Preparer Registration Wastes Time and Money - Guest Post by Joe Kristan

Originally Published on forbes.com on August 24th,2011

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Joe Kristan writes the Tax Update Blog for Roth and Company PC.  Joe is, like me a CPA.  Also like me, he is a fan of the Wandering Tax Pro.  While I just stand in awe and wonder at Robert Flach, who spends tax season preparing returns by hand 168 hours a week and the rest of the year blogging and going to musicals, Joe, who likens Bob’s tax season to a “death march”, has the temerity to disagree with The Pro on an issue near to his heart. 

It’s nothing but lawless anarchy in the unregulated tax preparation industry.  Just look at what’s happening out there:

- A practitioner spends years  helping taxpayers improperly deduct “lifestyle expenses” — their clothes, their make up — even their pets!

- A practitioner costs the Treasury hundreds of millions of dollars setting up corporations and arranging sham transactions to hide income in a tax-exempt shell.

- Another practitioner helps taxpayers unlawfully avoid taxes using sham trusts and transparently phony legal arguments.

It’s no wonder the IRS has started its huge new program to register all unregulated tax practitioners, make them pass a competency test, and subject them to continuing education each year.

Oh, wait… these cases didn’t involve unregulated preparers.  They involved anEnrolled Agent, an Attorney, and a CPA — all tax professionals that already have to pass much stiffer entrance tests and take more continuing education that anything proposed under the new unregulated preparer rules.  Anybody expecting the new rules to run unscrupulous or inept preparers out of the business can only look at the already-regulated tax sector to learn otherwise.

Unlike my own professional organization, the American Association of Certified Public Accountants – and apparently unlike right-thinking people everywhere — I think the new preparer rules are a waste of time and money.  I also think that they will rebound against consumers and most preparers, and will benefit only the largest and most influential players in the industry.

Robert D. Flach, an unenrolled preparer from New Jersey, pointed out in this space recently:

Cheating taxpayers will still find accommodating unethical and downright crooked preparers (and vice versa).  Most of these preparers already do not sign the returns they prepare – so they will remain “underground”.  And those with no real knowledge of tax law who charge for returns produced by merely entering tax information into a software program will continue to produce “self-prepared” returns for their clientele.

And Mr. Flach was writing in support of the new rules.  He thinks they are wise in spite of their futility.  Why?

As one of my fellow tax bloggers pointed out –“Electricians are licensed. So are plumbers. Even my hairdresser has to get an official piece of paper from the State of Texas before she can cut hair for a living.”  So why not tax preparers?

The better question is, why on earth does a hairdresser need a license? It’s not as if people were dying in droves from bad haircuts over the course of human existence until the State of Texas stepped in.  While promoted as protecting consumers, licensing is best understood as a way to restrict entry to a field to protect those already in it from competition.  It’s no accident that the author of the IRS preparer regulations is the former head of tax prep behemoth H&R Block.

Kauffman Foundation economist Tim Kane points out:

If there are any serious arguments on behalf of licensing, I’m not aware. Instead, you might hear superficial arguments about how licensing protects consumer safety, but is there any empirical data to support that? Does the low rate of licensing in Indiana make it a dangerous state? Hardly. Instead, most licensing represents regulatory capture, and often leads to less – not more – transparency among the licensed professionals, not to mention pushing the unlicensed actors underground or forcing poorer citizens to do things (electricity, plumbing) themselves.

While Mr. Kane isn’t writing about tax preparation specifically, he indicates the likely consequences of the new preparer regulations: higher prices, furtive illegal preparation, and poorer taxpayers either choosing to do their own returns without help or dropping out of the system altogether.  And there is precious little data to support the assumption that this will help consumers.

New Jersey’s Mr. Flach makes three arguments in support of the IRS regulation scheme:

(1) The IRS has a legitimate need for a central registry of all those who prepare tax returns for a fee.  

He doesn’t explain why the IRS needs such a thing, or what it is supposed to do with it.  But if IRS does need such a registry, it could be arranged with a much less intrusive scheme.

(2) The new “Registered Tax Return Preparer” designation awarded to those who pass the test and take mandatory CPE credits will provide the public with an indication of who, besides an Enrolled Agent (who already has taken a more extensive competency test and has similar CPE requirements), is at least minimally competent and remains current in 1040 preparation.

We’ve already seen that compentency testing and CPE are weak insurance against incompetent and venal preparers.

Mr. Flach’s third reason is revealing:

(3) The RTRP designation would put the competent, experienced, and ethical previously “unenrolled” preparer, again like myself, on an equal footing with the CPA in the eyes of the general public. It would dispel the unfounded “urban tax myth” that CPAs are 1040 experts.

Mr. Flach wants an official designation as a prestige marker.  While he is not accepting new clients, other unenrolled preparers will have a marketing tool.  I’m registered with the IRS!  Your refund is safe with me… you don’t need that high-priced CPA!

Far better to leave it to the markets —  to individuals who know their own needs and resources better than anyone else — to sort it out.  If some college student struggles through his own 1040, reading the instructions and working through the forms, why should it be a crime if his roommates or his girlfriend then pay him to do the same for them?  Why, for that matter, should a practitioner like Mr. Flach, who has been doing tax returns for decades, have to take a test that only shows that he has as much skill as the greenest graduate of the H&R Block tax course?

Different people have different tax needs.  Many people only need somebody who has read the instructions to help them claim their refunds.  Others need much more sophisticated practitioners to help them through complicated business and tax issues.   Imposing a licensing requirement will only make it more expensive for taxpayers to find the practitioner that suits their needs, while doing nothing to improve the product.

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I support preparer registration based on my reading of case law.  The IRS can take administrative action against people with tickets like EA and CPA but in order to encourage the worst unenrolled preparers to take up another trade they have had to sue for an injunction in federal district court.   I discussed some of those cases in my post Tax Business Not For Everybody.

I’ve noticed that Joe and I often write on the same cases.  Joe also has a great blog with the mysterious title 42-78127,  It is dedicated to the crew of a B-24 Liberator that went down off Corsica in 1944.  Sgt John James Kristan, Joe’s dad, survived the crash and lived another 55 years. I’d like to do a similar thing for my dad.  Many historians will likely tell you that the failure of the Axis power to bomb Fairview, NJ was due to their lack of long range bombers.  Personally, I believe that intelligence sources had made them aware that the excellent organization of Fairview’s air raid wardens would have made their efforts for naught.