The country managed to avoid the dairy cliff and the fiscal cliff (more or less), but it looks like we are in midair after falling off the tax preparation cliff. 

At the end of last year, I blogged about new Internal Revenue Service (IRS) rules that require small-time tax preparers to pay annual fees, take IRS exams, and obtain 15 hours of expensive continuing education.  Attorneys and certified public accountants are exempt from the requirements, and big tax firms like H&R Block actually backed the regulation, which will put many of their seasonal competitors out of business.

The economic litigation firm, Institute for Justice (IJ), filed a suit in March on behalf of several tax preparers with the U.S. District Court for the District of Columbia. But the new rules kicked in while they were still waiting for a ruling.

That leaves up to 350,000 mom-and-pop operations with an uncertain future. It is too late for them to comply with the law’s continuing education requirements. But the court could rule any day, making it theoretically possible for them to accept clients this tax cycle.

I checked in with IJ attorney Dan Alban to see how his clients were doing. Not great, he says:

The uncertainty over whether the IRS’s unlawful scheme will be struck down is bad for tax preparers, many of whom are unsure about whether they’ll be able to continue preparing tax returns in 2013 and beyond.  They are struggling with what to tell their regular customers as tax season approaches.  And it’s bad for taxpayers, many of whom don’t know if their longtime tax preparer will still be able to legally prepare their taxes this year.   This is yet another reason why taxpayers—not the IRS—should be the ones who decide who prepares their taxes.

There is a loophole in the law that exempts people who prepare returns for free from the onerous licensing requirements. Some folks who prepare tax returns on the side are considering offering their regulars returns for free this year in a bid to keep their source of supplemental income viable for the future.