ON THE MONEY
Hamill: Three strikes and your tax return is out
Good things come in threes. In Latin, this was said as 鈥淥mne, Trium, Perfectum,鈥� meaning everything that comes in threes is perfect.
Confucius said that the number three represents harmony, completeness and structure. One should consider three perspectives before acting.
Christianity believes in God in the form of the Trinity. Jesus was crucified at the third hour and rose on the third day.
Julius Caesar wrote, 鈥淎ll Gaul is divided into three parts.鈥� This included Belgae, Aquitani and Celts/Gaul. Caesar planned the conquest of Gaul with this in mind.
If you want to buy a house, remember that it鈥檚 location, location, location. Crossing railroad tracks? Be sure to stop, look and listen.
Social Security was intended to be one of three legs of a retirement 鈥� private savings, employer assistance and Social Security.
Even tax administration can be considered in three parts. That is the focus of today鈥檚 column. So, ready, set, go.
Congress writes tax laws. These laws should provide rules to ensure compliance. Compliance rules exist with all laws.
The Internal Revenue Service is responsible for administering the tax laws and collecting taxes.
Taxpayers are responsible for reporting their income and expenses and complying with the laws.
Unfortunately, the laws have become so complex that more than half of all taxpayers rely on a paid return preparer.
I begin with the premise that the 鈥減roper鈥� administration of the tax laws depends on three legs: Congress, the IRS and the tax return preparer.
Consider these three legs playing Twister. They become intertwined. Sometimes the results are less than desired.
Congress writes the laws but also funds the IRS. The IRS has oversight over tax return preparers based on laws written by Congress.
It turns out that more than half of paid return preparers are not regulated using laws written by Congress and administered by the IRS.
The Government Accountability Office, or GAO, prepares reports to Congress for a variety of purposes, including tax administration.
On Feb. 24, GAO submitted a report to Congress with a title suggesting that 鈥淥pportunities Remain to Improve IRS Oversight鈥� of paid preparers.
I have previously written about how Congress impacts tax collection and administration. I did the same with the IRS.
I now focus on those paid preparers. What do GAO and others think can be done to improve the role of the paid preparer in efficient tax administration?
First, we need to define some terms. A tax practitioner is subject to regulation by the Treasury Department.
Tax practitioners come in threes. Attorneys, certified public accountants and enrolled agents.
Each of these must hold certain educational credentials and then maintain continuing education on an annual basis.
These tax practitioners can represent clients before the IRS. They can debate substantive issues of law and handle appeals within the IRS.
These are special privileges granted in exchange for oversight through regulation. With privilege comes responsibility.
The GAO report indicates that roughly three in eight tax returns using paid preparers are prepared by tax practitioners.
This leaves a larger share of returns 鈥� five in eight 鈥� prepared by people who are not subject to regulation. They are defined to be 鈥渦nenrolled preparers.鈥�
Why does this matter? Because there are numerous studies, over several decades, showing that the accuracy of returns depends on the class of preparer.
There are significantly more errors and false claims filed by unenrolled preparers relative to tax practitioners.
To be clear, tax practitioners make mistakes. The data shows this. But the error rate is significantly different between the tax practitioner and unenrolled preparer groups.
The obvious solution is to begin regulating the unenrolled preparer group. In 2011, the IRS wrote regulations to do this.
In 2014, the Court of Appeals for the D.C. Circuit held that the IRS had no statutory authority to regulate the unenrolled group.
The obvious solution is for Congress to add a new law to allow the IRS to regulate the unenrolled group.
Twelve years after the court ruling, Congress has not acted. I understand Congress鈥� fear of raising taxes. I really don鈥檛 understand the reluctance to control bad tax preparation.
Let鈥檚 hope this do-nothing Congress becomes ready, willing and able to change the law. It just takes a little blood, sweat and tears.
Jim Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.
