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A Regulatory Leap Too Far

At Palisades Hudson, all of our client service managers are certified public accountants or Certified Financial PlannersTM. Two are also Internal Revenue Service enrolled agents.

These distinctions all require rigorous testing to obtain and regular continuing education to keep. The initials we append to our names provide our clients with the assurance that their business will be handled competently and knowledgeably, but none of these certifications is required in order to legally prepare a tax return on someone else’s behalf. Following a recent federal court ruling, neither is the IRS’ own Registered Tax Return Preparer credential.

The ruling, from U.S. District Judge James Boasberg in Washington, D.C., struck down an IRS regulation that would have required all paid tax preparers to complete a testing and continuing education requirement and to obtain a Preparer Tax Identification number (PTIN) from the federal government. The rollout of the program was already underway. The continuing education requirement and the PTIN requirement went into effect last year, and the testing requirement was set to take effect at the end of this year.

The program contained an exemption to the education and testing requirements for CPAs, attorneys, enrolled agents and those under their supervision, meaning the effect on firms such as ours that handle complex returns would have been small. Only some of our newer staff members, who have not yet obtained their advanced credentials, would have been affected. According to the IRS, however, 600,000 to 700,000 preparers would have been subject to the rule nationally. As of Jan. 3, more than 320,000 had yet to pass the tax agency’s competency exam.

I do not object to mandatory licensing or testing for return preparers. It would provide a valuable assurance to individuals who may not need a CPA or an enrolled agent, but who do need some form of professional help, that the person they hire has some basic knowledge and is not a cheat or a fraudster.

I have no objection, either, to the IRS taking on the job of administering this liscensing program. In fact, I would support a law setting up an IRS-administered tax return preparer regulatory program. The problem is that there is no such law, and the IRS imposed its regulations anyway.

The Service took the initiative under an arcane 1884 statute that gives the Treasury, which is the IRS’ parent agency, authority to regulate individuals who present cases before it. The IRS officials who implemented the program were apparently untroubled by the strange fact that, in the 100-year history of the income tax, no one had previously realized that filing a return was a form of presenting a case before the Treasury.

As noted by Boasberg, “Filing a tax return would never, in normal usage, be described as ‘presenting a case.’”

Boasberg issued an injunction immediately halting the program. The IRS, supported by several large tax preparation firms including H&R Block and Jackson Hewitt, hopes to appeal, though it will need the support of the Justice Department to do so. The case, Sabina Loving, et al. v. Internal Revenue Service, was filed by three independent tax preparers, with the aid of the libertarian Institute for Justice.

If the injunction survives, it is unclear what will happen to the more than $100 million in fees the IRS has already collected from its recently minted Registered Tax Return Preparers. Besides possibly having to refund that money, the IRS will also be forced to walk away from the $50 million it spent developing and implementing the program. Furthermore, it claims the upheaval in the midst of the 2012 tax season will result in “substantial disruption to tax administration.” I can’t see why, since tax administration has proceeded for 99 years without any such registration.

As well-intentioned as the agency may have been, the mission of the IRS is to carry out the responsibilities it is granted, not to redefine the scope of its own authority. We elect representatives to decide when a profession needs to be regulated and to determine how far such regulation ought to go, though the latter task is often delegated to executive agencies. At least, in those cases, Congress is actually doing the delegating.

And so, for now, anyone who thinks he can tell a 1099 from a W-2 is free to hang out his or her shingle. But if that shingle is hand-lettered with wet paint - or guarantees taxpayers a refund - customers should beware.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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