Bill Regulating Tax Preparers Faces Criticism for Impacts to Small Businesses, Consumers

New legislation aimed at regulating tax preparers has opponents of licensing and regulations warning that the new requirements would hinder competition and lead to increased costs for consumers.

Earlier this month, Reps. Diane Black, R-Tenn., and Pat Meehan, R-Penn., introduced a bill that would give the Internal Revenue Service the authority to regulate tax preparers. The legislation, called the Tax Return Preparer Competency Act, mandates tax preparers undergo examinations, participate in annual continuing education courses, and submit to a background check.

Black and Meehan argue that the bill would protect taxpayers from bad actors working as tax preparers with the intention of stealing people’s identities and carrying out tax return fraud.

“While Congress continues working towards a fairer, flatter, simpler tax code that will enable more Americans to complete their taxes on their own, we must also act now to rid out fraud and protect taxpayers from fly-by-night tax preparers who lack a basic background check and the requisite training to handle Americans’ most sensitive information,” Black said in a statement.

Large tax preparation firms like H&R Block have come out in support of similar measures regulating tax preparers. But opponents of the legislation argue the bill could negatively affect tens of thousands of tax preparers and cause many of them to close their doors because of the burdens such licensing schemes create.

“Tax-preparer licensing is protectionist and anti-competitive. It will squeeze out tens of thousands of independent preparers and allow the large tax prep firms like H&R Block to consolidate the market,” Dan Alban, a lawyer at the Arlington, Va.-based Institute for Justice told The Daily Signal. He continued:

It will raise prices for consumers and give them fewer choices. And it won’t actually fix anything. Licensing does nothing to prevent fraud, and even licensed California preparers & IRS-trained preparers have high error rates on returns they prepare according to IRS studies and [Treasury Inspector General] reports.

Still, Black contends that the legislation empowers the American people by providing them with peace of mind in knowing they can trust tax preparers with sensitive information.

“This will save costs and prevent much of the fraud and abuse that conservatives have worked to root out of our tax system for so long,” she said in a statement to The Daily Signal. “Importantly, the legislation gives Congress the ability to expressly define the scope of the IRS’s authority in this arena.”

But opponents of licensing and regulations, including Alban and Salim Furth, a research fellow at The Heritage Foundation, argue that those with bad intentions will find a way to game the system, regardless of the measures put in place by the bill.

“According to Reps. Black’s and Meehan’s statements, the issue isn’t that tax preparers don’t know what they are doing; it’s that a few of them are crooks. The proper response to crooks is to bring criminal charges against them,” Furth told The Daily Signal. He continued:

Occupational licensure does nothing to weed out criminality, and it prevents honest people from easily entering the field. The IRS already has authority to bar felons and people with discrepancies on their own taxes from preparing taxes; the proposed licensure requirements would lump honest, small-scale tax preparers … together with convicted felons.

Black disagrees.

“Concerns that bad actors may still slip through the cracks should not prevent Congress from doing its due diligence and taking this modest step to hold tax preparers accountable. I am not content to accept that scam artist tax preparers and fraudulent returns will be a perennial part of Americans’ tax season,” she said.

‘Job-Killing Scourge’

Four years prior to Black’s bill, the IRS attempted to regulate independent tax preparers with the implementation of a licensing scheme requiring tax preparers to get permission from the IRS before working.

The regulations were challenged in court by Alban and three independent tax preparers in the case Loving v. IRS. In the lawsuit, Alban argued the IRS didn’t have the statutory authority to implement the licensing scheme, because Congress never gave the agency the power to do so.

Alban also warned that the new rules would negatively affect more than 350,000 tax preparers and impose a substantial burden on small tax preparation businesses, many of which processed just a handful of returns each tax season.

The District of Columbia Circuit Court of Appeals agreed, ruling in 2014 that the IRS lacked the legal authority to impose the licensing scheme.

Despite the ruling from the federal court, Black’s and Meehan’s bill would effectively grant the IRS the authority it lacked to implement its 2011 licensing scheme.

“Occupational licensure is a job-killing scourge that harms consumers as well as workers. Tax preparation is a big business, and if the large chains like H&R Block can kill off their competition, they can raise their prices and make taxes an even greater burden on taxpayers,” Furth said. He continued:

It’s hard to imagine a worse way for Congress to respond to a problem of its own creation: taxes are too complicated and too intrusive.

Opposition to Black’s and Meehan’s legislation isn’t limited to those against overregulation.

In a letter to House Ways and Means Committee Chairman Kevin Brady, R-Texas, and Ranking Member Sandy Levin, D-Mich., the American Institute for CPAs urged the leaders to oppose the legislation.

“We believe the Tax Return Preparer Competency Act allows the IRS to overregulate professional, credentialed tax return preparers and their staff without providing adequate value to taxpayers or additional protection to the public,” the group said. “Congress should not enact yet another set of rules for professional, credentialed tax return preparers.”