Thursday, October 16, 2014
W. Edward Afield III (Ave Maria), A Market for Tax Compliance, 62 Clev. St. L. Rev. 315 (2014):
It is becoming increasingly clear that, due to political realities and budgetary constraints, the IRS is going to have to attempt to enforce the tax laws by doing more with less. Current enforcement efforts have yielded a tax gap (i.e., the difference between the amount of taxes that should be paid and the amount that are collected) of roughly $450 billion annually. Faced with this task, one of the steps that the IRS has recently taken is to try to improve the quality in services performed by paid tax preparers, a group that historically has been subject to little IRS regulation or monitoring but that continues to play an increasingly important role in the tax system.
Although the IRS’s recent efforts to better regulate paid preparers is a good step in improving the quality of tax services, its current structure as a mandatory regulatory regime causes it to miss a number of compliance oriented advantages that could be achieved through a voluntary system of tax preparer regulation in which tax preparers could choose to seek certifications indicating whether they had a positive track record of compliance.
This paper explores in detail for the first time in the literature how preparer regulation could achieve significantly more compliance gains if it were structured as a voluntary system designed to create a market that rewards tax compliance.
Under a voluntary compliance certification regime with appropriately structured participation incentives aimed both at paid preparers and their clients, paid tax preparers are not simply mandated to achieve a minimal level of competence; they are instead provided with competitive advantages in the marketplace for achieving higher levels of compliance than preparers who have poor compliance track records. As a result, preparers are more likely to choose to pursue higher levels of compliance in order to obtain and maintain a certification. In addition, many taxpayers are more likely to seek out compliance certified preparers because of the benefits associated with relying on advice and filing tax returns prepared by compliance certified preparers. This piece seeks to lay the framework for how such a voluntary compliance certification program would work and to discuss the benefits of such a system that are currently not being realized through the IRS’s current regulation of paid preparers.