Licensing Protects Competitors, Not Consumers

This is a long-running series on this blog, and the most recent example comes from John Stossel.

[T]he IRS plans to require paid preparers to register with the agency. Subsequently -- the timeline is not yet firm -- they will be required to pass competency tests and receive continuing professional education"¦

In a report issued Monday, the agency also raised concerns about the quality of tax-preparation software"¦

As is usual in such cases, the IRS uses some ridiculously mundane task (in this case, hair cutting) as an example of something which is licensed but its super-critical target industry is not.  This is typically supposed to be read as a justification of the extension of licensing to the new industry, though I always read it as a comment on how over-licensed we already are.

In field tests, the IRS noted Monday, tax-return preparers often gave bad advice"¦

Of course, in numerous field tests, the IRS itself often gives bad advice as well.  From MSN Money a while back:

Two decades ago, Ralph Nader's Tax Reform Research Group prepared 22 identical tax reports based on the fictional economic plight of a married couple with one child. Identical copies were submitted to 22 different IRS offices around the country.

Each office came up with an entirely different tax figure. Results varied from a refund of $811.96 recommended in Flushing, N.Y., to a tax-due figure of $52.13 demanded by the IRS office in Portland, Ore....

Physician, heal thyself.  Maybe the problem is in the tax code, not the preparers.  From the same MSN Money article:

Since 1988, Money magazine has conducted an annual study where 50 tax professionals, including attorneys and certified public accountants, have been asked to complete a tax return for a hypothetical family.

The results have been unnerving. The professional preparers come up with different results each year -- with spreads of as much as $1,000.

So let's see where we are. The IRS can't get the answers right. Neither can the professionals. That may explain why there have been U.S. Supreme Court tax cases where as many as four of the justices got the answer "wrong."

Maybe the justification has nothing to do with the quality of tax preparation.  Let's see who was happy about the IRS announcement:

H&R Block's enthusiastic response to the IRS's regulation plans suggests that the same thing will happen once the IRS licenses tax preparers:

Under the new rules, H&R Block "won't be competing against people who aren't regulated and don't have the same standards as we do," said Kathryn Fulton, senior vice president for government relations.

I will end, as I always do on this topic, with a quote from Milton Friedman:

The justification offered is always the same: to protect the consumer. However, the reason is demonstrated by observing who lobbies at the state legislature for the imposition or strengthening of licensure. The lobbyists are invariably representatives of the occupation in question rather than of the customers. True enough, plumbers presumably know better than anyone else what their customers need to be protected against. However, it is hard to regard altruistic concern for their customers as the primary motive behind their determined efforts to get legal power to decide who may be a plumber.

  • Max Lybbert

    > [T]he agency also raised concerns about the quality of tax-preparation software

    Years ago I looked into the requirements for writing tax preparation software. At the time, such software had to pass IRS-written tests for accuracy, and the IRS had to have the opportunity to review the design and implementation of that software. States that have an income tax often have similar requirements.

    If those tests can't be trusted (which is what the IRS appears to be saying), then the problem lies with the IRS employees who wrote them.

  • feeblemind

    Re licensing: 30 odd years ago when I was in college, we discussed licensing as a way to increase farm income in an Ag Policy class.

    As for the IRS. What a nightmare. They and the tax code are akin to heavy jungle that the taxpayer must negotiate with a machete to annually pay his taxes. Gawd but it is frustrating and disheartening!

  • Greg

    "Each office came up with an entirely different tax figure. Results varied from a refund of $811.96 recommended in Flushing, N.Y., to a tax-due figure of $52.13 demanded by the IRS office in Portland, Ore…."

    That, and the other example, are damning. We have way too much Gov., not that it's going to get better anytime soon.

    About the IRS - what do you think of the FairTax idea?
    http://www.fairtax.org/site/PageServer?pagename=about_faq

    I found various commenters on this site mentioning it, but I didn't find your comments.

  • Rick Caird

    Gee, I wonder if the cost of preparing a tax return will increase or decrease after the licensing is put in place

    Rick

  • Craig

    This is also about trying to draw more tax receipts. The gov't assumes that these unregulated preparers are causing their clients to underpay.

  • Ian Random

    Max Lybbert,

    Apparently, the pdf forms that you download from irs.gov can also do simple arithmetic. Supposedly, the IRS is too chicken to activate that feature for fear it makes a mistake. As for the original post, basically the IRS wants every who prepares a form for money to be a registered agent.

  • Bob Smith

    How long before the IRS starts pulling the licenses of tax preparers that take positions that are defensible within the Internal Revenue Code itself, but the IRS doesn't like?

  • James H

    Great, now they're gonna take away my tax prep software. I don't want to haul all of my stuff into the office of some guy who won't pay any attention to details and get me screwed on some audit. I see these commercials where they're supposedly looking at the "hard questions" people have that there must not be any way for software to help you with. Stuff like, can you deduct your home office/play room/guest room? Of course you can't, the software will tell you that!

  • O Bloody Hell

    1) I concur that this is all a crock of excrement.

    2) The net effect of most such licensure is both the restriction of the marketplace (and attendant rises in expenses for the average person) and, equality critically, an increase in the number of crooked charlatans involved in the business.

    3) The actual solution is to vastly simplify the tax code. The next time through, one thing would be to limit the tax code to "x" characters of total description -- say, not more than 10000 characters to define all taxes and rules thereupon. If you can write a Nation's Constitution in less than that, you should be able to manage the tax needs in it, too.

    Greg: re: The Fair Tax.

    I will point out to you that there is one major component of the FT that you MUST grasp, and that is that at the heart of ANY form of it there MUST be a rule that it does not take effect unless and until the finalized repeal of the 16th Amendment (the Income Tax Amendment). If that is NOT done (if they just "cancel the existing tax code and abolish the IRS", as many forms of the suggested law does) then you should reject it and make sure that those around you are fully aware of that lack.

    I guarantee you that, unless the law does not specifically tie to said repeal that, before long, some "fiscal emergency" (What? The government? A fiscal emergency? Nawwwww...) will result in a recreation of the IRS (some other name, no doubt) "just for the duration of the emergency, mind you", and a re-institution of the Income Tax, once more "just for the duration of the emergency" -- and you will be saddled with BOTH the Fair Tax **AND** an Income Tax "just for the duration"... which you will find out to be conveniently just slightly longer than there is fuel for the Sun to burn...

    So be utterly and completely certain that Congress CANNOT re-institute an income tax without going through the difficult step of re-passing a Constitutional Amendment allowing them to do so -- insist... demand! -- that any Fair Tax can ONLY be applied upon the finalization of the repeal of the 16th.

  • Ron H.

    I agree with your concern about a "temporary" income tax, however there is nothing NOW to prevent a "temporary" increase in the income tax rates.

    Us poor Californians are currently suffering under a "temporary" 1% additional sales tax "Just until state revenue improves."

  • Max Lybbert

    Here we go: http://www.irs.gov/efile/article/0,,id=205560,00.html .

    Clearly it's possible to pass this level of testing. The question is "what's wrong with this level of testing?" or "what problems have surfaced that would require more than this?"

  • Linda Morgan

    "This is a long-running series on this blog"

    And I thought about this blog the other day when I read this:

    "UBS AG analysts Andrew Fones and Margaret O’Connor issued a report that said the IRS initiative will help H&R Block by preventing small preparers from entering the market and driving others out of it."

    Here: http://www.businessweek.com/news/2010-01-04/h-r-block-jackson-hewitt-must-register-with-u-s-irs-update3-.html

    Love they way they acknowledge it's the "small" preparers whose entry is prevented, not lousy, unqualified preparers. Ditto those who are driven out -- not hacks, just "others."

  • ParatrooperJJ

    It allows the IRS to extend the problem preparers program to more preparers and therefore to increase tax revenues.

  • JamesLBurns

    And lord knows H&R Block is the standard we want for tax preparers. H&R Block-related headlines from a quick search:

    H&R Block Settles Tax Refund Loan Suit

    H&R Block Reaches Multi-Million Dollar Settlement Over Fraudulent IRAs

    ATTORNEY GENERAL CUOMO ANNOUNCES MULTI-MILLION DOLLAR SETTLEMENT WITH H&R BLOCK FOR ITS FRAUDULENT MARKETING OF FEE-LADEN IRAS TO LOW- AND MIDDLE-INCOME FAMILIES

    H&R Block subsidiary nears settlement with auditor

    H&R Block Slips After Legal Settlement, IRS Regulation News

    Attorney General Brown Reaches Agreement with H&R Block Prohibiting Deceptive Marketing of Tax Refund Loans

    Judge allows $62.5 million H&R Block settlement to proceed

    A class action lawsuit has been filed on behalf of persons who purchased auction rate securities from H&R Block, Inc.

  • David Schwartz

    Unfortunately, the FairTax is basically unimplementable as proposed. Nobody has yet come up with an enforcement regime that would result in a high enough compliance rate to make the tax fair. No State in the United States, nor country in the world, has ever managed to get a sales tax rate that high to work. And the advocates of the FairTax don't agree on a way among themselves either.

    For example, if a consumer has a receipt documenting that they paid the FairTax on a purchase, but the seller did not remit the tax, is the consumer liable if they knew or should have known that the FairTax would not actually be paid? I have asked every advocate of the FairTax this question and every answer I've gotten was immediately backed away from by the answerer once I explained the consequences of their answer. That is, nobody knows how to answer questions like these, and I submit that there are no good answers.

    That's why no jurisdiction in the world has a sales tax over about 11%. The percentage needed to make the FairTax work is beyond what anyone has any idea how to do. And the FairTax advocates have no idea. States trying to raise their sales taxes have already found that evasion increases to the point where they get lower revenues for higher rates.