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IRS asks U.S. lawmakers for 'OK' to police tax preparers

By Patrick Temple-West

WASHINGTON, April 8 (Reuters) - The U.S. Internal Revenue Service asked Congress on Tuesday for legal authority to regulate thousands of unlicensed tax return preparers, but lawmakers were neutral on the idea.

"I will have to talk with my colleagues to see what's doable," said Senate Finance Committee Chairman Ron Wyden, a Democrat, after gaveling an end to a hearing on the issue.

He gave no indication of when legislation might be introduced along the lines sought by the IRS, which failed last year in an effort to begin policing tax return preparers on its own, without explicit statutory authority from Congress.

IRS Commissioner John Koskinen told lawmakers at the hearing that many Americans are hurt by incompetent and dishonest tax preparers. The tax preparation business is not regulated at the federal level, though some states have started policing it.

Up to 60 percent of tax return preparers are unlicensed, Koskinen said, and the IRS wants to require those individuals to pass a competency test and take continuing education classes.

"I urge Congress to quickly approve ... explicit statutory authority to regulate all paid tax return preparers," he said.

The hearing was Congress' first look at the tax preparation industry since a U.S. appeals court in February struck down the IRS' first attempt to regulate tax preparers.

The U.S. Court of Appeals for the District of Columbia said the IRS did not have the authority on its own to impose rules on up to 700,000 preparers who are not already licensed as attorneys, accountants or "enrolled agents."

Wyden called the court's decision a "baffling outcome."

Tax return preparers often make more mistakes on tax filings than people who file their own taxes, according to a report released on Tuesday by the Government Accountability Office, the investigative branch of Congress.

Undercover GAO agents who visited commercial tax return preparers found inaccurate returns put taxpayers at risk of IRS enforcement actions, the report said.

"If Congress agrees that significant preparer errors exist, it should consider legislation granting IRS the authority to regulate paid tax preparers," the GAO report said.

About a third of the $9.4 billion tax return business is controlled by H&R Block Inc and three other large companies. The remaining two-thirds is divided among licensed and unlicensed preparers, many of them mom-and-pop operations.

Finance committee Republicans largely used the hearing to grill Koskinen about other issues, including the IRS' proposed rules for tax-exempt "social welfare" groups and its role in implementing the Affordable Care Act of 2010.

(Reporting by Patrick Temple-West; Editing by Kevin Drawbaugh and Dan Grebler)