For the 2007 tax year, about 60% of the 143 million individual tax returns filed with the IRS were done by paid preparers. Tax preparer registration for these paid preparers has been considered for years. The Government Accountability Office (GAO) and the Treasury Inspector General for Tax Administration both previously reported that unlicensed tax preparers have high levels of incompetence and unethical practices. Similarly, IRS Taxpayer Advocate Nina Olson claimed since 2002 that “untrained and unscrupulous preparers” are a problem for ordinary taxpayers that require regulation.
Earlier this month, the IRS finally announced action. Even so, the new registration requirements will not be effective for the 2010 tax preparation season, and will take three years to implement fully.
Perhaps more important, the IRS announced that it will immediately begin an enforcement program that includes IRS agents posing as taxpayers seeking preparer services. The IRS claims that it will visit “thousands of preparers” in the upcoming tax season. The IRS intends to crack down on what is perceived to be a widespread problem of preparers that aid and abet fraudulent tax returns. Referrals will be made to the Department of Justice to pursue civil or criminal action for violations.
Paid tax return preparers currently have no registration requirement with the IRS, but they are required to sign the returns they prepare and provide either their Social Security Number or a Preparer Tax Identification Number (PTIN). The PTIN has been an optional number a preparer can apply for if the preparer prefers to not disclose their Social Security Number. The IRS will require individuals who are required to sign a federal tax return as paid return preparer to register with the IRS and pay a user fee. Also, the IRS plans to make the use of PTINs mandatory instead of optional.
In IR 2010-1, the IRS outlined its plan that includes:
- “Requiring all paid tax return preparers who must sign a federal tax return to register with the IRS… 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 … .
- Requiring ongoing continuing professional education for all paid tax return preparers … .
- 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.”
The new IRS requirements will not affect attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies. Although attorneys, CPAs and enrolled agents are currently exempt, the IRS says they will evaluate the quality of returns prepared by these groups to determine whether the exemption should continue. No other preparers will be exempt from the testing and other requirements, regardless of the amount of prior return preparation experience.
Multiple competency tests will exist, covering (i) personal tax issues, (ii) small business income reported on Form 1040, and (iii) business taxes. The continuing education requirements will be a minimum of 15 hours annually, consisting of three hours on federal tax law updates, two hours on tax preparer ethics, and ten hours on other federal tax law topics.
Because the IRS believes it already has the authority to regulate paid preparers under IRS Code Section 6109, the IRS will not be seeking legislative approval of its plan.
Unlike most of the rest of the country, California has had a registration and continuing education requirement for years. Starting in 1997, California outsourced its taxpayer licensing requirement from California Department of Consumers Affairs to the California Tax Education Council (CTEC). CTEC is a nonprofit quasi-public benefit corporation that is entirely funded with preparer registration fees, and runs without any continuing government assistance. Last year CTEC registered more than 44,000 tax preparers. In California, anyone who accepts payment for preparing a tax return and is not otherwise exempt from registration (i.e., a lawyer, certified public accountant or enrolled agent) must meet the following requirements:
- Take a CTEC-approved 60-hour education course
- Obtain a $5,000 preparer bond
- Pay a $25 annual registration fee
Oregon, Maryland, and New York also have registration requirements.