Just What America Needs: More Red Tape

The IRS has taken upon itself a task no one asked it to do: regulate small, independent tax preparers.

Adding another aphorism to the English language, George Will recently observed that "as government expands, its lawfulness contracts." Will offered two examples, concerning the UN and education. But he has fallen short of the First Law of Journalism, which states: Any three anecdotes make a trend. He needs a third case study. Here it is.

The IRS has taken upon itself a task no one asked it to do: regulate small, independent tax preparers. And like any federal regulation worthy of the name, its rules are byzantine, unnecessary, redundant, legally dubious, and hostile to free enterprise.

The rules require anyone who accepts payment for filling out income-tax returns to register, pay fees, take special tests, and complete annual continuing-education requirements. "Having made tax filing so complicated that most Americans need help with the forms," The Wall Street Journal tartly notes, "Washington now wants to raise the price of such counsel by regulating advisers in a way that may reduce their supply."

But not all advisers. CPAs won't have to obey the new rules. Neither will lawyers. Not just tax lawyers, mind you—any lawyers, even those who specialize in patent law or personal injury. Neither will any tax preparers who are supervised by CPAs, or "enrolled agents" at, e.g., big tax-prep companies.

That still leaves about 350,000 other people who fill out tax forms part-time—people such as Sabina Loving, a longtime accountant who opened up a tax-prep storefront in a rundown Chicagoneighborhood. Watching people like Loving with a gimlet eye might make sense if people like here were ripping customers off, or defrauding the government, left and right. But they aren't. The IRS recommends sanctions against fewer than 500 tax preparers per year, and prosecution of even fewer than that. Some of those may work for nationwide accounting firms. But even if all were independent agents, that still comes to less than two-tenths of 1 percent of all mom-and-pop tax preparers. How much further would regulation reduce that number?

Sabina Loving has filed suit to fight the new rules. She is joined by Elmer Killian, a retired Korean War veteran in Eagle, Wisconsin, and John Gambino, a Certified Financial Planner and former equity analyst in Hoboken, N.J. None of them prepares more than 100 returns a year. They are being represented by the Arlington, Va.-based Institute for Justice.

The Institute for Justice (IJ) says the IRS has no statutory authority to impose the new licensing requirements. Instead, the agency is relying on an obscure 1884 law—i.e., one passed before the establishment of the federal income tax—concerning the representatives of people who were owed money by the federal government, not vice versa.

Of course, Congress delegates many rule-making powers to the Executive Branch, so perhaps Congress is fine with the IRS' unilateral assumption of power here. But it isn't. In 2008, Congress considered – and rejected – an amendment authorizing the IRS to regulate tax preparers. Now ask yourself: If the IRS already had the authority to regulate tax preparers, then why did Congress need to consider such an amendment?

Mark Ernst, a deputy commissioner of the IRS who had a hand in crafting the new rules, is a former CEO of H&R Block. You will be as shocked as Captain Renault to learn that big tax-prep companies—H&R Block, Jackson Hewitt, Liberty—all support the new regulations, for the same reason big tobacco companies go after roll-your-own smoke shops: It's in their interest to stifle low-cost competitors.

And while the big boys might couch their support in the usual consumer-protection language, the Swiss investment bank UBS has noted that the new IRS rules would aid H&R Block (and by implication others) by adding "barriers to entry (or continuation) for small preparers [and] provid[ing] revenue as Block may sell their continuing education and competency tests to others." As Timothy Carney, author of The Big Ripoff: How Big Business and Big Government Steal Your Money, noted a while back, the IRS regs provide further evidence that regulation often serves big corporate interests more than it serves consumers.

This might be a fairly minor matter, were it not part of (yes) a larger trend. In a 2010 paper published in the British Journal of Industrial Relations, Morris Kleiner of the University of Minnesota and and Alan Krueger of Princeton note that less than 5 percent of the U.S. workforce was required to be licensed in the 1950s. By 2000 the figure had surpassed 20 percent, and now stands just shy of 30 percent. The result: higher prices—and economic sclerosis.

"Everyone," said President Obama six months ago, "knows that small businesses are where most new jobs begin. And you know that while corporate profits have come roaring back, smaller companies haven't." Perhaps he should pause to ask himself why.