Regulating Tax Preparation

January 6, 2010

From the Washington Post:

The Internal Revenue Service plans to test, register and screen people who get paid to prepare tax returns, stepping into a virtually unregulated business on which millions of Americans depend for crucial financial services.

The agency wants to crack down on preparers who do shoddy or fraudulent work and create a way for consumers to make more informed choices — though the moves could increase the cost of having tax returns prepared.

Dan Mitchell of Cato at Big Government notes the regulatory capture:

The IRS and the big firms claim more regulations are needed to protect consumers from shoddy work, but this is the usual rationale for licensing laws and other government-imposed barriers to entry and the Institute for Justice repeatedly has shown such rules are designed to benefit insiders rather than consumers.

Tax preparers do make many mistakes, to be sure, but that is a reflection of a nightmarish tax code, and the annual tax test conducted by Money magazine showed that even the most-skilled professionals – such as CPAs, tax lawyers, and enrolled agents – were unable to figure out how to correctly fill out a hypothetical family’s tax return. But since the IRS routinely makes major mistakes as well, perhaps the moral of the story is that we need fundamental tax reform, not IRS rules to create a cartel for the benefit of H&R Block and other big firms.

Tax Vox (Tax Policy Center), though agreeing that tax preparation should be regulated, notes: “But cracking down on those seasonal shysters who abuse the system is only attacking a symptom of the real disease, which is our insanely complex tax code.”

Here is more on the problem of tax complexity.


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