H&R Block, TurboTax, and Obama's IRS lose in effort to regulate small tax preparers out of business

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  • Keep in mind @turbotax @HRBlock profit models include lobbying to crush their Mom & Pop competitors @TPCarney

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  • Bigger businesses can afford the regulations, and they often benefit as small guys wither

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  • For now, you as a taxpayer can make up your own mind -- despite the best efforts of big business & big government

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This tax season, as you walk past an H&R Block storefront or log on to TurboTax, keep in mind that these companies' profit models include lobbying to crush their Mom & Pop competitors.

Mom & Pop, however, beat the tag team of big business & the Obama administration in the most recent round, when the U.S. District Court for the District of Columbia struck down an IRS regulation that would effectively outlaw many part-time tax prep businesses.

Here's the story:

In 2009, the Obama administration hired Mark Ernst, the previous CEO of tax prep giant H&R Block, as IRS deputy commissioner. Ernst became a "co-leader" (in the words of an IRS spokesman) in drafting new regulations for tax preparers.

This seems to clash with President Obama's executive order barring appointees from working on regulations directly affecting their former employers.

But thanks to a fine legal distinction, these rules didn't cover Ernst. "Mark Ernst is a civil servant at the IRS; he is not a political appointee," an IRS spokesman wrote me. "The Presidential Executive order on Ethics Commitments by Executive Branch Personnel only applies to political appointees."

Ernst's regulations require anyone paid to prepare taxes to get a license, pass a test, pay an annual fee and complete a 15-hour course in tax training every year.

Many paid preparers already meet stringent testing and continuing education standards in order to become "Enrolled Agents." Absent Obama's rules, taxpayers have a choice: You could hire an Enrolled Agent or H&R Block, and pay a little more for the added expertise or institutional support. Or you could choose someone like Elmer Kilian, a retired Korean War veteran who, for 30 years, has spent a couple months a year helping his neighbors in Eagle, Wis., file their taxes.

Obama and Ernst's rule would effectively put Kilian and thousands like him out of business.

That's why H&R Block supports the rule. A 2010 analysis by investment bank UBS concluded the rules "should help Block" for many reasons, including "add[ing] barriers to entry (or continuation) for small preparers."

And that's why Kilian and two other small-time tax preparers filed suit to block the regulations. Lawyers at the libertarian public-interest law firm Institute for Justice argued that the IRS does not have legal authority to regulate tax preparers. Congress could legislate these rules, but the Obama administration can't do it on its own.

A federal judge in D.C. agreed with Institute of Justice and its plaintiffs, struck down the rules, and placed a stay on the IRS to prevent the agency from enforcing these rules in the current tax season.

The IRS objected, asking the court to leave the rules in place while it appeals. One argument the IRS made in its motion: "overwhelming public support for the new regulations" and "concerns ... about the impact of the Court's ruling on the public."

This is the nature of regulation: Bigger businesses can afford the regulations, and they often benefit as small guys wither.
To demonstrate these "concerns" and that "support," the IRS cited a press release from Intuit, owner of TurboTax. Intuit has lobbied since at least 2010 for these regulations, and last month the company criticized the court ruling voiding them. Of course Intuit would -- the human tax preparers Obama wanted to regulate compete with TurboTax.

H&R Block executive Amy McAnarney made that point in a press release: "It's easy for software providers like TurboTax to say they support these regulations when they, themselves are not directly impacted."

H&R Block, on the other hand, was lobbying for regulation of itself -- and its competitors. Reuters cited an industry analyst in reporting "[t]he court ruling could hurt institutional tax-preparation providers such as H&R Block and Jackson Hewitt by reopening the market to small competitors that the IRS program had been expected to squeeze out."

This is the nature of regulation: Bigger businesses can afford the regulations, and they often benefit as small guys wither.

Also lobbying for stricter rules: the National Association of Enrolled Agents. Enrolled Agents have made significant efforts to become experts. Now their lobby wants to ban competition from nonexperts. NAEA top lobbyist Bob Kerr says Obama's requirements weren't that high and that the consequences of an incompetent return are dire.

Kerr argued that the only competition he wants regulated out of business is the dishonest, incompetent or lazy competition. Kilian and others don't see it that way.

For now, you as a taxpayer can make up your own mind -- despite the best efforts of big business & big government.

Tim Carney is a visiting fellow at AEI.

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