The IRS and the latest licensing outrage

Dan Alban Contributor
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Who would you rather prepare your taxes?  A professional tax return preparer with over a dozen years experience in preparing tax returns for taxpayers without incident.  Or me, an attorney who has never so much as taken a law school class or continuing legal education course in tax law, and gave up on doing his own taxes last year once he started needing to itemize his deductions.  You probably think you’d prefer the first option, but the IRS says you’re wrong.

At a hearing that I am testifying at today, the IRS will consider adopting a sweeping licensing scheme that would place the careers of 700,000 tax preparers in jeopardy and likely harm over 87 million American taxpayers while benefiting a few politically-favored insiders.

Inexplicably, the proposed regulations exempt certain favored industry insiders.  The IRS wants to exempt all attorneys and CPAs, regardless of whether individual attorneys and CPAs have any actual experience or qualifications in preparing tax returns.

But are most attorneys really that much better qualified to prepare your taxes?  Absolutely not.  Like me, most attorneys don’t have any special training or testing on tax law, let alone tax return preparation.

This scheme would disproportionately hurt small tax-return preparation businesses and independent preparers, many of whom may be forced out of business.  Part-time and seasonal preparers — as well as those who specialize in assisting low-income or special-needs clients, such as those with language barriers — are likely to be hardest hit.  By contrast, large, politically connected industry insiders will be able to easily absorb the licensing costs and, predictably, many are in favor of the scheme.

In 2009, tax-return preparers prepared approximately 87 million federal individual income-tax returns.  The proposed licensing scheme, if passed, will likely result in a substantial increase in the cost of tax-return preparation services for individual taxpayers.

And make no mistake about it: These increased regulatory costs — along with the likely decrease in competition — will increase the cost of tax return preparation services.

So, with all these downsides, why is the IRS considering these proposed regulations?  The IRS claims it needs to pass these regulations to “ensure uniform and high ethical standards of conduct for all tax return preparers.”  But all tax return preparers, whether licensed or not, are already subject to criminal and civil penalties if they engage in misconduct.  In addition, tax return preparers may also be held civilly liable by their clients.  These deterrents have long constrained misconduct by tax return preparers and the IRS has offered no reason why they are no longer sufficient.

So what’s the real reason for these proposed regulations?  It’s often difficult to divine the motives of a government agency, but we can start by looking at the two primary effects of the regulations.  First, as noted, the compliance costs create an anti-competitive barrier to entry in the market for tax return preparation that benefits large tax preparation firms as well as attorneys and CPAs.  Indeed, at least initially, large firms like H&R Block supported the licensing requirement.

Second, mandatory licensure gives the IRS substantially more control over tax return preparers.  In fact, it makes preparers actually dependent on the IRS for their livelihood.  That’s a troubling new power dynamic that could give the IRS increased leverage in disputes such as disagreements with preparers over interpretations of the tax code.  And it seems likely to endanger the role that a tax return preparer has as an advocate of his or her client — will preparers really be able to fully represent their clients’ best interests in a dispute with the IRS when concerned about the possibility of having their license revoked?

These proposed regulations are an attempt to fix a system that isn’t broken.  You don’t need the IRS to approve who can prepare your taxes, and you certainly don’t need the IRS to favor an unqualified attorney like me over an experienced professional.

Dan Alban is a staff attorney at the Institute for Justice in Arlington, Virginia.  The Institute has filed comments with the IRS opposing the proposed licensing requirements and will appear at today’s hearing.