or, less glibly, the taxpayer’s
choice could be the decision to forgo a PFA and thus
roll the dice on a risky position, which ultimately
costs the government — and the taxpayers who
fund it — by requiring a lengthy audit and possible
battles in court.
It remains to be seen whether the price increase
will lessen the use of PFAs. Taxpayers who would
seek them tend to have the resources to pay large
fees. As described by Michael P. Dolan of KPMG
LLP, taxpayers might just have to accept the fee:
‘‘The tax director [may have to] scratch his head a
couple times in terms of being able to get budget
authority to do it, but the financial statement con-
sequence and the tax certainty consequence will still
be worth it for those major transactions.’’59
However, other fee increases have been followed
by reduced participation. From fiscal 2010 through
fiscal 2014, the number of private letter rulings
released decreased by 30 percent.60 In the year the
IRS imposed a fee for the OIC program — a
relatively cost-effective method of collecting delin-
quent tax debt — submissions fell by over 20
percent among taxpayers at every income level.61
5. Are user fees a tax? User fees may be the ugly
cousin no one wants to claim, but it’s hard to make
the argument that they don’t belong on the tax
family tree. However, that doesn’t mean user fees
are inherently wrong. If a court won’t overturn
them, government agencies can keep charging
them. The question again comes down to policy: Is
that how we should raise revenue, or should we
increase income taxes or create new taxes, like a
VAT?
G. Tax Return Preparers Fight Back
We may soon find out if a court will overturn one
of the IRS’s user fees — the PTIN fee. It’s the subject
of a class action lawsuit before the U.S. District
Court for the District of Columbia (Steele).62 Accord-
ing to T. Keith Fogg of Villanova University School
of Law, the case could ‘‘presage challenges to other
fees that the IRS charges, though it will be harder to
find a class in some of the other fee areas.’’63
The same court in two recent cases has found that
the IRS overreached in attempts to regulate return
preparers (Loving64 and Ridgely65). The Steele plain-
tiffs seek recovery of fees previously paid and a
judgment declaring that the IRS lacks the authority
to charge a fee for a PTIN or, alternatively, that the
amount of the fee is excessive.
Since the case is a class action, the stakes are high
for the IRS. The suit seeks recovery of fees paid,
which the plaintiffs say would exceed $130 million.
The plaintiffs estimate that the class in Steele —
which has now been certified for both the declara-
tory and monetary claims — includes between
700,000 and 1.2 million people.66
The IRS has issued PTINs since 1999, but they
were not initially mandatory, and the IRS did not
charge for them.67 In 2010 the IRS began to take a
57
TAS, supra note 1, at 18-19.
58
Id. at 19.
59
60
GAO, ‘‘IRS Is Scaling Back Activities and Using Budget
Flexibilities to Absorb Funding Cuts,’’ GAO-15-624, at 11 (June
2015).
61
62
Amended Class Action Complaint, Steele v. United States,
No. 1:14-cv-01523 (D.D.C. filed Aug. 7, 2015).
63
Nathan J. Richman, ‘‘Class Certified in Challenge to IRS’s
PTIN Fee Authority,’’ Tax Notes, Feb. 15, 2016, p. 765.
64
Loving v. IRS, 917 F. Supp.2d 67 (D.D.C. 2013), aff’d, 742 F.3d
1013 (D.C. Cir. 2014).
65
Ridgely v. Lew, 55 F. Supp.3d 89 (D.D.C. 2014).
66
Steele, 2016 U.S. Dist. LEXIS 103784 (D.D.C. 2016).
67
Amended Class Action Complaint, supra note 62, at paras.
9 and 10.

comprehensive look at regulating the tax return
preparation industry.68 This involved the require-
ments struck down in Loving for competency testing
and for continuing education for tax return prepar-
ers who were not otherwise certified as profession-
als (such as CPAs, attorneys, and enrolled agents).
Other changes in 2010 were to make PTINs
mandatory and to begin charging a fee for them, for
both the initial application and renewal each year.69
The fees at issue in Steele were $64.25 for a new
PTIN and $63 for a renewal.70 According to the IRS,
the fees are necessary to recover the direct and
indirect costs of providing the service. Of the fee,
the IRS said $50 was for ‘‘processing’’ the PTIN
application and that the rest was paid to a third
party to ‘‘administer the PTIN application and
renewal process.’’71
The IRS estimated that the fees would cover its
$51 million to $77 million in annual costs of the
PTIN registration program. That amount includes
payments to third-party vendors for processing
applications, as well as the IRS-incurred costs of
providing registration cards to each registered pre-
parer; creating forms, instructions, and other guid-
ance; and conducting ‘‘tax compliance and
suitability checks’’ of return preparers.72
According to the complaint, the IRS has not
performed any suitability checks, does not gener-
ally provide registration cards to return preparers,
and does not usually charge for the guidance and
instructions it provides to taxpayers. Further, the
complaint alleges that the IRS or another agency
has sold the PTIN database to vendors, who use it
to try and sell goods and services to PTIN holders.
The statutory authority the IRS relies on for the
fee is section 6109 and the general authority of the
IOAA. Section 6109 requires tax return preparers to
provide an identifying number on any return or
claim for refund they prepare, and it authorizes
regulations that would enable the IRS to obtain any
‘‘information as may be necessary to assign an
identifying number to any person.’’ The IOAA, as
discussed above, authorizes agencies to charge a
user fee when they provide a ‘‘service or thing of
value.’’
The value provided by the PTIN, according to the
IRS, is that it gives return preparers ‘‘the ability to
prepare tax returns for compensation.’’73 The com-
plaint in Steele points out that tax return preparers
had been preparing returns for many years without
the special power of the PTIN, and it cites Loving
and the U.S. Constitution for the proposition that
tax return preparers have ‘‘a right to prepare returns
for others for compensation.’’
Even though the plaintiffs have succeeded in
getting certification of the class in a court with a
track record of overturning IRS attempts at regulat-
ing tax return preparers, they may still face an
uphill battle. Previous challenges to the PTIN fee
have failed. The decision in Loving might not affect
the validity of the PTIN fee because the IRS justifies
the fee under a different statute than the one at issue
in Loving. The courts in Brannen74 (which predated
Loving) and Buckley75 (which was decided after and
discusses Loving) both found that the IRS had the
authority to impose the PTIN fee.
H. Conclusion
The IRS is not doing anything illegal by collect-
ing user fees and spending the revenue. However,
the spending clearly runs contrary to the express
desire of Congress to cut IRS funding, and some
lawmakers have introduced a bill to end the user
fee workaround.
The IRS experience has shown that user fees can
be an effective way to raise additional revenue. Fees
and excise taxes are a step in the direction of
consumption taxes, and at their best, they require
the people who benefit from specific government
services to be the ones who pay the cost of provid-
ing them.
But the current setup does not live up to the
beneficiary-pays ideal, regardless of its merit. In
general, IRS user fees do not fund the specific
services for which they are charged but rather fund
IRS needs as a whole. That puts the burden of
funding the agency on a very small, somewhat
arbitrarily selected group of taxpayers. And the
recent rate hikes appear to have less to do with
determining what specific services should cost than
with the IRS’s need to find additional revenue.
User fees for IRS services should be used spar-
ingly, if at all, and costs should be determined with
an eye toward whether they discourage the use of
cost-effective and efficient resources. Taxpayers
68
See IRS Publication 4832, Return Preparer Review (Dec. 2009)
(discussing the importance of regulating the tax return prepa-
ration industry).
69
T.D. 9501 (imposing the fee); T.D. 9503 (setting the rate).
70
The fees have been reduced to $50 for the initial application
and for renewal. The IRS said it reduced the PTIN fees because
it ‘‘has determined that the full cost of administering the PTIN
program going forward has been reduced from $50 to $33 per
application or renewal.’’ T.D. 9781.
71
REG-139343-08.
72
T.D. 9527.
73
Steele, 2016 U.S. Dist. LEXIS 103784 at *9 n.5.
74
Brannen v. United States, 682 F.3d 1316 (11th Cir. 2012)
(upholding the initial fee).
75
Buckley v. United States, No. 1:13-cv-01701 (N.D. Ga. 2013)
(upholding the annual fee).

want to choose the easiest and cheapest way to
accomplish what’s required of them — as should
the IRS.
Compliance with tax law is ‘‘voluntary’’ only in
the sense that the government gives you a chance to
pay before shaking the money from your pockets.
So although the IRS has a monopoly on administer-
ing federal tax law, we should think twice about
allowing it to charge high fees for taxpayers to do
something that — if given a real choice in the matter
— they would probably rather skip.
IN THE WORKS
A look ahead to planned commentary and analy-
sis.
Will Treasury’s interpretation of the cap on
ABLE make it more capable? (Tax Notes)
Stephanie Hoffer examines the purpose of
section 529A tax-favored savings vehicles
and argues that if individuals with qualify-
ing disabilities contribute and withdraw
money in the same year, those funds should
not count toward the annual limit.
VAT: Has the time come? (Tax Notes)
Jim Leet argues in favor of implementing a
VAT and says that doing so would stimulate
economic growth and increase wages.
DMA v. Brohl — ‘Son of Quill’? (State Tax
Notes)
David Vistica and Jeremy Sharp contend that
the long road traveled by Direct Marketing
Association v. Brohl has created two ap-
proaches for states seeking to challenge the
Quill/Bellas Hess sales and use tax physical
presence standard.
Test results from Massachusetts’s energy
laboratory (State Tax Notes)
Patrick Dowdall discusses two legislative
developments and a decision by the Su-
preme Judicial Court of Massachusetts that
have happened in the last six months regard-
ing the state’s incentives for renewable en-
ergy.
U.S. income tax treatment of Australian
superannuation funds (Tax Notes
International)
Roy A. Berg and Marsha-laine Dungog iden-
tify areas in which Treasury and the IRS
should issue guidance on the treatment of
Australian superannuation funds owned by
U.S. persons.
Mexican service companies come under
challenge by the tax administration (Tax
Notes International)
Manuel Solano, Koen van ’t Hek, and Terri
Grosselin discuss a recent Mexican court
decision regarding a VAT refund request and
the legal status of a service company.

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