Regulation and Tax Preparer Qualifications

Tax preparer regulation is a controversial topic among policy makers, the Internal Revenue Service, and certification providers. Proponents claim that regulation protects taxpayers from incompetent preparers while opponents assert that regulation increases costs and discourages preparers from attaining higher qualifications. Following longstanding regulations in Oregon and California, the IRS implemented the Registered Tax Return Preparer program in 2012, which was unexpectedly invalidated in just its second year. Using this quasi-experimental setting and a unique dataset of all U.S. tax preparers obtained from the IRS, we test the effect of regulation on tax preparer qualifications. We find that tax preparer regulation is positively associated with theproportion of highly qualified tax preparers. We also find that regulation increases (decreases) the likelihood that a market entrant (exiter) is highly qualified. In additional analysis, we find some evidence that tax preparer regulations are associated with increased fees and better tax return quality.

Occupational Licensure and Entrepreneurs: The Case of Tax Preparers in the United States

The authors examine the relationship between entrepreneurship and occupational licensure using data on the universe of more than 700,000 tax preparers in the United States. Prior research suggests that occupational licensure has negative effects on entrepreneurship because it increases the costs of operating a business. By contrast, the authors argue that licensure may allow entrepreneurs to signal quality and enhance their legitimacy. States that require tax preparers to be licensed have higher average rates of entrepreneurship—approximated by tax practice ownership—and, in high-income ZIP codes, more demand for paid preparer services. In the analysis of the introduction of a federal license requirement in tax preparation in 2013, voluntary early adoption of the license by preparers predicts higher chances of survival in the industry. Entrepreneurs are less likely to adopt the license early than are non-entrepreneurs, unless they lack other state-level credentials. Results thus suggest that licensure represents a trade-off for entrepreneurs between the costs of obtaining a license and the benefits of signaling quality and legitimacy.

Billions of Interest-Free Loans to the IRS through Filing Incorrectly on Form W-4

<p><em>Form W-4 was created by the IRS to provide tax withholding guidelines to employers. The form informs employers of employees’ filing status and the number of allowances each is eligible to claim. However, because of various factors, taxpayers unintentionally create interest-free loans to the IRS. Some of these factors include intentional and unintentional incorrect completion of Form W-4. Lack of education, knowledge, as well as fear of noncompliance have been contributing factors to this growing trend. </em></p><p><em>These interest-free loans create a one-sided benefit annually for the IRS, thus depriving taxpayers of the alternative use of such funds. CPAs and other tax preparers need to play a more proactive role in educating and assisting their clients in combating these interest-free loans to the IRS. Education is the most valuable tool to break the uneven cycle created by this behavior. True, some may continue to fund the coffers of the IRS from an inability to change, but through education, many others may change the way they manage their tax withholdings.</em></p><p><em>The subject of non-interest-bearing loans to the IRS is not heavily publicized nor discussed outside the financial arena. How does one engage average taxpayers in this discussion? Educating the public is key.</em></p>

Unreasonable S Corporation Compensation: Why has the IRS Failed to Enforce Circular 230?

ABSTRACT The fact that S corporations are required to pay reasonable compensation to shareholding employees is well established. In this paper, three S corporation reasonable compensation cases are discussed to demonstrate the issues faced by the taxpayer, as well as the penalties and professional responsibility problems that may impact the tax preparer. Analyses of the cases indicate that (1) paying low S corporation salaries leads to taxpayer penalties, and (2) that the language in Treasury Circular 230 may allow the IRS to apply penalties to the tax preparers involved with these cases. However, there is no evidence that the IRS has imposed penalties on the preparers related to these or any other S corporation reasonable compensation cases. I briefly review a series of preparer penalty cases in an effort to show that preparer penalties have been applied to situations bearing similarities to S corporation reasonable compensation cases.

Analysis and Sentiment Detection in Online Reviews of Tax Professionals: A Comparison of Three Software Packages

ABSTRACTThis study analyzes the “tax talk” in online client reviews of tax preparers, and evaluates off-the-shelf (SentiStrength, LIWC2007, and DICTION 6.0) and customized software packages' detection of sentiment in these reviews. Compared to human-coded sentiment, three off-the-shelf programs poorly assess client sentiment. We adapted two software packages, SentiStrength and LIWC2007, to “tax talk” by splitting the sample into learning and holdout segments (n = 50 each). Results for SentiStrength with a customized dictionary and keywords evidenced high validity. The results suggest that client reviews of tax preparers contain unique taxation language.Data Availability: Data used in this study are available from the corresponding author upon request.