Tax Carnival #62: Happy New Tax Year!
Tax Guide 2010 is here!

Tax preparer testing (& more) on the way

If the IRS has its way, the days are numbered for those temporary card table set-ups in dingy storefronts that proclaim, via slap-dash hand-lettered signs, they can get you the "Biggest Tax Refunds in Town!"

The IRS is hoping that its new tax preparer regulations, announced today, will put an end to these often-shady tax "professionals."

Now I know some tax-season-only folks are on the up-and-up. They pay attention to the tax laws, follow the rules and make sure their clients do, too.

But the annual return filing period also is prime breeding ground for scuzzballs who use and abuse taxpayers, either by sheer misfeasance or calculated malfeasance, and that needs to stop.

Yes, I know we're treating a symptom here -- incompetent and/or criminal tax preparers -- rather than the real illness -- a tax code and its implementation that is so complicated that most of us need outside help to meet our tax-filing obligations.

We all know, however, that the tax code is not going to get easier, despite presidential panels and election-year posturing. In fact, judging by the recent tweaks to just one law, the first-time homebuyer credit, our tax laws are likely to get even more convoluted.

So the IRS felt it had to step in. I applaud Commissioner Douglas Shulman for doing so.

"As tax season begins, most Americans will turn to tax return preparers to help with one of their biggest financial transactions of the year," said Shulman in announcing the preparer oversight measures. "Our proposals will help ensure taxpayers receive competent, ethical service from qualified professionals and strengthen the integrity of the nation's tax system."

To that end, the IRS will require three key things: registration, testing and continuing education.

Registration
All paid tax return preparers will have to register with the IRS, which will issue each a
preparer tax identification number. Registrations must be renewed every three years and preparers will be subject to a limited tax compliance check. Eventually, says the IRS, this database of registered preparers will be online and searchable by taxpayers.

Competency testing
Examinations will be conducted in two Form 1040 areas: wage and nonbusiness income tax returns and wage and small business income tax filings. These two areas cover the majority of individual tax returns. A third test on business tax rules will be added later.

Even though you may have been preparing returns honestly, thoroughly and accurately for years, the IRS will not allow any "grandfathering" when it comes to the testing requirements. You'll just have to put your good knowledge to work on the official IRS tax preparer exam.

All you tax attorneys, CPAs and Enrolled Agents out there who are yelling at your computer screens as you read this, calm down. You're exempt from this requirement as long as you're active and in good standing with your respective licensing agencies.

Continuing education
Tax preparers also will have to make sure they are up to date with tax laws and regulations. The IRS will demand ongoing
continuing professional education, again exempting from the extra studying those pros who already are required by their professional organizations to maintain continuing education standards.

Expanded ethical standards: All tax preparers will now have to abide by Treasury Department Circular 230,  which currently only apply to attorneys, CPAs and enrolled agents who practice before the IRS. This rule took effect in June 2005 and applies to written advice given by affected tax professionals. Circular 230 also allows the IRS to suspend or otherwise discipline tax preparers who engage in unethical or disreputable conduct.

Rules take effect in 2011: OK, that's a lot to implement when it comes to the thousands of tax pros who will be affected. That's why the IRS isn't trying to do any of it this filing season. The agency will phase in the new rules beginning in 2011.

But in the near future, the agency will start laying the oversight foundation.

The IRS will this week start sending letters to approximately 10,000 paid tax return preparers across the country. These are preparers with large volumes of specific tax returns where the IRS typically sees frequent errors, such as filings that include Schedule C (sole proprietor) income and expenses, Schedule A deductions, Earned Income Tax Credit claims and returns from folks wanting the benefit of the aforementioned First-Time Homebuyer Credit.

In addition, IRS agents will make personal visits to letter recipients just so the agency can be sure the preparers know, says the IRS, "their obligations and responsibilities to prepare accurate tax returns." Just a friendly little chat; don't be alarmed.

And the agency also plans to conduct "other compliance and education visits with return preparers on a variety of issues." Hmmm. From that wording, it appears some of those stop-bys might not be so friendly.

Greatest good: Overall, I think it's a good move by the IRS. As I mentioned in an earlier post, all sorts of folks are required to meet minimum standards before they get official approval to do their jobs. That doesn't necessarily mean they do the best job (trust me, I've had some licensed hairdressers who butchered my 'do!), but at least there is a mechanism in place to track those who do truly horrific and unprofessional jobs.

As for those tax preparers who've been doing damn fine and ethical jobs on their own, I understand your frustration with having to deal with official oversight. Sadly, that's America nowadays. Those who do what's right inevitably end up paying a price because of those who don't. If I could personally slap every idiot who caused me hassle because of his or her stupid (or worse) actions, I would. Unfortunately, it probably wouldn't do any good.

In the end, I believe (hope) that the greatest good for the greatest number of taxpayers will be achieved thanks to these new rules.

If you want more on what the IRS plans as far as paid preparers and what the IRS' six months of study and data gathering revealed, check out the official 54-page Return Preparer Review.

And if you want to make sure you're getting a qualified and ethical preparer this pre-regulation filing season, check out Picking a tax pro.

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Comments

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Evan

Kay,

While I am generally for less regulation, what is the argument against this move? I have to be registered with my state to represent someone in a Court of Law, why not force someone to be registered, thus being held accountable, for preparing probably the most important document of a citizen's year?

The only thing I can think of is that it will limit competition among low wage earners, but that is easily refuted because H&R block (or similar service) will get their guys registered.

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