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Regulation doesn't work. Let's regulate some more.

October 06, 2010

Florida tax attorney Peter Pappas passes on a depressing story:

After analyzing the taxpayers Z-tapes and bank statements we determined that it had failed to report upwards of $1,000,000 in gross receipts in 2006, 2007 and 2008.

When I called the taxpayer’s New York CPA preparer to alert him to the underreporting he said that he was aware of it and called us idiots for recommending that the taxpayer voluntarily amend its S corporation and individual tax returns to correct the underreporting. Here’s was his justification:

Nobody reports all of their cash receipts. That’s the way we do things in New York.

Believe it or not, the taxpayer, on the advice of this crooked preparer, fired us and hired a New York tax attorney¹ to represent it.

So the New York preparer was a (highly regulated) CPA. The apparently crooked lawyer was a (highly regulated) attorney. Both have to pass ethics and CPE requirements. Robert D Flach correctly concludes:

REGULATION DOES NOT PREVENT FRAUD

It doesn't prevent fraud, it doesn't prevent incompetence, all while imposing costs on the honest and competent at least as much as on the unscrupulous and inept.

So tell me again why all this new IRS preparer regulation is such a great idea?

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Comments

JK-

Thanks for the reference.

It appears Pappas and I do agree from time to time.

We, however, still disagree on this issue.

While regulation does not prevent fraud it does, to some degree, reduce incompetence.

Fraud requires knowledge of the Tax Code and willing participants on both ends (preparer and taxpayer).

Incompetence results from poor education and experience in the Tax Code, despite the best of intentions for preparing an honest return.

Taking some of the more "casual" tax preparers out of the business with the new testing and CPE requirements, and corresponding costs, and requiring others to maintain CPE, will reduce incompetence.

I still say the additional costs imposed on honest and competent preparers are not at all significant, and have not been shown otherwise.

TWTP

Robert, I think the burden of proof needs to be that additional regulation DOES help in a cost effective way -- rather than saying that it hasn't been proven that they are not cost-effective.

You have (with some justification) pointed out that there are lots of inept CPAs and lawyers around. They are regulated by more agencies in more (though different) ways than preparers, but there are still incompetent ones. We know that preparer regulation will impose increasing costs, but we haven't seen any explanation why this will work better than the CPA and attorney rules. I anticipate that you will say that this is tax-specific, unlike CPA and attorney CPE; I doubt that the nominal CPE and testing that to be required of unregistered preparers can possibly make much of a difference, as long as we have an impossibly difficult tax law.

JK-

To be continued - in tomorrow morning's post (Thursday, October 7th) at THE WANDERING TAX PRO!

TWTP

Robert, I'll look forward to it.

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