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Beating the IRS One Regulation at a Time

Occupational licensing is a tricky topic for those of us who have “professional” occupations. The notion that any old schmuck can simply hang out a shingle – in the case of a law practice – or open a brokerage with nothing more than a computer, smartphone, and printer – in the case of real estate – strikes fear in the hearts of established practitioners and of busybodies everywhere.

What about the ignorant public? What about the sacred profession (whichever profession) we’re a part of? What about my own livelihood?

If there are oxes to be gored, we’d prefer they be other peoples’ oxes. Not our own.

It didn’t used to be so. Occupational licensing and testing and fee-paying and continuing professional education programs didn’t really get going until the 1920s, a consequence of the progressive movement. In the 1950s, only about 1 in 20 American workers needed the government’s permission before pursuing their chosen occupation. Today, it’s almost one in three. Greg’s called this Rotarian socialism.

Enter the Internal Revenue Service. For nearly 100 years, tax preparers were unlicensed. Consumers – i.e., filers – could make their own decisions about whom they wished to hire in order to prepare their taxes. Civil and criminal statutes can punish preparers who prepare inaccurate or fraudulent returns.

But in 2011, the IRS decided these laws were not enough, and imposed sweeping changes that would require tax preparers to apply for licenses from the IRS in order to prepare federal tax returns on behalf of clients. The new regulations require all paid tax return preparers—except for attorneys and CPAS-to become a “registered tax return preparer” by taking and passing a competency examination, and paying application fees. They would also require preparers to complete 15 hours of continuing education.

The regulations did not spring ex nihilo into existence. They were largely drafted by the former CEO of H&R Block. Most occupational licensing helps big firms or brokerages which can bear the cost of training employees and paying fees, and who benefit disproportionately when small and independent providers are kept out of the business.

My good friend Dan Alban, an attorney for the Institute for Justice, a libertarian non-profit law firm that sues the government on issues relating to licensing, eminent domain, economic freedom, school choice, and the like, won a tremendous victory on January 18 when a federal district court judge struck down the the IRS’ licensing scheme, saying that the Congress had never given the IRS the power to regulate tax preparers and the IRS could not unilaterally grab this power on its own.

The IRS has since appealed the ruling, and asked for the judge to lift the injunction that has put a stop to these regulations.

I would not expect this battle to be over so quickly. The big tax preparers certainly have the ability to lobby Congress to grant the IRS this regulatory authority, even if the IRS loses on this particular issue.

That would be a shame. As I noted on my blog in a different context, there’s no evidence that compulsory educational requirements imposed by certain states on lawyers have any positive benefit for the public.

Whenever I broach the subject of the bar, the bar exam, and licensing regulations, lawyers I talk to acknowledge how ineffective these rules and requirements are. But in the next breath, they worry about the flood of people who would join the profession if we didn’t have such barriers to entry.

The idea that we should be free to pursue a profession or a job used to be a quintessentially American idea. But no longer…

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  • 19 comments

    19 Comments so far

    1. Larry T. January 28th, 2013 2:44 pm

      Damon, good information in here, especially talking about the IRS and how they factor in with the taxes and such, thanks for such good information here!

    2. Greg Swann January 28th, 2013 2:52 pm

      A shaft of sunlight, anyway…

    3. Sean Purcell January 29th, 2013 10:31 am

      Great piece Damon. I’m assuming that the IRS, in implementing its grand gesture of protection for existing tax preparers as well as us little people, did at the same time abolish all those nasty civil and criminal punishments that would obviously no longer be needed (what with all tax preparers now possessing the requisite education as deemed by the IRS itself)…

    4. Ray Smiley January 30th, 2013 2:37 pm

      Well said Damon. I learned something new today from this article. Interesting how America is the land of opportunity but at the same time they make it very hard for you to make the best of those opportunities by jumping through hoops. I agree though that you need barriers of entry to prevent an over saturated market.

    5. Sean Purcell January 30th, 2013 2:52 pm

      “… need barriers of entry to prevent an over saturated market.”

      Isn’t that the free market’s job?

    6. jimi February 1st, 2013 7:36 am

      Years ago, when I first got my RE license, there was a case involving the Realtor Association trying to kick a guy out because he could not pass the licensing exam. He was a broker prior to the licensing requirement and was unable to “test-in” as the licensing requirements were phased in. He was a top ten producer in the state and sold more farmland than anyone else by far. He was known as farm sales expert and trusted by the farmers … however, he was mostly illiterate. Eventually, they just grandfathered him in … but he would be unable to “get in” today despite his acumen and fidelity. Whatever happened to Caveat Emptor?

    7. Raquel February 2nd, 2013 6:56 am

      I was also very happy to see the IRS told that it cannot impose such requirements. When the IRS says you need an education and license to prepare tax returns for others, that’s really a study on how unnecessarily complicated the tax code is for a regular citizen. Maybe the federal government should consider revising the tax code so that people wouldn’t need to rely on tax preparers so much. Great blog by the way, keep it up!

    8. Don Reedy February 7th, 2013 2:55 pm

      “Beating the IRS one regulation at a time.”

      Damon, as Greg says, a “shaft of sunlight”, and I think he chose shaft instead of ray for a reason.

      With each regulation, the small guy gets the shaft, and we are no better off…no better off.

      Nary a scam or story of incompetence at the professional level comes with a background that says the defendant or accused was without the proper license. Instead, they are just bad guys. When we figure out how to license out “bad”, (other than the free market system) I may lend an ear.

    9. Jacqui Low February 9th, 2013 2:48 am

      Well said Damon. The small guy always seems to getting shafted with every regulation passed in Washington.

      Where are the middle-class tax loopholes?

      Perhaps someone could write an article on these?

    10. Ashlee Anderson February 9th, 2013 9:34 am

      Really interesting. Did not realize the real of the IRS in this regard. Though licensing is much easier and quicker in real estate, in a sense it is somewhat like college as in some cases you do not learn much how to do the job but it shows a level of commitment and paid interest to do the work.

    11. Jackson February 10th, 2013 5:59 am

      What an eloquent and well prepared post. I don’t believe tax preparers should have to be licensed. There are quite a few licensing procedures that are just bullshit ways for state and feds to mooch money out of private citizens. I just opened a small business at an address I found on zillow.com, and the permit and licensing process (just to register my address) is approaching four grand, two grand just for my business license. All bullshit.

    12. Justin Robins February 25th, 2013 11:50 am

      “Congress had never given the IRS the power to regulate tax preparers and the IRS could not unilaterally grab this power on its own.”

      I love how not just the IRS, but most government offices try to push the envelope and see how far they can run with things. Drives me crazy.

    13. Joane March 3rd, 2013 10:27 am

      It’s becoming such a pain lately having to deal with all those tax regulation the IRS is imposing on us. I really start to wonder if we’ll see a high number of people literally fleeing out of the country, wouldn’t be surprised since it’s becoming worse by the day!

    14. Jason March 5th, 2013 9:05 pm

      Such a great article Damon! It drives me nuts how us middle class, hard working Americans are always the ones to get screwed.

    15. Mark Hide March 10th, 2013 6:25 am

      Great article. Unbelievable how the IRS feels it has that much power and control and do as it pleases. God help us!

    16. Patrick March 12th, 2013 3:45 pm

      Good on you Damon – looks like you’ve started something. Fingers crossed it sticks!

    17. Bob March 13th, 2013 12:39 am

      Americans who work hard deserve anything that is best just as any other countries’ people do! This is a great article! Cheers!

    18. Pablo Abejas March 13th, 2013 1:41 am

      There are quite a few licensing procedures that are just bullshit ways for state and feds to mooch money out of private citizens.

    19. Shane Pollock March 15th, 2013 8:47 am

      I have to agreed with you Damon. IRS – Internal Revenue Services can’t totally impose such requirement. I believe the Government should revise the tax code as what Raquel stated above.
      By the way, thanks for sharing this article as well, I will definitely share this to my colleagues.