Tax Preparers Speak Out Against New Regs, File Suit Against IRS

“Because I said so.”

As a parent, I’ve grown to love the power of those words.

But as a professional? Not so much.

At work, I like to have rules. And I like to think we have those rules for a reason. I don’t like it when rules don’t make sense, appear arbitrary or aren’t backed by authority.

That’s exactly the problem with the new regulations for tax preparers, according to three independent tax preparers, Sabina Loving of Chicago, Illinois; John Gambino of Hoboken, N.J.; and Elmer Kilian of Eagle, Wisconsin. The three are accusing the IRS, among other things, of lacking the authority to license tax preparers. The three have joined forces with the Institute for Justice in filing a lawsuit today, March 13, 2012, against the IRS in the U.S. District Court for the District of Columbia. You can read the full complaint here (downloads as a pdf).

Plaintiff Sabina Loving owns Loving Tax Services, Inc., in the South Side of Chicago. Prior to starting Loving Tax Services, Loving worked an accountant. She’s been preparing taxes professionally for the past three years and expects to prepare approximately 100 tax returns this year.

Plaintiff Elmer Kilian is a retired Korean War veteran living in Eagle, Wisconsin, where he owns and operates Eagle Tax Services. He has been preparing taxes part-time and seasonally for about 30 years. He prepares about 80 to 100 paid tax returns per year.

Plaintiff John Gambino is a Certified Financial Planner (CFP) and registered investment advisor in Hoboken, N.J. Gambino has offered tax return prep services for his clients since 2004. He prepares approximately 50 paid tax returns per year.

Loving, Kilian and Gambino have retained lead attorney Dan Alban of the Institute for Justice, a libertarian public interest law firm. I spoke with Alban today and his message was simple: Congress never gave the IRS the authority to license tax preparers, and the IRS can’t give itself that power.

Alban has been following this issue closely for a few years now. He testified at the Congressional hearing on the matter in 2010, where he was the only party expressing opposition to the regulations. The rest of the testimony, he explained, concerned elements of the proposed regulations but were not generally opposed to the idea.

When asked to explain why he was opposed, Alban didn’t hesitate. “Tax preparers have the right to earn an honest living without permission from IRS,” he said. He went on to explain that the regulations, as written, were an example of economic protectionism. The exemptions and exceptions mean that certain professionals, like CPAs and lawyers, disproportionately benefit from the regulations.

But I thought that taxpayers were supposed to benefit from the regulations?

That is, according to Alban, exactly the point. As the regulations are written, taxpayers will eventually bear the burden of the new regulations. The fees, he notes, are not inexpensive. The annual PTIN regulation costs tax preparers $65 per year. The tax preparer competency exam costs $116. Additionally, there are annual requirements to take at least 15 continuing education credits which would likely cost more than $1,000 per year.

Attorneys, CPAs and enrolled agents (EAs) are exempt from the competency testing and continuing education requirements. That, according to Alban, means that the burden of complying with the new regulations falls on independent tax preparers and small businesses – those who now seek the new designation, Registered Tax Return Preparer. Without that designation, unless a preparer meets an exemption or exception, he or she may not prepare returns for compensation. In other words, the new regulations now require existing businesses to seek permission from the IRS in order to continue to work.

Many tax preparers think the system stinks. Chief among them is long term tax pro Bob Flach, who has been extremely vocal in his opposition to the new rules. Flach told me his biggest gripe was the IRS interfering with his business at this stage of the game, questioning why he is, “after 40 years of preparing 1040s for a living without incident, having to take a test to prove that I know what I have been doing all these years.” He notes that there are no grandfather clauses for existing preparers but are, instead, exemptions for CPAs, attorneys, and “supervised employees.” As Flach so eloquently expressed to me:

Just because a person has the initials CPA or JD after his (or her) name does not mean he knows his arse from his elbow when it comes to 1040 preparation.

I have a few initials after my name and I happen to largely agree with Flach. Degrees don’t necessarily equal competence.

For Alban, however, it’s not just about the exemptions and exceptions. He thinks there is a bigger problem: the IRS has no statutory basis for licensing tax preparers. The statute that the IRS is relying on predates the modern income Tax Code; it is an 1884 law which, he explains, was passed to protect military pensioners. It was not intended to authorize the IRS to regulate tax preparers and, he says, “they cannot give that authority to themselves.”

When asked about a time frame for the lawsuit, Alban advised that the IRS currently has 60 days to respond with either an answer or a motion to dismiss. He expects the case to move very quickly since there are no factual questions at issue. He anticipates an answer by the end of the year. So what does he hope to see happen? The ultimate outcome of the lawsuit would be, he hopes, to strike down the existing the regulations.

But what about those taxpayers that the IRS wants to protect? That’s what this whole thing is about, isn’t it? Improving tax compliance, limiting tax fraud and protecting taxpayers?

Alban thinks that can happen by working within the existing system. After all, the IRS already has penalties and fines in place in order to punish bad preparers. Is it necessary to introduce new rules that have the effect of punishing good preparers?

Flach agrees in principal, though the two differ in terms of what the end result should be. Flach believes a serious problem lies with a cherry picked system that seems to favor attorneys, CPAs, EAs and large firms. He doesn’t, however, think that the new rules put an excessive financial burden on existing preparers. At most, he thinks the additional costs may force out some “casual” tax preparers, querying: “Would you want a “casual” doctor removing your appendix?”

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Comments

  1. Maria

    Its fast and easy, now you can get your IRS PTIN number even you are at home its salshe free and clients can be secured that they are hiring real tax preparers that are under the IRS.

  2. Larry Williams

    On January 18, 2013, the United States District Court for the District of Columbia ruled in favor of Ms. Loving and her co-plaintiffs.

    I am an attorney and CPA, and my personal view is that the proposed regulations were a good idea as a general proposition. The government will probably appeal this decision.

    The idea that these regs would be unduly burdensome on people like Ms. Loving is dubious in my view. The existing formal education, testing, and post-licensing continuing education requirements for attorneys and CPAs, in terms of intellectual rigor, the costs in terms of time that must be spent, and the the financial costs, far exceed the minimal requirements proposed by the IRS for Registered Tax Return Preparers. There is simply no comparison.

    My response to Mr. Flach’s argument — that having a JD or CPA credential does not necessarily mean that the individual can prepare 1040 returns — is that the argument is misleading. Why? Because having prepared tax returns for 40 years “without incident” also does not necessarily mean that the prepare knows what he is doing. No amount of credentials OR EXPERIENCE, with or without “incident,” NECESSARILY proves that the preparer currently knows what he or she is doing. Just as there will always be some incompetent JDs and CPAs with plenty of experience, there will always be some incompetent non-licensed tax return preparers with plenty of experience.

    However, Ms. Loving is/was right about at least one thing: The IRS cannot make up rules and regulations without an underlying statutory authority to do so. It will be interesting to see what happens at the Court of Appeals.

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