Congress presses to license tax preparers

Claiming that the US loses almost $300 billion a year in tax-preparation fraud, Congress and the White House may impose a licensing requirement on paid tax preparers in order to ensure better compliance with the law.  Larger tax-preparation firms have already jumped on the bandwagon, but everyone seems to miss more direct and far better ways to help Americans meet their tax responsibilities:

The Internal Revenue Service is considering for the first time requiring income tax preparers to be licensed by the federal government as a way to root out fraud and raise compliance with increasingly complex tax law.

IRS Commissioner Douglas Shulman revealed the seismic shift in congressional testimony Thursday. He said erroneous tax returns were such a large problem that the United States could shrink the so-called tax gap – the difference between what the government receives and what it should collect – by making sure the nation’s tax preparers do their job correctly. …

The recommendations “could focus on a new model for the regulation of tax return preparers; service and outreach for return preparers; education and training of return preparers; and enforcement related to return preparer misconduct,” the IRS said.

The changes could help the government recover a portion of the estimated $290 billion in uncollected taxes each year, Mr. Shulman said.

Shulman said he would consult with Tim Geithner on the options.  Of course, Geithner could tell him all about collecting owed taxes, having avoided paying tens of thousands of dollars in taxes until he got appointed by Barack Obama to be Treasury Secretary.  Perhaps, rather than licensing tax preparers, Barack Obama just needs to appoint every American as a czar of something or other.

H&R Block has already issued a supportive statement for licensing, as has the National Association of Tax Preparers, but that’s not a big surprise.  In any market, larger companies tend to favor licensing requirements, either private-sector certifications or government-imposed licenses.  It helps keep competition out of the market as well as keeping bad actors from giving the industry a bad name.  I saw this first hand in the alarm industry, which had extensive relationships with government agencies by its very nature.  Licensing was said to keep out the “trunk slammers”, which it did, but it also made it harder for start-ups to compete for market share without significant venture capital at their back.

In any event, everyone seems to miss the underlying cause of the problem.  The issue isn’t that Americans are inherently dishonest and uncompliant; it’s that the tax code is far too Byzantine even for lawyers and accountants to keep up with it.  The best way to ensure compliance is to make the tax system easy enough for any American citizen to pay taxes by themselves.  We have two major proposals on the table for that in political circles — Fair Tax and Flat Tax.  While both have issues, they represent an order-of-magnitude improvement over the progressive patronage system foisted on the American public by politicians who use the tax code to buy support and curry favor.

If we just simplified the tax code through either of these methods, we wouldn’t need to create yet another bureaucracy to license tax preparers, because no one would need them … which is the other reason the larger preparers would prefer to assume the costs of licensing.