Tax Preparer Regulation: A Response to Joe Kristan

Tax Preparer Regulation: A Response to Joe Kristan

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This is starting to get fun.

I never thought we’d have such impassioned commentary about an issue as seemingly mundane as the IRS’s regulation of otherwise non-licensed tax preparers.

Yet here we are.

Last week a highly respected fellow tax blogger answered a question I raised in my post titled “Hialeah Florida Tax Preparer Indicted For Preparing False Tax Returns: Still Don’t Want to Regulate Tax Preparers?.”

In Yes, I Still Don’t Want To Regulate Preparers, Joe Kristan of Tax Updates blog propounded six arguments in defense of his position that non-licensed tax preparers should not be regulated by the IRS.

Here is my point-by-point response:

1. Plenty of regulated preparers cheat too. 

Joe says,

A licensing regime won’t put an end to cheating preparers; it will just give them a government seal of approval until they are caught.

First, the fact that already-licensed preparers also cheat is a better argument for more regulation than it is for less regulation.

If tax compliance is difficult for those subject to a regulatory regime that includes a commitment to continuing one’s tax education and a fidelity to specific ethical standards, think how much more difficult it must be for those who are not bound by those basic regulatory requirements.

Of course, even the most well-trained and committed tax professionals make mistakes and run afoul of the law from time to time.

Nobody is suggesting that the regulation of unlicensed preparers is going to eradicate negligent and fraudulent behavior, but it is bound to reduce or chill that behavior by creating a (soft, under my scheme) barrier to entry into the tax preparation field.

Joe uses three extreme examples of tax shelter fraud to make his point – KPMG’s and Ernst & Young’s tax shelter promotions and Arthur Anderson’s Ark Scam – but in doing so I think misconstrues the purpose of proposed tax preparer regulation.

It is not the promotion of complex tax shelter schemes that the regulation of unlicensed tax preparers seeks to prevent, but, rather, routine incompetent tax preparation which results in an increased number of audits and an increased burden on an already over-burdened IRS tax compliance function.

Regulation will not eliminate this burden, but it is logical to assume it will reduce it.

Second, and lastly, Joe says that regulation and licensing will give unscrupulous tax preparers a “government seal of approval.”

But this argument would apply equally to CPAs, Lawyers and IRS Enrolled Agents.

Is Joe suggesting that we do away with the licensing of those professionals on the grounds that such licensing merely makes it easier for them to dupe the public?

It would save me a heck of a lot of money spent on continuing education credits.

2. Getting indicted seems like a pretty stern form of regulation already

Criminal prosecution is not regulation, it is ex post facto enforcement.

The twin goals of any regulatory scheme are,

a. To prevent the commission of crimes that if perpetrated would hurt members of the public; and

b. To reduce the public cost of prosecuting those crimes.

What’s that cliche again?

Something about prevention, cures and ounces.

3.  A licensing regime spends most of its efforts shuffling the paperwork of honest preparers

This is Joe’s best argument, even if it is a tad cynical.

In effect, Joe is saying that the regulation of unlicensed tax preparers will impose an undue burden on honest preparers while the dishonest ones will find a way to circumvent the rules.

In other words, regulation won’t work.

But here again, this argument would seem to apply to all professionals who are regulated or licensed by a government entity i.e. Doctors, Lawyers, CPAs, Electricians, Bankers, Stockbrokers, etc.

If regulation is worse than non-regulation for non-licensed tax preparers, why would it not also be worse for currently regulated preparers?

4.  Two states already regulated non-CPA, non-lawyer, non-Enrolled Agent preparers

Joe observes,

It’s not clear that better preparation has resulted. While Oregon’s licensed preparers were more accurate than the national average, according to a GAO report, California’s were less so.

The issue here is not whether or not tax preparers in Oregon and California exceeded the national average in tax preparation accuracy, but, rather, has the rate of their accuracy increased or decreased since the enactment of the licensing requirement.

I don’t have the statistics, but would be willing to wager that the rate of tax return accuracy increased in both Oregon and California since the imposition of a licensing requirement.

5.  Unlicensed preparers fill a need

Here’s what Joe says,

Tax is hard. When some single mom has to battle through her earned-income credit form, she needs somebody cheap and handy to help. Regulation will reduce the number of preparers and increase her costs, without getting her a better result.

I can’t think of a better example than the Earned Income Tax Credit (EITC) for why non-licensed tax preparers should fly from tax returns as fast as Superman flies from Kryptonite.

As Joe correctly observes, people who qualify for the EITC are the ones who are most likely to turn to “cheap and handy help.”

They are also the ones most likely to get an IRS notice disallowing their claim for refund.

There is more fraud and abuse involved in the claiming of the EITC than in any other single area of tax law.

Joe is right. Tax preparation is hard.

And that is precisely why we should not allow just anyone to do it.

6. The real problem is the tax law

I agree.

But politicians have been promising to simplify the tax code for decades and it never gets done.

In fact, the result of every so-called tax simplification bill in recent memory has been an increase in the size of the tax code followed by a commensurate increase in the size of my wallet.

Simplification is preferable to regulation, but regulation is preferable to nothing.

About Peter Pappas

Peter is a tax attorney and certified public acccountant with over 20 years experience helping taxpayers resolve their IRS and state tax problems.

He has represented thousands of taxpayers who have been experiencing difficulty dealing with the Internal Revenue Service or State tax officials.

He is a member of the American Association of Attorney-Certified Public Accountants, the Florida Bar Association and The Florida Institute of Certified Public Accountants and is admitted to practice before the United States Tax Court, the United States Supreme Court, U.S. District Courts - Middle District of Florida

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  1. First, the fact that already-licensed preparers also cheat is a better argument for more regulation than it is for less regulation.

    First, the fact that patients die after leaches are applied is an argument for more leaches.

    Criminal prosecution is not regulation, it is ex post facto enforcement.

    Only if it lacks a deterrent effect. Ex-post penalties punish criminals for crime; regulation punishes everyone for doing something that a criminal could do to commit a crime.

    In other words, regulation won’t work.

    Or rather, they don’t work as well as punishment. We’d spend a lot less time punishing people for actually doing wrong than trying to figure out how they might do wrong in the future, and then trying to prevent it. Among other things, this means crooks will have more of an incentive to hire smart (or well-connected) people to get around regulations.

    And that is precisely why we should not allow just anyone to do it.

    But is that also why you should add more red tape to make it even harder?

    6. The real problem is the tax law

    I agree.


  2. Tax Rascal,

    I see where you’re coming from, but I would ask you the same question I asked Joe.

    If you are saying regulation of professionals is worse than no regulation, are you also proposing that Doctors, CPAs, Lawyers and Stockbrokers not be regulated?

    If not, why not?

  3. Sure. Or rather, I would prefer that they be able to join voluntary standards organizations. The Internet is way more complicated than the tax code, but it still functions based on voluntary compliance and mutually agreed-upon standards. If necessary, I guess some nerds could lend a few IQ points to the IRS for a little while to explain to them why mandatory compliance is a bad plan.

  4. I think you’re way off base here.

    We do need to make government more efficient and competent, but the idea of just letting anyone perform surgery without any regulation or licensing is extreme.

    The internet is not a very good illustration of the “benefits” of non-regulation.

    It’s utter chaos.

    Any acne scarred, bitter, nerd, typing from his mother’s basement can say anything he wants about anyone he wants and he’s not required to reveal who he is or what his evidence is.

  5. Unfortunately, everything I have seen on the upcoming tax regulation of preparers will not improve the system one iota… well, except maybe for those of us who actually know what we are doing! Let’s be honest… it is simply a way for the government to extract fees and increase costs to those in the profession. The argument that CPAs, attorneys, etc. shouldn’t need licensing either is a specious argument. From experience I can assure you that a CPA or a law license qualifies no one for preparing taxes. The heart of a CPA license is for auditing… and the possession of that license provides a type of service only someone with that certification can perform. Most know something about taxes, but their training, unless they specialize in that area is light. An Attorney who specializes in tax may be qualified, but all attorneys would not necessarily be. To exclude either of these professionals with a blanket exemption points out the other hammer that is being instituted… by regulating preparers, the government has something to threaten preparers with (loss of approval) to make them kowtow to their whims… preparers that try to take a position counter to the IRS (and legitimately so) can be thus threatened. Sound farfetched… I have personally observed the government doing exactly that in other areas.

    And what kind of test will they administer? If it has any teeth in it, you are going to have complaints as far fetched as racially biased, etc. It will be called unfair and appeals will be endless. If it is “dumbed” down (think teacher’s tests) what is the point? Just extra Government revenue.

    Paid preparers already have to sign the returns they prepare and show their contact information and identification number. Regulating them will not add any further level of identification or assurance on the government’s end. Preparers that fraudulantly prepare returns are subject to administrative and criminal action already… establishing another level of government control in these times of bloated government is foolhardy at best.

    But who am I to complain… years ago I passed the CPA exam… since I moved and don’t have an active license, I will need to comply with these regulations… so what it will do for me is limit my competition, give me another “badge of honor” and ultimately give me the justification to get a major increase in rates. Still feel the government is working in YOUR interest?


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