TaxProf Blog

Editor: Paul L. Caron
Pepperdine University School of Law

A Member of the Law Professor Blogs Network

Thursday, January 7, 2010

WSJ: IRS Takeover of the Tax Preparer Industry

Following up on Tuesday's post, IRS Issues New Tax Return Preparer Rules:  Wall Street Journal editorial, H&R Blockheads: The IRS Wants to Save You From Your Rogue Tax Accountant:

We're guessing that when Americans think of outlaw industries, tax preparers aren't the first rogues that come to mind. But lo, the nation's green eyeshades are now destined to come under the regulatory rule of the IRS as part of the Obama Administration's latest revenue grab.

Under the plan, which would begin with the 2011 tax season, anyone who takes money to help people with their taxes will have to register with the IRS, and eventually pass competency tests and sign up for continuing education. So having made tax filing so complicated that most Americans need help with their forms, Washington now wants to raise the price of such counsel by regulating advisers in a way that may reduce their supply. ...

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. ...

The new IRS blueprint is already in play in California, whose rules for regulating tax preparers seem to have inspired Commissioner Shulman, including his new education and registration requirements. To get taxpayers away from preparers and off-the-shelf software, the state is pushing programs like CalFile, which allows voters to file returns through a state run electronic program. Under the ReadyReturn program, the state will even scour your W-2 for the year and send you a return for your signature already filled out. The eventual goal seems to be to have the government do everybody's state tax return, like the French do.

The feds are now getting in on this act, with Montana Democrat Max Baucus and Iowa Republican Chuck Grassley supporting a free e-file portal at the IRS Web site that would compete directly with private tax preparation software. In March, Treasury Secretary Timothy Geithner told a Ways and Means Committee hearing that he'd also like the IRS to begin sending taxpayers pre-completed returns.

We can certainly understand why Mr. Geithner wants government to do his returns, but please spare the rest of us. ... The U.S. has survived for 235 years with an unregulated tax prep industry, but the Obama crowd can hardly resist grabbing one more corner of the private economy it doesn't control. Here's a better idea: If Washington doesn't like taxpayers working the system of legal deductions to reduce their tax burden, it can always simplify the code and flatten the rates.

http://taxprof.typepad.com/taxprof_blog/2010/01/wsj-irs-takeover-of.html

News, Tax | Permalink

TrackBack URL for this entry:

http://www.typepad.com/services/trackback/6a00d8341c4eab53ef0120a7b1f346970b

Listed below are links to weblogs that reference WSJ: IRS Takeover of the Tax Preparer Industry:

Comments

obama administration revenue grab? who appointed shulman? oh yeah, that other guy

Posted by: r. | Jan 7, 2010 12:50:32 PM

Yeah, that makes no sense. This has been in the works for a long time.

Posted by: kansas | Jan 7, 2010 2:57:43 PM

Regulation of tax preparers also makes a lot of sense, and it hardly sounds as if the regulations will be substantial. I think Mom & Pop should be able to handle it. And if they can't, then they shouldn't be preparing returns in the first place.

Posted by: Kris | Jan 7, 2010 5:01:19 PM

Hey, I cannot represent someone in a court of law because I am not a licensed attorney. I cannot perform surgery on someone because I am not a doctor. As a CPA the majority of poorly prepared tax returns are those prepared by unlicensed preparers. I talk to people that cannot believe that I am going to charge them $275 when last year the old guy they used that just died only charged them $75. Oh wait, I amended those returns for you and you are getting hundreds or thousands of dollars back.

Posted by: Matt | Jan 8, 2010 9:49:55 AM

We should all be grateful that Little Timmy is still allowing us to prepare our own returns. It won't last long. Once you control the banks, you can just TAKE what you deem is required. In the future tax returns will be self-prepared only to claim a right to the return of SOME of the money that Little Timmy (or many others of his species) has taken.

Posted by: VLS CPA | Jan 8, 2010 9:50:38 AM

The tax prep industry has only been around for 97 years (February 3, 1913) and the lack of regulation costs honest taxpayers millions of dollars every year due to the incompetency and dishonesty of unregulated tax preparers through the cost enforcement and loss of unpaid taxes. Of all the things that require demonstrated competency and a license, only tax preparation and procreation remained untouched. It's about time we get the one under control. And maybe its time to address the other.

Posted by: DC | Jan 8, 2010 10:23:44 AM

One only need visit the Department of Justice's Web site to discover the number of prosecutions of dishonest tax preparers that occur every month of every year. That list is proof, yet again, that any unregulated activity in America is an invitation to crooks to steal money from unsuspecting fellow Americans - and, in this venue, from the US Treasury, too. And, that list excludes the tax preparers who perform their task poorly because of inadequate education about the tax law and its application, which leads to untold millions (billions?) of dollars in errors on tax returns, which cost the taxpayer or the Treasury depending upon the direction of the errors. Perhaps the blogger has better ideas about how to cause people to behave honestly with regard to their obligations to society and fellow citizens?

Posted by: Mitchell Howard | Jan 8, 2010 11:04:38 AM

I think the IRS proposals will improve tax preparation about as well as driver's licensing improves driving and diplomas improve education.
I wonder if the IRS noticed an improvement in the quality of returns prepared in CA and OR, where a program of licensing and registration has already occurred, as compared to the rest of the country?
Considering the level of income of the clients that "incompetent" tax preparers probably deal with, I wonder how much of an effect this provision will have on the national treasury. Probably the bigger/intractable issue is how to regulate and control the competent and independent preparers who minimize the taxes of those who are taxpayers in ways that Congress never anticipated.
Along those lines, I wonder if tax returns will still be prepared by unregistered preparers accepting "fees" under the table, or more tax returns will be self prepared; and the quality of returns will be no better than before.
Perhaps the IRS agents will take the same test?

“It's about time we get the one under control. And maybe its time to address the other.”
“Perhaps the blogger has better ideas about how to cause people to behave honestly with regard to their obligations to society and fellow citizens?”

The above comments are symptomatic of the overall issue. If government is going to protect us it must control us, and spend large amounts of resources doing both. Much like many parents do with their children. But, parents to let their kids grow up even if they experience pain and suffering along the way.

Matt brings up a point, about the issue of trusting stangers to perform a task at an acceptable level of competence. It seems to me, anyhow, that conducting research on an individual’s or institution’s competence might work as well, or better than government regulation. This does take time and requires that one has friends or third parties one can hire for research; but, again in my opinion, regulated individuals or institutions are not automatically trustworthy. When I see what regulators have on their checklists, be it for banks, schools, etc. I am not sure that regulators regulate what is really important, anyhow.

Posted by: Mike | Jan 8, 2010 12:35:19 PM

To Matt I would point out that I just acquired a new client yesterday who said she thought she was paying a downtown CPA firm (you know, one of those who takes up the entire floor of a downtown office building) too much ($725) to prepare her tax return, for which I will probably charge her half the fee from my upstairs home office. Oh, and little ol' unlicensed tax preparer me once changed the tax return prepared by a CPA and reduced the taxpayer's tax by $6,964 because the CPA took the easy way, instead of the most advantageous way, of preparing the tax return. So maybe not all mom and pop unlicensed tax preparers are incompetent and not all certified professional accountants are experts.

Posted by: Jeff | Jan 8, 2010 12:45:59 PM

Some regulation is probably needed (we all have seen poorly done returns from new clients), but is the IRS the right organization to do it? Year after year journalists have at least one story about the percent of wrong ansers given by IRS telephone "helpers," and, of course, the IRS does not even stand behind such advice. Congress dumps more chaos and confusion on the IRS each year, who then dump more responsibility and duties on the tax preparation industry, now the service is being called on to set up a regulatory scheme without any forethought or study of future consequences.

Posted by: JCO CPA | Jan 8, 2010 1:11:31 PM

May the force be with you Paul.
While there are unqualified preparers out there, it really is the taxpayers responsibility to select and utilize a qualified preparer.
Having said that, I think Congress and the IRS might want to focus some attention to those firms offering Refund Anticipation Loans and other banking services at userous rates.
Happy trails,
Stephen D Jennelle CPA

Posted by: Steve Jennelle | Jan 8, 2010 1:28:20 PM

I have been doing taxes professionally and conscientiously for about 28 years now. I am a highly trained and caring professional. Methinks thou dost protest too much. I have seen what idiots and frauds do, and I have had to clean them up, which is no easy task. It is not the perfect solution, but if it gets the abovementioned idiots and frauds out of here, it makes my life easier.

Posted by: Neil Aronoff | Jan 8, 2010 1:55:25 PM

This is actually a good thing. After being audited for 3 tax years because my CPA's office were complete monkeys - I was basically told that anyone with a pulse can become a tax preparer with no training or licensing at all. I spent many thousands preparing and dealing with my audits, and even more thousands in overdue taxes & penalties.

Yeah I would love a simpler tax code as well, but until then - the IRS holds the taxpayer responsible for any mistakes, not the tax preparer. So any idiot can type in pages of numbers into an IRS longform that may or may not be even legal or close to accurate, and unless you know the laws yourself, and check each equation yourself - you will be at the mercy of lady luck (that you don't get flagged and audited).

Posted by: Chris the Audited | Jan 8, 2010 4:37:42 PM

I have no problem with the IRS regulating this area. Too many greedy and selfish Americans spend more money on avoiding paying their fair share of taxes, which is really more than theft from the government. After 8 years of hearing Bush act like providing social services and a social safety net is wrong and that the less fortunate women, children, and minorities of our country should be left to rot, too many people think it is OK to steal from the government and dodge taxes. Once this plan is implemented, there is no doubt we'll be able to pay for health care reform because regulated tax preparers will be less likely to aid and abet criminal tax evasion than they are now.

Posted by: Brian G. | Jan 8, 2010 4:43:15 PM

Will these rules also apply to tax-preparation software? When regulation make the help of professionals too expensive, most people (such as myself) will turn instead to automated systems for help. So, will those programs be certified by the IRS as well? I'm sure Tim Geithner will be in favor of that, given his tax problems.

Posted by: Brown Line | Jan 8, 2010 4:45:18 PM

You just know that if the government ends up preparing your tax return form and gets it wrong, that you the individual will end up paying the extra penalty and, if it comes to that, going to jail. The real problem with all these big-government, New Deal type "solutions" is that most of today's young and middle-aged government employees, after decades of bad public education and affirmative action programs, are functionally incompetent compared to government employees five and six decades ago. The only possible exception to this rule may be the armed forces -- but it's hard to tell because their recent successes have been -- literally -- against backwards tribes and third-world countries.

Posted by: D, Ch. | Jan 8, 2010 4:50:41 PM

I think that all of the congresscritters should be *required* to prepare their own returns. Lock them in the capitol with a calculator and tax info, and give them 8 hours. Then an audit. Fail the audit, and you're out of Congress.

Posted by: chris | Jan 8, 2010 4:52:06 PM

Oh sure, more regulation will fix EVERYTHING just like it does with everything else, right?

God forbid the govt simplify the tax code such that the average "ordinary" citizen can readily calculate and file their taxes without the aid of an entire parasitical segment.

Posted by: H Tuttle | Jan 8, 2010 4:56:53 PM

Reading the above comments, no wonder politicians of both parties treat us with such disdain! Government created the monstrosity that is the tax code, and government can eliminate it - so, why don't they?

Eliminate all deductions and the problem goes away... I say: tax all income above $10K at the same flat rate. Your tax return will fit on the back of a postcard, and anybody capable of doing basic arithmetic (or operating a pocket calculator) will be able to do it.

Posted by: John Q Liberty | Jan 8, 2010 4:58:27 PM

"The feds are now getting in on this act, with Montana Democrat Max Baucus and Iowa Republican Chuck Grassley supporting a free e-file portal at the IRS Web site that would compete directly with private tax preparation software."

That is the part that stands out to me. There should already have been a way for taxpayers to free efile without going through a third party. My taxes are not very complicated and I should not have to go through a third party or pay someone else to my returns if I want to efile.

Posted by: pete | Jan 8, 2010 5:00:54 PM

The article talks about two completely different things:

1. Making it hard to become a tax consultant.

2. Providing free software.

Number 2 is obviously good. There is no reason why TaxCut and Turbotax should be doing this: the IRS should provide official tax software for filling out forms, and if private companies want to supplement that with tax *advice and planning* software, fine.

Number 1 is almost certainly bad. It is like licensing barbers and daycare, a way for high-price, high-quality tax advisors (the CPA's in the comment thread) to use the government to kill their competition--- both the small-fry and the corporate.

Posted by: Eric Rasmusen | Jan 8, 2010 5:17:26 PM

who appointed shulman? oh yeah, that other guy

It's worth pointing out that this revenue grab didn't materialize under "that other guy".

Posted by: Blacque Jacques Shellacque | Jan 8, 2010 5:20:34 PM

So the IRS calculates your return, incorrectly... TAKES the money from your bank account, because they WILL have direct access to your accounts... and OOPS!! they made an error, overcharging you... Can you only imagine the grief of trying to get them to acknowledge and correct their error? That is, if you can even begin to understand the convoluted, bloated tax code and catch their error. We need to really think about the scope and depth of this intrusion and control by our government.

Posted by: Jeane | Jan 8, 2010 5:22:44 PM

Ah yes, a government bureau--which cannot teach its own people how to answer tax questions correctly--is supposed to be able to teach others how to answer tax questions correctly. What could possibly go wrong?

Posted by: Fritz J. | Jan 8, 2010 5:25:30 PM

Like all registration and licensing proposals, this benefits the big players like H&R Block. But, in this case it also benefits the IRS. There will be significantly fewer of those pesky tax court problems because the IRS will tell these captive tax preparers to follow the IRS definitions of the law rather than what the law actually says. This is a lose/lose proposal for the taxpayer and all but the largest tax preparers. I also wonder what the legal basis is for the IRS to mandate licensing.

Rick

Posted by: Rick Caird | Jan 8, 2010 5:25:58 PM

How can the IRS establish standards for regulation, education and testing of tax advisors when it has a systemically failed to develop the competence of its own employees to provide correct and accurate advice about tax issues?

Posted by: Paddy | Jan 8, 2010 5:32:29 PM

I understand that the regulations will attempt to determine the fitness of a tax preparer by denying licenses to individuals who have not timely filed their personal tax returns and/or failed to pay income taxes. If not filing proper tax returns and paying taxes on a timely basis didn't disqualify Timmy from heading up the US Treasury, why should the IRS impose this standard on the rest of us?

Posted by: Dan | Jan 8, 2010 5:58:24 PM

please help us oh great and powerful Government ...

the next step is to disallow preparing your own taxes ...

if you picked a shady tax preparer I will almost guarantee you that was for a reason ... "My buddy Bob says he "really" knows how to get back the most" ...

If you are making enough to need help then you need to spend a little of that precious quality time reading up on the tax code so that you can make an informed decision about whom to pick ...

Otherwise short form it ...

Posted by: Jeff | Jan 8, 2010 6:04:30 PM

I was a front-line customer service rep for the IRS for two years, and I spoke to at least a dozen people every day who were getting ripped off/screwed over by dishonest or incompetent tax preparers. There is no reason any wage earner should have to pay one penny for tax preparation services or private e-filing. It's about time the IRS is doing something about this.

Posted by: Z. | Jan 8, 2010 6:05:52 PM

Next comes the SEIU to organize tax preparers. H&R Block might take another look at this.

Posted by: Michael Kennedy | Jan 8, 2010 6:15:41 PM

Business and individual taxpayers lose untold billions of dollars hiring CPA and Mom & Pop tax preparers.

Now we should spend even more on another bureaucracy (unionized, 'good paying' jobs with generous retirement and health care plans) to overcome the legal nightmare of the existing tax code?

Will wonders never end?

Posted by: Matt O | Jan 8, 2010 6:33:26 PM

There's an awful lot of people here cheering on this growth of government and regulation. They all uniformly seem to forget one thing -- if it wasn't for the massive intervention, regulation, and unnecessary complexity of the US tax code to begin with, we wouldn't need any more regulation or training.
The end result is always the same, so called "enlightened" societies always regulate, tax, and nanny themselves right into extinction in the interest of trying to make everything easy and fair for everybody, while enriching the banking elite and the politician handmaidens of the banking elite.

Posted by: Jon | Jan 8, 2010 6:53:59 PM

If Timmy Geitner, a man who made most primitive errors with his own tax returns, and not once, but for a series of years - and yet is qualified to run the IRS - then what exactly should be the requirement for the tax specialist working for a client?

BTW, same goes for all congressmen. Can they decide the tax policy if they did not pass the tax-preparation test?

This is just another power grab by the feds, nothing more.

Posted by: Hyphenated American | Jan 8, 2010 7:35:51 PM

The IRS already has a system for licensing preparers. It is Called the Special Enrollment Exam. Those persons passing this exam are then able to represent clients before the IRS, They are called Enrolled Agents. There are approximately 40,000 EA's currently. Besides passing a rigorous exam, an EA must also complete 16 hours of continuing education every year to maintain his/her license.

Also the State of Oregon, California, and Maryland licenses preparers. Along with supervision the Oregon regulators actively pursue and prosecute fraudulent preparers. I do not have any information regarding CA or MD, only OR, where I am licensed.

To me it makes sense for the states to establish a universal regulation and criteria for the purpose of licensing regulating, and educating the preparer industry, similar to the Insurance industry. Lord knows we are in a world of hurt when it comes to dealing with the complex tax code, along with IRS regs and procedures.

Posted by: Philip Brown, EA | Jan 8, 2010 7:58:44 PM

It is amusing, but also sad how many people truly believe that licensing/regulation will decrease fraud.

Licensing for tax preparers will prevent tax fraud as effectively as licensing for real estate agents and lenders prevented bad home purchasing and lending practices.

Whatever money is spent on this new stupid regulation would have been better spent paying the salaries of IRS agents to investigate fraud. (Want to create jobs? I'd sign up to do this work in a heartbeat, but nope that would make too much sense.)

Posted by: Mark | Jan 8, 2010 9:34:24 PM

CPAs and EAs are already tested and have CPE requirements. As mentioned above, a lot of the unlicensed preparers run RAL bucket shops where the vigorish on those loans makes payday loans and used car financing look like charities.

Posted by: betheweb | Jan 8, 2010 9:39:57 PM

I'm one of those people being targeted by the IRS. I got into the business by accident. I've always done my own taxes. My friends and family that know I have an accounting degree would ask me all sorts of simple questions this time of year as the tax code is to broad for anyone to know. Or, I'd be shown returns prepped by CPA's and big Tax return companies that were very simple...A W-2, some interest and Home mortgage interest / property Tax...and they were getting charged $150-250. Insane. So I started doing a handful of returns for 1/3 or half what they were paying. I paid taxes on the money I made. Everyone wins.

I'll just let people take me to dinner starting next year. And some of my lower income friends I'll do gratis so they aren't ripped off. Although I heard they want to regulate ALL 3rd party prep. Because, once again, in an effort to protect people they just screw the poor. George Bush hates poor people...oh, wait a minute. Well, it's OK, it's his fault somehow. Right Brian G.?

None of the "expert" CPA's applauding this proposal know the tax code. No one person knows the tax code. It's impossible. But we need to make Neil Aronoff's life easier and ensure his competition is thwarted.

Posted by: Ron Torget | Jan 9, 2010 8:01:01 PM

The cash register people at McDonalds and the people prepping the food are unregulated. People who mow lawns for extra cash are unregulated. People who help others cross the street are unregulated. I see a lot of need for regulation here. There are probably other unregulated dangers. Like mothers giving medicine to their children. Or feeding them. Who knows what is in the food?

Posted by: M. Simon | Jan 10, 2010 2:54:52 PM

Well, well, well, it has finally happened; the unlicensed, work out their basements or garages with no overhead, no staff, no insurance, no competent software, etc. will now be monitored. The issue, as I see it, is with the background investigation of current CPA's who do not wish to file electronically. Finger printing, tax return investigations, business tax return investigations, payroll tax investigations, tax filing compliance, etc is an invasion of too much business privacy. Here we go again; society never goes after or punishes the real criminals. Does it really matter if a CPA has not filed their personal return for 2008 or 2007? There are many taxpayers who do not want their returns filed electronically. Does everyone now trust the internet? No. This is crazy. There is too much stolen identity still going on in society. The solution, in my opinion, is for the IRS to not allow any taxpayer to file their own tax returns or to be prepared by anyone other than a CPA. Tax lawyers? Who are they? Come on, they are only lawyers with the word "tax before their title". What the hell does that mean? A CPA then should be able to call them a Legal CPA; right? A CPA has to pass the toughest examination and must attend 80 hours of courses every two years. The bar is a very easy test; one where a lot of CPA's who are engaged in court work would pass. An EA is a want to be tax preparer that could not pass the CPA examination. As they all say, it is only a test. Well then pass the test. Congress should get off their fat rear ends and pass a law that requires all taxpayers to have their tax returns prepared only by a CPA or they will be heavily penalized. After all as someone state in an article I read, only attorneys are able to practice law and only doctors are able practice medicine. The CPA has been discriminated against for years. The CPA should be held at the same standard as an attorney and a doctor.

Posted by: Robert C Olivieri, Jr | Jan 10, 2010 3:07:18 PM

Preparers will now be partners and police with the IRS. Someone above said most mistakes are made by unregulated preparers. That may be because they prepare a lot more returns. The big prep firms will definitely increase their market share as the mom and pops will disappear. Many of us unregulateds will have to take time from our work schedule to study and take the test. I'm sure that we can bill out that time later. The tax law is a moving target so what will be on the test? Not to test CPA's and lawyers because they already took a test is ludicrous. The IRS and the public are still enamored with those initials as defacto tax experts. It's just not so. I may have to be a non signer working under one of my exempt attorney tax clients. If we lose thousands from the industry the rest of the industry will not be able to handle the work. Do you know any tax preparers who are not swamped already? Now double their workload. I certainly don't want any more to do. Tax software is also an issue with the IRS. The introduction of tax software has revolutionized the industry and has helped the IRS with compliance. Without it the system cannot function. It's going to turn out to be a mess for everyone. This will undoubtedly backfire on the IRS.

Posted by: Charlie MBA | Jan 13, 2010 3:45:29 PM