Tuesday, November 30, 2010

How to clean up a problem

As a libertarian, I'm against most governmental license and permit programs because they usually do nothing but bar entrants into any particular field.

For instance, maybe my only asset is a perfectly well running auto but I can't use it for a transportation service without obtaining a taxi license, which often are limited by most cities; hence driving up the cost.

However, as a tax preparer, you hear stories about the flat out fraud that is going on in the tax preparation business. As a result of this fraud, the IRS has instituted a series of changes to rid the profession of fraud and incompetence.

One of the changes, is the requirement that all paid preparers get a PTIN. The American Thinker with the story..........

Reports are circulating that the IRS is amping up regulation of tax preparers, with sinister possibilities being raised.

Here's the deal: since just about forever the IRS has required preparers to have their own social security numbers on the returns. In the late 90's, when identity theft started becoming prevalent, preparers complained to the IRS that our numbers were becoming common knowledge, since the returns were being used to get loans and all that, and who knew where the SSN's would go from there.

So, in 1998, the IRS provided a different option -- those preparers who wanted to could obtain from the IRS a new preparer identification number that they could use instead of their SSN's. Some got the numbers, some did not, and the IRS did not care either way.

Now, under the new law, everybody has to get and use a PIN.

I received a PTIN back around 2004. At the time, all you did was fill out an application and the service issued the number that a preparer could use in lieu of their social security number.

I just completed the application for the revised law and you are required to have all of your tax returns filed and taxes paid, not have a felony in the past ten years, and have some level of tax education (which I have as a CPA).

All of these seem to be modest requirements so that the public can trust the tax prep business.

But all this stuff eludes the basic question. How is it that the business has become polluted with so many derelicts?

And like most questions in life, if you answer "money" you'll be right 95% of the time.

See the dirty little secret in the tax prep business is that if there were no Earned Income Credit, the felons would look somewhere else to commit their crime.

For instance, if you are a single mom with two kids and earn $15,000, you can expect a tax refund of around $7,000 from the earned income credit and refundable child credit. (see a copy of a dummy return above).

Since most of these people don't have the skills to do these returns themselves, they show up at your local neighborhood Jackson Hewitt or Liberty Tax Service and pay upwards of $500 for tax preparation and rapid refunds. Go into your average bad neighborhood and you'll see these places right next to the local carryout, bodega or pawn shop. They're like the only business profiting in the 'hood.

And of course when someone walks out of one of those shops with $6,000 cash in hand, it doesn't take long before people come up with ways to defraud the system and for tax preparers to become complicit in the process.

So the IRS can start cracking down on preparers, it just gives guys like me another reason to increase my fees. Or congress can take the money out of the system and the system will clean itself up.

So you can guess what's really going to happen.


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