It's Back! Again!

The regulation that Congress can't seem to pass - tax preparer licensing - is back in the news. IRS Commissioner Doug Shulman has announced that by the end of 2009 his office will propose recommendations to better "leverage" tax practitioners. The idea to increase tax compliance and ethical standards. Possibly to include preparer licensing. Nothing new there. Nina Olson, the National Taxpayer Advocate, has been recommending licensing for years now. In fact, there have been bills before the last 3 Congresses which would require licensing. They have all died when that Congress ended because there were other more pressing issues distracting lawmakers. Even before Mr. Shulman office releases their recommendations, I would not be surprised if a new licensing bill is introduced. There is considerable interest in tax preparer regulation. Why? Because there are people who are preparing returns that are incorrect and costing the government millions is missing revenue. Some mistakes are mistakes of knowledge some are fraud. A good licensing program should cut both types of mistakes down. But what is good licensing regulation?

The IRS does have some preparer regulations. Professionals who are approved to practice before the IRS; Attorneys, CPAs and EAs, are guided by the Office of Professional Responsibility and Circular 230. There are also some guidelines for non-enrolled preparers in Circular 230 but for the most part anyone can prepare taxes for others without any training or oversight. Everything that has been proposed starts with testing preparers for basis competence in taxes. Then making sure that they keep up to date with continuing education. Finally, oversight to keep everyone following the rules in Circular 230. Sounds good, a preparer who knows what he/she is doing is less likely to make mistakes. But ...I have some questions and concerns.

How is a tax preparer being defined? The previous proposed regulations used the phase "paid preparer" as trigger. Currently, if you are paid to preparer returns you have to sign the return and include other information under the Taxpayer's signature. This includes your SSN or your Preparer Identification Number. My concern are the "preparers" from the pawn shops and car lots being able to use badly wording rules to claim they are not covered by the licensing. I believe it was in the 2002 TAS Report to Congress that a young couple was used as an example why licensing is need. This couple planned on using their tax refund as a down payment on a car. Instead of filing them as Married Joint with 2 children, the "preparer" filed them each as Head of Household with one child. This greatly increased their refund and what they could buy. Until the letters came and they ended up owning over $4500 back. Licensing won't help if people can hide behind narrowly defined terms. "Paid preparer" needs to mean anyone who has or is employed by someone who has any financial benefit from the return directly or indirectly.

How is the public being educated to the change and some of the rules? Congress needs to allot money for a good, intensive education campaign about licensing and why taxpayers need to look for licensed preparers if they do not do their return themselves. I don't have any problem with "kitchen table" preparers (there are some great part time, office in home preparers) but they need to be subject to the same rules I am. And with an educated public that is more likely to happen. The public also need to know some of the preparer rules for consumer protection. This can actually start now. Taxpayers need to know that a fee for an original return can't be based on the size of the refund. They need to know that the documents can't be held for ransom. If they want them back, they have to get them back. 

How much are you going to spend to enforce the rules? There are a few rules now for preparers but there are not enough IRS staff to thoroughly investigate complaints. One problem I hear about each year are people who file returns without having all the taxpayer's W-2 in hand. They use a pay stub instead. There are instances where this is acceptable but not in January because the taxpayer doesn't want to wait for their employer to issue the form. Most preparers know this isn't allowed, but it continues because it is unlikely they will be caught. There has to be some policing built into the program or you have put the good preparers at a disadvantage while rewarding the bad eggs.

How are you going to deal with the enablers? There will be people who will try to skirt the new rules. They will prepare returns without a license because they have clients that don't care. People who have built a practice preparing incorrect returns to increase refunds and fees. Taxpayers continue to use them because of the tax savings even if they know (or think) something illegal is happening. There lies a problem. For licensing to work, it needs to be fairly applied to everyone. Those who can get around the rules will if they can make money. It is worth considering penalties on people who use unlicensed preparers. Not all but those who constantly use a preparer they know is blatantly preparing returns illegally. The idea is for the taxpayer to know if caught not only will they pay back the government with interest and penalties but are also subject to an additional fine for being an accomplice to tax fraud. To protect themselves, hopefully they won't use the unlicensed preparer. If the law will not stop these preparers maybe no business will.

Don't call the licensed preparers, Enrolled Preparers! This was proposed in one of the proposed laws. The phrase Enrolled Agent is hard enough to explain without the confusion of adding another "Enrolled" tax professional in the mix. How about Registered Preparer instead?

Licensing tax preparers is something most agree is going to happen. The question is not when, but will it be fair? Will the law and it's enforcement protect the taxpayer, the tax professional and the government interests while solving the problems it addresses? This needs to be thought out carefully. We don't need another confusion of interpretations like "The Consent to Use."