IRS Advisory Council Recommends New Tax Preparer Requirements

An Internal Revenue Service advisory group has released a report detailing a wide-ranging set of 70 recommendations, including new requirements for tax preparers.

Among the suggestions, the IRS Advisory Council recommended that the IRS develop a system to identify all paid preparers, including unlicensed ones, through the use of a unique identification number, in addition to the Preparer Tax Identification Number for licensed preparers. IRSAC also said the IRS should conduct research to create a better process for monitoring and controlling paid preparers utilizing these unique identification numbers.

"Paid preparers include both licensed and unlicensed persons," said the report. "Licensed persons prepare tax returns and also are authorized to practice before the IRS. These include state-licensed professionals such as lawyers and certified public accountants, and federally licensed enrolled agents. Unlicensed persons can only prepare tax returns and do not represent taxpayers before the IRS. There have been recent government and private industry studies that have concluded that part of the 'tax gap' is the result of paid preparer error."

A recent report by the Treasury Inspector General for Tax Administration found that 61 percent of a limited sample of tax returns prepared by unlicensed persons contained errors resulting in a significant net understatement of tax, the report noted (see Study Results Boost Preparer Registration Movement).

Only licensed preparers are regulated by Circular 230, but some commentators have proposed licensing, training and testing for all paid preparers, the report noted. Various proposals have been introduced in Congress to license and register all paid preparers.

The council also recommended that the IRS permit appraisers to apply for an expanded Preparer Tax Identification Number, or for an equivalent discrete number, that would permit the service to identify their work without exposing them to the possibility of identity theft.

In addition, the council said the IRS should raise or eliminate the maximum income level on its Free File Program, allowing more taxpayers to prepare their taxes for free with software downloaded from the Web. The council also suggested allowing Volunteer Income Tax Assistance sites to prepare both Schedules C and E returns for low-income taxpayers, if they have the appropriate training and certification.