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Since 2002, TAS has been a strong proponent of legislation providing the IRS authority to establish minimum competency standards for return preparers. Both taxpayers and the tax system depend heavily on the ability of return preparers to prepare accurate tax returns. Because the tax code is so complex, the majority of taxpayers pay preparers to complete their returns for them. Unfortunately, many taxpayers have no easy way to determine whether the preparer they are hiring can do the job adequately.
Anyone can hold herself or himself out as a return preparer with almost no knowledge or skill by simply sitting with a taxpayer and working through the tax return preparation software’s question-and-answer format. Taxpayers, with limited tax knowledge themselves, are ill-equipped to assess a preparer’s expertise in taxes and tax return preparation. The absence of minimum standards leaves taxpayers vulnerable to preparers’ inadvertent errors that could cause them to overpay their tax – or to underpay their tax and face IRS enforcement action. It also leaves some taxpayers open to unscrupulous preparers, many of whom would be weeded out if the return preparation industry were professionalized.
Credentialed preparers, including attorneys, certified public accountants (CPAs), and enrolled agents (EAs), are generally required to pass competency tests and take continuing education courses (including an ethics component). Volunteers who prepare tax returns as part of the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs also must pass competency tests. However, the vast majority of paid preparers are non-credentialed and are not required to pass competency tests or take any courses in tax return preparation.
In 2009, the IRS Commissioner concluded that the IRS had the authority to regulate tax return preparation as “practice” before the IRS. The IRS initiated extensive hearings and discussions with stakeholder groups to receive comments and develop a system within which all parties believed they could operate. The IRS, together with the Treasury Department, implemented the program in 2011. However, it was terminated in 2011 after a U.S. district court held, and the U.S. Court of Appeals for the D.C. Circuit subsequently affirmed, in Loving v. Internal Revenue Service, that the IRS does not have the authority to impose preparer standards without statutory authorization.
Since the 2011 program was terminated, House and Senate members have introduced legislation to provide the IRS with the statutory authority to establish and enforce minimum standards. Most recently, Congressman Panetta and Congressman Rice sponsored bipartisan authorizing legislation, the Taxpayer Protection and Preparer Proficiency Act of 2021.
The IRS currently administers a voluntary “Annual Filing Season Program” for non-credentialed return preparers to establish minimum competency. Program participants must meet specific requirements, including taking 18 hours of continuing education each year, which includes an examined tax refresher course. If they meet the requirements, the IRS will provide them with a “Record of Completion” that they presumably can use in their marketing to attract potential clients. However, participation in this voluntary program is very low.
Low-income taxpayers are particularly susceptible to the harm created by incompetent or unscrupulous return preparers. Due to the complexity of refundable credits, many low-income individuals reach out to paid return preparers to prepare and file their tax returns. A TAS 2014 phone survey of taxpayers eligible for assistance from Low Income Taxpayer Clinics found that “the low-income population is vulnerable and more likely than the population at large to be taken advantage of by unskilled or unscrupulous tax return preparers.”
The lack of standards for unenrolled paid preparers stands in stark contrast to the training and oversight required for many volunteer preparers. Volunteers with the VITA or TCE programs must complete training courses before being certified, as well as annual training to ensure they are current on new tax laws.
Without any federal oversight or minimum competency standards in place, taxpayers must do their own due diligence when choosing a tax professional. And taxpayers pay the ultimate price if their preparer prepares an inaccurate tax return. Many believe that their preparer is responsible for a mistake, but they may be in for a rude awakening. It is the taxpayer who has to pay the IRS any additional amounts due, including penalties and interest. Taxpayers cannot simply point a finger at their tax return preparer to avoid liability for an inaccurately prepared return.
Numerous studies have consistently found that non-credentialed tax return preparers prepare inaccurate returns. Such studies have been conducted by the Government Accountability Office, the Treasury Inspector General for Tax Administration, the New York State Department of Taxation and Finance, and the IRS. For example, the IRS study, issued in 2014, estimated compliance with Earned Income Tax Credit requirements during the 2006-2008 period. Among the findings of the study, non-credentialed return preparers not affiliated with a national tax return preparation firm were responsible for “the highest frequency and percentage of EITC overclaims.”
The IRS’s Taxpayer Experience Strategy provides an additional basis for establishing preparer standards. Pursuant to the strategy, the IRS envisions giving preparers access to taxpayer information through online accounts. While there are considerable benefits to this plan, there are also significant security risks, including identity theft and other fraud and the IRS must mitigate any risk. Requiring minimum competency standards for preparers is one critical step to ensuring these return preparers can be entrusted with taxpayer information.
Congress must provide the IRS with the statutory authority to establish minimum competency standards for federal tax return preparers. Most recently, I included a legislative recommendation in the National Taxpayer Advocate 2021 Purple Book supporting competency standards. Minimum competency standards are an important and necessary taxpayer protection because they would increase the accuracy of tax returns and protect taxpayers from unqualified return preparers. In 2004, the Senate passed legislation to do this by unanimous consent, and more recently, both the Biden and Trump Administrations have recommended that Congress authorize the IRS impose minimum standards for tax return preparers. IRS Commissioner Charles Rettig has also been a strong proponent of increased oversight of paid tax return preparers as well as increased penalties on ghost preparers (i.e., someone who doesn’t sign tax returns they prepare). Enacting appropriate legislation is just common sense to ensuring accuracy in tax return filings and protecting U.S. taxpayers.
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.