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How tax preparer regulation tastes like chicken

October 11, 2009

To see the future of the tax prep industry if the IRS imposes a new testing and certification regime, go to beakfast with Econlog's David Henderson in Santa Fe, New Mexico (emphasis mine):

I sat with a woman who runs a Mexican restaurant in a small town in Colorado. We talked about various things, including her criticism of "factory farms" that, in her view and that of many others, are producing unhealthy food.

...

She was telling me about some chickens she had cooked that are from a small farm near Durango. People had commented on the wonderful aroma and flavor and asked what was special about the dish. She answered that it was simply healthily grown chicken. So I asked the woman, "Didn't it cost a lot more?"

"Yes," she said, and I was willing to pay that price they were charging, but here's the problem. It's illegal for me to use those chickens."

"Why is it illegal?", I asked.

"Because," she answered, "The chicken farmers raise only a few hundred chickens at a time and they have to get USDA certification. Getting that certification is very expensive and it isn't worth it for them."

The light bulb went on for me. I pointed out to her that this is an example of what I called, in my 1976 Ph.D. dissertation on why safety legislation for coal mines did little for safety but wiped out thousands of small mines, "economies of scale in compliance."

She got it and we both agreed that there are market mechanisms for certification and that the USDA is not needed.

Substitute "H&R Block and Jackson Hewitt" for "factory farms" and "IRS" for "USDA," and that tells you what you need to know about the proposals for stricter preparer regulation. Oh, and substitute stand-alone preparers and small local shops for the chickens.

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Comments

The part of the "let's regulate the preparers" proposal I don't like is that we have yet another situation of the government saying "I'm holding a club in my hand but trust me, I won't use it to hit YOU."

The other part of the "let's regulate the preparers" proposal I don't like is that it doesn't solve the problem. The problem is not the preparers. The problem is the Internal Revenue Code and the gargantuan pile of administrative excretia that devolved from it. Make tax law simpler and tax preparation issues dissipate magically.

The other other part of the "let's regulate the preparers" proposal I don't like is that it doesn't solve the problem in another way. There will always be a small percentage of people who lie, cheat, and steal. Does the great alluvial plain of government regulation really need an additional layer of complexity that affects the 98% of the people who don't matter, all in an attempt to chase the 2% of people who don't care?

Meh.

First they came for the unlicensed tax return preparers, but I didn't speak, because I have a law license. . . .

(Sorry. You may invoke Godwin's law now.)

Phil.

Phil (and Joe) -

I agree that the problem is not the preparers. The problem is the Internal Revenue Code and the gargantuan pile of administrative excretia that devolved from it.

And I agree that there will always be a small percentage of people who lie, cheat, and steal. This is true whether they are “unenrolled”, CPAs, lawyers, or EAs. Regulation of CPAs did not stop the Enron tax fraud.

The reason for licensing tax preparers is so the public can know that the person they choose to prepare their return has some knowledge of the Tax Code and takes continuing education each year to keep current – and is not some Joe (or Jane) Blow with no education, training or experience who went out and purchased a tax preparation software package and decided to start a business preparing 1040s. Or a CPA who took a tax course in college and answered a few questions right on a test 20 years ago, but doesn’t know his/her arse from a hole in the ground when it comes to current 1040 law.

TWTP

Robert - I don't believe regulation will provide the assurance you think it will, any more than the letters "CPA" do. All we know for sure is that it will create a big IRS bureaucracy that will assume control of your practice and your livelihood, while raising our expenses and the costs to our clients.

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