December 17, 2012

IRS Rule Threatens Tax-Preparing Entrepreneurs

By: Dan Alban

While the media obsesses over the so-called “fiscal cliff” created by the Budget Control Act, another government-imposed fiscal cliff looms at the end of this year: tax-return preparers must begin complying with a sweeping and unlawful new IRS licensing scheme.

Despite a federal lawsuit filed in March by three independent tax preparers and the Institute for Justice (IJ), the IRS refuses to budge on its December 31 deadline for roughly 350,000 tax-return preparers to comply with a mandatory continuing-education requirement, which will be followed next year by an IRS-mandated exam.

Unless the judge intervenes, many tax preparers—perhaps tens of thousands—are expected to close their doors rather than comply with these costly and time-consuming regulations that could waste up to 5 million man-hours.  The Economist concluded that these new IRS regulations “threaten to crush . . . small, local” tax preparers and are “likely to push mom and pop into another line of work.”

“This new requirement will cause an exodus of tax preparers who will stop practicing rather than take the test and complete annual education,” explained Chuck McCabe, CEO of the Income Tax School, in an article in Accounting Today titled Tax Preparer Shortage on the Way.  “The result will be a shortage of qualified tax preparers and, consequently, a bidding war.”

Who’s footing the tab for this “bidding war”?  In all likelihood, you are.  A majority of American taxpayers—about 85 million—use the services of a tax-return preparer each year to file their tax return.  The shortage of tax-return preparers created by these regulations is expected to drive up the costs of tax preparation for consumers.

Not surprisingly, large tax preparation firms lobbied for this new licensing scheme.  As The Wall Street Journal explained: “Cheering the new regulations are big tax preparers like H&R Block, who are only too happy to see the feds swoop in to put their mom-and-pop seasonal competitors out of business.”

Unfortunately, what’s happening to independent tax-return preparers is part of a broader nationwide trend.  Across the country, in industry after industry, established businesses push for costly and burdensome occupational licensing regulations to keep out their competition.  These laws force consumers to pay higher prices for fewer choices and threaten to make criminals out of entrepreneurs who are just trying to earn an honest living.  In the 1950s, only five percent of American workers needed a government license to work in their chosen occupation.  Now, nearly 30 percent have to obtain a government permission slip before they can go to work.

But tax preparers aren’t going over this fiscal cliff just yet.  The IRS filed their final brief earlier this week in Loving v. IRS, and the case is now ready for a decision.  Even if there’s no ruling by December 31, a victory for IJ’s three tax-preparer clients would allow many tax preparers to reopen their doors and return to helping customers with their tax returns in the new year.

Dan Alban is an attorney at the Institute for Justice in Arlington, VA and is the lead attorney in Loving v. IRS. Image courtesy of Big Stock Photo.