Alarmed: has the IRS ventured into fee setting?

• Author: Allen, Bruce C.
• Position: Internal Revenue Service

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...