IRS Proposes Licensing Tax Preparers

January 22, 2010

The Internal Revenue Service (IRS) has proposed regulations, effective in 2011, that would require paid tax preparers to register with the IRS, pay fees, take exams, and attend (not free) continuing education. The IRS is concerned that paid preparers who are not attorneys, accountants, or "enrolled agents" don't know what they're doing.

George Mason University Professor Don Boudreaux says it's a solution without a problem:

With up to 40 percent of their incomes at stake each year - and knowing that the IRS is a humorless, unforgiving monster when it isn't fed what it believes to be its annual ration - each taxpayer has strong incentives to seek out and find tax-preparers who are skilled and careful.  Surely the vast majority of persons with incomes and expenses sufficiently high to justify taking deductions other than the standard one are intelligent enough to choose their own tax-preparers without the government's "help."

Of course, licensing requirements can be more about eliminating competition than ensuring competency. (Competency exams, like state bar exams, can have little to do with actual practice.) The Wall Street Journal noted that H&R Block has predictably got on board with the effort (and since the licensing process will be contracted out, they may very well run it):

Cheering the new regulations are big tax preparers like H&R Block, who are only too happy to see the feds swoop in to put their mom-and-pop seasonal competitors out of business. Kathryn Fulton, senior vice president for government relations, told the Washington Post the company was glad to support rules that meant H&R Block "won't be competing against people who aren't regulated and don't have the same standards as we do." With fewer tax preparers in the market, H&R Block will find it easier to raise prices.

The tax code is big, complex, and ever-changing. That is the problem, since it doesn't need be. No paid preparer knows every nook and cranny of tax law and if we truly graded people for competency, no one could pass. National Taxpayer Advocate Nina Olson, despite supporting the new regulations and optimistically assuming that they'll be minimal and one-time for each preparer, reveals that much of the complexity is due to each year's new credits, exemptions, and changing rules, and that we need tax reform.

Those pushing for more regulation and more centralization of tax preparation should instead focus their efforts on tax simplification.

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