By Patrick Temple-West
WASHINGTON (Reuters) - A appeals court on Tuesday upheld a lower court ruling that quashed the U.S. Internal Revenue Service's authority to regulate tax-return preparers, dealing a blow to the Obama administration's bid to fight tax preparation fraud.
A federal court judge had invalidated test-taking and continuing education requirements the IRS wanted to impose on hundreds of thousands of unregulated tax-return preparers.
"We agree with the District Court that the IRS's statutory authority ... cannot be stretched so broadly as to encompass authority to regulate tax-return preparers," the U.S. Court of Appeals for the District of Columbia said in its unanimous ruling.
The latest decision means the status quo will prevail for now in an industry led by H&R Block Inc, a handful of mid-tier firms, and thousands of tiny, mom-and-pop firms.
Tax return fraud is a growing problem, and in 2011, the IRS moved to regulate unlicensed tax return preparers for the first time, with a program requiring up to 700,000 of them to meet testing and education requirements.
Institute for Justice in 2012, a libertarian group, challenged the program, arguing Congress did not give the IRS the authority to regulate tax preparers.
In January 2013, U.S. District Court Judge James Boasberg issued an injunction halting the program. The Justice Department appealed his decision and lost in a ruling written by Judge Brett Kavanaugh for three-judge appellate panel.
The Justice Department and IRS did not immediately comment after the appellate decision.
Together, tax return preparation firms annually help about 80 million Americans comply with a complex tax code.
"It's a big win for tax preparers," said Dan Alban, the lawyer for the Institute for Justice who argued the case.
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 Jeffrey Benkoe)