Two things happened on Sunday.
One, I sat down for an interview with Dan Alban, the lead attorney in Loving et al v. Commissioner (downloads as a pdf).
And two, I had friends over to the new house for a chat.
You might think the two are completely unrelated. But you’d be wrong. You see, while settled in our chairs in the living room, my friends and I talked about all kinds of things. Downton Abbey. Holiday weddings. Gun control. DOMA (Defense of Marriage Act). We had spirited debates and great conversation. And in the midst of it, my friend, Jason, said something to the effect of “If you’ve already made up your mind about something, and you don’t want to think about both sides, no amount of discussion or logic will change it.” And he’s right.
Which brings me back to the interview that I had with Dan Alban.
As a tax attorney, I have a lot of concerns about the consequences to my clients when preparers go (or start out) bad. I’ve seen what happens to good people who find themselves in a situation where a return has been prepared incorrectly or where folks were talked into claiming improper deductions. It’s not good. And so, when IRS Commissioner Doug Shulman started making noise about tax preparer regulation in 2009, I was intrigued. After all, anything that is meant to protect taxpayers is a good thing, right?
When U.S. District Court Judge James E. Boasberg ruled in Loving that the IRS did not have the right to regulate preparers under the current scheme, I was a bit taken aback. I didn’t expect that ruling. And I really didn’t expect this close to the opening of tax season. As I sat back and tried to make sense of it, I was struck by the reactions of tax preparers to the decision, many of whom wrote to me after I blogged the case, calling me out on my lack of outrage, one going so far as to tell me that I “clearly didn’t care about taxpayers.”
Whoa. How did we get from the point where choosing to become a bit more informed about the decision – and the law behind it – was equal to not caring about taxpayers?
So as I picked up the phone to chat with Dan Alban about the decision, I tried to keep in mind what my friend had said to me about preconceived notions. I decided to make a concerted effort to really listen to Alban’s thoughts about the case and the process – and what it meant. And I found myself surprised for a second time.
I asked Alban if the case, likewise, caught him by surprise. In terms of timing, he indicated that he was definitely caught off guard, saying “[w]e had no idea when the decision would come down.” He was, of course, “pleasantly surprised for the timing” because it was before the start of tax season (which officially opens on January 30). The timing of the decision meant that preparers should be able to prepare returns this season even if they were not compliant with the current IRS regulations. He did note, however, that all of the Plaintiffs in the matter had already submitted their PTIN (preparer tax identification numbers) and had planned to continue preparing returns this season.
But it couldn’t last, right? I had already indicated that I expected an appeal. Alban said that he certainly wouldn’t be surprised by an appeal, though he had not heard from the IRS officially. That tends to happen when a ruling comes down after 4 pm on a Friday on a holiday weekend.
Of course, since the legal basis for the ruling indicated that the power to regulate preparers had to come from Congress and not the IRS, I asked whether Alban thought that Congress might follow-up with a bill to do just that. While calling it “certainly a possibility,” Alban was a bit dismissive of the idea. He pointed out that Congress had considered eight different bills that would give IRS authority to regulate preparers over the last ten years and has never passed a single one. Clearly, it hasn’t been a priority for them; Alban seems to think that the underlying reason is that Congress doesn’t think IRS needs this power.
Finally, with all of the legal niceties out of the way, I asked Alban the really tough questions: What about all of those folks who say that regulation is a good thing? What does this ruling mean for taxpayers? And why would you embrace a scheme that wouldn’t require – at a very basic level – some semblance of regulation to ensure that preparers are competent?
Alban didn’t hesitate. Intent, he says, is key. The intent of any kind of licensing scheme should be to protect the consumer. But Alban, who focuses on occupational licensing in his practice, noted that frequently, these kinds of laws instead protect established interests from competition. That is, he says, not in the best interest of the consumer.
And with that, I paused. You see, in all of the years that I’ve been writing this blog, I’ve only received a phone call from IRS complaining about a post once. And it was for this one. The IRS wanted to assure me that the exemptions had nothing to do with any special interests. None. Not a whit. Interestingly, many preparers at smaller firms thought differently. I received a number of supportive emails and “off the record” comments about how the new rules felt discriminatory.
In addition to the carve-out for certain tax preparers who will not be signing returns, there were other exemptions. Certified Public Accountants. Attorneys. Enrolled Agents. All exempt from the continuing education and competency exam requirements because they were in industries that were self-regulated. Most of those folks were pretty quick to share that they were certain that their regulations were more stringent than those of their colleagues (the interplay between CPAs, attorneys, and EAs was never more entertaining).
That left tax preparers without a designation. So the IRS dreamed up a new designation, RTRP (registered tax return preparer) which would require testing, ongoing education requirements, and registration with IRS in order to prepare returns.
A number of folks thought that the new scheme stunk. Chief among them was long-time preparer and tax blogger, Bob Flach. Flach, who noted that he had never been flagged for a bad return, isn’t a CPA, an attorney or an EA. He has been incredibly vocal about the new rules, telling me (perhaps one of my favorite quotes from an interview on the blog ever):
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.
And Flach is right. Under the rules, as written, an attorney like my husband would be exempt from the competency exam and continuing education requirements simply by virtue of his profession. My husband sat through one tax class in law school. He’s never had to display competency in tax: in Pennsylvania, there is no tax-specific section on the bar exam. And though he has taken – and taught – hours and hours of continuing legal education (CLE) courses throughout his practice, I don’t think he’s ever taken a tax CLE. Nonetheless, he would be considered a competent preparer according to the IRS – while Bob would not. It would appear that attorneys benefited disproportionately from the regulations; as a point of context, the American Bar Association (ABA) has encouraged the regulation of “other” preparers for years.
Why is that? Is there maybe something to Alban’s idea that these kinds of laws protect established interests from competition?
And then Alban said something else that struck me: about fifty years ago, only 1 in 20 workers in the U.S. needed government permission (in the way of regulations) to earn a living. Today, that number is 1 in 3. That, he said, is troubling. We are increasingly relying on the government to decide who is qualified to perform services for us. Is that something we want? Does regulation really make someone competent? Or honest?
The Institute for Justice, Alban’s employer, thinks there’s a better alternative to increased government regulations: voluntary certifications. The RTRP certification, for example, that the IRS has put into place on a (heretofore) mandatory basis could actually be a voluntary certification that the IRS has blessed. In that way, taxpayers who wanted someone with that credential could seek them out, much as now some taxpayers seek out CPAs or attorneys, which are self-regulated by industry. [As a sidebar, Flach has written on this issue today – I haven’t read the piece yet because I didn’t want it to influence my post.]
The benefit of a voluntary certification, Alban points out, is that consumers get to make their own choices rather than relying on a regulatory body. He says that framework gives consumers more choices which is what we claim to want.
That struck a nerve. I asked Alban if he found it inconsistent for taxpayers to clamor in one breath for less government while embracing more government intervention in regulatory schemes like this one. That is, he indicated, the point. Many free-market proponents eschew intervention unless it benefits them. What happened, he wonders, to open competition and the free market?
With that, he gave me a little something to think about.