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Tuesday, November 4, 2008

Oregon gets it right

Licensing of people who prepare income tax returns for pay, that is. Oregon requires that such folks take classes, pass a test, and continue their education over their careers. The federal Government Accountability Office says that's the way the federal government should go for all paid preparers across the country.

Comments (4)

What? You mean they don't? That is scary.

That's a good point.

Of course, it also suggests that we reconsider and fundamentally redesign the tax code. Right now we endure a taxation system that is so fantastically baroque that even the brightest people need paid professionals to navigate through it. It is so stupifyingly riddled with jargon and intentionally obscure provisions that the folks working for the IRS get the MAJORITY of questions about it wrong. Further, this vast complexity exacts a huge toll on society, as many exceptionally bright people spend their days exploring the ins and outs of the tax code rather than producing anything of value (helping their patrons get a bigger slice of pie rather than working on productive activities that would make the pie bigger).

Same goes for so-called mortgage brokers, and financial advisors.

Unless you want to simply the global economy, it will be impossible to simplify the tax code.

Regarding the GAO's report, it admits that its methodology can't demonstrate that Oregon's licensing requirements led to more accurate returns. Further, I have doubts as to the effectiveness of the program.

Anecdotal evidence suggests there is a thriving "kitchen-table preparer" market in Oregon. In addition, I routinely come across returns prepared by both LTPs and LTCs with fundamental mistakes (i.e. failure to include income, failure to use appropriate standard/itemized deduction, failure to include withdrawal penalties). However, having never practiced in another state, I have no basis for comparison.

My gut reaction is that Oregon's system separates the spectrum of preparers into three categories. First, the best preparers get licenses and continue preparing. Second, the mediocre preparers attempt and fail to get licenses and quit preparing. Third, the bad preparers don't bother with licenses and continue to kitchen-table. As a result, the market now has a greater percentage of "bad" preparers operating under the radar.

This problem is compounded by Oregon's failure to promote their licensing system with taxpayer -- most are unaware of the requirements. This is most epidemic in minority communities. The taxpaying public is unaware of the license requirements and the honest, but mediocre, preparers have been forced out so many have returns prepared by "bad" preparers. Fly-by-nighters promising quick refunds via electronic filing are quite popular among the meth-population; I doubt LTP/LTCs are the preparers here. If no one knows of the requirements, public enforcement is impossible. As a result, the program is ineffective.

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