TAX PREPARER REGULATION – WHERE ARE WE?
- Why Regulate Preparers?
- Requiring Preparer Tax Identification Numbers
- To Test or Not to Test?
- Continuing Education Requirements
- Who Would Regulate Preparers?
- When Would Any Changes Go Into Effect?
Why Regulate Preparers?
The introduction of tax preparation software for commercial preparers has made it possible for people who never would have considered it before to start their own tax preparation businesses, according to remarks presented by OPR Director Karen Hawkins at the fall meeting of the American Bar Association. She was particularly critical of those “who use this software and rely on it as if it does everything for them.” She noted that the software makers have expressed the view that their product does not make anyone a tax expert.
The number of taxpayers preparing their own returns has declined by two-thirds from 1993 to 2005, Hawkins said. The “vast majority” of software-prepared, paper-filed returns and standard electronically filed returns are coming from paid preparers, totaling nearly 90 million, she said. In consequence, because many of these paid preparers rely on software and do not have sufficient (or sometimes any) tax knowledge to properly prepare a return, Hawkins stated that this has become a matter not only of protecting the public but also of protecting the tax system itself. “Preparers can be facilitators of tax compliance, or they can be enablers of tax noncompliance,” she said, referring to the perspective with which she views the review project.
Requiring Preparer Tax Identification Numbers
There have been discussions about whether the preparer’s tax identification number (PTIN) should somehow be coded so IRS can track types of preparers, such as whether a preparer is a certified public accountant or a lawyer, Hawkins said. Hawkins said she thinks requiring the registration of preparers is something everyone agrees should happen so the service can identify the preparer population and track its conduct.
One item from the 2008-2009 guidance business plan on which the Treasury Department is still working is regulations under tax code Section 6109 that would mandate the use of preparers’ tax identification numbers (PTINs), said Joshua Odintz, acting tax legislative counsel at Treasury who also spoke at the ABA meeting.
The current PTIN system, for which preparers may apply via IRS’s website or through a form, is not mandatory, he said. The guidance Treasury is contemplating proposing would require that, the identifying number of the signing return preparer be the PTIN for returns filed after Dec. 31, 2009, he said. “We need to have a better understanding of the tax return preparer community,” Odintz said. “Requiring this number will allow us to do so.”
To Test or Not to Test?
Hawkins said she thinks it is legitimate to consider having individuals take some sort of test to gain authorization to prepare tax returns. Questions that have arisen on this issue include whether certain groups or individuals should be exempt from an exam or if they can be “grandfathered” into the system, she said.
Individuals currently subject to Circular 230 believe they should not have to take an additional test to qualify to register as paid preparers, Hawkins mentioned by way of example. However, Hawkins, who is a licensed lawyer in California, said that lawyers and CPAs have yet to convince her that there is anything inherent in attaining their licenses that makes them qualified or competent tax return preparers. “I am not convinced that they should be exempted from testing by the mere fact that they are licensed by their state bar or by their state accountancy board,” she said.
In addition, many unenrolled and unlicensed preparers who have been preparing returns for a long time support the grandfathering concept, as they do not think they should have to take a test this late in their careers, she said. These individuals often do not enroll or become licensed because they just want to prepare returns and do not want to represent taxpayers in front of the IRS, Hawkins said. She noted that groups like NSA, H & R Block and the ABA have expressed the view there should be some kind of examination process to test an individual’s minimum tax competency, with some exceptions for those who have already taken a competency exam that IRS deems sufficient. The consensus at the Tax Preparer Forums held by IRS, most recently on Sept. 30 in Chicago, is that “minimum competency” is knowledge of the tax law as found in Publication 17. Clearly, since any ACAT examination is more difficult than the Pub. 17-based test contemplated above, we have asked the IRS to exempt from any testing requirement ACAT credential holders who have passed a valid ACAT examination.
Another element that needs to be addressed is what would happen to preparers in states that already require some sort of licensing, such as California and Oregon, she said. NSA also notes that some states, like New York, require registration for some tax preparers and these registration requirements would also have to be reconciled with any new federal rules.
Continuing Education Requirements
Even the potential requirement for continuing education has caused some controversy, according to Hawkins She noted that some individuals, primarily CPAs and attorneys, are required to have a specified number of hours on continuing education, but that CPE is not necessarily required to be tax-related, raising the question of what to require for those who are currently licensed and must participate in continuing education anyway. IRS does not want to increase burden on anyone concerning continuing education, “although I would say that I don’t think it would do anybody any harm to have to take maybe a couple extra hours a year that was on current developments and hot topics in tax law,” Hawkins said. She gave the distinct impression that there would be a requirement for tax-related CPE for those who are not otherwise required to have any CPE.
Who Would Regulate Preparers?
There has also been discussion about who will oversee the regulation of tax preparers, Hawkins said. Some people initially suggested that OPR do it, but it is not as clear anymore how the regime should be implemented and what body should oversee that, she said. It is being debated whether it should be overseen internally or whether there are “discrete portions that can be farmed out” to third parties, Hawkins said.
As practitioners are aware, the IRS computer system is not as robust or as technologically advanced as one would hope. In fact, NSAlert readers learned in our issue of July 31, 2009, that IRS data on tax preparers is stored on 22 different systems and the systems are not integrated. For that reason, NSA has suggested that a third-party entity be created to regulate tax return preparers. If nothing else, this entity could at least begin with a new computer system.
When Would Any Changes Go Into Effect?
The answer to the effective date question is dependent on whether the IRS could impose any new requirements via regulations or whether legislative changes are necessary. Hawkins said IRS would do the most it can without having to ask for legislation. She said she does not anticipate creating additional preparer penalties right now and thinks the regime currently in place will work as long as IRS enforces it a bit more rigorously.
Most practitioners and professional organizations, including NSA, have expressed the view that any tax preparer regulation effort must be coupled with a “robust” consumer education effort to be effective. In particular, consumers should be reminded it is their obligation to require a paid preparer to sign any return. This education effort will in all likelihood require additional funds in the IRS budget. However, amounts designated for this purpose are not included in the current federal budget that just began last week on Oct. 1, so it is questionable whether funds for this consumer education effort (or for testing, CPE monitoring, etc.,) could be available prior to the beginning of the next federal budget year in October 2010.
This leads to the supposition that most changes, with the exception of the possible requirement to use a PTIN, would go into effect on or after January 2011 at the earliest.