A Chicago story broke this week that has implications for entrepreneurs (and taxpayers) nationwide. Independent tax preparer Sabina Loving filed suit in federal court to challenge a new IRS rule that requires tax preparers to be tested and licensed annually. This requirement will cost independent tax preparers many hours and hundreds of dollars every year, which they will either have to take out of their own pockets or pass onto their customers as higher prices.
Besides making it more difficult for Loving Tax Services, Inc. to serve local clients – the majority of whom are low- to middle-income individuals – the new rule also has a chilling effect on the availability of jobs in Loving's south Chicago neighborhood.
“I expect the rule will cost me about $1,000 every year,” says Loving. “If I were to employ five tax preparers, that would be an additional $5,000. As it stands now, I’ll only be able to hire one or two people instead of five.”
Although this new rule applies to all tax preparers, it is especially burdensome to Loving and other independent preparers who are working for themselves instead of H&R Block or Jackson Hewitt, companies that can better absorb compliance costs.
The rule is also illegal according to attorney Dan Alban at the Institute for Justice, the public interest law firm representing Loving.
“Congress never gave the IRS the authority to license tax preparers, and the IRS can’t give itself that authority,” says Alban. “The IRS is a bureau of the Department of the Treasury, which is empowered under the U.S. Constitution. The Congress could have passed a statute permitting the IRS to license tax preparers, but it didn’t.”
Just because Congress didn’t pass a statute doesn’t mean there was no lobbying involved in creating the rule. Lobbyists won exemptions for their clients, most notably an exemption for CPAs. Neither CPAs nor attorneys are required to pay the costs or take the time to become and stay licensed. What’s more, members of those privileged professions can also supervise non-licensed tax preparers. But given that Loving is neither a CPA nor a lawyer, she would not be able to supervise her employees legally even if she were licensed.
This seems silly especially considering her extensive experience. Loving has worked in accounting and financial services since 1994. She is a member of the American Institute of Professional Bookkeepers and has been a regulatory accountant for several prominent firms. After preparing other people’s taxes professionally for seven years, she founded Loving Tax Services two years ago.
“I went through a series of layoffs, where my employer would get bought out or would downsize,” Loving says. “I decided I wanted to take my destiny into my own hands. I didn’t want to depend on executive decisions that anyone else made.”
Loving now works 19-hour days, going into her own firm’s office after working a full day as an investment manager liaison at Northern Trust.
Although she has doubled her business from 56 filings last year to 104 filings this year, Loving cannot yet work at Loving Tax Services full-time. Rules and regulatory compliance costs aren’t making it any easier.
“It’s hard because there’s so much that you have to do to stay in compliance with the law,” says Loving. “There are a lot of people who are self-employed who don’t necessarily go down the checklist of what you have to do to be fully compliant. It was important for me to be in compliance with city and state regulatory agencies.”
While forming her business, Loving discovered the Institute for Justice’s Clinic on Entrepreneurship at the University of Chicago. The IJ Clinic helped her navigate the red tape to ensure her business was on solid legal footing.
Loving's previous interaction with IJ gave her the opportunity for the firm to represent her in her current lawsuit against the IRS. IJ has fought several cases challenging occupational licensing legislation that requires people to have licenses to practice everything from interior design to horse tooth filing.
“Ms. Loving’s case is part of a 50-year trend of increasing government-established occupational licensing,” says Dan Alban. “In the 1950s, legislation required only one out of 20 professions to be licensed. Now, one out of three jobs must be licensed.”
Although justified usually under the notion of consumer protection, occupational licensing allows large industry interest groups to use government to prevent competitors from entering the market. This raises prices for consumers and diminishes their choices.
Loving feels these problems first-hand in her business.
“I think government policy favors the haves over the have-nots,” Loving says. “If you’re not established, it’s very difficult to build something or to improve your quality of life. If you don’t have connections, it can almost be impossible.”
Loving hopes her lawsuit will help to realize the solution to the problem of government intervention and crony capitalism, both for herself and other entrepreneurs.
“There must be equality in all areas of business,” Loving explains. “Everyone should be held to the same standard. There should not be a special exemption for one class or another in business. We should all be held to the same standards. We live in a capitalistic society, so everyone should have the same freedoms.”
This piece originally appeared at ChicagoNOW.com.
Photo Credit: ChicagoNow