Tuesday, March 30, 2010

Preparer regulations and home-cooked tax returns

Iowa CPA Joe Kristan worries that increased preparer regulations proposed by the IRS will cause higher prices and says:

One consequence of higher prices will be that fewer people will use preparers. It's still legal to do your own return. It's hard to see how that will improve the finished product.

We regulate restaurants for health code reasons, and perhaps that regulation causes restaurants to have higher prices.

It's still legal to do your own home-cooking.

That doesn't change the fact that it's still a good idea to regulate restaurants for health and safety codes.

I'm not a fan of all government regulations (for example, the idea that you need to have a license to braid hair seems a bit ridiculous!), but there are clearly cases where it's warranted.

Tax preparers have access to a vast amount of sensitive and confidential taxpayer data. Tax preparers have the power to move vast amounts of money from the US Treasury into people's bank accounts on a systematic and large scale. Tax preparers also have the power to create vast amounts of havoc in their clients' lives.

That calls for regulation, in my book.

The public has a right to know that someone is checking the scales and fuel pumps at grocery stores and gas stations; the public has a right to know that someone is checking that restaurant kitchens are not overrun with vermin; the public has a right to know that someone is checking to make sure that tax preparers are not systematically defrauding the US Treasury. The public also has a right to know that someone is checking to make sure that tax preparers are not selling a product that can endanger their financial health.

Consider the taxpayer in the video below. It certainly sounds to me as though she would have been better off doing her own return than turning it over to the paid preparer that she said she patronized.

What I don't understand, however, is why this particular firm is apparently still in business two years after this episode aired. They are even offering a franchise service to other wanna-be tax preparers who want training and a turn-key opportunity to follow in their footsteps.

And they have a Facebook page. Two of their photos show a happy taxpayer holding a refund check and an unhappy taxpayer holding his head in distress. The caption on the first photo reads "HE E-FILE [sic] HIS TAX RETURN PROFESSIONALLY..." and the caption on the second photo reads "HE TRIED TO DO HIS TAX RETURN BY HIMSELF AND MADE MISTAKES!"

It's true. Taxpayers do make mistakes when they do their own returns. But so do paid preparers. The average taxpayer probably makes more mistakes than the average paid preparer, just as the average home cook probably makes more sanitation mistakes than the average restaurant chef.

But the worst paid preparers who systematically prepare quantities of inaccurate returns should be weeded out of the system, just the way snake-oil salesmen calling themselves physicians, unsanitary restaurant operators, and vendors using dishonest weights and measures have been weeded out.

As for more taxpayers doing their own returns, that's already happening, even without the regulations. The statistics show that more people are going the do-it-yourself route, perhaps because of the economy.

Personally, I think it's a good thing for more people to take ownership of their financial information. Preparing their own tax returns could be an opportunity for people to take stock of their financial position in an intelligent and thoughtful manner.

Congress could go a long way in that direction by designing a smarter and simpler tax code that would not push so many ordinary taxpayers with relatively simple financial lives into wasting so much time, effort, and/or money on preparing their tax returns.

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