Regulating Tax-Preparers

The ignorance here is amazing. There are hundreds of "tax preparers" who are either incompetent or unethical. The IRS has seen patterns of such "tax preparers" claiming nonexistent home offices to get nonexistent deductions, etc. Regulating such preparers, so that the IRS can more efficiently find the fraudulent ones and act to prevent their being able to continue to hoodwink innocent taxpayers into filing erroneous returns, is a good idea. It is an idea that has been supported for years by the taxpayer advocate, tax attorneys, CPAs and, yes, even those responsible tax preparers who know that their livelihood is being stolen by cheats.

You act like all government regulation implies a "nanny state" and is consequently bad. Nuts. Capitalism without adequate government regulation implies an oligarchic state. Regulation is what helps form a reasonably safe and trustworthy middle ground where people can get on with their lives and seek out paid expertise without being duped through no fault of their own.

If tax-preparation should be regulated, surely non-experts who do their own taxes are a menace. How long before these "well-credentialed accountants and tax-preparers" ask for tax preparation software to be made illegal? Or that every tax payer MUST hire a licensed tax-preparer to do their taxes? Maybe the government could even impose a tax on each tax payer to pay for this professional tax-preparation? How's that for a great idea: tax citizens for paying tax?!

"Each taxpayer has strong incentives to seek out and find tax-preparers who are skilled and careful."

Don - I have to disagree here. If you look at it strictly form a cost/benefit analysis, the incentives to cheat are actually pretty high. Something like 1% of tax returns are actually audited, and if you do the cheating intelligently, you can easily make it look like an honest mistake or just simple carelessness and accept the proposed increase in tax and associated penalties. The associated penalties are, at most, around 60% of the tax owed in the worst case scenario and usually around 25% in the typical scenario. The IRS _rarely_ goes after anyone for fraud (the only way prison time can result) because the standard of proof is pretty high.

"The IRS _rarely_ goes after anyone for fraud (the only way prison time can result) because the standard of proof is pretty high."

I'm not sure what you mean by "high" -- by relative standards, their burden of proof is about as low as it can go. Tax cases are (voluntarily) heard in tax courts. Normal rules of justice do not apply.

Regulation and licensing protects who?

The current entrenched.

Anything to reduce competition.

This seems kind of like knee-jerk outrage to me. Objections to regulating tax preparers would be more credible if they included some proposal to handle fraud. A quick google on “income tax preparer scams” shows that this does seem to be a problem.

This looks simlar to any other professional service: consumers hire an expert because they feel they don’t know enough to do something themselves. They are then, to some extent, at the mercy of the expert. This is a well-recognized problem, and we accept regulation of doctors, lawyers, plumbers, etc. all on the same grounds. Someone who needs to hire a professional is, almost by definition, not entirely able to evalute the professional’s integrity and expertise.

If protecting citizens from crime makes the government a "nanny state," then sign me up!

Underwriters Laboratories does a much better job of protecting consumers against fraud than any government regulation of electrical appliances.

If there is rampant fraud among tax-preparers, why hasn't a private-sector organization, modeled after UL, stepped up to certify the honest tax-preparers? Honest electrical appliance manufacturers pay for UL to certify their products. Why wouldn't honest tax-preparers pay similarly for "Honorable Accountants Inc." to certify the integrity of their service?

Actually, as I browse the study that motivated these new recommendations (note that they're not regulations yet), it seems like the IRS's main motivation is accuracy. There have been two studies on the preparer industry--one found 17 out of 19 filed incorrect returns, the other had 17 out of 28 incorrect.

http://www.irs.gov/pub/irs-pdf/p4832.pdf

Does the IRS have the right to do QC? Should they be required to accept returns from providers with a history of error? If the IRS's return processing functions were privatized, would anyone expect a corporation in the same position to continue to do business with vendors who perform low-quality work?

This question posed by MnM is as pertinent to your post here, as it was to the thread in general:

If the tax code is so complicated that professional tax preparers need regulation, isn't the code too complicated?

I remember similar articles about getting different answers from different IRS agents to the same tax question. If their own people don't understand the law, then who are they to say someone else does low-quality work?

There is a cheaper way to make sure income taxes are properly filed. It won't be popular with politicians, bureaucrats, or tax-preparers.

I guess I'm treating "is government regulation of a profession legitimate" and "is the tax code too complicated" as two separate issues.

If they are 2 separate questions, the answers are NO and YES, in that order.

In this case, I don't think that's possible. How can an organization (the IRS) whose own agents can't give consistent information have any clue whether H&R Block does?

Who rated H&R Block that day? The agent who incorrectly said that you could make a certain deduction, and ended up costing you thousands in penalties for following said incorrect advice? (Remember, you are liable for penalties, even if an IRS agent incorrectly tells you something is acceptable.)

The system is FUBAR, and IMO, I don't think it will help taxpayers by further empowering the agency in charge of making sure it stays FUBAR.

The older I get and the more I learn about my fellow humans the more terrified I am of them.

"If protecting citizens from crime makes the government a "nanny state," then sign me up!"

Sir, do you even have a clue as to how totally silly-ass this statement is?

Ask Methinks about the regulations protecting citizens from financial crimes, ask her about how many there are and in how minute detail.....then when you get your answer lean back in your seat and think about Bernie Madoff.

If government, any department, agency, branch, or local office could or would protect citizens from crime then WTF is crime still being committed all around you on a minute by minute basis?

Your general logic "because there is some crime, efforts to reduce crime are pointless" is a falacy. The same argument you make could be used for fires and fire departments, death and doctors, etc. etc.

Are you seriously suggesting that the response to a Bernie Madoff should be less regulation of the financial industry?

Ahhh yes, you must have learned your writing craft at the same institution that Disingenous Kuehn did. When called out the first thing you do is want to change the debate.

"If protecting citizens from crime makes the government a "nanny state," then sign me up!"

You see there is a vast difference between "protecting" citizens from crime, and trying to "reduce" crime. Tsk Tsk, sir, see my response to you above, it addressed the "protect" thesis you laid out.

So, sticking to the debate, I have to confess that one of the reasons I have become terrified of my fellow human is the lack of rational thought displayed, the lazy sloppy thinking on display, even here where I am the least formally educated of all.

No, government does not protect me or you from crime. If it could, if it did, then obviously there would be no crime, thus no Bernie Madoffs or Lucky Lucianos et. al. No Sol Alinskys, no congress (ha ha ha gotcha there).

No, the firemen and the fire departments do not protect me from fire. They can help reduce the numbers of fires through education; but there is no way they can protect me, that is my job because I am right here in the home. All the fire department can do is try and get here and help me contain the fire and hopefully put it out before it consumes every thing. All a police force can do is pretty much the same, in the vast majority of cases get to the crime scene after the fact, take information, complaints, and hope to catch the criminal.

Does that sound like protection to you? It doesn't to me.

Now let's take a look at the side debate developed twixt you and Brotio.

"Financial markets aren't complex becuse(sic) of regulation, there(sic) simply inherently complicated things."

Really?

Let's put that under the microscope. There are two, and should be only two, participants in a market (financial or otherwise). That would be the seller and the buyer.

The seller offers a product, the buyer buys the product. Is the fact that the product is a "piece" of stock or a bond instead of a pound of butter in and of itself "inherently complicating"? Can you tell me how transactions get complicated beyond that without factoring in regulation?

Can you tell us how any market anywhere gets complicated without acknowledging government(s) as the complicating factor?

If I can walk over to my neighbor's discrete little farmer's market and buy a dozen eggs without having to know the Uniform Commercial Code or the SEC regulations, why shouldn't I be able to do the same by going to the NYSE and buying one "piece" of stock in Coca Cola with the same lack of "inherent complications"?

Oh yeah, I am a simple man and I sure as hell like it that way.

Frankly I think this: "Financial markets aren't complex becuse(sic) of regulation, there(sic) simply inherently complicated things."; reveals you as another of the "inherent slaves" that can't take personal responsibility and initiative without having that nanny state's guiding hand in all your activities.

You, and those like you, scare me.

Are you seriously suggesting that the response to a Bernie Madoff should be less regulation of the financial industry?

Yes.

Schemes of Madoffian proportion are much more difficult to execute if average citizens can comprehend the rules of the game.

Financial markets aren't complex becuse of regulation, there simply inherently complicated things.

Madoff's scheme wasn't particularly complicated, and any average citizen could have comprehended it. He got away with it because of incompetent regulators.

To the "UL model" idea, there are plenty of industry organizations that certify financial planners, investment advisors, brokers, etc. Didn't seem to do much help here. Not to say that one failure invalidates the model, but neither govt regulation nor industry self-regulation worked in the Madoff case.

"... neither govt regulation nor industry self-regulation worked in the Madoff case."

Actually, regulation facilitated the Madoff fraud. People thought they were safe, and didn't do their own due diligence.

Many, many investors suspected that both Madoff and Stanford were frauds -- and avoided any fund that dealt with them. There are many other funds continuing to operate which appear to be frauds. The only people being fooled are the regulators and people who have faith in them.

I've spent my entire career in financial markets.

They are not inherently complicated. Regulation adds mind-boggling complexity to the markets.

And Madoff got away with his scheme precisely because of regulation.

Regulation allowed everyone to be lulled into a a false sense of comfort. After all, he's regulated! We have nothing to worry about.

Meanwhile, people in the industry as powerful and politically connected as Madoff can ALWAYS get the SEC to look the other way by calling on their political allies to pressure the SEC into backing off.

That's in addition to the fact that SEC can't catch every criminal in the act. The SEC always has and always will attract only the least competent in the industry because the bright minds don't want to spend their time grinding through a massive bureaucracy. They prefer to work in the industry. Because working for the government is so much fun, the employee turnover rate is enormous. That means that every new examiner must familiarize himself with the case all over again. That causes obvious problems.

You are right and wrong about the SROs. The SEC doesn't examine regulated firms. The SROs enforce the rules. Without mentioning names, one very large SRO is superb in examining and regulating member firms and another one...well, just sucks. But it's difficult for any SRO to enforce regulations because most of the regulations are so vague that they raise a huge number of questions. Every "clarification" from the SEC answers nothing but raises 800 more questions. I've never once seen a regulation do what is intended (assuming what is intended is favourable in the first place).

Paradoxically, the more regulations, the more the parties the regulations are supposed to protect get screwed. As the cost of regulation rises, so do the barriers to entry. Competitors disappear and insider (regulated firms) gain more power with regulators. The stronger and more numerous the regulations and the more draconian the enforcement, the fewer firms want to deal with it and the weaker the regulating body becomes. The regulator/regulatee relationship is co-dependent and that's never a good thing for the market or the regular Joes regulation is supposed to protect.

The reality you're going to have to come to grips with is that the SEC works much more like a police force. It really can't prevent the murders. It just investigates them after they happen.

One more thing to keep in mind about Madoff. Despite a few high profile cases like Madoff, the rate of investor fraud in the industry is some tiny fraction of 1% of all the investment partnerships that exist. The reason it's so small is not because of regulation. It's because most people would like their company to be a going concern and most people are not criminals. In this business, your reputation is everything. Imposing enormous additional regulatory costs on everyone to engage in the fantasy that we can reduce that tiny fraction to 0% is fantasy and, needless to say, not worth it.

I don't dispute that financial markets are complex, but the rules of the game, by several magnitudes, make them even more complex, and guys like Madoff operate by knowing the regulations better than the regulator does.

I'll let people in the business carry the debate farther than I can here (if you and they choose to), because they work in it, and if I'm incorrect in my assertions at this point, one of them will correct me. But I'm at a point where I can't discuss specific regulations because I don't work in that field, and all I've seen is the the several-hundred-pages snippets of the regulations that have been posted to this blog by people who have to know them.

Fair enough, but let me leave you with the link below, a story about how "astonished" Madoff was at the failure of the SEC to catch him years earlier.

http://www.nydailynews.com/news/ny_crime/2009/1...

There's a big difference between *certification* and *licensing.* There are already several classes of people who are certified by well-regarded bodies to prepare tax returns, such as CPAs and tax lawyers.

All an IRS-based licensing system will do is increase compliance costs (which I guarantee you will be passed on to the consumer) and restrict the availability of low-cost, alternative help in preparing tax returns.

There is already a very good system to handle fraud.

It's called the U.S. legal system

It's actually pretty bad at handling fraud, in my opinion -- but I'm thinking civil. I suppose if the government were the victim, that would be criminal -- and it's possible it could be quite efficient.

I don't know how bad the court system is at handling fraud. But, what would make a regulator better at preventing it?

"I don't know how bad the court system is at handling fraud. But, what would make a regulator better at preventing it?"

Because then the fraudsters would be regulated and voluntarily licensed. It means the government can take action without having to go through the messy and time consuming court system, which is so narrow-mindedly focused on due process.
;)

Well, if nothing else, requiring registration at least gives you a method of preventing known offenders from continuing to operate.

Known offenders wouldn't continue to operate without registration. They would be sued and everyone would know they are known offenders.

Doctors are required to register, yet fraudulent doctors continue to operate simply by moving to another state.

The benefit (if there is one) is minimal but the cost of regulation is large. It's not as if anybody who is worried about all this stuff doesn't have an alternative now. They can choose to pay more to have their taxes done by a CPA. Clearly, the people who don't turn to CPAs do their taxes have decided that whatever added protection engaging a regulated preparer offers them is not worth the price. Who are we to override their personal decision?

Riiiight.

No surprise that H&R Block has come out in favor of regulation. Once the "do-gooders" pass their legislation and go on to the next crusade, they'll have to leave the details to . . . well, the tax preparation industry. They are the experts, after all. No doubt more legislation will be needed in 10 years to "fix" the laxed regulation, further reducing competition.

This is stupid. I know a family that prepares a dozen or so income tax returns for extra money every year. They aren't licensed in anyway. To my knowledge, no person that used their services ever had any problem. This family isn't a large firm, they are just a simple middle class family that decided that a few hundred extra dollars each year was worth the time and effort. The funny thing is, the people that use the services of this family didn't and won't go to the "well-credentialed" accountants-- For their purposes, the "well-credentialed" accountants were/are too expensive in the first place.

By contrast, plenty of people who used licensed and regulated professionals did have problems. The attempts by government to dictate the minutia of our lives are becoming more and more thinly veiled, aren't they?

I'll ask the obvious question.

If the tax code is so complicated that professional tax preparers need regulation, isn't the code too complicated?

Oops! I should have read the whole thread before replying to DK, above.

:-D

How is this anything other than the industry trying to keep prices high and competition low with the government acting as unwitting (?) accomplices?

Could you provide some background on exactly what regulations are being discussed? It seems hard to say anything without that information.

It seems hard to say anything without that information.

It doesn't seem hard to me. If there is a perceived need to regulate tax-preparers, then we need to be looking at why there is even a need for tax-preparers.

Easy Bro, easy. Clean uncomplicated logic scares some people.

Silly me - I guess I was just hoping that a well known expert on the economics of regulation might provide a little more detail on... regulation. Don't get me wrong - going back and forth over the fundamental political philosophy is great, but sometimes that needs to have a little context.

Here's a start.

http://findarticles.com/p/news-articles/charles...

Thanks

Of course well-credentialed, already regulated tax preparers are delighted by this news. It's great way to drive their smaller competitors out of business. Producers hate competition.

I'm finding it more difficult to view the state as a "nanny" state, though. Increasingly, I find it a lumbering, slimy monster with a barely concealed thirst for the populations' blood.

Like what climbs out of cess pools, maybe? Huh Huh, just maybe?

You are familiar with my suggestion on how to deal with D.C., well, I make it again.

Nuke D.C., preferably when congress in session, glaze it to radioactive glass where no human can go for thousands of years, start over again with a government confined to quonset huts in rural Iowa, make them communicate via tin cans connected by string between huts, and via carrier pigeon for outside communications, and pay them them full value minimum wage.

From the linked article:

"but the IRS has pledged"

Oh Ha Ha Ha Ha Ha ha ha, gasp, Ha ha Ha Ha Ha ha, gasp, Ha ha ha ha, oh crap....wheeze, Ha Ha Ha ha ha ha!!!!!!!!!!!!!

and that's the truth.

I had the same reaction when Bush stood at the mic and asked for money for Haiti, promising that if we gave the three presidents the money "we'll make sure it gets spent wisely". Bush. said. that. with as straight a face as Bush is capable of.

I'm glad I missed that one then, my sides hurt too much from laughing at the quote above.

Jaw dropping! I was too stunned to laugh.