Regulating Tax Preparers vs. Tax Simplification

April 5, 2006

Yesterday on Capitol Hill, a hearing was held by the Senate Finance Committee looking into the problem of fraud and confusion among taxpayers and tax professionals. The solution from members of Congress? Federal licensing requirements for paid tax preparers. From the Minneapolis Star-Tribune (AP):

Tax laws should require paid return preparers to meet minimal standards for training and competency, senators said after hearing that congressional investigators uncovered errors in virtually every tax return prepared for auditors masquerading as taxpayers.

If barbers need a license to cut hair, there’s no reason the government cannot set requirements for tax preparation, said Senate Finance Committee Chairman Charles Grassley, R-Iowa.

“The worst that can happen when you get a lousy barber is you have a bad hair day,” he said. “But if you get an unqualified tax preparer who gives you bad advice, you may be audited, owe thousands of dollars and even face jail time.”

Grassley and Sen. Max Baucus, the top Democrat on the panel, said laws may be needed to impose a training requirement on tax professionals.

The article further describes the government report detailing the problem:

The senators heard from investigators at the Government Accountability Office, who found mistakes in virtually every tax return filled out by commercial chain preparers. The investigators said they looked at a tiny number of tax returns, and that their conclusions could not be generalized to the rest of the tax preparation industry.

The auditors, posing as taxpayers from two hypothetical families, got the correct refund amount in only two of 19 tax returns prepared. Both of those returns, nevertheless, showed errors.

Incorrect refunds on the other tax returns delivered as much as $2,000 extra to some taxpayers but took more than $1,500 from others. (Full Story)

Too often the easy answer for members of Congress is additional federal regulation, without regard to the benefits and costs of doing so.

Given the problem of a confusing tax code, requiring that tax professionals be licensed is clearly the wrong policy response. For one, it will result in a restricted supply of preparers, likely driving up tax preparation fees and causing more taxpayers to prepare their own taxes—likely leading to more mistakes on tax returns, not less.

The most effective action Sens. Grassley and Baucus could take to remedy the problem of erroneous tax returns is to move the Senate Finance Committee toward fundamental tax reform.

The fundamental cause of erroneous tax returns is the complexity of the federal income tax code, not the lack of government oversight of paid preparers. Rather than attempting to regulate an entire industry of tax preperers, why not focus on the tax complexity that gives rise to the fraud, confusion, and abuse that’s rampant in federal tax filing?


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