Hamill: Why regulating preparers matters

With malice toward none; with charity for all….to do all which may achieve and cherish a just and lasting peace, among ourselves, and with all nations.”

So said Abraham Lincoln in his second inaugural address. We can all go to Washington and read these words on the Lincoln Memorial.

Seven weeks after this inauguration, Lincoln was assassinated. The Civil War had ended just six days before his death.

Not everyone believes in malice toward none and charity to all. This has led me and others to suggest that chances of passing “good” tax legislation are dismal.

But let’s all be hopeful. There are a few positive signs. First, remember that that Civil War Lincoln led us through cost 2% of the population their lives.

That’s like losing the entire state of Indiana. We can be assured that the people of Indiana are safe from our present political wars.

Second, the (tax writing) Senate Finance Committee just released a bipartisan discussion draft.

Republican Chair, and unfortunately named, Mike Crapo, and Democratic ranking member Ron Wyden agreed on this proposal.

The proposal mirrors legislation introduced last December in the House . So, what’s all this “charity to all” about?

Reigning in unscrupulous tax return preparers. The proposals are to allow Treasury to regulate all tax return preparers.

This may seem like “inside baseball” to some of you. It might be more important to eliminate malice in our political system so we can pass reform-minded tax legislation.

But it is a key step in a unified strike against the so-called “tax gap.” This is the difference between what the government should collect and what it does.

There are varied estimates about the size of this gap. But I will boldly state that whatever it is, it is growing in magnitude.

We cannot have that in periods of massive budget deficits. Tax return preparers who claim to be professionals should not be a major cause of lost revenue.

The Treasury Department currently regulates three types of tax advisors — CPAs, attorneys and enrolled agents.

In exchange for regulation comes certain privileges of practice. But there is a larger group of tax preparers who escape any federal regulation.

The Treasury Department did try to regulate these people. These regulations were shot down by the courts in a case named Loving.

More than half of all tax returns are prepared by unregulated preparers. Treasury has an incentive to regulate the behavior of all preparers.

Courts accept that the regulation of CPAs, attorneys, and enrolled agents, grounded in a law first passed in 1884 and later ratified in 1982, is appropriate.

The reason is that in exchange for this regulation these parties gain special privileges of representation before the IRS.

With privilege comes responsibility (Mama Berenstain Bear). Unregulated preparers have no statutory grant of a similar privilege.

Hence, the courts said Treasury has no right to regulate the unregulated. But Congress now proposes a law that would allow this.

Regulation would require initial and continuing education and a background check. The currently regulated are exempt since they are already regulated.

There are eight states that do regulate the federally unregulated preparers in some fashion.

If you read this column, you have heard me drone on and on about lack of IRS resources.

Tommy James and the Shondells had a 1967 hit that said, “I think we’re alone now, there doesn’t seem to be anyone around.”

It continued, “Look at the way we gotta’ hide what we’re doing, ‘cause what would they say if they ever knew.”

With the current lack of IRS resources, most tax return preparers are alone now. They can hide what they are doing.

Regulation will not solve that problem. But it will provide a hammer to apply to those who are caught.

It is unfortunate that most of Congress seems to want to diminish the strength of the agency that collects the taxes that Congress itself legislated.

Bringing all tax return preparers within federal regulation may be a small step in the right direction, but it is in the right direction.

Lincoln was emboldened by the stalemate at Antietam that froze Lee’s advance to the North. Perhaps regulating all preparers will freeze the raid on federal revenues.