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Tax preparer oversight goes to court again: AICPA vs. IRS

The current filing season isn't officially over until the Oct. 15 extension deadline, but a legal battle over paid tax preparers who will file returns in 2015 is already heating up.

As is fitting for anything related to tax, things are complicated and messy.

On one side are many independent tax professionals who resent what they see as a heavy-handed patriarchy by the IRS, as well as a respected professional association that already mandates standards for its members.

On the other side are the Internal Revenue Service and the National Taxpayer Advocate, whose job is to keep the IRS in line and ensure that taxpayers receive credible and fair treatment form Uncle Sam's tax collector.

And as is so often is the case, the taxpayers are in the middle.

Long fight to regulate tax pros continues: The IRS has been trying for years to establish standards for tax preparers who are not otherwise regulated, either by their states or through membership requirements of their profession, such as CPAs, Enrolled Agents and attorneys.

The IRS effort to mandate continuing education and testing for certain tax professionals was struck down last year by two federal courts. So the IRS has decided to try the voluntary route.

IRS education and testing or tax preparers target of AICPA lawsuit July 2014

Last month, IRS Commissioner John Koskinen announced the implementation of a voluntary Annual Filing Season (AFS) program for tax preparers. The goal is to have the program in place in time for the 2015 filing season.

Under the AFS plan, preparers who choose to participate would take 18 hours of continuing education each year. Upon completion of coursework, preparers must pass a test to receive a record of completion that would be good for the filing season. Those tax pros also would have limited representation rights before the IRS on behalf of their clients.

Participation and the IRS imprimatur upon completion in the voluntary program would be done on an annual basis.

Voluntary opposition: Some folks, however, have problems with the IRS' latest tax preparer plan.

Among them is the American Institute of CPAs (AICPA), which has filed a federal lawsuit challenging the IRS' authority to institute its proposed voluntary continuing education and testing of tax preparers.

Although the AICPA has generally supported the IRS goal of ensuring all tax preparers are adequately equipped to serve clients, the professional group says the voluntary program is "an unlawful exercise of government power."

The AFS plan is essentially mandatory, argues the AICPA, since only the tax preparers who complete the program will be allowed by the IRS to represent customers if there are issues with their returns. Tax professionals who already meet continued education and qualification standards (the aforementioned attorneys, CPAs and Enrolled Agents) are not affected by the IRS proposal.

Loving redux: Basically, says the AICPA, the voluntary program is "an end-run around Loving v. IRS," the federal case successfully brought against the agency's earlier mandatory effort to regulate tax return preparers.

Here's what the AICPA's filing with the U.S. District Court for the District of Columbia, which was the court that issued the original Loving decision, says:

"The IRS may contend that the AFS rule is different from the rule invalidated in Loving because it is purportedly voluntary. In reality, however, the new rule is de facto mandatory because it creates a strong competitive incentive for Quotation-marks-quoteunenrolled tax return preparers to comply. Indeed, Commissioner Koskinen and the IRS have admitted as much. Commissioner Koskinen stated that the Record of Completion and place in the Directory of Federal Tax Return Preparers will enable those who successfully complete the program 'to stand out from the competition by giving them a recognizable record of completion that they can show to their clients.' … And in the Revenue Procedure implementing the rule, the IRS explained that a tax return preparer 'who successfully completes continuing education courses related to federal law will generally have a better understanding of the tax law necessary to represent a taxpayer before the IRS during an examination than an unenrolled individual who has not taken any continuing education courses related to federal tax law.' Rev. Proc. 2014-42, § 2."

It is obvious from IRS statements, continues the lawsuit, that the tax agency understands that tax preparers, facing the prospect of not participating and losing business, will choose to comply.

"As a result," contends the AICPA, the voluntary program "is mandatory as a practical matter, and achieves substantially the same outcome as the rule invalidated in Loving."

And while the Court in its Loving ruling against the IRS concluded that "[i]t might be that allowing the IRS to regulate tax-return preparers more stringently would be wise as a policy matter," the AICPA lawsuit points out that the Court also noted that such a decision is up to "Congress and the President to make if they wish by enacting new legislation."

Olson on the other side: That's exactly what the National Taxpayer Advocate Nina Olson believes should happen.

Olson recommended that Congress authorize the IRS to establish minimum standards for tax return preparers in her 2002 report to lawmakers. In her latest missive to Capitol Hill, the Fiscal Year 2015 Objectives Report to Congress released July 16, Olson continues her argument for minimum standards for return preparers.

Such guidelines, she says, are important to protect taxpayers from incompetent or unscrupulous preparers.

"More than 140 million individual taxpayers each year file tax returns, and well over half use return preparers. Yet there are currently no standards for hanging out a shingle and preparing returns, and there is considerable evidence that many preparers lack the knowledge and ability to prepare accurate tax returns," says Olson.

Olson says the IRS' voluntary filing season proposal is well-intentioned, but the absence of a meaningful competency exam limits the program's value. She recommends that the IRS also develop a minimum competency exam as a part of its voluntary program.

Further, Olson agrees with the IRS that "the only effective way to increase competency throughout the return preparer profession is for Congress to provide the IRS with the authority to implement a mandatory program substantially similar to the one already in place before [the] Loving [court decision]."

In her midyear report, the Taxpayer Advocate recommends that Congress pass legislation authorizing the IRS to reinstitute the program it had implemented prior to the U.S. Court of Appeals decision.

Several members of Congress previously indicated their support for such legislation. That possibility, however, has been shunted aside as lawmakers fight over IRS funding.

And there's also the continuing multiple investigations into recent IRS operational problems, such as the partisan controversy over agency review of 501(c)(4) tax-exempt status for Tea Party and other potentially political organizations.

So it looks like that the judicial branch will once again hold at least temporary control over IRS efforts to regulate paid tax preparers.

Olson on other IRS issues: In addition to weighing in on the IRS' tax preparer oversight efforts, the Taxpayer Advocate addressed several other matters in her midyear report to Congress.

Olson again praised the IRS decision last month to formally adopt a Taxpayer Bill of Rights, a goal she has championed throughout her career as the tax agency's in-house watchdog.

She also provided a detailed discussion of exempt organization concerns, including the continuing controversy over IRS screening methods in determining whether groups are granted 501(c)(4) status. Olson offers the IRS and Congress a proposal she says could provide a clearer test to determine whether an organization seeking this tax-exempt classification is primarily for social welfare purpose.

And as I noted laBankrate Taxes Blog iconst this week at my other tax blog, Olson slammed the IRS for ignore the problems faces by taxpayers who are victims of tax preparer fraud.

While this tax-filing crime is not as prevalent as false filings due to identity theft, the victims or preparer fraud often suffer more at the hands of the IRS. Some taxpayers have been waiting since 2008 for the IRS to reissue their stolen refunds, according to Olson's report.

Also this week over at Bankrate, I looked at the IRS' role in the $106 billion improper payment gap. These are federal payments -- some Social Security and Medicare benefits, unemployment insurance, Supplemental Nutrition Assistance Program (food stamps) and the like -- that are paid out when they shouldn't be.

Almost $16 billion of that improper payment pot comes from the IRS in the form of bad Earned Income Tax Credits.

My additional tax thoughts for Bankrate Taxes Blog are usually published each Tuesday and Thursday. If you miss them there, check here at the ol' blog the following weekend -- or perhaps a bit earlier -- for a synopsis and links.

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Lee Reams

The tax refresher course requirements from the IRS are quite comprehensive. You would think until they get a mandate this is a good first step. You must be pretty competent to pass the timed final exam. They also require non exempt tax preparers to take additional hours on general tax law and ethics. Similar to what California has been doing with CTEC for many years.

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