Tax preparer regulation: Late for the party

Don't you hate it when you thought the invitation said 9, but the party really started at 8?

I figured I'd still come the to party, even though it may mean receiving disdainful looks from those wondering why I'm so slow. So here's my take on the specific issue of tax preparer regulation:

One of my pet peeves (and goodness, there are many) is when a person repeatedly talks about problems but never suggests solutions. Granted, I am always pointing out problems (much to the challenge of co-workers), but all the while strive to find solutions.

Going back and reading my previous post, "Why Regulation Won't Work," I now kick myself for doing just that which I detest -- discussing the problem but not possible solutions. Doh! Let's see if I can get back in my own good graces.

So regulation won't solve our problems. That's simply a fact of life. In all aspects of life, we have a gap between the ideal and the reality. The issue, then, is how to minimize the size of the gap. We must have law and order if we are to avoid anarchy.

A couple of concepts from Economics 101 come into play here. First, we must deal with externalities, both benefits (such as public safety) and costs (such as pollution). And second, we have limited resources.

How do we deal with it? We must decide whether to use our scarce resources to affect an externality, be it public safety, education, law enforcement, whatever.

I'd argue that tax evasion itself is an externality. Most people would not comply with tax law if society did not dedicate resources to its enforecement. Few people argue that we do not need laws or regulations. Rather, the argument centers on the method and extent of regulation.

I think those involved in this debate agree on several things, such as:

• Ideally, all tax preparers would be knowledgeable and honest.
• The reality is far from this ideal.
• The public would benefit if the reality-ideal gap were decreased.
  

If we all agree on those points, then the key issue is: Would the benefits of regulating unlicensed preparers justify the resources required to do it?

I'm inclined to say no. In my experience, government (and the IRS in particular) does not operate efficiently.

Maybe I'm wrong, and someone will present to us a beautiful, inexpensive, efficient system to regulate preparers. If that happens, I will gladly eat my words. But until them, I'd rather the IRS spend its scarce resources on other things.

(Bruce the Taxguy provides a nice list of links to blogger commentary on the issue.)