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Is licensing tax preparers a good idea?

Posted Jan 07 2010 8:15am

The USA Today writes that “the IRS has proposed a broad initiative that would require hundreds of thousands of tax preparers to register with the government, pass a competency exam and adhere to ethical standards.”  This sounds like a good idea as it will safeguard individuals from unscrupulous tax preparers.  But who will this truly benefit?

If you want a high quality tax preparer, there are many reputable companies that can prepare your taxes.  These tax preparers will be well trained and you’ll pay more for them.  Firms have an incentive to maintain this quality so their customers continue to require their services.  If quality is above average over the long run, they can build a reputation and charge higher prices.  Thus, for individuals who already have high quality tax preparation, there is no benefit.  In fact, there could be an increase in cost to these individuals if the government standards require additional training that does little to improve quality.

This idea will most certainly hurt poor immigrants.  When I was in college, I spent my Saturdays in the spring doing tax preparation for immigrant farm workers in Kennett Square, PA.  I worked for a non-profit legal firm.  I receive training on the basics of tax preparation.  Because most of these migrant workers had little assets and no mortgage, doing their taxes was simple.  If an individual had a more complex tax return (e.g., if they had a mortgage), I would refer them to the supervising lawyer.  The migrant workers received their tax preparation for free since we were volunteers.  However, this practice may not continue into the future.

If the government requires everyone who prepares taxes to pass through an onerous training program, fewer volunteers will decide to participate in free tax clinics.  Many non-English speaking Americans may not fill out their taxes themselves.  Further, the non-profit’s scope of their program will likely decrease if they have to pay for additional training for all their staff. 

Also, how will the government guarantee people will act ethically?  Will they give them a test of what is ethical?  Will they ask nicely ask people not to do a bad job?  

In short, licensing tax preparers is a bad idea.

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