* Court upholds January 2013 lower court ruling
* U.S. tax authority cannot regulate preparers -court
By Patrick Temple-West
WASHINGTON, Feb 11 (Reuters) - An Obama administration campaign against tax-return fraud suffered a blow on Tuesday when an appeals court invalidated the first federal rules for unregulated tax-return preparers.
A three-judge appellate panel upheld a lower court's January 2013 ruling that said the U.S. Internal Revenue Service does not have the power to impose test-taking and continuing education requirements on hundreds of thousands of 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 a unanimous ruling.
The tax-collecting IRS said in a statement that it is reviewing the decision. "The IRS continues to believe that it's critical for taxpayers to be able to rely on quality work from tax preparers," the agency said in a statement.
With the April 15 tax filing deadline two months away, the court ruling means that, for now, the status quo will prevail in the tax-return preparation industry, which annually helps about 80 million Americans complete and file their tax paperwork.
About a third of the $9.4 billion tax-return business is controlled by H&R Block Inc and three other large companies. The remaining two-thirds is divided among licensed and unlicensed preparers, many of them mom-and-pop operations.
LIBERTARIAN GROUP CHALLENGES IRS
The IRS took steps starting in 2011 to regulate unlicensed return preparers for the first time, with a program requiring up to 700,000 of them to meet testing and education requirements.
But independent preparers complained. Then in 2012, a libertarian activist group called the Institute for Justice sued the IRS, arguing that Congress never gave the agency authority to regulate preparers.
In January 2013, U.S. District Court Judge James Boasberg issued an injunction halting the IRS's regulatory program. The Justice Department appealed his decision and lost on appeal.
The institute praised the latest ruling. "It's a big win for tax preparers," said Dan Alban, the lawyer who argued the case for the institute.
It was unclear whether or not the Obama administration would appeal Tuesday's ruling. If it does, it would seek a U.S. Supreme Court review.
Separately on Tuesday, the U.S. Justice Department issued a statement on its 2013 efforts "to combat fraudulent tax-return preparers and promoters of tax-fraud schemes," citing recent cases it has brought against "abusive schemes and scams."
After the ruling, a Justice Department spokeswoman said, "We are, of course, disappointed with today's decision ... We are studying the opinion and weighing our options."
H&R Block CEO Bill Cobb said in a statement that the court decision was a blow to taxpayers. "It is outrageous that all consumers don't enjoy basic protections with such a significant financial transaction as tax preparation," he said.
The Institute for Justice has said that H&R Block supports the IRS regulations because they would help the company squeeze smaller competitors out of business.
The IRS rules would not apply to lawyers, accountants and "enrolled agents" who are already licensed.
The court ruling may prompt more states to regulate preparers on their own, tax professionals said on Tuesday.
Currently, California, Oregon, Maryland and New York have laws that regulate tax preparers. But a state-by-state regulatory patchwork could become dysfunctional, experts said.
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.