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Taxpayer advocate calls for raising taxpayer costs, reducing preparer supply

July 02, 2009

The National Taxpayer Advocate has issued her annual report. Along with a number of sensible recommendations is this clunker:

The Advocate reiterates her longstanding recommendation that the government do more to protect taxpayers by regulating unenrolled federal tax return preparers, including by requiring initial testing and continuing professional education, and recommends that the IRS step up enforcement actions against preparers who fail to perform due diligence or consciously facilitate noncompliance.

The report has a critical unstated assumption: that such regulation would do more good than harm. Not bloody likely. The predictable unintended consequences:

- The supply of preparers would go down as folks will not want to screw around with the bureaucracy for what is for many just seasonal work.

- Unenrolled tax preparers will go underground, not signing returns. It is, after all, legal for folks to do their own returns (for now, anyway). These folks will be very difficult to track. A single mom trying to figure out her earned income credit in a housing project isn't going to lose sleep over whether the lady helping her with the paperwork in her apartment is licensed.

- Honest preparers will get caught up in paperwork mistakes of their own making, or made by the new IRS preparer bureaucracy, and will lose their seasonal income before the problems get ironed out.

- Resources that could be used to develop computerized enforcement tools to identify dishonest filing patterns will instead be used shuffling CPE paperwork and harassing preparers.

Finally, it is highly unlikely that all of this will result in a better product. We all remember when Fortune magazine would have a tax return preparered by different preparers and get as many results as preparers. The real reason for poor return prep quality is a poor quality of tax law. That root problem will exist until my modest reform proposal is finally adopted:

I have the answer to this problem, of course -- require that all Congresscritters do their returns in public themselves via a live webcast. They can use Turbotax or the software of their choice, as long as all input screens and output are broadcast live on the web, with a sidebar for running viewer commentary. Or, perhaps, selected tax pros could do the kibitzing - think "Mystery Science Theater 3000," tax geek version. Naturally, the whole comedy should also be available for playback on YouTube. I think this would have two useful results: Congresscritters would have a stake in tax simplification, and they would learn the difference between a deduction and a credit.

For a contrary view on the Taxpayer Advocate report, see Peter Pappas. Dan Meyer also has more.

Tags: Dan Meyer.Nina Olson.Peter Pappas.preparer penalties.Preparers.Taxpayer Advocate.