IRS lacks authority to impose tax on tax by regulating tax preparers – Lawsuit alleges

The Two Seasons: Tax and Non-Tax

It used to be that at least in theory there were four seasons. But, now in practice, there are only two seasons: “Tax Season” and “Non-Tax Season”. “Non-Tax Season” is getting shorter and shorter.

Warmer air usually means that it’s tax season. HR Block is one of the largest tax preparation service companies in both the U.S. and Canada. I see the ads on the subways “$59 for a basic return”, “$tudent tax returns $29”. The also give tax advice to U.S. citizens in Canada suggesting that they must enter “VDI” (voluntary disclosure initiative), and more … This particular bit of horrible, misleading and dangerous advice from HR Block, was the subject of numerous comments on the Isaac Brock Society blog.

 

 

 

Assistance with tax returns is NOT just a business. It’s a big business. HR Block is everywhere.

American Exceptionalism Means Exceptional Tax Problems For U.S. Citizens Living Abroad

For U.S. citizens living outside the United States, tax compliance is very difficult. After all, only the United States subjects its citizens to the insanity of citizenship-based taxation. The cost and complexity of completing tax and information returns is causing enormous anxiety (not to mention the cost) to U.S. citizens abroad. The financial cost of compliance is so high that U.S. citizenship has been priced out of the market. And it is going to get a lot worse. Lots of reasons, but a very interesting one in particular …

The IRS under the leadership of Commissioner Shulman has written a regulation that requires all “paid tax preparers” must  be registered with the IRS. This includes passing exams and taking continuing education courses. (There are a number of different kinds of U.S. tax preparers – you can choose your dance partner.) But, does the IRS have the authority to do this? The IRS is simply an administrative agency which has the job of administering the Internal Revenue Code. People are so afraid of the IRS that they imagine that the IRS can do anything. You know the joke:

What’s the difference between the IRS and God? God doesn’t think he/she is the IRS!

But, can the IRS impose requirements on who can help you fill out your tax return? Apparently the IRS is on the receiving end of a lawsuit, alleging that it does NOT have the authority to license tax preparers. Interesting, this argument may have a good deal of merit.  The gist of the lawsuit is described in the Weekly Standard as follows:

“Tomorrow, the Institute for Justice (IJ) will file a lawsuit against perhaps the most hated of all federal agencies—the Internal Revenue Service (IRS).

The suit challenges licensing requirements that the IRS introduced last year. Tax return preparers must take a test and obtain IRS permission—and pay fees to the bureaucracy—before they can continue to offer their services. As IJ attorney Dan Alban says in the below video, “Congress never gave the IRS the authority to license tax preparers, and the IRS can’t give itself that power.”

Occupational licensing requirements almost invariably hurt small businesses, to the benefit of the big ones. That’s certainly been the case in previous economic liberty suits IJ has fought, including burdensome licensing requirements for florists, hair-braiders, and casket-builders.

H&R Block and Jackson Hewitt support the IRS’s new rules. That’s not surprising—attorneys and CPAs are exempt from these licensing requirements, as are those employees they supervise. That includes an exemption from a new continuing education obligation of 15 hours each year.”

But, there is another interesting twist to this lawsuit. In any lawsuit, one must ask: what are the interests of the parties? Who exactly benefits from the IRS rule requiring “paid tax preparers” to be licensed? Well, some people think that HR Block is one of the principal beneficiaries of the rule (if not the principal beneficiary). At first blush, this makes a lot of sense. This IRS rule will:

–        Make it very hard for small independent tax preparers to compete;

–        Will increase the costs to being a tax preparer;

–        Will increase the costs to consumers of getting their tax returns filled out

The effect of all this on “small preparers” was described by Bloomberg:

“UBS AG analysts Andrew Fones and Margaret O’Connor issued a report that said the IRS initiative will help H&R Block by preventing small preparers from entering the market and driving others out of it.

“We think the regulations could be a boost for Block starting” in 2011, the analysts said.”

It is in effect a “tax” on “tax”. Yes, that is where the U.S. has come to . The additional costs of having your tax return completed, are a tax on tax itself. But I digress.

So, it is in the interests of the big boys “HR Block”, etc. to have barriers to entering the tax preparation business. Now, the story continues to get even more interesting (and this may all be only circumstantial and irrelevant). But, it is very interesting. The Washington Examiner opines that:

“But again, H&R Block isn’t just a passive beneficiary of this regulation — it was an active supporter. In July, once the IRS announced it was considering these rules, H&R Block hired the Podesta Group to lobby on the matter. The Podesta Group was co-founded by John Podesta, who later became an Obama confidant and his transition director. Podesta Group is currently run by Tony Podesta, the leading lobbyist-bundler in the country, who has raised, together with his lobbyist wife, well over half a million for Democrats this election.

But wait, it gets better. The IRS official in charge of writing these rules: Mark Ernst, former CEO of H&R Block. As I wrote at the time:

Mark Ernst, in December 2007, was chief executive officer of H&R Block, the nation’s largest tax-preparation company. Thirteen months later, once President Obama took office, Ernst was named a deputy commissioner at the Internal Revenue Service, where he would spend his first year drafting new regulations for tax preparers — regulations that H&R Block welcomes and market analysts say will benefit the company.

With Ernst in mind, recall Barack Obama’s campaign pledge: “No political appointees in an Obama administration will be permitted to work on regulations or contracts directly and substantially related to their prior employer for two years.”

This campaign pledge manifested itself in an executive order requiring “every appointee in every executive agency” to pledge, “I will not for a period of 2 years from the date of my appointment participate in any particular matter involving specific parties that is directly and substantially related to my former employer or former clients, including regulations and contracts.”

Ernst obviously didn’t follow these rules, but the IRS tells me that Ernst is not covered by these rules. “Mark Ernst is a civil servant at the IRS; he is not a political appointee,” according to an e-mail IRS statement by an agency spokesman.”

Mark Ernst became a deputy IRS commissioner in early 2009.

Now, just in case you are not getting this:

  1. HR Block is one of the principal beneficiaries of the IRS tax regs
  2. There is evidence that HR Block lobbied to get these regs passed
  3.  Mark Ernst who was the CEO of HR Block from 2001 – 2007 became a deputy commissioner of the IRS. In that role, he may have been responsible for assisting with the development of the IRS rules and regulations governing the tax preparation industry.

Does this pass the smell test? Is there anything wrong with the former CEO of HR Block becoming a deputy commissioner at the IRS? I don’t know. You tell me.

Epilogue:

Mark Ernst’s tenure at the IRS did not last long (early 2009 to late 2010). As noted by “Accounting Today

“IRS Deputy Commissioner Mark Ernst Resigns

Washington, D.C. (October 21, 2010)

By WebCPA Staff

Mark Ernst, the former chairman and CEO of H&R Block who went on to become deputy commissioner for operations support at the Internal Revenue Service, will be leaving the IRS later this year, according to an announcement Thursday by IRS Commissioner Doug Shulman.

Ernst joined the IRS last year after having been chairman and CEO of H&R Block from 1998 to 2007. He left Block to head the venture capital firm Bellevue Capital for two years before joining the IRS.

“Mark has been a most valued, respected and dedicated member of my leadership team, and he brought a unique perspective and focus to some of our most important initiatives, such as technology modernization, cybersecurity, financial management and workforce issues,” said Shulman. “I want to thank him for his strong contributions to the nation’s tax system, and he will be deeply missed by all of those who had the opportunity to work with him.”

Shulman noted that Ernst plans to return to the private sector. Succeeding him as deputy commissioner for operations support will be Beth Tucker, who currently serves as deputy commissioner for support in the IRS’s Wage & Income division.”

Incidentally, Mr. Ernst’s replacement at HR Block was none other than Richard Breeden. Canadians might be interested to know that this is the Richard Breeden of Conrad Black fame.

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One thought on “IRS lacks authority to impose tax on tax by regulating tax preparers – Lawsuit alleges

  1. markpinetree

    This is interesting. Where I am we are free to discuss freely tax issues with our CPA in a mutually trusted and confidential relationship. I guess in the USA this is not the case. Even with tax lawyers in the USA this seems not to be allowed. I disscussed this with an italian Tax Lawyer who works with Americans Living in Italy and he was clear that his consultations were confidencial and privileged,,,except if related to tax preparations… now I hear that in the USA the CPAs will have to be approved by the IRS… The land of Freedom?

    Reply

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