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Funny, you don't look unregulated

October 11, 2010

The IRS proposals to impose a new regulation regime on preparers are misguided and foolish. When this is pointed out, some regulation boosters ask the question that Robert D Flach asks:

Since regulation does not work would you prefer that CPAs, attorneys, stock brokers, architects, engineers, doctors, etc not be regulated?

Robert, there is no such thing as an unregulated preparer industry. In fact, tax return preparation is regulated right now. Hardly a week goes by without the IRS announcing that it has sued or shut down another preparer for bad behavior. Preparers can and do go to jail for bad work. For preparers covered by the Enrolled Agent, CPA and Attorney designations, the IRS and state agencies are always at work investigating and disciplining bad actors.

The most important source of regulation, of course, is the client. Every time a client chooses or fires a preparer, regulation takes place at its most effective level. If a preparer is incompetent, clients will inflict punishment by walking away long before the IRS has any idea what is going on. This regulation, while imperfect, will always be more effective than anything the ponderous IRS behemoth will ever do.

What the IRS proposes wouldn't be the first discipline in a nasty and brutish world of anarchy. It is the imposition of a specific sort of regulation regime: a new national occupational licensing regime, complete with barriers to entry and centrally-administered annual compliance requirements on an unprecedented national scale. This is superficially attractive to some preparers who are not Enrolled Agents, CPAs or lawyers because it gives their business the dignity of a licensed profession. It pulls up the ladder behind them, reducing their competition and allowing them to charge higher prices. I'm sure that many regulation advocates sincerely believe that the consumer will benefit by not being allowed to buy from unlicensed preparers, but it's also true that many other regulation advocates likely see themselves as standing to benefit financially.

I believe the attraction of these currently unlicensed preparers to regulation is short-sighted, and that they will ultimately be losers to the benefit of the nationwide franchised preparation outfits. It's also probable that the regulations will bring little benefit to consumers despite imposing costs on consumers and the preparation industry. But one thing is certain: the industry isn't unregulated now.

Considering the pointless and burdensome nature of the IRS proposals, regulation advocates need to articulate what problems they are really trying to solve, and whether the answer to those problems is a vast new IRS bureaucracy.

Links:

Tax Policy Blog: Institute Criticizes New Tax Preparation Licensing Requirements
Reason.com: Occupational Licensing Abuse Meets the IRS

Prior Coverage:

Institute for Justice speaks out on IRS power grab
Preparer testing? Only after Congresscritter testing, Treasury-secretary testing, and IRS agent testing.

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Comments

I expect that the worst of the worst won't be run out of business no matter what. They'll just stop signing off as preparer & have their clients indicate that they've prepared the returns themselves. I agree with you that all this does is place additional burden on the legitimate guys & income into the Treasury's account.

It gives them income, but it especially gives them power. That's what they like.

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