The IRS Tuesday lost a federal appeal in a legal battle over its effort to institute competency exams and other new regulations for as many as 700,000 paid tax preparers.

A three-judge panel of the U.S. Court of Appeals for the District of Columbia unanimously upheld a lower court's ruling last year that the IRS lacked authority to impose the new rules without congressional authorization.

The regulations were challenged by the Institute for Justice in Arlington, Va., a libertarian legal group that has filed a variety of lawsuits challenging occupational licensing laws. It argued that the proposed regulations for tax preparers were onerous and would have put thousands of mom-and-pop tax preparers out of business.

Dan Alban, a lawyer for the institute who argued the case in front of the D.C. circuit, called the ruling "a clear win both for tax preparers and taxpayers" and said it could have broad implications for federal agencies that attempt to issue regulations without a mandate from Congress.

"Congress never gave the IRS the power to license tax preparers, and the IRS cannot give itself that authority," Alban said.

The IRS has said the rules are needed to weed out ill-trained and incompetent tax preparers. It said it had the authority to impose the regulations under an 1884 law passed to help Civil War soldiers seeking compensation for dead horses.

That law authorizes the IRS to "regulate the practice of representatives of persons before the Department of the Treasury," but the appellate judges said it should not be stretched to give the IRS regulatory dominion over tax preparers.

"It might be that allowing the IRS to regulate tax-return preparers more stringently would be wise as a policy matter. But that is a decision for Congress and the President to make if they wish by enacting new legislation," Judge Brett Kavanaugh wrote in an opinion joined by David Sentelle and Stephen Williams.

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