|Regulating Tax Return Preparers
What might be included in the forthcoming IRS plan to regulate return preparers?
October 15, 2009
In June 2009, IRS Commissioner Douglas Shulman announced (IR-2009-57) that by year end the IRS would issue "a comprehensive set of recommendations to help the Internal Revenue Service better leverage the tax return preparer community with the twin goals of increasing taxpayer compliance and ensuring uniform and high ethical standards of conduct for tax preparers." Notice 2009-60 (PDF) requested comments from interested parties on a specific set of questions. In addition, three public forums were held. Over 500 pages of comments were submitted (Tax Return Preparer Review Web site).
The idea to regulate preparers beyond existing standards of conduct and penalties is not new. Stronger oversight has been advocated in the past by some legislators, as well as the National Taxpayer Advocate (NTA).
This article summarizes some of the data that leads to calls for more comprehensive oversight, selected recommendations and the recently submitted comments.
Preparation Basics and Problems
Over 60 percent of individuals pay someone to prepare their tax return. In addition, in fiscal year 2006, about 73 percent of individuals claiming the earned income tax credit (EITC) used a paid preparer (2008 NTA report (PDF), p. 423).
While many preparers are attorneys, CPAs or Enrolled Agents (EA) and subject to various regulations (such as admissions testing, mandatory continuing education and rules of conduct), only California and Oregon have rules on who may prepare a return for compensation. While there are various penalties in the Internal Revenue Code that can be imposed on preparers and advisers for both intentional and unintentional mistakes, not all mistakes can easily be found. Also, the Circular 230 rules of conduct generally only apply to attorneys, CPAs and EAs. Thus, many preparers are not governed by any rules with respect to ethical conduct or tax law knowledge.
The General Accountability Office (GAO), Treasury Inspector General for Tax Administration (TIGTA) and a few other organizations have discovered some egregious situations of improper behavior by return preparers. A 2006 GAO study (GAO-06-563T) found that in 10 out of 19 situations, preparers failed to report business income. Also, an ineligible child was claimed five out of ten times for the EITC, among other errors. (For additional GAO findings, see GAO testimony (PDF) before the IRS, September 2, 2009.)
More recently, a September 2008 TIGTA report (PDF) described the findings of an undercover test of 28 unlicensed and un-enrolled preparers. They found that only 11 of 28 returns (39%) were prepared correctly, with 35 percent of the mistakes deemed reckless. All of the returns were prepared with tax prep software. Only five of the 28 returns were signed by the preparer.
The New York Department of Taxation and Finance also conducted an undercover review of almost 200 preparers. At a September 2, 2009 IRS forum, they reported (PDF) finding "an epidemic of unethical and criminal behavior" resulting in the arrests of over 20 preparers and 13 convictions.
The 2003 and 2008 NTA reports to Congress called for broadened regulation of preparers (2003 report (PDF), pages 270 to 301; and 2008 report (PDF), pages 423 to 426 (PDF) and pages 74 to 116 (PDF)). NTA recommendations include "requiring unlicensed preparers to pass a minimum competency test, register with the IRS and satisfy continuing professional education requirements" (2008 report (PDF), p. viii).
Various legislative proposals have been offered that include preparer regulation. For example, S. 1219 (110th Congress) called for testing and continuing education for un-enrolled preparers (also see H.R. 5716 (110th Congress)).
Two states, California and Oregon, require un-enrolled paid preparers to register. California preparers must pass a 60-hour course and post a bond. Oregon requires preparers to have a high school degree or equivalent, complete 80 hours of education and pass an exam. After initial registration, California requires 20 hours of annual education while Oregon requires 30 hours. (GAO-06-563T (PDF), p. 14)
The numerous suggestions made to the IRS to aid in its plan to better regulate preparers are categorized and summarized below.
Registration: To be able to identify and monitor preparers, some type of registration system is needed. TIGTA and others suggested that a single, unique identification number be utilized. Suggestions were also made to charge a fee to help cover the costs of regulation. This technique is used in both the California and Oregon preparer regulation systems (September 2, 2009 testimony).
The New York Department of Taxation and Finance suggested that registration data be made public. It also suggested that "the IRS should promote data matching and information sharing with and between States regarding investigations or concerns regarding incompetent or unscrupulous preparers" (September 2, 2009 testimony).
Certification and standards: Some commentators noted that barbers and beauticians were required to be tested and licensed and a similar standard made sense for tax return preparers. Suggestions included avoidance of a one-size-fits-all model because, for example, not all preparers needed to know corporate tax law.
Suggestions also included an initial background check and either phasing in any testing requirement or excusing existing preparers. For example, the National Association of Tax Professionals (July 30, 2009 testimony) suggested that preparers who belong to a professional organization be excused from any initial testing. Several commentators noted that standards should address both technical competency and ethical conduct.
The extent of any testing varied among commentators. Some suggested that preparers should at least be able to pass the VITA exam. Others noted that attorneys and CPAs are not tested deeply on the tax law so any testing might need to be applied broadly. Some noted that if a person had been tested once, there was no need to do so again.
Suggestions were made to broaden application of the Circular 230 standards to apply to all paid preparers and require preparers to report violators. Recommendations also included not imposing regulatory requirements on CPAs, attorneys and EAs that would duplicate what they are already subject to through licensing and professional organizations (for example, see AICPA testimony (PDF) of July 30, 2009).
Continuing education: The need for annual education requirements was noted by many commentators. Some also noted the need for such programs to include updates on state tax law.
Public education: Some commentators offered suggestions on how a regulatory system could also provide an appropriate role for taxpayers. For example, the IRS could pursue a public awareness campaign to let taxpayers know that a paid preparer is required to sign a return. Others noted that taxpayers should be able to check on the IRS website to know if a preparer was registered (for example, see American Bar Association (ABA) comments of July 30, 2009).
Tax preparation software: To help identify someone who might be a paid preparer, a suggestion was made that controls should exist in software to disable it if used to prepare more than a stated minimum number of returns (National Society of Accountants, July 30, 2009). Suggestions also included requiring software preparation vendors to meet standards set by the IRS. In contrast, others suggested that such oversight was not needed due to competitive market forces that kept standards high and e-file monitoring already in place.
- The IRS should continue to push for simplification of the tax law.
- Greater oversight of EITC returns is needed.
- There should be better enforcement of existing preparer penalties.
- Exclusion from registration should be considered for individuals who prepare a de minimus number of returns, such as less than five and who receive less than $1,000 per year. (ABA, July 30, 2009)
- Refund anticipation loans (RALs) should be banned as they can encourage some preparers to use them to hide the cost of return preparation and take fraudulent or aggressive tax return positions. The IRS should work to issue refunds more quickly so RALs are not needed. (Consumer Federation of America, July 30, 2009)
The IRS received a significant number of suggestions for its plan to regulate preparers. It also has regulatory systems in California and Oregon as guides along with longstanding suggestions and research from the NTA, GAO and TIGTA, among others. Ideally, the plan will greatly reduce the flagrant violations of the tax laws to increase respect for the tax system and reduce the tax gap, while recognizing that the majority of preparers are technically and ethically competent.
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Annette Nellen, CPA, Esq., is a tax professor and director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She serves on the AICPA’s Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.