Why are Barbers Regulated, But Tax Preparers Aren’t?

In the State of Florida, the Department of Business and Professional Responsibility (DBPR), licenses barbers, beauticians, and other professions. The fact of the matter, is that someone that handles sensitive information, like Social Security Numbers, bank account information, doesn’t have to be licensed, much less take a test to demonstrate a basic knowledge of how the tax system works. They go into business, knowing how to beat the system, and there are minimal, if any consequences for their actions. Not to mention, they undercut a licensed prepare’s fees, which causes clients to go with the lowest bidder.

I represented an unlicensed tax professional, who was pumping up earned income. To take advantage of the Earned Income Tax Credit (EITC). If that wasn’t enough, they were making up college expenses in order to take advantage of the refundable American Opportunity Tax Credit. The way they were pumping up income was through Nanny Income. Now, anyone licensed will tell you that a nanny is required to get a W-2, a fact that was lost on this preparer. The company in question, used this methodology, until their tax program, changed the way that Nanny Income was reported, and forced them to report that income as wages, with no W-2 to backup the entry.

The IRS, eventually caught wind of this, and launched a phishing expedition, gathering evidence for Criminal Investigation (CI). The IRS had, sent in an agent, incognito, to pose as a taxpayer, and saw how the business operated. The business had a client fill out a form, as a way to do some form of due diligence. The agent filled out the form, and had her return prepared. As the return was prepared, the preparer, gave the agents hints on how to get a higher refund, but that would cause the preparers fee to be more. We can’t charge a fee based on our client’s refund, not to mention we can’t explain that increasing income, taking a college credit for a person that didn’t go to college, would give the client a better result.

The outcome of the audit was that the preparer got their EFIN, and PTIN shut off. There was no criminal investigation, and the preparer had to pay a $2,000 penalty. The company is still in business, with the preparer acting as a consultant, and the same thing is still going on.

A few years ago, the IRS tried to regulate tax pros. However, their mistake was adding the component of representation. The case was struck down by the Supreme Court. However, there needs to be some test or even just a demonstration from a tax professional that they know what they are doing. This needs to be coupled with some oversight, along with some continuing education.

What happens on our end, is that you meet with a client. You give them a range of what something will cost. They will then go to an unlicensed professional, whose fees will be a fraction of yours. The client doesn’t know that they are comparing an apple to an orange, and they usually learn the hard way.

How is this fair to legitimate professionals that have taken the steps to get licensed, and know what they are doing. I charge on the higher end of most professionals, and when I encounter a price shopper, I cut the appointment short. I will not be cheaper then the next guy, but there are a lot of clients that get it, and are more than willing to pay my fee.

The point I am making is that, CPAs, and enrolled agents, have demonstrated their knowledge, are required to take continuing education. Why not level the playing field and require that of all tax pros?

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Craig W. Smalley, MST, EA, is the Founder and CEO of CWSEAPA, PLLC. He has been admitted to practice before the Internal Revenue Service as an Enrolled Agent and has a Master’s Certificate in Taxation from UCLA. In practice since 1994, Craig is well-versed in U.S Tax Law and U.S. Tax Court cases, and specializes in individual, partnership, and corporate taxation for high-net-worth clients; entity structuring and restructuring; and representation before the IRS regarding negotiations, audits and appeals. Craig is currently a columnist for CPA Practice Advisor and AccountingWEB and has had 12 books published. His articles have been featured in publications including the Wall Street Journal, The New York Times, and Christian Science Monitor, and he has been interviewed and appeared as a featured guest on numerous radio shows and podcasts. Craig can be reached at craig@craigwsmalleyea.com.