IRS Business Protection Act

The IRS got another ignominious turn in the spotlight last week as the agency battled mom-and-pop tax preparers in the D.C. Circuit Court of Appeals, the Wall Street Journal notes. Under a 2011 regulation from the agency, all tax preparers would be forced to get a federal license, a requirement that would cost hundreds of dollars and put many small operations out of business.

The IRS claims that it gets the authority to do this from an obscure 1884 statute that allows the agency to regulate "representatives of persons" before the Department of the Treasury. But that argument hasn't been getting much traction. In January, a federal district judge rejected the IRS claim that it could unilaterally impose the new licensing requirement (which requires exams, annual fees and continuing education courses), ruling on behalf of three independent tax preparers represented by the Institute for Justice.

The IRS appealed, and at the oral argument before the three-judge panel, Judge David Sentelle was similarly skeptical that the IRS could so casually empower itself to carry out a vast new regulation based on a 130-year old statute, calling the government's interpretation "awfully strange." As Judge Sentelle put it, "A hundred and thirty years of not thinking they gave you that power might make it a little less convincing when you say it does."

The IRS says the restrictions will enforce higher quality and greater consistency on tax returns, but the evidence for this is less than overwhelming. Judge Stephen Williams noted that a 2011 study by the Treasury Inspector General found that returns done by tax preparers trained by the IRS itself had a 61% error rate. Nothing like the IRS aiming high.

Big-foot tax preparers like H&R Block HRB +0.04%and Jackson Hewitt lobbied for the regulation and have been explicit in hoping it will squeeze lower-priced competition. In 2010, one H&R Block official told the Washington Post that she was glad the new licensing meant H&R Block "won't be competing against people who aren't regulated and don't have the same standards as we do." A Charlotte, North Carolina owner of 22 Jackson Hewitt stores said that "more regulation is good for us" because he had been "seeing a decline in the business because of all these moms and pops who open up out of nowhere."

The IRS has made enough trouble for itself in recent years trying to pick tax winners and losers. Let's hope the D.C. Circuit puts the new licensing scheme out of business.

Source:  The Wall Street Journal at http://online.wsj.com/article/SB10001424052702303759604579095473225014730.html