COMMENTARY| On January 18, the U.S. District Court for the District of Columbia enjoined the IRS from enforcing the regulatory requirements for registered tax return preparers. Judge James E. Boasberg ruled that tax return preparers are not required to complete IRS mandated competency testing or meet continuing education requirements, a program that the IRS had announced in 2010.
The lawsuit, called Loving v. IRS, was filed in 2012 by three independent tax preparers along with the Institute for Justice, a libertarian law firm. They challenged IRS' authority to license tax preparers, arguing that Congress did not provide such power to the IRS. According to Dan Alban, the lead attorney on the case, the licensing requirements harmed the ability of independent preparers to compete with big tax preparation firms. The cost of complying with the regulations included $63 for the PTIN, $116 for the initial competency exam and 15 hours of annual continuing education. The Judge ruled in favor of Loving et al., however on February 1, he modified his order to clarify that it does not affect the requirement for all paid tax return preparers to obtain a preparer tax identification number (PTIN).
So as of now, it is voluntary for about 350,000 non-professional tax preparers to take new IRS exams and continuing education. CPAs, attorneys, enrolled agents, enrolled retirement plan agents or enrolled actuaries were exempt from IRS' regulatory practice requirements.
I am all for keeping government agencies in check against expanding their authority. I am also for independent, small businesses standing up to corporate giants such as H&R Block and Jackson Hewitt, especially because their tax preparers are not necessarily more reliable. For example, according to an undercover survey performed by the Government Accountability Office (GAO), H&R Block tax returns had errors in 100% of the 19 returns submitted as part of their sting operation (that a majority of the errors favored the taxpayer is another matter).
According to the IRS, there were 449,809 identity theft related tax scams last year, a 80% increase over 2011. Victims of identity fraud have to wait about six months for their refund checks. In fact, according to IRS' Dirty Dozen Tax Scams, in addition to identity theft, which is at the top of the list, tax preparer fraud ranks at #3. Common tactics used by unscrupulous tax preparers include fake credits, inflated deductions or business expenses, which promise higher refunds, diverting refunds to their own accounts, or simply collecting the preparation fees and never filing the tax return.
I believe not providing oversight to the tax preparation field would be a disservice to the millions of taxpayers. Even if it adds some burden to paid preparers, I believe it is necessary for the IRS to be able to track down each and every paid tax preparer, who are in possession of a staggering amount of personal, sensitive information from their clients.
In fact, that should be the start. There should be a way to distinguish a competent, committed tax preparer from one who aims to prepare a couple of tax returns on the side. I would prefer a tax preparer who has passed a basic competency test and is familiar with annual tax law changes. Last year, I interviewed four CPAs for preparing my corporate income taxes. I was surprised to find many of them were not knowledgeable in tax laws. Having all paid preparers pass a standardized test would make sure every paid tax preparer (including CPAs and attorneys) has the basic competency to prepare taxes.
I worked in the securities industry, which requires multiple license exams, a drug screening test, and fingerprinting. Despite these stringent requirements, the Raj Rajaratnams and Bernie Madoffs of the world engage in securities fraud and illegal activities. While it is impossible to eliminate all bad apples, some oversight and regulation of the tax preparation industry will likely dramatically reduce tax fraud and identity theft by weeding out the fly by night, non-professional (meaning unregulated by the American Bar Association, AICPA or IRS) tax preparers.
Ultimately, the U.S. legislative and judicial system will decide if the IRS should regulate the tax preparation industry, and whether licensing should be compulsory or voluntary. Even if it costs $20 less in tax preparation fees, I would not hire someone to prepare my taxes if they are unlicensed and have no credentials beyond tax preparation experience. If I am providing my personal financial information to the tax preparer, I should have some assurance that I am protecting myself from tax preparer fraud and identity theft, and filing a tax return without errors.
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