My sparring partner Joe Kristan of THE ROTH AND COMPANY TAX UPDATE BLOG and I have continued, or rather restated, our debate on the new tax return preparer regulation regime.
Joe stated in a recent post “Regulation Doesn't Work. Let's Regulate Some More” -
“It doesn't prevent fraud, it doesn't prevent incompetence, all while imposing costs on the honest and competent at least as much as on the unscrupulous and inept.
So tell me again why all this new IRS preparer regulation is such a great idea?”
I responded as a comment on the post -
“While regulation does not prevent fraud it does, to some degree, reduce incompetence.
Fraud requires knowledge of the Tax Code and willing participants on both ends (preparer and taxpayer).
Incompetence results from poor education and experience in the Tax Code, despite the best of intentions for preparing an honest return.
Taking some of the more ‘casual’ tax preparers out of the business with the new testing and CPE requirements, and corresponding costs, and requiring others to maintain CPE, will reduce incompetence.
I still say the additional costs imposed on honest and competent preparers are not at all significant, and have not been shown otherwise.”
Joe replied, also as a comment -
“Robert, I think the burden of proof needs to be that additional regulation DOES help in a cost effective way -- rather than saying that it hasn't been proven that they are not cost-effective.
You have (with some justification) pointed out that there are lots of inept CPAs and lawyers around. They are regulated by more agencies in more (though different) ways than preparers, but there are still incompetent ones. We know that preparer regulation will impose increasing costs, but we haven't seen any explanation why this will work better than the CPA and attorney rules. I anticipate that you will say that this is tax-specific, unlike CPA and attorney CPE; I doubt that the nominal CPE and testing that to be required of unregistered preparers can possibly make much of a difference, as long as we have an impossibly difficult tax law.”
Joe and I agree that –
(1) Regulation of tax preparers will not prevent tax fraud. Regulation of CPAs and attorneys has not prevented tax fraud by CPAs and attorneys, and, for that matter, regulation of doctors has not prevented Medicare fraud.
(2) Any regulation bureaucracy has the potential for occasionally causing agita and inconvenience to those being regulated. The problem that I, and other tax professionals, encountered in attempting to register online is certainly proof of this.
(3) Regulation of tax preparers via testing and CPE requirements, and the costs associated with maintaining one’s registration, will force many of the more “casual” tax preparers to stop preparing taxes for a fee. I, however, further believe that for the most part this will be no great loss. The preparation of 1040s is a profession and there is no room for “casual” professionals.
(4) Perhaps most important, the best way to reduce tax fraud, incompetently prepared tax returns, and the Tax Gap is to simplify the Tax Code
Here is where we part.
I believe, and Joe disagrees with me, that –
(1) The costs that tax preparers will need to incur to comply with the new regulation are not substantial, material or prohibitive. Serious tax professionals should already be attending CPE classes in federal taxation. The 15 hour requirement represents two days of classes – barely enough to remain current. I attend more than 15 hours per year in federal taxation, and I am sure so does Joe. So there is really no additional cost involved with this component. There will be a one-time cost of $100-$200 to take the test and an annual registration fee of $64.25. Certainly not a hardship, considering that these expenses are fully tax deductible as ordinary and necessary business expenses and therefore partially “reimbursed” through tax savings. Even if these costs are passed along to the client the increase in fees will not be substantial, material or prohibitive.
.
(2) While regulation will not prevent tax fraud it will help to reduce incompetence, as I have discussed above.
Joe stated in a recent post “Regulation Doesn't Work. Let's Regulate Some More” -
“It doesn't prevent fraud, it doesn't prevent incompetence, all while imposing costs on the honest and competent at least as much as on the unscrupulous and inept.
So tell me again why all this new IRS preparer regulation is such a great idea?”
I responded as a comment on the post -
“While regulation does not prevent fraud it does, to some degree, reduce incompetence.
Fraud requires knowledge of the Tax Code and willing participants on both ends (preparer and taxpayer).
Incompetence results from poor education and experience in the Tax Code, despite the best of intentions for preparing an honest return.
Taking some of the more ‘casual’ tax preparers out of the business with the new testing and CPE requirements, and corresponding costs, and requiring others to maintain CPE, will reduce incompetence.
I still say the additional costs imposed on honest and competent preparers are not at all significant, and have not been shown otherwise.”
Joe replied, also as a comment -
“Robert, I think the burden of proof needs to be that additional regulation DOES help in a cost effective way -- rather than saying that it hasn't been proven that they are not cost-effective.
You have (with some justification) pointed out that there are lots of inept CPAs and lawyers around. They are regulated by more agencies in more (though different) ways than preparers, but there are still incompetent ones. We know that preparer regulation will impose increasing costs, but we haven't seen any explanation why this will work better than the CPA and attorney rules. I anticipate that you will say that this is tax-specific, unlike CPA and attorney CPE; I doubt that the nominal CPE and testing that to be required of unregistered preparers can possibly make much of a difference, as long as we have an impossibly difficult tax law.”
Joe and I agree that –
(1) Regulation of tax preparers will not prevent tax fraud. Regulation of CPAs and attorneys has not prevented tax fraud by CPAs and attorneys, and, for that matter, regulation of doctors has not prevented Medicare fraud.
(2) Any regulation bureaucracy has the potential for occasionally causing agita and inconvenience to those being regulated. The problem that I, and other tax professionals, encountered in attempting to register online is certainly proof of this.
(3) Regulation of tax preparers via testing and CPE requirements, and the costs associated with maintaining one’s registration, will force many of the more “casual” tax preparers to stop preparing taxes for a fee. I, however, further believe that for the most part this will be no great loss. The preparation of 1040s is a profession and there is no room for “casual” professionals.
(4) Perhaps most important, the best way to reduce tax fraud, incompetently prepared tax returns, and the Tax Gap is to simplify the Tax Code
Here is where we part.
I believe, and Joe disagrees with me, that –
(1) The costs that tax preparers will need to incur to comply with the new regulation are not substantial, material or prohibitive. Serious tax professionals should already be attending CPE classes in federal taxation. The 15 hour requirement represents two days of classes – barely enough to remain current. I attend more than 15 hours per year in federal taxation, and I am sure so does Joe. So there is really no additional cost involved with this component. There will be a one-time cost of $100-$200 to take the test and an annual registration fee of $64.25. Certainly not a hardship, considering that these expenses are fully tax deductible as ordinary and necessary business expenses and therefore partially “reimbursed” through tax savings. Even if these costs are passed along to the client the increase in fees will not be substantial, material or prohibitive.
.
(2) While regulation will not prevent tax fraud it will help to reduce incompetence, as I have discussed above.
.
(3) The administrative cost to the IRS will be covered by the $50.00 component of the annual registration fee, or so we have been told. $50.00 multiplied by 1 Million plus tax preparers is a substantial amount of money. The federal budget, and therefore the mounting deficit, should not be increased by this system. And I do believe that the tax preparer gets a value worth at least what will end up being more like $45.00 out of pocket per year from the regime. This seems cost effective to me.
.
.
I trust I have been accurate in identifying Joe's positions.
.
I further believe that -
(1) The taxpayer consumer receives a definite benefit from regulation. He/she will now know that a person with the initials RTRP after his/her name at least has a minimal competency in 1040 preparation and remains current through required CPE. Prior to regulation, as I have pointed out time and again, any cafone could “hang out a shingle” as a “professional” tax preparer, and the taxpayer consumer has no way, other than the initials EA, to know if that person knows his/her arse from a hole in the ground about federal individual income taxes.
(2) The serious and truly professional previously “unenrolled” preparer, like me, will receive respect and recognition as a professional. The “urban tax myth” that a CPA is automatically a 1040 expert will finally be done away with. With the promised public education campaign on the regulation regime by the IRS the ability to use the initials "RTRP" in advertising will benefit the previously unenrolled tax pro.
(3) The IRS, and tax administration, benefits by way of a having a central registry of all tax preparers.
It looks to me like everyone benefits at a reasonable financial cost.
One of the comments made by a member of the IRS civilian oversight board, which helped to start the initial review by the IRS, does make some sense. He observed that his barber is required to have a license, but a person who prepares federal income tax returns is not.
My question to Joe is this - Since regulation does not work would you prefer that CPAs, attorneys, stock brokers, architects, engineers, doctors, etc not be regulated?
TTFN
I further believe that -
(1) The taxpayer consumer receives a definite benefit from regulation. He/she will now know that a person with the initials RTRP after his/her name at least has a minimal competency in 1040 preparation and remains current through required CPE. Prior to regulation, as I have pointed out time and again, any cafone could “hang out a shingle” as a “professional” tax preparer, and the taxpayer consumer has no way, other than the initials EA, to know if that person knows his/her arse from a hole in the ground about federal individual income taxes.
(2) The serious and truly professional previously “unenrolled” preparer, like me, will receive respect and recognition as a professional. The “urban tax myth” that a CPA is automatically a 1040 expert will finally be done away with. With the promised public education campaign on the regulation regime by the IRS the ability to use the initials "RTRP" in advertising will benefit the previously unenrolled tax pro.
(3) The IRS, and tax administration, benefits by way of a having a central registry of all tax preparers.
It looks to me like everyone benefits at a reasonable financial cost.
One of the comments made by a member of the IRS civilian oversight board, which helped to start the initial review by the IRS, does make some sense. He observed that his barber is required to have a license, but a person who prepares federal income tax returns is not.
My question to Joe is this - Since regulation does not work would you prefer that CPAs, attorneys, stock brokers, architects, engineers, doctors, etc not be regulated?
TTFN
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