McLEAN, Va. — After three decades as a part-time tax preparer, 80-year-old Elmer Kilian of Eagle, Wis., is concerned that new IRS regulations may prevent him from hanging out his shingle.
Kilian is one of three plaintiffs in a federal lawsuit by a libertarian legal center this week that challenges new licensure requirements for hundreds of thousands of tax preparers across the nation.
The IRS says the new regulations, more than two years in the making, are needed to ensure that taxpayers who hire tax preparers get high-quality service. The regulations require most paid tax preparers to pass a federal competency exam and take ongoing continuing education courses to keep up with changes in tax laws.
But the Arlington, Va.-based Institute for Justice, which expects to file the lawsuit Tuesday in Washington on behalf of Kilian and two others, say the IRS lacks the statutory authority to require these kinds of licenses without congressional authorization. The new rules are bad policy, the institute contends, that put mom-and-pop tax preparers out of business and give unfair advantages to lawyers and certified public accountants, who are exempt from many of the licensing requirements.
"The likely result of these regulations is less options for consumers and higher prices," said Bob Ewing, a spokesman for the institute. The nonprofit law firm has filed numerous legal challenges against government regulations, including local licensing requirements for professions from hair braiders to yoga teachers and federal rules against paying bone-marrow donors.
The licensing requirements for tax preparers are part of an explosion in ill-conceived licensing regimes across a variety of professions, the institute says. They cite research that shows the percentage of the U.S. workforce subject to licensure has increased from 5 percent in the 1950s to 30 percent in 2006. The institute has filed numerous legal challenges questioning government authority to license various professions, from hair braiders to tour guides to yoga teachers.
Kilian said the new regulations may well force him out of business. He started doing taxes three decades ago on his dining room table as a part-time job, and the business grew to about 150 clients a year.
He now estimates he does about 100 returns, and still does them by hand for clients that he's served for many years. His fees aren't much higher than when he began: $45 for an itemized 1040 return, and about an extra $5 a sheet for additional forms when required. He hangs out a homemade wooden shingle advertising his business during tax season.
The costs of complying with the new regulations might require him to substantially increase his fees: $64 annually to register, plus more than $100 to take the IRS competency exam, plus the time and cost associated with continuing education courses and perhaps the need to buy a computer to comply with other parts of the regulations. He said he would be more likely to quit the business altogether.
Another plaintiff, John Gambino of Hoboken, N.J., said he believes the new regulations are designed to benefit big tax preparation firms – which support the changes – and attorneys and CPAs who don't have to take the competency test.
"I view it as crony capitalism" to favor businesses with connections in Washington at the expense of independent preparers, Gambino said.
Gambino is a certified financial planner who does fewer than 100 tax returns a year, basically as a customer service to clients. The licensing requirements would make it less attractive for him to offer that service.
The IRS claims authority to enact the regulations under a 19th century law authorizing the executive branch to "regulate the practice of representatives of persons before the Department of the Treasury."
But Dan Alban, an attorney with the Institute for Justice, says the law was written before there ever was a federal income tax or an Internal Revenue Service, with the apparent goal of protecting military pensioners who were being swindled by unscrupulous attorneys on claims they filed for lost horses.
An IRS spokesman said that the agency couldn't comment on a lawsuit that hasn't even been filed yet, but provided a statement saying that generally, the exemptions for attorneys and CPA's from the competency exam exist "because they have generally already passed a test and have continuing education requirements" in their respective professions.
IRS statistics show that as of March 1, nearly 700,000 people have been issued the required tax preparer ID number, which requires payment of a $63 fee. About half of those belong to attorneys, CPAs and others who are exempt from the requirement to pass the competency exam or take continuing education. The remaining half will be required to take 15 hours of continuing education this year and pass the exam by December 2013 to keep a valid license.
Paid tax preparers fill out 60 percent of all U.S. tax returns, according to a study from the Government Accountability Office, a congressional watchdog agency. The GAO has found significant problems over the years in the quality of work done by tax preparers. In one 2006 study, the GAO took tax returns to 19 different commercial tax preparers, and 17 of 19 incorrectly calculated the taxes due.
National taxpayer advocate Nina E. Olson said in a statement released Tuesday by the IRS that registration, testing and continuing education will help address problems in return accuracy and ethics.
"Regardless of whether preparer standards are implemented by regulation or by legislation, however, I continue to believe we need to have them," Olson said. "If a preparer cannot pass a basic competency test and does not take courses to remain up-to-date on tax law changes and understand his or her ethical responsibilities to clients and to the tax system, that individual should not be preparing tax returns for compensation.
Gambino, for his part, said that if the IRS really wants to ensure that tax returns are prepared properly, it would be better served to simplify the tax code. He said he'd support measures that increased transparency for consumers, so they could see whether a preparer had a history of incorrect returns or audits. But he doesn't think the new IRS regulations will really help.
The lawsuit seeks an injunction that bars the regulations from taking effect.
"I'm not asking for any money," Gambino said. "I just want them to leave me alone."