Regulation and Tax Preparer Qualifications

Tax preparer regulation is a controversial topic among policymakers, the Internal Revenue Service, and certification providers. Proponents claim that regulation protects taxpayers from incompetent preparers, while opponents assert that regulation increases costs and discourages preparers from attaining higher qualifications. Following longstanding regulations in Oregon and California, the IRS implemented the Registered Tax Return Preparer program in 2012, which was unexpectedly invalidated in just its second year. Using this quasi-experimental setting and a unique dataset of all U.S. tax preparers obtained from the IRS, we test the effect of regulation on tax preparer qualifications. We find that tax preparer regulation is positively associated with the proportion of highly qualified tax preparers. We also find that regulation increases (decreases) the likelihood that a market entrant (exiter) is highly qualified. In additional analysis, we find some evidence that tax preparer regulations are associated with increased fees and better tax return quality.