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WASHINGTON, Jan 22 (Reuters) - The U.S. Internal Revenue Service on Tuesday rescinded new registration and training rules that it put in place just months ago for about 700,000 tax return preparers, bowing to a federal court's permanent injunction issued on Friday.
In a setback for the tax agency, the IRS said in a statement on its web site that nonprofessional tax return preparers "are not currently required" to register with IRS, pass a competency test or take continuing education classes to do tax returns.
A decision from the U.S. District Court for the District of Columbia on Friday barred the IRS from proceeding further with its IRS Return Preparer Initiative, a new enforcement program affecting up to 700,000 tax return preparers.
The government can appeal the decision.
The IRS "continues to have confidence in the scope of its authority to administer this program," the agency's statement said. "It is considering how best to address the court's order and will take further action shortly."
The IRS said lawyers, accountants and other licensed tax return professionals must still meet the regulatory requirements related to their certifications.
The court ruling threw the tax preparation industry into disarray. Thousands of independent "mom and pop" individuals, as well as employees for tax return companies H&R Block Inc and Jackson Hewitt Tax Service Inc were complying with the IRS rules.
"It is quite a mess," Mark Steber, chief tax officer at Jackson Hewitt, told Reuters.
Under the IRS requirements, preparers had 2 1/2 hours to finish a 120-question competency test that cost $116. They also had to take 15 hours of continuing-education classes annually.
About 55,000 individuals have already passed the test, said Chuck McCabe, chief executive of the Income Tax School in Richmond, Virginia. Some of these individuals will seek a refund from the IRS for their test fee, he said.
If the court decision is not reversed on appeal, "it could be a real can of worms," McCabe said.
Regulating tax preparers was a top priority for former IRS Commissioner Doug Shulman before he stepped down in November.
Shulman in 2009 called for an IRS effort to root out tax preparation fraud. The return preparer initiative began in 2011.
In March 2012, three independent tax preparers and the Institute for Justice, a civil-liberties advocacy group, challenged the program's legal authority. They accused the IRS of enforcing the requirements without congressional approval.
The IRS said a law dating to 1884 gave it that authority, but the court disagreed and halted the agency's initiative.
The IRS wants to weed out dishonest tax preparers who can abuse their access to clients' sensitive financial data in any number of ways. Before the IRS launched its program, there was no federal oversight of the tax preparation industry.