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Senate tax reform proposal supports IRS oversight of tax pros

Tax preparers who are fighting the Internal Revenue Service in court over the agency's attempt to regulate them might have the upper hand in the legal system.

Max Baucus D-Montana Senate Finance chairThe tax pros, however, do not have a friend in Sen. Max Baucus (pictured at right).

He supports the IRS' oversight effort.

Preparer regs part of tax reform: The Democrat from Montana heads the Senate Finance Committee. Baucus also has partnered with his House counterpart, Ways and Means Chairman Rep. Dave Camp (R-Mich.), to push for tax reform.

Camp has yet to release his suggested Internal Revenue Code changes. Baucus, however, has been on a tear, releasing a series of discussion drafts on various tax system components.

As part of his proposals released this week to improve the administration of U.S. tax laws, Baucus specifically addresses the issue of IRS oversight of tax preparers.

The chairman of the Senate tax-writing panel is in favor of such IRS authority.

His tax administration reform discussion draft proposes to amend the tax code "to make it clear that the Treasury and IRS have the authority to regulate all paid tax return preparers."

The draft, however, is careful to note that "no negative inference is intended or should be taken with respect to whether the IRS and Treasury Department have the authority to regulate return preparers in past periods."

Tax oversight savings: Essentially, Baucus is saying let the lawsuit contesting IRS regulatory authority over preparers wind its way through the system.

The IRS is no doubt thankful for Baucus support, as well as that of Rep. Cedric Richmond (D-La.) who sponsored a House bill to allow such preparer regulation.

The agency needs that Capitol Hill support and more since it looks like the agency will lose, at least at the latest appellate level, its attempt to effort to regulate certain preparers.

Tax professional helping taxpayer via US Army

The IRS has long maintained that unqualified preparers cheat taxpayers by too often filing incorrect returns, as well as cost the U.S. Treasury. Not only do IRS employees have to spend more time checking returns, improper -- and sometimes flat-out fraudulent -- filings by ill-equipped tax preparers often include claims that should not be paid but do slip through.

That's why Baucus' proposed statutory confirmation of the IRS to regulate tax return preparers is included in section discussing ways to reduce the tax gap. The tax gap is the amount of money the IRS says it is owed, but has not been able to collect from taxpayers.

No IRS love for Loving: Specifically, the IRS wants regulatory authority of tax preparers who aren't already subject to professional oversight and continuing education, that is, tax pros who are not Enrolled Agents, tax attorneys or CPAs.

By registering all tax preparers and making those who aren't already credentialed pass a tax competency exam, the IRS believes it would improve taxpayer service and collections.

Three tax preparers, however, contend that the IRS is over reaching its authority. The trio, with the help Arlington, Va.-based Institute for Justice, filed suit against the IRS to stop the regulation plan.

The tax preparers and the IRS are awaiting the court's decision.

The big question is which will happen first, a final court ruling on the IRS right to regulate tax pros or enactment of a new tax law giving the agency that authority?

I'm betting on the courts. If the ruling goes against the IRS, watch for the proposals by Baucus et al to get renewed attention, either as part of tax reform or on their own.

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