by Roger Russell
The war drums are beating in Washington, with the message to crack down on tax preparers. There are at least three separate moves afoot on Capitol Hill that would intensify federal government oversight of preparers.
While the most obvious has been the proposed changes to Circular 230 that tighten standards for tax advisors, less publicized have been comments by Sens. Chuck Grassley, R-Iowa, and Max Baucus, D-Mont., and National Taxpayer Advocate Nina Olson.
Proposed changes to the Circular 230 rules heighten the standards for tax advisors by setting out specific requirements for tax opinions, including best practices for tax advisors. The proposed rules call on professional services firms to put in place procedures for all of the firm’s personnel that are consistent with these best practices.
The changes would obligate tax advisors to inform clients explicitly about what protections, if any, an opinion provides to the client. For example, tax advisors would be required to advise clients about issues that the opinion does not address and warn the client if the opinion will not protect the client against penalties.
Meanwhile, Grassley and Baucus, chairman and ranking member, respectively, of the Finance Committee, recently charged that the Internal Revenue Service is doing too little to rein in tax practitioners.
“At the heart of every abusive tax shelter is a tax lawyer or accountant,” Grassley said. “If the IRS isn’t getting at the lawyers and accountants who take unfair advantage, then it’s not pulling out the weed by its roots. The same goes for paid tax preparers who overcharge their clients. Often the tax practitioner, not the taxpayer, is the problem.”
The concern about oversight is not limited to CPAs and accountants who prepare high-end tax returns, but extends to all preparers.
In a letter to Treasury Secretary John Snow, Grassley and Baucus expressed concern “that the IRS chief counsel has been slow to follow through on any substantial changes to Circular 230. The IRS has historically restrained itself from regulating paid tax preparers, even though there is no statutory restriction. We remain concerned that the Treasury and the IRS have not acted to alter that approach.”
The most radical recommendation has come from National Taxpayer Advocate Nina E. Olson, who, for the second year in a row, recommended that the IRS register, test and certify people who prepare more than five tax returns for a fee.
“For two years now I have called for action in regulating un-enrolled return preparers,” she stated in her report to Congress. “We have known about the problems associated with this population since before 1976, when Congress enacted preparer penalties and imposed basic requirements on return preparers. These problems have compounded with the advent of electronic filing and the entry of car dealers, pawnshops and furniture stores into the tax preparation field.”
The proposal would require the registration, examination and certification of any person other than an attorney, CPA or enrolled agent who prepares more than five federal tax returns in a calendar year.
Olson recommended the formation of a joint task force that would include representatives from the Treasury, the IRS, the Federal Trade Commission, state tax and consumer protection agencies, nonprofit consumer protection agencies, and tax professional associations. The task force’s mission would be to “obtain data about the composition of the return preparer community and make recommendations about the most effective means to ensure accurate and professional return preparation and oversight.”
According to Olson, several tax professional associations have advised her office that they would be interested in partnering with the IRS in administering a registration and testing regime for tax preparers.
In its response to Olson’s initial recommendation a year ago, 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 Accounting 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,” she stated.
“There are between 700,000 and 1.2 million paid preparers,” said Ken Drexler, senior advisor for the annual report. “If you subtract the number of attorneys, CPAs and enrolled agents, there are at least 50 percent of paid preparers who are not held to a competency standard.”
In its latest response to Olson’s call for preparer registration, the IRS reiterated its objection that licensing of professionals is within the purview of state government. The IRS said that it has contacted the two states that have established entry requirements for tax preparers — California and Oregon — and neither state has data on the effectiveness of their program. California specifically noted the difficulty of identifying unregistered preparers, according to the IRS.
The major objection cited by the IRS is a lack of resources to administer a program to register and regulate tax return preparers.
“Given the fact that funding does not always accompany legislative requirements,” it said, “the IRS would be faced with re-deploying resources from other programs, which could have a negative impact on current enforcement, service improvement and revenue collection efforts.”
One of the unanswered questions is what to do with returns prepared by an unlicensed preparer. “That taxpayer is still trying to submit a return that’s been prepared by somebody who is not within our scheme. We need the return,” said Office of Professional Responsibility deputy director Steve Whitlock.
The OPR, which investigates allegations of misconduct or negligence against tax practitioners and enforces the standards of practice for those who represent taxpayers before the IRS, has doubled in size over the past year.
Olson acknowledged that the proposal might result in some preparers dropping out of the system, or going underground and no longer signing their names to a return. However, she said, a program with the resources to provide real consequences for preparers who contribute to noncompliance “has the potential to achieve significant improvements in compliance at a much lower cost than extending audit coverage to the affected population.”
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