The IRS To Regulate Tax Return Preparers

In responding to a lengthy review (.pdf), the Internal Revenue Service has decided that it needs stricter oversight of firms that prepare tax returns. It wants these parties to register, prove competency, perform continuing education and follow ethics guidelines. While these new rules seem sensible at first glance, I think they miss the point.

Here's a key statistic from the report:

For 2007 and 2008, over 80 percent of all federal individual income tax returns were prepared by paid tax return preparers or by taxpayers using consumer tax preparation software.

80% is a lot! So the logic goes, since so many people use prepares, the IRS better make sure that these parties are doing things right. Given the current convoluted and overly-complex tax system, this probably makes sense. The IRS is one of those government agencies with too small a staff to possibly ensure that everyone is paying their taxes properly.

Even though the press release talks a lot about protecting consumers, I can't help but believe that this is really being done mostly to ensure that Uncle Sam gets his taxes. That's one way to increase tax revenue.

As an honest taxpayer, I'm okay with that. Whenever I hear someone talk about their "tax guy" who saved them thousands of dollars this year, I always squirm. While there are plenty of legitimate reasons out there to claim deductions, I have little doubt that there are quite a few shady tax preparers who stretch the truth a little too far and ignore the intended purpose for many tax deductions.

Despite the fact that this regulation might seem sensible, I would have responded differently to the statistic I quoted above. If over 80% of people hire others to help prepare their taxes, my immediate reaction isn't to demand more regulation of those preparers -- it's to demand a simpler tax code. If we had a clearer, less-complex tax system, then we wouldn't have to waste money hiring people to help us with our taxes. Heck, I used to work in finance and have a degree in physics, but I still use tax software to avoid wasting countless hours to fully understand the tax code. As we all know, Treasury Secretary Timothy Geithner, who is now technically the head of the IRS, has also used such software in the past -- and made mistakes!

So yes, in the current framework, regulate tax preparers. But a much better solution would be to construct a new tax system where we don't need tax preparers. Maybe I'm crazy, but I think more simplicity is a far better alternative to more regulation.