South Side Woman Sues the IRS

South Side Woman Sues the IRS

This morning, a small business owner in West Woodlawn is taking a stand against perhaps the most unpopular agency of the United States federal government: the Internal Revenue Service. At stake is her ability to earn a living by helping people to prepare their tax returns.

Sabina Loving has joined two other plaintiffs 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 the 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 when you realize 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 to 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.”

Comments

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  • I hope she wins her case. Nice post.

  • In reply to Aquinas wired:

    Thank you, Aquinas. She's got a great legal team. I think her chances are excellent.

  • She probably won't though. The issue isn't whether the Internal Revenue Code says that the IRS shall or is authorized to license individuals, but whether the regulation is necessary or proper for the IRS to fulfill its functions. It might not be, but that's the bigger question.

    In any event, someone always seeks judicial review of any regulation. Never take what counsel for one party or the other says at face value.

    With all the crooked stuff going on in tax preparation (like the two in Indiana arrested for filing false returns and cashing their clients' refund checks), maybe some regulation is required.

    Being a libertarian, I'm surprised that you didn't come out against the current tax system. Various people have denominated the Internal Revenue Code as the "Lawyers' and Accountants' Relief Act." Apparently not enough for her, but I'll also bet that she wouldn't have a business without the Earned Income Credit. Mitt or Warren probably don't go to West Woodlawn to get their taxes done.

  • In reply to jack:

    Thanks for the comments, jack. I am against the current, muddled, progressive income tax system. That wasn't relevant to the story, so I omitted it.

  • In reply to Richard Lorenc:

    Good point. For once a blogger that stayed within scope.;-)

  • Saw this earlier today. Been meaning to write of it, myself. Good post.

  • In reply to publiusforum:

    Thank you, Warner. It's an important case.

  • I can't speak to the legality of the IRS licensing scheme but as a tax accountant I do support it. This rule requires three things of unregistered preparers like Ms. Loving 1) pass a test, 2) take 15 hours of continuing education per year, and 3) get a PTIN. While I don't see a lot of value in having people pass a test (I don't think they are good predictors of how good a tax accountant you will be) I do see value in requiring tax preparers take continuing education classes. The tax law is extremely complex regardless of the income level of your clients (EIC and education benefits are extremely complicated and only apply for low and middle income taxpayers). No matter how much experience you have the continual changes in tax law make make continuous learning a necessity. I just can't see how any preparer could serve their clients well without at least a pre busy season tax update class.

    Also, I am skeptical of Ms. Loving's cost figure of $1,000 per year. I know the exam fee is $116 and the PTIN registration fee is $63. The education requirement is 15 hours and I took a two day seminar last year specifically designed to meet this requirement for less than $300. If she is already taking an update class this $300 wouldn't even be an extra cost of the rule. Am I missing some costs here?

    I also find that your point about CPAs not needing to spend the time and money to comply with this rule makes no sense. As a licensed CPA I 1) have already passed a test, 2) am required to take 40 hours of continuing education per year, and 3) still have to register for a PTIN. CPAs were exempted from the testing and education portions of this rule because they are already going above and beyond what it requires.

    In agreement with Jack's post above there are crooked tax preparers out there and I think a little regulation is in order. I also don't think that what the IRS enacted is unduly burdensome.

    Finally I think that the tax code should be overhauled with an eye for simplicity. It is ridiculous that regular people who just have a job and go to school or own a house or have kids need tax preparers because their returns are too complicated. Interestingly that would make this whole post moot because Ms. Loving would have no tax returns to prepare.

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    In reply to cdjacksn:

    Well that's just great cdjacksn. You can't address the *legality* but you agree it will maintain your advantage over non CPAs and Attys. (OK, I read in the second part.) But but given the rather simple and straightforward purview of the IRS, (administer and enforce tax code), why not let *congress* do what they do so well — create such authority via law. (Hmm... seem to be an analogy to POTUS creating Czars and his fiats and laws.)

  • Every professional labors with mandatory "continuing education" hanging over them on a regular basis....costing time and money.. but...when you seek a professional, be it doctor, lawyer, accountant or insurance broker, you want that person to be sharp and on top of the changes and any new rules, products and laws.
    You want a poorly trained, well intended imbecile, doing your taxes?

  • In reply to gposner:

    Thanks for your comments, gposner. As far as poorly trained, well-indended preparing my tax returns goes, I am that person. So is everyone who prepares their own taxes. Don't assume people are so stupid that they cannot discern a professional from an imbecile. A system of fines (up to $100,000) is already in place for those preparers who skirt the rules. And those fines are usually never levied.

  • fb_avatar

    What is the IRS doing with the fees? They are not required to raise money to operate. They are funded by Congress.

  • I don't see an issue with requiring an annual license update for a few reasons:
    1) Forces preparers to maintain currency in tax regs (things get added and removed every year, this makes sure the professionals know about the changes)
    2) If I were to have someone do my taxes and I had my choice between a licensed firm that costs a little more and a firm that isn't licensed but costs less, I would choose the licensed firm for the reason I stated in item 1.
    3) If it weren't required but an option, I would think it would make a good marketing tool for the preparing firm "Licensed by the IRS as opposed to the guys across the street"
    4) A licensed professional almost always garners a higher fee than an unlicensed professional, passing it on to the customer is almost expected, maybe if you are serving a lower income area you don't push the entire cost onto the client, you can still pass on a little bit to help defray the cost.

  • As an employee of the IRS as well as a former Tax Professional, I can fully agree with the licensing requirement. Yes, I am biased, but I understand the complex issues that people face on a daily basis with tax related issues. Anybody who claims to know all the tax laws is telling you a lie. Congress cannot even interpret the laws, and they write them. I do not know all the tax laws and regulations, and I do not pretend to, either, but I do know how to find the laws as they relate to each individual, and I will do my best to interpret the regualtion as it pertains to the taxpayer.

    Every law and regulation affects everybody differently. Congress changes the tax code nearly every week, and it is extremely important that anybody who prepares tax returns keep up with the changing tax code through Continuing Education. When an individual or organization prepares a tax return, whether it is a simple 1040EZ, a return with EITC, education credits, Child Care, a complicated Schedule A, or a corporate return, they are taking the client's financial future in their hands. It is not asking a great deal for the IRS to be able to know who is preparing that return.

    And, yes, it is a better idea to seek out a professional who is licensed and knows their craft, than a person who is not. After all, I want to know the person doing the work has passed the requirements of their profession and can show me they know what they are doing.

  • I been doing taxes for many years, and taxes is a serious business, EVERYBODY has to follow the changes in tax law, and if she is not willing to put the time and the money required, then she is not good for this business! this is not just a mony maker business, is a business where a mistake can cost taxpayer a lot of money or their freedom!

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    Richard Lorenc

    Libertarian (classical liberal), entrepreneur, big cat enthusiast, Apple-head, Trekkie, double bass player. Director of Programs and Alumni Relations for the Foundation for Economic Education (FEE), the first free market organization in the country, whose mission is to inspire, educate, and connect young people to the ideas that make free societies successful. Former chairman of the Chicago chapter of America's Future Foundation, a group developing intellectual leadership among young professionals.

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