Thursday, January 14, 2010

Commentary on the IRS Announced Plans to Regulate ALL Tax Return Preparers

On January 4th, 2010, IRS Commissioner Doug Shulman announced the IRS would start regulating all tax preparers beginning with the 2011 filing season. The new regulations will mandate all paid tax return preparers register with the IRS, require continuing education and pass an entry competency test. While these requirements seem more than reasonable, there are some provisions which exempt CPAs and attorneys from these requirements. The reasons for the exemption are CPAs and attorneys have already passed a licensing examination and are already subject to continuing education requirements.

As a practicing CPA, I have a real big issue with exempting CPAs and attorneys from ALL of the requirements placed on “unenrolled preparers”. An unenrolled preparer is a tax preparer who assists with tax preparation and filing but who is not authorized to represent a business or individual before the IRS. Being a licensed CPA or attorney is no guarantee of tax expertise. The licensing examinations do not emphasize tax law. Plus, neither is required to take any tax related continuing education to maintain their licenses. Truth is many CPAs and attorneys have little tax experience. I should know. I prepare tax returns for them. Frankly, any CPA or attorney in tax practice and not willing to take the IRS competency test should be ashamed of themselves.

Before this announcement, I was fortunate to attend a public forum held in Chicago on September 30, 2009. The purpose of this forum was to gather input on tax return preparer standards. The forum featured two panels of representatives. The panels represented the tax software and unenrolled preparer industries. After the public forums was to provide Commissioner Shulman with a comprehensive set of recommendations to boost taxpayer compliance and to strengthen the standards for the tax preparation industry.

At this forum, I really thought the unenrolled preparers represented themselves well. The one thing they all had in common was their support for additional regulation for their industry. I suspect this panel probably had some quality tax preparers (at least the ones who didn’t represent the major chains) on it. From my own experience, there are some really good unenrolled preparers out there.

Unfortunately, many unenrolled preparers aren’t very good and guess where they work? The major chains like H&R Block, Jackson Hewitt and Liberty. The problem is most of these preparers are only doing this as seasonal and part-time work. Of course, their fees do reflect this lack of experience. There is a place for these operations in this world of tax preparation, but I wouldn’t recommend them for anything other than a single W-2 worker who files a 1040-EZ. If someone is willing to prepare your tax returns for something ridiculous like $40…then buyer beware!

It was curious why the IRS would even want input from software vendors who provide tax preparation software. While the software representatives also supported additional regulation for preparers. I would question why they would even care. After hearing their statements, it became obvious their only vested interest was to become the providers of continuing educations and to administer any competency test the IRS develops. It sounds like a money grab to me…a nice big, fat government contract!

It’s safe to assume the motivation for establishing these regulations was from a Treasury Inspector General for Tax Administration (TIGTA) report prepared in 2008. According to this report, unenrolled, unlicensed preparers had only a 35% accuracy rate in preparing income tax returns and more than one-third of the erroneous returns contained misstatements or omissions that TIGTA considered willful or reckless. While this isn’t a shock to me, I feel like this report was flawed on two levels.

First, the TIGTA report only sampled 28 unenrolled preparers. That’s a very small sample size. It’s certainly not a large enough sample to produce accurate results. Second, the testing excluded enrolled preparers such as CPAs, attorneys, enrolled agents and enrolled actuaries. I suspect if they were included, they would have found the same problems. Of course, none of this is news to me. Virtually every new client I get is an amended tax return waiting to happen. Guess who prepared the returns I’m amending…mostly CPAs! My brotherhood…go figure!


Daniel said...

This is the most clear headed assessment that I have read on the issue of regulating tax preparers.

Thank You Neil!

The Tax Dude® said...

Thank you.