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April 4, 2012
Government Power, Cronyism, and the IRS Running Amok

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by David Brunori

The Institute for Justice has filed a lawsuit against the IRS challenging the agency's new tax return preparer regulation standards. Although the standards are another incremental intrusion into our lives, few citizens are likely to notice.

The IRS promulgated regulations requiring anyone who is paid to prepare a tax return to jump through some significant hoops. The thousands of people who prepare returns for money have been largely unregulated since the inception of the income tax. And for about 100 years, the country seemed to get along just fine. But now, suddenly, preparers will have to register, pay a fee to the IRS, pass a competency exam, undergo a background check, and enroll -- at their expense -- in 15 hours of continuing education. (For the institute's complaint, see Doc 2012-5226 or 2012 TNT 49-14. For REG-138637-07, see Doc 2010-18447 or 2010 TNT 161-3.)

IRS Commissioner Douglas Shulman praised the regulations when they were first proposed, saying they would "help ensure taxpayers receive competent, ethical service from qualified professionals and strengthen the integrity of the nation's tax system." Really? The irony of the IRS wanting to ensure preparer competency is palpable. The Service is notorious for handing out incorrect information to ordinary citizens who call for help. Millions of Americans rely on IRS advice at their peril, yet the agency is worried about the competency of the preparers? (For prior coverage, see Tax Notes, Mar. 19, 2012, p. 1507, Doc 2012-5217, or 2012 TNT 49-3.)

The IRS and Shulman are also purportedly concerned about potential ethical lapses among the nation's 350,000 paid preparers. It is possible that Americans want their return preparers to be ethical. Of course, they are probably more concerned with the preparer getting the return right and avoiding an audit. Even before the regulations, preparers faced civil and criminal penalties for cheating. And if jail time won't deter improper behavior, it is unlikely that the new regulations will have much effect. Lawyer disbarment lists are littered with unethical individuals despite government regulation of their profession.

The classical theory of government regulation is that society has problems and the government through reason can thoughtfully address them. But what is the problem the IRS is trying to solve with the regulations? There is no indication that paid preparers are incompetent, certainly not on a scale that would require government intervention. Why not let the market solve the competency issue? A crooked return preparer will be penalized by the IRS. But a preparer who leads his clients to audit will be out of business. And, to the extent it matters, there is no indication that paid preparers are less ethical than anyone else.

The institute's complaint alleges that the IRS does not have the legal authority to issue the regulations. While I believe it makes a compelling case, I leave it to the reader and court to determine whether the government possesses such authority. But it should surprise no one that the Service maintains that it has the power to regulate paid preparers. It is natural for government agencies to expand their reach whenever possible. After all, when your job is regulating, you need to keep finding things to regulate.

That bureaucratic incentive is bolstered by the interested parties in the private sector. H&R Block and Jackson Hewitt were tripping over themselves in support of the regulations. They know that onerous regulations will impose a cost on paid preparers, particularly individuals. That cost will force many preparers out of business. The big preparer companies cannot wait to get their hands on the millions of Americans who will be looking for tax help. Even more outrageous is the fact that H&R Block and other big companies will be exempt from some of the regulations. If a preparer is supervised by a lawyer or CPA, he is deemed both ethical and competent (although he still must register for a preparer tax identification number). So H&R Block and Jackson Hewitt not only escape the burdens of the regulations, but their direct competitors will be put out of business. Brokerage houses and investment advisers were putting H&R Block on the buy list because the regulations would present a barrier to competition. This, of course, is nothing new. Virtually every professional license requirement since medieval guilds is an example of this rent-seeking.

The Podesta Group, led by former Obama administration official Tony Podesta, was lobbying for the regulations on behalf of H&R Block. That is the way Washington works. Industry lobbies for regulations that will hurt competitors. The bureaucracy is only too happy to oblige. The industry is enriched, and the bureaucracy is enlarged. We can only hope the Institute for Justice is successful.

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