On July 29, 2011, Shanelle Smith testified at a Cuyahoga County Environment and Sustainability Committee meeting about green options for the county.

Full Testimony

Testimony of David Rothstein
Researcher – Policy Matters Ohio 
Research Fellow – New America Foundation 
Steering Committee Member – National Community Tax Coalition 
House Committee on Ways and Means, Subcommittee on Oversight 
Hearing on New IRS Paid Tax Return Preparer Program 
July 28, 2011

Full Testimony

On July 28, David Rothstein testified before the U.S. House Ways and Means Committee on the New IRS Paid Tax Return Preparer Program.

Accounting Today

Congress held an oversight hearing Thursday to examine progress on the Internal Revenue Service’s new tax return preparer initiative.

The hearing by the House Ways and Means Oversight Subcommittee looked at the new requirements for tax
preparer registration, testing and continuing education, along with the related costs and benefits.

“We do not yet know the full cost and compliance burdens the new program will place on return preparers, or whether
the requirements will yield the intended benefits,” said Rep. Charles Boustany, R-La., who chairs the subcommittee,
during his opening statement. “Indeed, the new requirements will cost tax return preparers an estimated $51 to $77
million annually in registration fees alone. This does not include the additional costs associated with taking the
competency examination and continuing education.”

He noted that it is necessary for the IRS to conduct outreach to ensure that return preparers and taxpayers alike
know and understand the new requirements. “Without an effective public education campaign and enforcement plan,
some argue that little progress is being made at reaching preparers that pose the greatest compliance threats,” he
added. “This is a critical issue for tax administration and it is important that Congress understands the new
requirements and continues its oversight to judge whether the new program improves tax compliance. Taxpayers,
paid preparers, and the IRS are best served if this initiative is successful.”

Paul Cinquemani, director of member services, business development and government relations at the National
Association of Tax Professionals, presented a discussion paper to the subcommittee on the Return Preparer
Review Initiative, which outlined some of the concerns of the preparers.

The paper noted that those tax preparers who “must take the competency examination in order to stay in business
naturally have concerns.” For example, some are concerned about the threat to their practice, and they want to be
able to study for and take the exam immediately.

“They believe they are being singled out as though they’re responsible for all the unscrupulous behavior and
incompetence in the preparation of tax returns,” said the paper. “They believe that all of the effort and resources
expended in this process will have little effect in ridding the system of the incompetent and/or unscrupulous. They
believe that they’re being unfairly punished and that they’re put into the same category as mobile scam artists that
proliferate from January 15 through April 1. They believe they’re being discriminated against on the basis of
credentials. They believe they’re effectively being governed by professionals that would like to put them out of
business. They are going through ‘test anxiety.’ Since the average age of our members is 56 years old, it’s been quite
awhile since they’ve had to take an exam. Some of them have indicated that they will work right up to December 31,
2013 and then retire. Others will sell their businesses. Some are studying to pass the EA examination so that they’re
part of the ‘governing group.’ For some, the lack of due process and the restraint of trade provisions in revised
Circular 230 were the last straw. They talk of taking to the courts.”

The NATP said it is concerned that the tax administration system will be harmed by a loss of capable preparers that
provide for the current compliance enjoyed by the system.

David Williams, director of the Return Preparer Office at the IRS, noted that for decades, most taxpayers prepared
their own returns, but over the past 20 to 30 years, the reality of tax filing in this country has changed dramatically.

“Today, more than eight out of 10 taxpayers use a tax preparer or tax software,” he said. “However, despite the fact
that paying taxes is one of the largest financial transactions that the average American family has each year, there
have been no basic competency requirements for tax return preparers. Practically anyone can prepare a federal tax
return for any other person for a fee. Through the Tax Return Preparer Program, the IRS is in the process of ensuring
a basic competency level for tax return preparers and focusing our enforcement efforts on rooting out unscrupulous
preparers.”

A representative from the American Institute of CPAs testified at the hearing. “We believe the IRS should be
commended for its efforts to implement the return preparer program,” said Patricia Thompson, chair of the AICPA Tax
Executive Committee. “They listened to stakeholder concerns and suggestions, and they’ve gotten it right.”

Thompson noted that the AICPA supports registering paid tax return preparers and issuing them unique preparer tax
identification numbers; expanding the ethical umbrella of IRS Circular 230 over all paid income tax preparers;
creating a continuing education structure geared towards “unenrolled” preparers, and implementing a basic Form
1040 oriented examination as a condition to become a “registered tax return preparer.”

Rep. John Lewis, D-Ga., the ranking Democratic member on the subcommittee, also praised the IRS. “I want to
commend the Internal Revenue Service for its leadership in this area,” he said. “I am pleased with the overall strategy
of the agency and its timeline for phasing in the new requirements. I also am pleased that many in the paid preparer
community support the program. We have all heard too many stories of ‘fly-by-night’ tax preparers who take
advantage of low- and middle-income taxpayers. I have long believed that regulating tax preparers will protect
taxpayers by making sure that persons who are paid to prepare returns are knowledgeable and trustworthy. I also
believe that regulating tax preparers will enhance tax compliance. The new requirements will allow the agency to
provide more oversight of preparers. This will allow the agency to detect patterns of fraud or simple error, and take
steps to remedy the problem and protect taxpayers.”James R. White, director of strategic issues at the Government
Accountability Office, presented a GAO report on tax preparer regulation, which found that improving tax return
accuracy would depend upon the IRS’s use of its new requirements.

“The extent to which the new paid preparer requirements will result in more accurate tax returns depends on IRS
actions,” said the report. In an earlier report in March, the GAO recommended that the IRS document a strategic
framework for how it plans to leverage the requirements to improve taxpayer compliance. The IRS agreed and is
working on such a plan. The GAO noted that there are various ways for the IRS to leverage the paid preparer
requirements in order to provide better service to taxpayers and ultimately improve taxpayer compliance, such as
conducting research on which strategies are most effective for improving the quality of tax returns prepared by
different types of paid preparers.

Lonnie Gary, the chairman of the Government Relations Committee at the National Association of Enrolled Agents,
said in prepared testimony that the NAEA has advocated tax return preparer oversight for years and supports the
bulk of the IRS’s decisions to date with one major exception.

“Our main area of concern, however, is that the newly licensed will be tested only on a basic individual income tax
return (Form 1040) but be allowed to prepare all tax returns,” he said. “This approach is troublesome for several
reasons. First, it allows those who have taken a basic test to market themselves as licensed to meet all tax
preparation needs. Second, it protects only a portion of the general taxpaying public and, frankly, we don’t
understand why IRS insists on protecting only some taxpayers, but not those with the most complex returns. Enrolled
agents believe that taxpayers and the tax community are better served by the basic proposition that tax returns
should only be done by a preparer who has shown competency – through testing – on that particular return. To that
end, we suggest the agency create a tiered credentialing, with a limited credential (registered tax return preparer) and
unlimited credentials/license (enrolled agents, CPAs and attorneys).”

Katherine Pickering, executive director of the Tax Institute at H&R Block and vice president of government relations
at the tax prep chain, acknowledged that the issue of tax preparer regulation is vital to H&R Block. She said Block
was able to register the majority of its preparers by the start of tax season.

However, she said Block has several concerns about the IRS’s program. “The IRS competency exam is redundant to
H&R Block’s program,” she said, listing the concerns in her prepared testimony. “There is no clear success
measurement for taxpayer compliance. There is no defined compliance and enforcement program. Late decisions
impact the filing season. Group registration is not an option.”

She noted that the IRS has informed Block that it would not certify or credential the company’s testing program, nor
the one developed by the Oregon State Board of Tax Practitioners. “H&R Block already has an extensive training and
testing program for its tax preparers, and it includes criminal background checks,” she said. “Our program, which is
built into the fabric of our company and complies with all existing laws and regulations, already exceeds the new IRS
requirements. We must continue administering our own program because it is critical to our business and our
reputation.”

David Rothstein, a research fellow at the New America Foundation, testified on behalf of the think tank as well as the
National Community Tax Coalition and Policy Matters Ohio. He emphasized that low- and moderate-income tax filers
need and deserve high-quality, affordable options with regards to tax preparation assistance, and the costs and
approach of paid tax preparation services should be transparent and easy for consumers of such services to
understand. However, he noted that several exemptions in the paid preparer regulations had been established in
response to issues raised by the industry and there were several implementation challenges that could be modified to
better serve working families.

One of his concerns relates to the delayed registration of about 100,000 tax preparers, according to IRS estimates.
“The data from this past tax filing season confirms that an extremely high number of fly-by-night paid tax preparation
sites set up for a few weeks, charge high fees, and complete subpar and error-riddled returns,” he said in prepared
testimony. “At worst, the preparers are totally disingenuous, targeting elderly and low-income filers, and selling them
unnecessary services related to transferring funds, recovery rebates, and exaggerated refunds and Social Security
claims. A recent wave of claims have suggested that several companies have misled consumers by intimating that
they are the IRS or ‘associates’ of some fashion. Attorneys General are filing lawsuits on behalf of consumers in a
number of states, and the IRS has issued warnings cautioning tax payers about these abusive practices. But the
damage in terms of taxpayers’ faith in the tax preparation sector has been significant, and these continued abuses fly
in the face of this new registration program.

Full Article (PDF version)

Ohio Public Radio

A think tank on the political left is questioning why Ohio legislators have OKed millions of dollars in additional tax breaks when the new two-year state budget is the tightest in decades. Republicans who dominate the Ohio House of Representatives say there’s good reason. Statehouse correspondent Bill Cohen has both sides of the debate.

Full Article (Listen to debate here)

Liberal group cites $400M-plus; Kasich defends policies

Columbus Dispatch

At the same time that lawmakers were making wide-ranging cuts in the state budget enacted this
month, they gave more than $400 million in tax breaks, a public policy group says in a new analysis.
“Some of the kind of tax breaks we are generating do not have any job requirements attached to
them,” said Zach Schiller, research director of Policy Matters Ohio, a liberal-leaning group based in
Cleveland.

“We’ve got every state trying to do this type of thing, and it’s a zero-sum game. We create a new tax
break, and then everybody else does it. And vice versa.”

The beneficiaries of these new or extended incentives approved by legislators and Gov. John Kasich
range from horse tracks to private operators of the state’s development efforts and Ohio Turnpike to
gift cards and customer-loyalty programs to buildings for captive deer.

The new tax breaks take their place alongside 128 others totaling around $7 billion a year already in
Ohio law.

“We comprehensively overhauled our business tax system in 2005 under the theory we were cutting
large numbers of special breaks and abatements because we would have a tax system that would have
lower rates and attract business.

“Are we in effect saying that’s failed?” Schiller said.

The 2005 changes eliminated the corporate franchise tax in favor of a new commercial-activities tax.
A 21 percent cut in the state income tax also was part of the plan; the final phase took effect this year.
Kasich defended his budget approach as “absolutely correct.”

“These are policies that have driven a strong job-creating economy throughout the history of our
country,” he said.Kasich accused his predecessors of “raising taxes” every time “we got ourselves in a bind,” and he
cited Standard & Poor’s recent upgrade of Ohio’s credit-rating outlook as proof that his budget and
policies have the state on the right track.

When asked about business- and income-tax cuts implemented by previous Govs. Bob Taft and Ted
Strickland, Kasich said those reductions didn’t reach far enough.

“As the CAT tax applies to people who are exporting out of the state, it’s good,” Kasich said. “But for
those who are not in that business, it doesn’t help them much. The idea that we should continue to
reform government and reduce taxes and make the state more competitive is the winning ticket, and
that’s exactly what we are doing.”

House Democratic leader Armond Budish of Beachwood agreed with the Policy Matters assessment.
“It is inexcusable that Ohio’s recently passed budget cuts millions from education, police and fire
protection, mental-health services and long-term care for seniors, while giving huge tax cuts to the
wealthiest among us and to special interests,” Budish said.

“The effects of the hundreds of millions in lost revenue will be catastrophic, and the burden of fixing
it will be left for the next General Assembly, while communities across the state pay the price.”

Mike Dittoe, spokesman for House Speaker William G. Batchelder, R-Medina, had a different take:
“Besides failing to recognize that the last General Assembly’s budget set the stage for the problems
we face today, this report unfortunately does nothing more than advocate for tax increases on
farmers, small-business owners and other job creators throughout Ohio.”

The Senate’s version of a state budget called for a panel to study the state’s tax breaks, but that
provision was stripped out in the final deal with the House and governor’s office.

However, Senate President Tom Niehaus hopes to accomplish much the same thing in asking Sen.
Tim Schaffer, a Republican from Lancaster and chairman of the Ways and Means Committee, to
regularly review all tax expenditures in relation to economic development, said Niehaus spokesman
John McClelland.

Full Article (PDF version)

Boston Globe

Taxpayers will be able to examine the qualifications of paid tax-return preparers in a 
database being built by the Internal Revenue Service that may be available as soon as 2013.

The database is part of the phased-in regulation of tax preparers that began in 2010 with a
requirement that they register with the IRS. Over the next two years, paid preparers will be
required to pass a competency test. They will also need to take annual continuing education
courses unless they are in professions, such as accounting and law, with their own
professional standards.

“The goal is to ensure that taxpayers receive top-quality service from this important
industry,’’ David Williams, director of the IRS Return Preparer Office, said in a statement
before a subcommittee of the House Ways and Means Committee.

The database will contain the names, addresses, and qualifications of tax preparers, along
with any publicly disclosed disciplinary actions.

Paid preparers handle about 60 percent of all tax returns filed annually. About 717,000 of
them have registered so far.

Williams said the agency does not know the total number of paid preparers. The IRS has
said it is contacting about 100,000 preparers who worked on returns this year and did not
comply with registration requirements.

The subcommittee’s chairman, Charles Boustany, a Louisiana Republican, said he is
concerned that the IRS isn’t doing enough to publicize its efforts.

Boustany urged the agency to “conduct outreach to ensure that return preparers and
taxpayers alike know and understand the new requirements.’’

He also said there have been “no basic competency requirements for tax-return preparers.
Practically anyone can prepare a federal tax return for any other person for a fee.’’

The government decided to regulate paid preparers after identifying a troubling level of
errors on tax returns they had handled. In 2006, the Government Accountability Office had
tax returns prepared at 19 outlets of tax-preparation chains across the country. “In all 19
cases there were mistakes,’’ said James R. White, the GAO’s director of strategic issues.

“Some favored the taxpayer. Some favored the government.’’Kathy Pickering, vice president
of government relations at H&R Block Inc., proposed that the IRS certify the company’s testing
program because it exceeds IRS requirements.

Williams said he has heard from 15 to 20 businesses seeking such certification and is
concerned that “we would end up with a patchwork system. Our concern was there would
be consumer confusion’’ over which certification was valid.

David Rothstein, a researcher at Policy Matters Ohio, which examines how government
policies affect low- and middle-income people, urged the IRS to require tax preparers to
provide clear estimates of their charges to consumers.

Full Article (PDF version)

Washington Post

Richard Cordray is no stranger to defeat.

A soft-spoken man who pads around in socks and admires the writings of Supreme Court justice Louis Brandeis, he has run for office in his native Ohio nine times in the past 20 years, losing nearly as many races as he’s won.

Now, he faces an entirely different kind of vote, one that won’t be decided at the polls but rather in a U.S. Senate full of political enemies. As President Obama’s nominee to lead the controversial new Consumer Financial Protection Bureau, Cordray faces an uphill confirmation battle over which he has little control.

Senate Republicans have vowed to block him. The House recently passed a bill that would abolish the director’s position. Some other Obama appointments have either languished for months or never gotten a hearing.

Cordray declined to be interviewed in advance of any potential hearings. But people close to him said that his stumbles at home have taught him a perseverance that should serve him well in Washington.

“I don’t dwell a lot on my political career because I’ve seen setbacks and reverses and seen how hazardous it is to lay plans,” Cordray told the Dayton Daily News last year.

Cordray is a compromise candidate for the CFPB after fiery Harvard law professor Elizabeth Warren, the Democrats’ top pick for the position, antagonized the GOP and financial groups with her strong rhetoric. Obama has pointed to Cordray’s appeal among local Republicans.

“He’s been up and he’s been down, and he knows what’s really important in all of this,” said Luke Blocher, who managed Cordray’s 2008 campaign for attorney general. “He’ll be able to understand when a political moment is happening that isn’t really about his confirmation.”

Cordray waded into politics as a Democrat in 1990 with an early win to the state House of Representatives, but was booted out two years later. He then made ambitious bids for the U.S. Senate, House and Ohio attorney general. He lost each time.

So Cordray scaled back his plans. In 2002, he was elected treasurer of Franklin County, which includes Columbus, and began to focus on the types of consumer issues that would later define his career. He aggressively went after overdue property taxes, but created a special program to help elderly residents who were delinquent.

Four years later, Cordray won the race to become state treasurer and took on payday lending and foreclosures, which were plaguing the state long before the financial crisis hit.

Amy Hanauer, executive director of the nonprofit Policy Matters Ohio, said Cordray took an early interest in concerns her group had over tax refund loans marketed to low-income residents.

What he saw in office mirrored what he would later read in “The Two-Income Trap,” a book by his future mentor Harvard law professor Elizabeth Warren that described the debt load saddling middle-class America.

Hanauer said in her conversations with Cordray about the book that she was struck by the similarities in thinking between him and Warren. “When he saw what was happening in Ohio communities . . . it gave him an understanding of how working people’s wealth was being sapped,” Hanauer said.

Warren also took note of Cordray. When he became attorney general in 2008, he became one of a handful across the country who relentlessly advocated for the creation of the new consumer bureau that she is credited with inventing and became a steadfast ally of the Obama administration.

Warren made Ohio her first stop outside of Washington after she was charged with setting up the CFPB in the fall. While there, she had a half-hour phone call with Cordray about potential collaboration between the bureau and the state.

The talk occurred just weeks before Cordray lost his reelection.

Three days later, Warren called him again. This time, she offered him a job as head of enforcement at the fledgling bureau.

Those who know Cordray said he never expected to wind up as Obama’s nominee to become the bureau’s inaugural director. But as the months rolled by and antipathy toward the more outspoken and high-profile Warren grew more pronounced, it became clear that the White House was searching for alternatives. Warren said she began mentioning Cordray’s name to the administration shortly after he started.

Republicans have threatened to block any nominee unless the White House agrees to structural changes to the bureau that would replace the director with a five-member commission, among other things. Administration officials had hoped the Senate would hold hearings within two weeks of his nomination, but prospects look increasingly dim.

When he eventually appears before the Senate, Cordray will bear the brunt of GOP opposition not only to the bureau but to the legislation that created it. During dinner in downtown Washington a few days after his nomination, Cordray talked with Tom Miller, Iowa’s attorney general, about what lies ahead.

“I think he’s excited,” Miller said, but added, “He’s not looking forward to all the politics of the confirmation process.”

Full Article (link to site) 
Full Article (PDF)

The budget bill approved by the Ohio General Assembly in June 2011 imposes devastating cuts on schools, local governments and health and human services. These cuts will hurt our economy and result in fewer jobs in the public and private sectors. Yet elected leaders who tout the virtue of spending cuts are spending on the other side of the ledger – in the tax code. Legislators approved an array of new tax breaks, the bulk of them for wealthy Ohioans and special interests, that will add up to more than $400 million a year when fully implemented. This July 2011 brief describes more than a dozen tax breaks the legislature authorized, expanded, extended or otherwise modified.

Full Release

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Columbus Dispatch article, “State Budget’s Targeted Tax Breaks Draw Criticism”

Akron Beacon Journal editorial, “Big Spenders”

Ohio Public Radio story on tax breaks

Implications of an Industry in Transformation

The automotive industry has played a critical role in the expansion of America’s middle class for nearly a century. Yet the industry has suffered great losses in recent decades and was deeply affected by the recession of 2008-9, which saw auto sales fall by 40%, and two of the Detroit 3 automakers enter bankruptcy. To more effectively serve the large numbers of dislocated auto industry workers and to better understand and mitigate the negative repercussions of these trends, the Labor Market Information Offices of Indiana, Michigan and Ohio formed the Driving Change consortium.

Full Report