Is Tax Preparer Regulation the Answer?
In the recent proposed regulations published in the Federal Register, all tax preparers have to pass a compulsory examination to be qualified as registered tax preparers. Only such tax preparers will be eligible to prepare and submit tax returns on behalf of paying clients. But the question is does this proposed regulation actually benefit taxpayers?
The regulations mean that the IRS has the power to issue or cancel registrations that will directly affect the bread and butter of tax preparers. This will inevitably cause tax preparers to tone down on how strongly they advocate for their customers.
Another effect is that registration will cause smaller tax preparers to drop out. This is clearly one of the main objectives of the requirement. But this also effectively reduces the choices for taxpayers. There are currently 600,000 unregistered tax preparers, many of whom are part-timers working for some side income. Some are retirees, others are volunteers who provide their services for a nominal fee to those who cannot afford to pay a full-fledged tax preparer’s fees.
How many of these preparers will be weeded out? These requirements are easy enough for big companies to comply because of economies of scale and the number of administrative staff they have. But clearly this is not the case for smaller Mom and Pop tax preparer companies. It appears that big companies are using these regulations to nudge out smaller companies.
Economists Nicole V. Crain and W. Mark Crain calculated that big companies with more than 500 employees incur costs of $7,755 per employee per annum to comply with the IRS requirements whereas smaller firms have to pay a princely sum of $10,585 for each employee per year. That is an in-built $3,000 competitive advantage without even having to do any work. It is no wonder that H&R Block spent nearly $1 million in the latter part of 2009 mostly to lobby for this regulation.
Another area of unfair competition is tax preparation software like the Turbo Tax software by Intuit. At this point, legislation to regulate that is already on the drawing board. And it is unlikely to favor taxpayers.
And finally, the last competitor to tax preparers is the IRS itself. The Taxpayer Advocate’s report states that the IRS is aiming to attain only a 75% answer rate of the calls it receives. In 2008, the IRS hardly answered 50% of the calls it received.
Yet the IRS has increased expenditure for enforcement measures while at the same time, expenditure on service to taxpayers has declined. All these mean that the work of tax preparers becomes that much harder. And who has to ultimately bear the costs? Taxpayers.
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