New Rules for Tax Return Preparers

The IRS recently announced new requirements for paid tax return preparers.  As it currently stands anyone can hang out his or her shingle, proclaiming themselves to be tax return preparers.  Although these actions are commendable, there is doubt about their effectiveness at combating the problem of incompetent and unethical tax return preparers.

The IRS plans to implement several steps designed to improve tax return preparation.  The first step is to require all paid tax return preparers to register with the IRS and obtain a preparer tax identification number.

Secondly, the IRS is going to require competency tests for all paid preparers except attorneys, certified public accountants, and enrolled agents who are active and in good standing with their respective licensing agencies.   Related to this requirement is a series of competency tests for all paid tax preparers except those in the previously mentioned groups.  I have a problem with the exclusion of attorneys and CPA’s.  Enrolled agents already have a continuing education requirement in tax, so that exclusion seems valid.  However, as an attorney or CPA, there are no requirements for competency in the tax area to maintain a license.  There are many practicing attorneys and CPA’s who know little or nothing about the tax law – their practice is in other areas.  It appears that there will be a series of examinations to “certify” preparers for different types of returns, although this is not certain at this point.

Treasury Department Circular 230 is the document that prescribes ethical standards for tax return preparers.  It currently applies only to attorneys, CPAs, and enrolled agents who practice before the IRS.  Practicing before the IRS generally gives the preparer the right to represent clients in an IRS hearing.    Under the new proposals, Circular 230 will apply to all paid preparers.

Again, I see a problem with this.  Suppose an unethical preparer tells his client that he will take a reduced fee and not sign the return.  Since most taxpayers are unable to deduct the fee for tax return preparation, some will be inclined to accept such an offer.  There are an estimated 700,000 paid preparers who do not sign the return as paid preparers.  These provisions, while bringing them under the ethical rules of Circular 230 will do nothing to compel them to sign the return.  The existing penalty is $50 for each violation.  Is bringing them under the rules of Circular 230 going to make them sign the return?  I have my doubts.

A problem I see with registration and education requirements is that those who operate “in the shadows” will stay there.  What about these proposals will compel them to become registered, obtain continuing education, and abide by the rules of Circular 230?

These steps will be implemented over a period of time.

In a series of related efforts, the IRS is going take immediate action to step up oversight of preparers.  This includes sending letters to 10,000 preparers who prepare large number of returns, urging them to be “vigilant” in areas where errors are frequently found.  Additionally, a number of preparers will receive visits from IRS agents to “discuss their obligations and responsibilities to prepare accurate tax returns.”  An additional initiative involved wider use of investigative tools including visits to preparers by IRS agents posing as taxpayers.   I see these efforts as intrusive to ethical, competent preparers while not reaching the vast number of unethical preparers who don’t sign the returns.

It is estimated that 70-80 percent of taxpayers hire someone to prepare their income tax return.  This is a choice that should be made carefully, and not just based on the company having someone standing on the street corner with a sign and an Uncle Sam outfit, urging you to use their services.  Some tips to selecting an honest, professional preparer include:

Be wary of those who claim they can obtain larger refunds than others.  That’s unethical to begin with and indicates they may take unethical liberties to obtain a large refund.  It is acceptable to state that “no one can obtain a larger refund for you.”

• Avoid preparers who base their fees on a percentage of the refund.  More unethical conduct.
• Use a reputable preparer who signs the return and gives you a copy.  Both are required.
• Consider whether the individual or firm will be around in November to answer questions about the return.
• Check credentials.  Only attorneys, CPA’s and enrolled agents can represent taxpayers before the IRS in all matters.  Other may only represent taxpayers for audits of returns they actually prepared.  And if they didn’t sign it, you’re on your own.
• Find out if the preparer is affiliated with professional organizations that provide continuing education and other support in tax matters.  Does the organization have a code of ethics?

The amount of income taxes you pay annually is usually one of the largest, if not the largest, financial transactions you will have in a given year.  Make sure that the person you entrust with this task is someone in whom you can place your confidence.