Washington - The call for the nation's tax preparers to be more closely monitored for proficiency has been echoed by the National Taxpayer Advocate, as well as by a number of tax professional membership associations.

Until recently, however, the various proposals have been less than clear as to how the monitoring should proceed.

In her 2002 and 2003 annual reports to Congress, National Taxpayer Advocate Nina Olson recommended the establishment of a federal program that would regulate unenrolled tax preparers.

Although the Senate passed legislation to implement the recommendation in 2004, the act never made it into law.

In fact, a main stumbling block for any kind of preparer scrutiny that would lead to licensing has been the difficulty of developing and managing such an endeavor. Now, the National Taxpayer Advocacy Panel has come up with its own proposal for licensing tax preparers, and has filled in some important details as to how such a plan might work.

In its just-released 2004 Annual Report, the panel said that taxpayers "with little knowledge of tax preparation are deluged with choices of tax preparers who are not regulated and are not required to demonstrate the minimum competency to prepare tax returns."

"Tax preparers are not subject to any rules or standards of conduct and are not required to participate in continuing education programs," the report continued. "There is very little federal regulation."

Although tax preparers who prepare returns for a fee that fail to comply with certain requirements such as signing a return or failing to provide a copy to the taxpayer could be assessed a penalty, the report notes that in reality very few penalties are assessed and, of those, only a small fraction are actually collected.

Rather than create a new level of bureaucracy for testing and certification, the panel said that the federal tax system should rely on the private sector to encourage, require and supervise a system of continuing professional education. The report cites a number of professional national tax associations, including the National Society of Tax Professionals, the National Association of Tax Practitioners, the National Society of Accountants and the National Society of Enrolled Agents, that would be in a position to provide the foundation for establishing a system for measuring compliance.

The proposal presumably would exempt accountants, attorneys and enrolled agents from certification requirements.

Such a system would be easy to monitor, according to the panel, with each of the national associations assuming direct responsibility for providing standards and procedures for registering and certifying all tax preparers. The VITA exam given by the Volunteer Income Tax Assistance Program would be the basic testing mechanism, and current preparers would be grandfathered into the program through an application subject to approval by the Internal Revenue Service.

Too simple?

Through e-file, Free File and other programs, the government has been moving toward simplifying the process of doing taxes, according to Paul Cinquemani, director of government relations with the Appleton, Wis.-based National Association of Tax Professionals.

"However," he said, "there's a notion that a taxpayer just has to go online and answer a few questions and your taxes are done. The problem is, he has to tell the truth, and the software has to be checked out. That's a continual challenge. The result is, when mistakes are made and the government contacts individuals about their returns, it scares them into going back to a paid preparer."

The reliance on organizations such as the NATP to administer a testing program makes sense, according to Cinquemani, since they all have an organizational structure with experience at putting on courses at multiple locations.

"We're adept at setting up presentations, teaching courses and testing," he said.

However, Cinquemani believes that a proposed exam might need to be on a higher level than the VITA exam.

"The VITA exam is for volunteers to help the elderly and low-income taxpayers," he said. "They will want to test for more than that. We envision a test for individual returns, and another tier for business returns that would get into Schedule C and depreciation, partnerships and corporations. Another test would address fiduciaries."

The proposal would affect about 300,000 preparers, according to Cinquemani, who believes that the total number of tax preparers is somewhat less than the official IRS estimate of 1.2 million.

"It's probably closer to 600,000 or 700,000," he said. "Once you cull out the Circular 230 preparers [attorneys, CPAs and enrolled agents], there would be something in the neighborhood of 200,000 or 300,000 who need to be tested."

In its original form, the proposal would apply to paid preparers of more than five returns. "If you prepare returns for your mother and uncle and a few other family members for free, you wouldn't be covered," he said.

In its response to Olson's initial recommendation, the IRS noted that it is the domain of the states to regulate preparers independent of the federal government. Such regulation would also have consumer protection aspects, according to the General Accountability Office, which would necessitate the participation of the Federal Trade Commission.

For Olson, these are not obstacles. "Indeed, partnering with the Federal Trade Commission, tax professional associations, and/or the states, we will raise both the level of competency and the professionalism of return preparers," the taxpayer advocate stated.

The panel also recommended that taxpayers should be notified by their return preparer if all or if a significant portion of the preparation or processing of their income tax return is going to be outsourced to a location outside of the United States.

"The name of the country or countries to which the tax return preparation and/or processing is being or could be outsourced should be disclosed, and such disclosure must be prominently displayed and not 'buried' in an engagement letter or some other document," the panel said.

In addition, the panel recommended that Circular 230 should provide that "outsourcing tax returns without the client's informed consent is 'disreputable conduct' or, at the very least, include among 'best practices' informing clients if tax return preparation will be outsourced."

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