Plans by Internal Revenue Service officials and federal lawmakers to establish new national certification and testing requirements for unlicensed tax return preparers are drawing cautious support from mainstream tax professionals.

Testifying at recent congressional hearings on this, a spokesman for the American Institute of CPAs offered a generally positive appraisal of legislation introduced earlier this year in the Senate to create a new system for testing and regulating the nation's growing army of tax return preparers.

But at the same time, AICPA Tax Executive Committee chair Tom Purcell made it clear that the institute would oppose provisions of that legislation that may encourage the IRS to launch an "overzealous and inappropriate" enforcement crackdown against the nation's tax professionals.

As currently drafted, the Senate bill would allow the IRS to use monetary penalties collected from tax professionals to bankroll a new public awareness program designed to steer taxpayers away from questionable tax preparers. Purcell said that the AICPA is concerned that this provision may give tax service employees an incentive "to initiate overzealous and inappropriate enforcement actions against tax professionals and the preparer community."

Additionally, Purcell said that the institute would not be in favor of any new federal tax preparer registration system that would be stretched so as to include CPAs, tax attorneys or enrolled agents - professionals that are already regulated under IRS Circular 230.

National Society of Accountants spokesman Larry Cross struck a similar chord in separate testimony before the subcommittee. He stressed that the NSA "can fully support the Senate bill ... only if it provides recognition of tax practitioners who have already demonstrated their professional competence and their commitment to life-long learning" by obtaining credentials or a license from an established regulatory board or credentialing body.

"Allowing individuals who possess such credentials or licenses to receive a waiver from the initial examination requirement will achieve that recognition," he told the subcommittee.

CPA Larry Gray, the government liaison for the National Association of Tax Preparers, told Congress that the members of his group also support the principle of new registration requirements for return preparers who are currently unlicensed.

"The fact is that the greater tax practitioner community ... will likely welcome licensing or registration as a means to put distance between themselves and 'fly-by-night' charlatans that bilk the American public every tax season," Gray said.

Nevertheless, the spokesman for the NATP cautioned the subcommittee against using such a new registration mandate to create "more bureaucracy, red tape and consequent taxpayer cost" to the system.

"It would be a gross disservice to taxpayers and the tax administration system to drive 'good preparers' out of business to reduce the number of 'bad preparers,'" Gray warned.

All in favor

Other witnesses at the House hearings voiced unequivocal support for action to register tax preparers.

Testifying on behalf of the National Association of Enrolled Agents, EA Francis X. Degen said that it "strongly endorses the concept of regulating all unenrolled paid return preparers, requiring an initial test for competency, background checks, annual minimum continuing education requirements and compliance with the current Circular 230 ethical standards."

Most taxpayers "would be astounded to find out that, while their barber or manicurist is licensed, their preparer may not be," the NAEA president told Congress. "Comparing the downside of a bad hair cut to an incorrect tax return, it is time to establish federal standards to ensure basic competency and ethical behavior."

Much of the focus during the hearings centered on New Mexico Democrat Sen. Jeff Bingaman's Taxpayer Protection and Assistance Act - a bill that instructs the Treasury Department to develop and administer an eligibility examination designed to test the knowledge and technical competency of individuals who prepare federal income tax returns.

Supporters of the bill estimate that between 200,000 and 600,000 tax practitioners would be required to register in the first year of the program alone.

A weapon against fraud

Within the IRS, the main source of support for such requirements is National Taxpayer Advocate Nina Olson, who regards registration of tax preparers as a vital step toward curbing Earned Income Tax Credit fraud and refund anticipation loan abuses.

Because of "the advent of electronic filing and electronic commerce and the increase in the maximum EITC dollars available to taxpayers, a new class of preparers has emerged - one which is not engaged primarily in the business of preparing taxes," Olson told Congress. "Rather, these preparers use tax preparation as a means to attract customers for some other product or service they offer that is unrelated to return preparation or even financial or tax planning."

Today, refund anticipation loans are being used to promote businesses that range from storefront check cashing outfits to used car lots to pawn shops, she said.

"Unlike 15 years ago, when we could at least count on some minimum level of competency for 'unenrolled' preparers because that was their primary business, we have no such comfort with the new businesses that are now preparing returns, because tax preparation is only an ancillary product of their business," she said. "Indeed, with the excellent commercial tax preparation software now available, a return preparer need not have any actual knowledge of tax law or tax administration in order to begin preparing taxes."

This arrangement is largely to blame for the abuses that have been associated with the Earned Income Tax Credit program, she maintained.

"We know, for example, that over 32 percent of EITC returns are prepared by unenrolled paid preparers, and that the overclaim rate on those returns is over 34 percent," Olson said.

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