Today’s guest post is by Dan Alban from the Institute for Justice, who was the attorney who ably litigated the case of Loving v. IRS. As we mentioned yesterday, the government has decided that it will not seek Supreme Court review of Loving. That development ushers in a new phase in the debate about regulating return preparers. With the administration proposing that Congress give the IRS the power that the DC Circuit said it did not have and last month’s Congressional hearings on the merits of additional regulation, the focus shifts from statutory interpretation and Chevron deference to what makes for good tax policy. In this guest post, Dan takes on that policy issue, showing that he is also a skilled policy advocate. Les
Today, the victory for independent tax preparers against the IRS in Loving v. IRS became final, as yesterday was the deadline for the government to file a cert. petition in the U.S. Supreme Court, and it did not do so. Now that the case has concluded and this issue is once again a policy matter, I’d like to thank Les for generously providing this opportunity for me to (belatedly) respond to his Tax Day post on IRS Regulation of Return Preparers. As with his post, I won’t endeavor to comprehensively address every argument on this issue, but will instead focus on a few key points.read more...
1. Loving is a victory for both independent tax preparers and their customers.
As we explain in our press release, we view this case as a victory not just for independent tax preparers, but also for consumers, who will have more choices and are likely to pay lower prices for tax-preparation services due to continued robust competition in the field. Those aren’t just empty words – it is a genuine victory that provides relief for the satisfied taxpayer-customers of my clients Elmer Kilian and John Gambino—both of whom would have had to close the doors of their tax preparation business—and many hundreds of thousands of taxpayers whose longtime, trusted tax preparers would have been forced out of the market by the out-of-pocket cost and opportunity cost of these regulations. As a result of Loving, satisfied customers won’t be forced to stop using their preferred tax preparer simply because he or she doesn’t have a permission slip from the IRS.
(See also, e.g., amici Dennis Tafelski, who worked for the IRS for 33 years as an Internal Revenue Agent, Examination Group Manager, and Appeals Officer, before retiring in 2006. Mr. Tafelski was approached by other members of his retirement community about preparing their taxes and only prepared a handful of returns per year, but stopped when the RTRP regulations were implemented. As the amicus brief explains: “Because of the cost and compliance burden imposed by the regulations, Mr. Tafelski concluded it is not worthwhile for him to continue preparing returns, because of the small number of returns he prepares and the modest fees he charges. If the district court’s decision were upheld, Mr. Tafelski would resume preparing returns.”)
Others, such as the low-income customers of my client Sabina Loving (who operates a tax preparation business in an impoverished neighborhood on Chicago’s South Side) and amici Ronda Gordon, who has an adult handicapped child and prepares returns for many similarly situated families with handicapped children, won’t have to pay higher prices than they can really afford. (Elmer Kilian also charges well-below market rates for tax-return preparation.)
2. The cost of preparer regulations is real, as are the resulting higher prices for tax preparation.
In his post, Les indicates skepticism about the cost of the regulations, describing the issue as a “red herring,” but the cost is very real and has real-world negative effects that cannot be so easily dismissed, as discussed anecdotally above and statistically below.
a. There has been a dramatic downturn in the number of tax preparers in the past few years – roughly 1/3 to 1/2 of tax preparers have left the industry.
In 2010, the IRS estimated there were up to 1.2 million tax preparers in the US. See also IRS Expects to Register 1.2 Million Tax Preparers, Accounting Today, Aug. 30, 2010 (“The Internal Revenue Service anticipates that the number of individuals who will request Preparer Tax Identification Numbers will swell to 1.2 million after its new rules for registration of paid tax preparers go into effect at the end of the year.”) Numerous other IRS documents mention these same figures.
The IRS says it has actually issued PTINS to just over 1 million individuals. (“Cumulative number of individuals issued PTINs since 9/28/2010: 1,035,592”). But today (as of May 1, 2014) there are only about 684,000 preparers with a PTIN. (“Number of Individuals with Current Preparer Tax Identification Numbers (PTINs) for 2014: 683,930”).
At the same time, the IRS has consistently downgraded its estimates of unenrolled preparers, likely indicating that many were being pushed out of the market by the increased number of regulations. The IRS estimated there were 600-700,000 unenrolled preparers in 2010, and again in 2011. David Williams, then-head of the IRS Return Preparer Office (and now an executive at Intuit, makers of TurboTax, which supported the regulations) estimated in Congressional testimony in late July 2011 there were 400-500,000 unenrolled preparers who had registered for a PTIN.
Indeed, the IRS’s own data confirms that the market shrank dramatically between 2010 and 2012—losing over 200,000 preparers—due to several sets of regulations being imposed on preparers during that timeframe (RTRP licensing, PTIN registration, and e-file mandate). Although the RTRP regs have now been struck down, many preparers such as amici Dennis Tafelski above, left the tax preparation industry in anticipating of RTRP licensing, and some may not return. The IRS downgraded its estimate even further in November 2011, to 350,000 unenrolled preparers. It is unclear how many unenrolled preparers currently hold PTINs because the IRS stopped reporting those figures after the initial Loving decision, and now the IRS only provides a total number of PTIN holders with no breakdown showing unenrolled preparers (the numbers in the columns clearly do not add up to the total figure at the top, but because there is overlap between some categories, it is difficult to know how many unenrolled preparers hold PTINs).
It may well be that some of the missing preparers have not fully left the industry, but have instead gone “underground” as so-called “ghost preparers” who (illegally) do not obtain a PTIN nor sign the tax returns they prepare. But that is itself a real cost, making enforcement against fraudulent preparers more difficult and exposing taxpayers to greater risks by participating in this black market. As I note below, the IRS could at least help taxpayer-consumers know whether or not their preparer has registered with the IRS by providing an online list of preparers who currently hold a PTIN, but has failed to do so since promising to do so in July 2011.
b. Major industry consolidation has resulted from latest round of preparer regulations.
The IRS data also indicates serious industry consolidation, as small preparers are being driven out of the market at a much higher rate than other preparers:
- Preparers who prepared between one and twenty returns decreased from 66% of all preparers in 2004, to 58% of all preparers in 2010, to just 46% of all preparers in 2012.
- Meanwhile, preparers who prepared over 100 returns increased from 17% of all preparers in 2004, to 22% of all preparers in 2010, to 30% of all preparers in 2012.
- There has been a sharp uptick in the average number of returns prepared per preparer, even though the total number of returns prepared has remained relatively constant.
This data indicates substantial industry consolidation as small preparers are squeezed out of the market by the cost of compliance with burdensome regulations. Licensing will only further exacerbate this problem. This is consistent with the projections by several financial analysts, who concluded that the largest firms, such as H&R Block, stand to benefit the most from licensing tax-return preparers, as their competitors are pushed out.
c. The preparer shortage has already lead to significantly higher prices for tax preparation.
Unsurprisingly, this shortage of tax preparers, coupled with industry consolidation, has led to significantly higher prices for tax preparation, which are outpacing CPI by 340%. (“The cost of [tax-prep] service is rising at a far faster pace than the costs of all goods and services. According to the consumer price index data released Tuesday, the price of tax preparation and other accounting fees increased 5.1% in the year ended in March compared to the 1.5% gain for the top-line CPI.”)
Real consumer-taxpayers are paying these increased costs and this cannot simply be pushed under the rug and ignored. Moreover, higher prices and fewer choices can have unintended consequences. First, it may push unqualified taxpayers to try to prepare their own returns, potentially increasing error rates, or to stop preparing returns altogether, reducing tax compliance. Second, it may push taxpayers who can’t afford to pay for legal tax preparation services to utilize black market “ghost preparers,” which not only exposes these taxpayers to greater risk, but is also likely to boost the number of these unregistered underground preparers, making enforcement even more difficult for the IRS.
3. The IRS cannot simply assume benefits and ignore costs.
Part of Les’s argument that the costs of preparer licensing are overblown is that it ignores the reduced costs to taxpayer-consumers resulting from fewer botched tax returns and audits. But this merely assumes a purported benefit without evidence that increased accuracy will result from the licensing program (and fails to attempt to quantify this purported benefit to see if it would likely produce benefits larger than the sizable costs of imposing licensing). Indeed, that is what the IRS has consistently done from the 2009 Return Preparer Review process to the present. But ignoring costs and assuming benefits is not how agencies should conduct cost-benefit analysis.
Contrary to Les, I do not think it is wise policy for Congress to simply trust “what the IRS in its judgment believes” would improve tax administration, and merely ask the IRS to report the costs and benefits after the regulations are imposed. Saying that “Congress should give the IRS the tools it needs to do its job” simply assumes the result of the cost-benefit analysis, which is inappropriate. There are plenty of perverse incentives for mission creep that lead agencies to overstate problems and seek additional authority even when it is unnecessary and due to the ratchet effect of entrenched interests, it is much harder to repeal laws and regulations than to impose them. Congress should not give credence to unsupported and self-serving agency claims about the need for greater legal authority over tax preparers, particularly when it has so many tools that it barely uses (as discussed below).
a. Lack of evidence that problems are unique to return preparers
First, the IRS has never demonstrated that tax-return error rates (or fraud) are a problem unique to unlicensed preparers. Starting with the 2009 Return Preparer Review, the IRS has instead relied on GAO and TIGTA mystery-shopper sample studies that have failed to include any control group, such as attorneys, CPAs, or enrolled agents. And the GAO studies, including the just-released April 2014 study, have only conducted these mystery shopper tests on major chain preparers, not independent tax preparers like my clients. In his recent testimony before the Senate Finance Committee, Dr. John Barrick, Associate Professor of Accountancy at BYU, indicated that he was unaware of specific evidence indicating that credentialed preparers have different error rates from unenrolled preparers, and offered to assist with designing more statistically reliable studies on the subject.
Les’s post states that, “IRS research…suggests there are higher error rates among unlicensed return preparers as compared to other preparers,” but the only support for that statement that I’m aware of—and I thank Les providing the reference—comes from National Taxpayer Advocate Nina Olson’s February 26, 2014 House Testimony, in which she references the IRS’s internal 2006-08 NRP Compliance Study, which is not publicly available, as indicating that “the difference [between credentialed and unenrolled preparers on returns claiming the Earned Income Tax Credit (EITC)] is statistically significant in some comparisons.” Ms. Olson only provides very limited information about this purported difference in error rates on EITC returns, and none of the data that provides a basis for comparison between the EITC overclaims by unaffiliated unenrolled preparers and other preparers or self-preparers. I would like to see the full set of figures, and not just Ms. Olson’s cherry-picked excerpts, to offer more meaningful comment, but a sometimes-statistically-significant-sometimes-not-difference on EITC returns among a subset of unenrolled preparers (in a category of returns where ~60% of returns are done by paid preparers, and 75% of those—or ~45% of all EITC returns—are done by unenrolled preparers) seems an awfully small hook for IRS to hang it’s regulatory hat on. This is certainly not the data that the IRS has been trumpeting as justifying RTRP licensing in the 2009 Return Preparer Review, the preambles to the RTRP proposed or actual regs, or anything else from IRS. Much better data is needed
b. Absence of evidence that licensing will solve the purported problems.
Second, the IRS has never demonstrated that the RTRP licensing program would actually improve preparer competence—or magically make preparers more honest. And there is good reason to think that it may not: TIGTA has found that IRS-trained-and-certified VITA volunteer preparers in mystery-shopper sample studies have had error rates of 61%, 51%, and 49% in the past three years, respectively. Similarly high error rates have been found over the years in TIGTA studies of IRS employees answering just a single tax question. (This is a longstanding problem at IRS.) Likewise, in California, one of just four states that licenses tax preparers, an IRS study found that California preparers had the third highest error rates in the country for two years in a row despite the state’s longstanding licensing program.
And, despite the claims of licensing proponents, Oregon’s tax-preparer licensing scheme is no panacea. The 2008 GAO study admits that Oregon’s above-average performance on estimates of tax-return error rates cannot be attributed to the tax-preparer licensing scheme (and found that California, which also licenses preparers, had a below-average performance on estimates of tax-return error rates). In fact, Oregon’s above-average performance is partly attributable to the above-average performance of self-prepared returns in Oregon, which speaks well of the ability of Oregonians to prepare their own tax returns, but cannot be attributed to Oregon’s licensing scheme. The GAO study also notes that seven other states—Colorado, Iowa, New Mexico, Ohio, Pennsylvania, West Virginia, and Wisconsin—also had more accurate returns than the national average, even though those states do not license preparers. And even under the GAO’s most optimistic estimates, returns prepared by Oregon-licensed preparers still have a 33% error rate. (I offer more thorough and detailed comments on Oregon’s tax-preparer licensing program—which has also created a chronic shortage of tax-return preparers in the state and driven up the cost of tax-preparation for consumers—in the supplemental testimony I submitted to the Senate Finance Committee.)
4. Voluntary certification is preferable to mandatory licensing.
As suggested above, voluntary certification is preferable to mandatory licensing because it carries many of the same benefits—for both consumers and preparers—without unnecessarily imposing costs on those who don’t value the certification or license. For customers looking for a new preparer—and for new preparers or those looking to expand their business—a certification might be a valuable way of indicating commitment or a certain level of training in the field.
But for many, certification/licensing is simply less important than other factors. For customers who are satisfied with their longtime preparer or who value other criteria more when selecting a new preparer—such as personal recommendations—licensing/certification may not be terribly valuable, certainly not worth paying for the additional costs. And for preparers who are not looking to expand their business, licensing/certification offers very little of value in exchange for the lost time and money (and the increased costs necessarily passed on to customers). Elmer Kilian’s longtime customers, for example, don’t particularly care what initials he can put after his name – they just know he’s done a good job preparing their taxes for the past decade (or three) and they’ve never been audited or otherwise had any trouble with the IRS.
To the extent that so-called consumer advocates think that some consumers are duped into thinking that tax preparers are more qualified than they are, the solution is education (perhaps via public relations/marketing), not imposing costly prophylactic mandates that can never truly protect the gullible or the ignorant from hucksters. This issue is much broader than the issue of tax-return preparation – consumers need to be empowered to take advantage of the many tools already available to them in our information society to evaluate the quality of goods and services.
Online review sites like Yelp—accessible through apps on most cell phones—may offer much more consumer protection than licensing ever could by magnifying and accelerating the natural self-regulatory process of markets. As my client John Gambino explained: “The market serves as my ultimate regulator. If a client isn’t satisfied, he or she simply leaves. Freedom and choice are what ensure quality.” This only becomes more true as the cost of acquiring such information drops thanks to online social networks and review sites, as well as membership-based sites like Angie’s List.
To that end, I find it remarkable that the IRS still has not provided a publicly available list of PTIN holders so that taxpayer-consumers at least know whether their preparer has a PTIN. This is something that has promised since July 2011, but still has not come to fruition. Online marketers have all of this information, which the IRS sells for $35 on its website, but it is not available to the average taxpayer-consumer who simply wants to know if their preparer has bothered to register with the IRS (and keep that registration current). It is unclear what is holding this up, as the IRS already has the data and only minimal technology would be necessary to maintain the list, which could be updated monthly or quarterly, depending on the frequency of internal IRS updates to its PTIN registry.
5. IRS already has the tools it needs to identify & investigate the few “bad apples.”
The IRS already has both the legal and technical tools it needs to identify and track the few bad apples without unnecessarily burdening the vast majority of law-abiding preparers with costly licensing regulations.
Tax preparers are already regulated by numerous federal statutory requirements imposing both civil and criminal penalties for everything from failing to keep a list of the returns they’ve prepared for the past three years to actual tax fraud. Tax preparers are also required to register with the IRS to obtain an individualized number known as a PTIN that they must include on every return they prepare so that the IRS can track and analyze their returns. The IRS also has the statutory authority to enjoin repeat offenders from further preparing tax returns. Enforcement of these existing laws is far preferable to licensing because it does not unnecessarily impose substantial costs on the vast majority of law-abiding tax preparers.
Despite having these legal tools, actually pursuing “abusive preparers” does not seem to be a high priority for the IRS, which only initiated 309 investigations of abusive preparers in 2013 (resulting in 207 convictions), down from nearly-as-low figures reported in 2012 and 2011. This indicates that either the problem of “abusive preparers” is much smaller than portrayed by the IRS, or that the agency is doing a very poor job of allocating resources to address what it claims to be a critical problem in tax administration that justifies imposing a nationwide licensing scheme.
In terms of technical tools, Les and I seem to be in agreement that the IRS has under-utilized its ability to fully leverage the PTIN number by using computer algorithms to identify unusual or suspicious patterns in returns prepared by specific preparers. This is important because enforcement really is the only way to address actual issues of fraud (both by penalizing the bad actors and by providing a deterrent to others). Enforcement can be expensive, however, so the IRS must find ways to leverage the tools and data it has to narrow in on the preparers most likely to be engaged in bad behavior.