Licensing Tax Preparers Won't Help Consumers

"[T]he power to tax," Supreme Court Chief Justice John Marshall wrote nearly 200 years ago, "involves the power to destroy." So is the power to regulate, which is one reason why the most recent attempt to "help" taxpayers by licensing tax return preparers deserves a skeptical eye.

The Tax Return Preparer Competency Act, which would require anyone taking money to help others with their taxes to register with the IRS, submit to a background check, pass an exam and complete continuing education classes each year, is an attempt to achieve two goals. Rep. Diane Black (R-Tenn.), one of the bill's sponsors, noted that licensing tax preparers would protect against both dishonest preparers and fraudulent returns. She cited a 2013 report from the Treasury Inspector General for Tax Administration proclaiming that the IRS may have issued more than $15 billion in improper earned income tax credit (EITC) payments in that year alone.

Certainly, fraud is a problem. However, does regulating the people helping others to prepare their taxes actually solve it?

The issue is larger, and more systemic, than simply trying to ensure that only the most honest dealers prepare tax returns. It's important to start by asking why so many individuals turn to others to fill out their forms in the first place. That answer is simple: The tax code as it stands today is a mammoth, complex mess. Littered with loopholes, exemptions, credits and other various programs, the increasing complexity in the code only creates confusion over how to comply.

It should be no surprise, then, when Black cites estimates that 80 million Americans turn to tax preparers to assist in filing their yearly returns. Others estimate that nearly 60 percent of all taxpayers pay someone else to fill out forms for them. Overall, when including those who use tax preparation software, 90 percent of taxpayers seek some form of assistance.

With a tax code so unwieldy and complicated that nearly every American needs help complying, how would regulating preparers make things easier? It won't.

In fact, regulating preparers will destroy a lifeline for many low-income individuals to get the help they need at a price they can afford. History makes this clear. When the IRS attempted to impose similar regulations on their own in 2010, the results were unequivocally disastrous. Testifying before the Senate on licensing tax preparers, Dan Alban of the Institute for Justice explained that it led to a sudden loss of more than 200,000 preparers. Alban has explained that the data "indicates 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."

If the goal is curtailing improper EITC payments, then taking away the assistance that many low-income families have come to rely on might have the opposite affect; forcing families to file returns themselves and simply guess as to whether or not they are eligible for programs.

Ultimately, if policymakers truly don't like taxpayers taking advantage of the EITC payments — or any other programs — that they are ineligible for, there are plenty of solutions beyond trying to license preparers. First, policymakers could always simplify the code. Second, every tax preparer must already put his or her name on the returns they prepare. If the policymakers are interested in prosecuting tax fraud, they already know where to find the fraudulent preparers.

Moreover, as I've explained in a recent research, there are a number of mechanisms that consumers can use to protect themselves against fraudulent activity. In fact, with the growth of services such as Yelp, Consumer Reports and others, consumers are likely in a better position to protect themselves than the federal government is to tell them who is — or is not — an honest dealer.

The problems with tax compliance have little to do with who is preparing returns. Making it more difficult for individuals to get the assistance they need will help no one. There are plenty of creative, helpful and productive reform proposals coming from a variety of sources. Licensing preparers just isn't one of them.