On the heels of last month's Government Accountability Office study on the errors committed by commercial chain tax preparers, the legislative push toward preparer registration and licensing appears to have gained considerable traction."With the bills introduced last year and this latest report, it looks like preparer registration is on its way," opined John Hewitt, chief executive of Virginia Beach, Va.-based Liberty Tax Service. "We're going to do that internally. We've already taken steps to implement our own certification program in advance of any legislation."
S. 832, the Taxpayer Protection and Assistance Act of 2005, was introduced in the Senate a year ago and co-sponsored by Sen. Chuck Grassley, R-Iowa and chairman of the Senate Finance Committee, and Sen. Max Baucus of Montana, the ranking Democrat on the committee. Section 4 of the bill, Regulation of Income Tax Return Preparers, would require the regulation, examination and continuing education of return preparers.
The bill puts the responsibility of administering the regulation of preparers on the IRS Office of Professional Responsibility, which would require examinations for and impose continuing education requirements on any advisor who prepares federal income tax returns. The bill requires non-monetary sanctions - suspension or termination - for failure to comply.
Kansas City, Mo.-based H&R Block said that it supports preparer registration. "Thirty years ago, [company co-founder] Henry Bloch proposed IRS registration of all paid tax preparers," said Block vice president Robert Weinberger. "We believe IRS certification of paid tax return preparers - which would require validation of applicable tax knowledge, criminal and tax-filing background checks, and minimum levels of continuing tax education - would benefit the public."
For the study - prepared for the Senate Finance Committee - the GAO sent undercover staffers to 19 offices of various national tax return preparers in a single major metropolitan area with federal returns. The GAO uncovered what it termed "serious" errors, including failures to include cash income disclosed by the GAO investigator, discrepancies in child-care benefit deductions and not claiming all available deductions.
"We see this as a quality control issue," said Stephen Parezo, a spokesman for Columbia, Md.-based Fiducial. "Fiducial has always required ethics training of its tax preparers. We also provide ongoing tax training for all preparers, and all returns are reviewed. In general, we see this as a matter of ethics, not as application of the tax code, but as an ethical application of the rules."
As previously reported, the GAO discussed its findings with the IRS and referred to it the problems that were found. Had the problems been discovered by the IRS on real returns, IRS officials said that many of the preparers would have been subject to penalties for such things as negligence and willful or reckless disregard of tax rules.
"Any Joe can hang a shingle and prepare income tax returns. There are no requirements at all," said Grassley. "It's incredible that we have legal requirements for a barber to cut your hair, but there are no requirements for someone to prepare your taxes. The worst that can happen when you get a lousy barber is a bad hair day. But if you get bad tax advice, you may be audited, owe thousands of dollars and even face jail time. Americans have a right to expect that when they hire a tax preparer, they're going to get honest, straightforward advice."
"With Sen. Grassley making the comments he has, this bill will start surfacing again," predicted Cindy Hockenberry, tax information analyst at the Appleton, Wis.-based National Association of Tax Professionals. "The NATP has been in support of licensing for quite awhile, but we believe it shouldn't become an undue burden on preparers."
Grassley said that taxpayers' reliance on paid tax preparers is compounded by the poor electronic filing options available. His staff found a series of problems with the services provided by the Free File Alliance, the IRS-private industry program that allows certain classes of taxpayers to prepare their taxes for free using approved software vendors.
Taxpayers are inundated with additional charges and with the sale of ancillary services, according to Grassley. Charges include fees for state return preparation and filing, resetting passwords, printing and mailing services, professional tax return review, audit protection, live chat help, telephone technical support, per-question fees for consultation with a tax professional, and more.
Taxpayers entitled to a refund receive offers for refund anticipation loans, to have fees deducted from their refunds, or offers to get their refunds by cashier's check, prepaid Visa card or retail gift card - all with hidden costs to the taxpayers. One Free File site even contains a link where the taxpayer can sign up for a tax preparation franchise - no experience necessary - for $15,500.
An ineffective watchdog?
Meanwhile, a new report from the Treasury Inspector General for Tax Administration charges that the Office of Professional Responsibility does a less-than-stellar job in overseeing the tax practitioners it already regulates - CPAs, attorneys and enrolled agents.
"Notwithstanding the increases in enforcement activity, there are still a significant number of tax practitioners whose conduct appears to warrant disciplinary action, but who have not been identified by the OPR," the report said. "We believe the OPR needs to improve its ability to identify such practitioners so it can take appropriate disciplinary actions. Some tax practitioners who have been convicted of tax-related crimes or whose licenses have been suspended or revoked by state authorities have not been suspended from practice before the IRS."
"Clearly, there's a lot we need to do to make life easier on taxpayers," Grassley said. "We need to ensure that when taxpayers use a preparer, they can trust that preparer to be a knowledgeable professional who will do the right thing and put the taxpayers' interest first. Preparers need to be mindful that it's their duty to make sure taxpayers pay the right amount of tax, not a penny more, not a penny less."
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