IRS Proposes New Standards For US Tax Preparers

by Glen Shapiro, LawandTax-News.com, New York

06 January 2010

The US Internal Revenue Service (IRS) kicked off the 2010 tax filing season on January 4 by issuing the results of a landmark six-month study that proposes new registration, testing and continuing education of tax return preparers.

More than 80% of American households use a tax preparer or tax software to help them prepare and file their taxes, and the IRS says that higher standards for the tax preparer community will "significantly enhance protections and service for taxpayers, increase confidence in the tax system and result in greater compliance with tax laws over the long term".

The IRS also announced a "sweeping" new outreach campaign targeting tax return preparers with a combination of enforcement and education. As part of the outreach effort, the IRS is providing tips to taxpayers to ensure they are working with a reputable tax return preparer.

"As tax season begins, most Americans will turn to tax return preparers to help with one of their biggest financial transactions of the year. The decisions announced today represent a monumental shift in the way the IRS will oversee tax preparers," explained IRS Commissioner Doug Shulman.

"Our proposals will help ensure taxpayers receive competent, ethical service from qualified professionals and strengthen the integrity of the nation's tax system. In addition, we are taking immediate action to step up oversight of tax preparers this filing season," Shulman added.

Based on the results of the Return Preparer Review released January 4, the IRS recommends a number of steps that it plans to implement for future filing seasons, including:

• Requiring all paid tax return preparers who must sign a federal tax return to register with the IRS and obtain a preparer tax identification number. These preparers will be subject to a limited tax compliance check to ensure they have filed federal personal, employment and business tax returns and that the tax due on those returns has been paid.
• Requiring competency tests for all paid tax return preparers except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies.
• Requiring ongoing continuing professional education for all paid tax return preparers except attorneys, CPAs, enrolled agents and others who are already subject to continuing education requirements.
• Extending the ethical rules found in Treasury Department Circular 230 - which currently only apply to attorneys, CPAs and enrolled agents who practice before the IRS - to all paid preparers. This expansion would allow the IRS to suspend or otherwise discipline tax return preparers who engage in unethical or disreputable conduct.

Currently, gaps in US law allow anyone to prepare a federal tax return for anyone else and charge a fee. While some preparers are currently licensed by their states or are enrolled to practice before the IRS, many do not have to meet any government or professionally mandated competency requirements before preparing a federal tax return for a fee.

The IRS expects that the newly-announced initiatives will take several years to fully implement and will not be in effect for the current 2010 tax season. However, in the meantime, the tax authority is taking immediate action to step up oversight of preparers for the 2010 filing season.

Beginning this week, the IRS is sending letters to approximately 10,000 paid tax return preparers nationwide. These preparers are among those with large volumes of specific tax returns where the IRS typically sees frequent errors.

The letters are intended to remind preparers to be vigilant in areas where the errors are frequently found, including Schedule C income and expenses, Schedule A deductions, the Earned Income Tax Credit and the First Time Homebuyer Credit.

These letters will be followed up by visits to tax preparation firms by IRS revenue agents in the coming weeks to discuss their obligations and responsibilities to prepare accurate tax returns. This is part of a broader initiative by the IRS to step up its efforts to ensure paid tax return preparers are assisting clients "appropriately."

Separately, the IRS will be conducting other compliance and education visits with return preparers "on a variety of issues".

In addition, the IRS will more widely use investigative tools during this filing season aimed at determining tax return preparer non-compliance. One of those tools will include visits to return preparers by IRS agents posing as a taxpayer.

As part of this effort, the IRS intends to work closely with the Department of Justice to pursue civil or criminal action as appropriate.

The measures have been welcomed by the senior members of the Senate Finance Committee, which has jurisdiction over tax legislation.

“I support the IRS in its efforts to improve oversight of paid tax preparers and increase voluntary compliance among taxpayers," Committee Chairman Max Baucus (D - Mont.) stated in response to the IRS announcement.

He continued: "Increased accountability and competency of tax preparers will improve customer service for American taxpayers and help protect them from scams that cheat both taxpayers and the US Treasury."

Baucus also noted that a better regulated tax preparation industry will help narrow the USD345bn 'tax gap' between taxes legally owed and actually paid.

"Americans have a right to expect that when they hire a tax preparer, they’re going to get accurate, straightforward advice," stated Chuck Grassley, Committee Ranking Member. "The IRS is correct to take action. People who seek out professional service should get it, plain and simple. If taxpayers overpay their taxes, it’s unfair to them. If they underpay, it’s unfair to those who pay what they owe.”

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