IRS to Mom and Pop: Drop Dead

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Katherine Mangu-Ward

Doing your taxes sucks. Paying someone else to do your taxes sucks, too. But you know what sucks most of all? Having the person who does your taxes go out of business (or dramatically raise prices) thanks to an IRS power grab.

Last year, the Internal Revenue Service (IRS) got into the business of licensing tax preparers. The IRS wasn't granted the authority to do this by Congress, they just decided to go for it. At a time when unemployment is still awfully high, 350,000 people--many of whom are self-employed or own small businesses--will be hit by rules that axe their jobs or make it more difficult and expensive to keep their calculators clacking.

Lucky, the be-suited superlawyers* at the Institute for Justice (IJ) are on the case. Today, the economic litigation outfit filed suit in the U.S. District Court for the District of Columbia along with three independent tax preparers. (Watch a video about the case with rushing clouds and ominous music here.)

Readers get no points for guessing who backed the regulation. H&R block, and other big tax prep firms were in favor of the rule. Attorneys and certified public accountants are exempt from the requirements. As with many kinds of regulation, relatively low compliance costs for the big boys can be ruinously high for the little guys.

Here's what IJ says about compliance costs in a backgrounder on the case:

Registered tax return preparers need to renew their registration annually by completing 15 hours of annual continuing education credits and paying renewal fees. They also have to submit to any written or oral examination demanded by the IRS, as well as a "tax compliance check and suitability check," at the IRS's discretion. 

The costs of compliance can be substantial. If a "registered tax return preparer" obtained all 15 of their required continuing education credits from the IRS Nationwide Tax Forums Online, which charges $45.00 or $67.50 per one-hour seminar, the annual cost of complying with the continuing education requirement alone would range from $675 to $1,012.50. 

IJ's formula is simple for these kinds of cases: Put a human face on a wonky, abstract problem. They've done the same thing to fight occupational licensing requirements in all kinds of professions, from florists to hair dressers to interior designers. In fact, they do it so well and so often, journalists who cover this stuff get jaded on their perfect poster boys. But that's wrong. The whole point is that actual humans are getting totally screwed by regulation every day. So meet Elmer Kilian, who literally hangs out a shingle in tax season to help people put together their returns.

elmer-kilian-md_4263.jpg

Look at this dude! He does his taxes at a table covered in a lace doily for crying out loud. In a sweater. Sure, he uses a typewriter. Sure, he probably makes mistakes. 

But--and this is the important thing--forcing this guy to spend a thousand bucks on continuing education and more on fees isn't likely to mean more accurate returns overall. For one thing, a bunch of his clients will probably go back to doing their taxes themselves rather than pay increased rates. For another, there's a long, sad, history, of bad advice being given out by the IRS itself, something its just as likely to do in those $50/hour seminars as it does on its free advice line. And for an unfair anecdotal third thing, H&R Block once filed all of my freelance journalism income as farm income.

Should guys like Kilian take on complex tax returns affected by recent laws? Probably not. But he probably doesn't already. His neighbors tote over their W2 and a box of receipts sometime in March and he does the rest on their simple returns which they have totally valid reasons for preferring not to do themselves. And if he's systematically messing up returns, his clients are going to hear about it from the IRS, and probably not go back the next year. If he's messing up returns in a spectacular, fraudulent kind of way, there are legal remedies, which, while expensive, are unlikely to come anywhere close to eating up the money and resources consumed by the licensing regime. 

* Disclosure: I am friends with this particular IJ suit hanger, plus a few other dudes over there. You should be too.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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