IRS Jumps Out Front on Regulation of Paid Tax Preparers

The IRS has announced plans to regulate paid tax preparers, starting in 2011. This is a remarkable step forward, and an example of the executive branch getting out in front of pending action by the Congress.

Here are highlights of the new regulations proposed by the IRS:

• Requiring all paid tax return preparers who must sign a federal tax return to register with the IRS and obtain a preparer tax identification number (PTIN). 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 except attorneys, certified public accountants (CPAs) and enrolled agents who are active and in good standing with their respective licensing agencies.
• Requiring ongoing continuing professional education for all paid tax return preparers except attorneys, CPAs, enrolled agents and others who are already subject to continuing education requirements.
• 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.

So, Registration, Competency Testing, Continuing Education, Ethical Mandates, that’s a lot of tools in the toolbox coming into play all at the same time. Tax Preparation software is also coming under scrutiny: “The IRS will establish a task force…to address identified risks associated with the dependence of tax administration on consumer and commercial tax preparation software, and discuss the possibility of establishing industry standards.” This is a big step forward and good news for consumers, and considering that 80% of households use a tax preparer or tax prep software, something that should improve reliability and accuracy for vast numbers of the American public. While these changes (and possibly more) should go into effect in 2011, the IRS is stepping up education efforts for tax filers in 2010, and encouraging the use of credentialed filers.

The Washington Post has further detail and analysis, including generally positive comments from Senator Chuck Grassley (R-IA) and the nation’s largest tax preparation firm, H & R Block. One item that bears watching is flagged in the article, and that is the issue of unpaid tax preparers. Volunteer Income Tax Assistance (VITA) programs provide a critical service to low-income tax filers, helping to ensure that they file on time and receive the benefits to which they are entitled. H & R Block wants those volunteer programs to play by the same rules as Block and other preparers, that seems a bridge too far to me, as VITA volunteers currently must be trained and pass a certification exam before providing services. It will be interesting to see how or if the IRS wades into the issue of volunteer tax preparation.