Regulation and Tax Preparer Qualifications

• In Event: Tax Issues, International and More

Abstract

Policy makers in the U.S. at both the State and Federal levels have taken a significant interest in regulating the tax preparation industry with the stated purpose of reducing the negative effects of incompetent and unscrupulous tax preparers. In this paper, we consider the consequences of tax preparer regulation on the qualifications of tax preparers.

More precisely, we test how the imposition of minimum requirements of registration, competency exam passage, and continuing education affects professional designations of tax preparers at all levels. We test a unique multi-year data set attained directly from the IRS that includes all U.S. tax preparers who have attained a U.S. Preparer Tax Identification Number (or PTIN). Our empirical design utilizes natural experiments of regulatory shocks including the implementation and invalidation of the nationwide tax preparer regulations under the RTRP program as well as cross sectional tests comparing regulated versus non-regulated jurisdictions.

Based on our analysis, we find that implementing regulations on tax return preparer populations is associated with three important primary effects: (i) regulation reduces the number of tax preparers per capita because fewer tax professionals become certified to sign tax returns and more tax preparers register as supervised tax return preparers who cannot sign or file tax returns, (ii) regulation is associated with greater percentages of highly qualified tax preparers, and (iii) fees for tax preparation services are higher in regulated jurisdictions than in non-regulated jurisdictions, which is likely caused by a combination of the limitations on the supply of tax preparers, the additional costs to tax preparers associated with compliance with the requirements of the regulations, and/or the higher fees demanded by a more qualified workforce.

Our analysis supports that there are more highly qualified preparers in regulated jurisdictions for several reasons. First, tax preparers who lack the ability or inclination to complete the competency exam and continuing education tend to drop out of the tax preparer market altogether or migrate to the non-preparer status of a supervised tax preparer. Second, more tax preparers tend to seek the second-level designation of Enrolled Agent in regulated jurisdictions, likely because the difference between achieving the minimum level and the higher level preparer designations is diminished and the higher level designation is viewed as a valuable signal to the market of competency.

Authors

• Matthew Reidenbach, Pace University

• John S. Treu, Pace University