Alarmed: has the IRS ventured into fee setting?

Before they get barraged by questions from clients, tax practitioners may want to review the 2005 1040 instructions with taxpayers this year--especially those that appear on Page 79 of the booklet, www.irs.gov/pub/irs-pdf/i1040gi.pdf.

On Page 79, the IRS reveals its new estimates of taxpayer burden in completing and reporting to the IRS. The page includes average preparation times and out-of-pocket expenses based on a new survey of taxpayers and a "more accurate method of estimating taxpayer burden."

The estimates focus on taxpayer characteristics and activities, rather than forms, and replaces the burden estimates shown in prior year form instructions.

Cost Estimates or Fee Setting?

Some tax practitioners were understandably alarmed by the last column on that page, which indicates hours and costs estimates associated with using a paid professional.

For instance, "non-business filers of Form 1040 and other forms and schedules, but not schedule A or D" could anticipate spending 16.1 hours and incurring a cost of $17 to prepare the tax return themselves without tax software; increase the hours to 21.8 and cost to $42 if the return is self-prepared using tax software. If a paid professional prepares the return, the hours would decrease to 10.9, but the cost would increase to $172.

The top cost to a business filer for preparation of the 1040 and forms and schedules including more than one Schedule C, C-EZ, E, or F, or Form 2106 or 2106-EZ would be $866 if using a paid preparer.

It is interesting to note that the taxpayer burden increases in both time and cost when tax preparation software is used to self-prepare the returns. The IRS is on record as actively supporting increased e-filing. The information on the table would not seem to support that objective.

CalCPA Opposition Letter

CalCPA's Committee on Taxation responded immediately upon learning about the 1040 instructions by filing a letter of protest with the IRS Commissioner.

The letter, written by committee chair John DiCarlo, points out that the cost estimates were misleading to the taxpayer and could be interpreted as a suggestion of what would be considered reasonable fees.

Under that interpretation it could be viewed as fee setting which would, if done by a group of competitors, be a violation of federal antitrust laws.

DiCarlo's letter points out that the costs presented do not reflect marketplace reality, regional differences of costs to perform the service, regional differences in fees charged for services, the complexity of the return or the professional standards to which the preparer subscribes. Nor does it consider the preparation of state tax returns which are often included as part of a preparer's services.

Given these variables, the information in the 1040 instructions is meaningless to any individual taxpayer and serves no useful purpose.

DiCarlo further points out that in some instances the schedule actually could serve to increase the taxpayer's burden by encouraging tax practitioners who currently charge less than the posted cost for a specific service to increase their fees.

The letter, available at www.calcpa.org/BUZZ/1040dicarlo.htm, strongly urges the IRS to reconsider publishing the 2005 Form 1040 Instructions in its present form.

AICPA Goes on Record

The AICPA also filed a protest letter with the IRS making interesting observations about the data presented.

According to the letter, AICPA concerns include that the estimates:

* Provide no distinction for the complexity of a taxpayer's tax return;

* Do not take into account how well a taxpayer's records are organized;

* Do not take into account geographic considerations relating to a tax professional's cost of doing business in a major metropolitan area vs. lower cost areas represented by smaller towns or rural areas;

* Do not take into account the expertise or level of experience of the tax professional, or even their professional designation, e.g., whether the professional is a CPA, enrolled agent, or an unlicensed tax preparer;

* Show that the average hourly cost charged by a paid preparer for 'Form 1040, Schedule C or C-EZ, and other forms and schedules, but not Schedule E or F or Form 2106 or 2106-EZ' is $5.96;

* Explain to taxpayers who prepare 'Form 1040, Schedules A and D, and other forms and schedules' that their burden will increase 37.45 percent by using software; and

* Will put tax professionals in the difficult and awkward position of trying to explain why they must charge substantially more than the published IRS estimates.

Think Twice in 2006?

It is unlikely that the IRS will be able to have the offending information removed in time for mailing to taxpayers, but at least the profession is on record objecting to this thoughtless government intrusion into the marketplace.

As you are aware, the President's Advisory Panel on Federal Tax Reform recently released its recommendations. That panel, probably using data collected by the IRS, estimated that Americans spent more than 3.5 billion hours preparing their taxes and about $140 billion on tax preparation and compliance in 2004.

Bruce C. Allen is CalCPA's director of government relations.