- - Tuesday, April 8, 2014

ANALYSIS/OPINION:

The Senate Finance Committee heard testimony on Tuesday from Internal Revenue Service officials and the CEO of H&R Block, asking Congress to give the IRS more power over tax preparers.

This latest ploy comes after the IRS lost twice in federal court in a case brought by my organization, the Institute for Justice, on behalf of three independent tax preparers. My clients’ case rightfully challenged the agency’s unilateral attempt to impose a sweeping licensing scheme on tax preparers without congressional authorization.

Congress should not accede to demands by the IRS (and the largest firm in the industry) that tax preparers must be forced to get the government’s permission before they can assist taxpayers with their tax returns. Instead, taxpayers — not the IRS — should be the ones who get to decide who prepares their taxes.

Tax-preparer licensing should be rejected for three main reasons: First, it is protectionist and anti-competitive, benefiting special interests instead of consumers. Second, licensing would harm taxpayers by increasing prices and reducing choices. Third, it is unlikely to achieve its stated goals.

Rather than protecting consumers, licensing regulations would protect large incumbents and industry insiders from competition by erecting costly barriers to entry. Indeed, several financial analysts have concluded that the largest tax-preparation firms stand to benefit the most from preparer licensing.

Unsurprisingly, the recently invalidated IRS licensing scheme was a product of lobbying by powerful special interests. H&R Block, Jackson-Hewitt and Intuit (the makers of TurboTax) all actively supported licensing, while other industry insiders, such as the American Institute of CPAs, obtained special exemptions for their members. Former H&R Block CEO Mark Ernst even oversaw the drafting of the regulations at the IRS.

Meanwhile, licensing burdens usually fall hardest on the little guys, who don’t have the same financial resources and can’t benefit from economies of scale. Government-forced licensing could push out as many as 10 percent to 20 percent of all tax preparers. Most who would be put out of business are seasonal mom-and-pop preparers, like Institute for Justice client Elmer Kilian, of Eagle, Wis., a Korean War veteran who hangs a shingle outside his house every tax season and has been preparing tax returns for more than 30 years on his dining-room table.

Licensing is not just bad for independent preparers; it is also bad for consumers. Because it would dramatically reduce competition while increasing regulatory compliance costs, licensing is expected to artificially drive up the prices consumer pay for tax preparation.

Licensing also reduces consumer choices and interferes with consumer autonomy over personal finances. Many taxpayers will not only be left with fewer options, but will be forced to pick a new preparer if licensing drives their current preparer out of business.

Licensing also fails to deliver on its promises of preventing tax fraud or reducing error rates.

Licensing has little to do with fraud prevention. Dishonest preparers can take exams and sit through continuing education courses just as well as honest preparers. Instead, fraud prevention is addressed by existing laws.

Tax preparers are already regulated by numerous federal laws imposing civil and criminal penalties, and they are required to register with the IRS to obtain an individualized number known as a Preparer Tax Identification Number, which they must include on every return they prepare so that the IRS can track and analyze their work.

Government-mandated training is also largely ineffective at reducing error rates. For example, IRS trained-and-certified preparers were found to have a 61 percent error rate in 2011. Likewise, an IRS study found that California preparers had the third-highest error rates in the country for two years in a row despite the state’s long-standing licensing program (one of just four in the country).

That’s because the real problem is tax-code complexity. As the National Taxpayer Advocate explained in an article last May, tax-code complexity “almost guarantee[s] that every return has an error in it — some inadvertent, some intentional.” Thus, licensing will not prevent tax preparers from making errors. It will simply limit who is licensed to make those errors.

Here are three alternatives that are superior to licensing: First, voluntary certification is better than mandatory licensing because it allows both taxpayers and tax preparers to choose how much they value certification and permits them to opt in or opt out as they see fit. Consumers who are satisfied with their longtime preparer may not care if he is certified, while other consumers may only want to use a certified preparer.

Second, the best way to reduce errors is to reduce complexity. Congress should simplify the tax code to reduce error rates.

Third, between the Preparer Tax Identification Number registration and existing criminal penalties, the IRS already has the tools it needs to identify, track and penalize the few bad apples without unnecessarily burdening the vast majority of law-abiding tax preparers.

Dan Alban is a lawyer at the Institute for Justice, which represented three independent tax preparers in Loving v. IRS.

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