IRS to hold hearing on licensing tax preparers

The IRS on Friday will hold a hearing on the new mandate requiring professional tax preparers to become licensed for the 2011 tax season. 

The new requirement states that any person who makes money from completing tax returns must register with the IRS, pay a fee and eventually pass competency tests and possibly attend continuing education programs.

Supporters of the new rule say it will clamp down on preparers who in the past have promoted bogus tax schemes and perpetrated frauds while missing legal deductions, like the recent telephone tax refund that 30 percent of all taxpayers failed to claim, according to the IRS. 

A 2006 Government Accountability Office (GAO) study showed that preparers either don't play by the rules or don't know what the rules are. Of the 19 tax-preparer offices it examined, 17 made material mistakes on returns that affected refunds. 

Still, others say the new rule will be cost-prohibitive to smaller tax shops that work on narrow profit margins. 

Dan Alban and Scott Bullock with the Institute for Justice will testify at Friday's hearing and contend that the new rule could jeopardize the careers of mom-and-pop tax preparers.

"The proposed licensing scheme would disproportionately hurt small tax-return preparation businesses and independent preparers, many of whom may be forced out of business," the organization states. "Part-time and seasonal preparers, as well as those who specialize in assisting low-income or special-needs clients, such as those with language barriers, are likely to be hardest hit. By contrast, large, politically connected industry insiders will be able to easily absorb the licensing cost."

The group also notes that the licensing fee will be passed on to customers and drive up the cost of completing a tax return.

The initiative could also become a quagmire as approximately 700,000 preparers will register with the IRS before the start of next year's tax season. The IRS is expected to discuss the registration process at Friday's hearing.