(Bloomberg) The Internal Revenue Service said it will appeal a court’s ruling that it lacks the power to license tax preparers, a decision that might affect as many as 700,000 people who work on clients’ returns.

Immediately discontinuing the agency’s tax preparer oversight program “would result in a substantial disruption to tax administration,” the IRS said in a court filing yesterday accompanying a request to lift a court order barring it from regulating return preparers during its appeal.

U.S District Judge James Boasberg in Washington, D.C., ruling on a lawsuit filed by three preparers, invalidated the program Jan. 18. The agency overstepped its authority by relying on an 1884 law that allows it to regulate people presenting cases before the Treasury Department, he said.

The IRS program favored large corporate providers of tax services such as H&R Block Inc. and Intuit Inc. over smaller independent return preparers, said Dan Alban, an attorney with the Institute for Justice, a self-described libertarian public interest law firm representing the plaintiffs.

Large providers lobbied the IRS “for this program that they knew would put a lot of mom-and-pop preparers out of business,” Alban said in a phone interview from the group’s Arlington, Va.’s offices. “This is an example of protectionism at its finest.”

Program Proponents

Tax-preparation companies have expressed support for the program.

“We have been proponents of oversight, not to disadvantage competitors but in favor of consumers,” said Julie Miller, a spokeswoman for Intuit, the maker of TurboTax.

The IRS said the rules were designed to impose standards on return preparers who aren’t certified public accountants, attorneys or enrolled agents already licensed to practice before the agency.

The idea, promoted by Douglas Shulman while he was IRS commissioner, was to impose minimum standards and help the agency thwart tax fraud.

The agency’s licensing program affects from 600,000 to 700,000 preparers “who are responsible for a substantial number of the more than 80 million returns filed each year,” the IRS said in court papers.

The program required preparers to register with the federal government, pass a competency test and meet continuing-education requirements. A 15-hour continuing-education regime began in 2012 and the testing was set to go into effect this year.

Registration Fees

Almost 100,000 return preparers have registered to take the test and the IRS has collected more than $100 million in registration and competency-testing user fees, according the IRS filing. The agency said it has spent more than $50 million and assigned 167 employees to operate the program.

The IRS also would probably face lawsuits and demands for fee refunds if the injunction isn’t lifted during an appeal, the court filing said.

“All these actions—and taxpayer funds—would be wasted if the Court of Appeals subsequently overturned this court’s decision and reinstated the return preparer program,” the IRS said in its request to Boasberg to suspend the injunction against the program for at least 14 days to allow an appeal.

The case is Loving v. Internal Revenue Service, 12-cv- 00385, U.S. District Court, District of Columbia (Washington).