The Internal Revenue Service has discussed, but not yet documented how it plans to develop its service and enforcement efforts to leverage the new paid preparer requirements to improve taxpayer compliance, according to a new report by the Government Accountability Office.
The IRS has implemented a registration requirement for paid tax preparers, which includes obtaining a preparer tax identification number, and plans to implement competency testing and continuing education requirements, the report noted. The IRS also plans to require paid preparers to adhere to standards of practice. The revisions are currently being reviewed by the Office of Management and Budget
The report found, however, that the IRS has not developed a framework for evaluating the effect of any of its planned service and enforcement efforts or the effect of the requirements themselves on improving taxpayer compliance. One of the IRS’s goals for the paid preparer requirements is to better leverage the tax preparer community to improve taxpayer compliance.
The director of the Return Preparer Office shared with the GAO ideas on how to achieve that goal. For example, according to the RPO director, the IRS plans to develop a comprehensive database containing information on paid preparers and the tax returns they prepare.
The IRS plans to use information from this database to test which strategies are most effective for improving the quality of tax returns prepared by different types of paid preparers. Likewise, the IRS has discussed how to measure the effect of the requirements, for example, the effects that requiring continuing education and testing have on tax return accuracy. In planning, the RPO has included other IRS divisions, such as the Small Business/Self-Employed division, which is responsible for examining tax returns, and the Research, Analysis, and Statistics unit, which will help monitor and evaluate whether the new requirements improve taxpayer compliance.
Although the IRS discussed with the GAO its planned approaches for using the requirements to improve taxpayer compliance, it has not yet produced a document that lays out this approach. Likewise, the IRS has yet to decide how it will enforce paid preparers’ compliance with the requirements.
The IRS has conducted an outreach campaign to inform paid tax preparers of the new requirements. For example, the IRS developed a standardized message that it distributed in different formats. The IRS is also developing strategies for how to ensure that paid preparers comply with the new requirements, according to the director of the IRS's Return Preparer Office.
The IRS is funding the paid preparer requirements through user fees, which it is setting consistent with the established criteria for cost estimating. For example, in setting the PTIN user fee to ensure it covered program costs, the IRS identified some of the key costs associated with registration, estimated the fixed costs, and based some variable costs on similar registration efforts.
Most, but not all, paid preparers were able to obtain a PTIN online, the GAO report found. According to an official involved in the implementation of the new requirements, approximately 92 percent of paid preparers who attempted to obtain PTINs by the start of the filing season got them online. The rest either attempted to obtain a PTIN by paper or were directed to obtain a PTIN by paper, likely as a result of an online authentication issue.
Officials and members of multiple paid preparer organizations stated that some preparers have encountered technical problems when using the PTIN registration system but also noted that the IRS’s administration of the PTIN registration system has improved. The RPO director said that the IRS has worked to address problems with the registration system since it was initiated. For example, married paid preparers with different last names from their spouses who filed tax returns under the married filing jointly status were experiencing difficulty obtaining a new PTIN.
The RPO director said that the IRS solved this problem. For the 2011 tax filing season, the IRS will allow paid preparers who are able to demonstrate a good faith effort to obtain a PTIN, but were unsuccessful, to use their old PTINs or Social Security numbers on tax returns.
But the report found that the IRS has yet to document how it will assess the new preparer requirements' effect, for example, by identifying what baseline data the IRS needs. Without a documented framework, the report noted, the IRS may have difficulty assessing whether it has adequately planned for what data it needs to collect and deciding how to allocate resources given competing priorities.
A framework could also help assure paid preparers—who bear the burden of complying with the requirements—that the IRS would assess whether the requirements deliver their intended benefit. The GAO recommended that the IRS document a framework for using the paid preparer requirements to improve taxpayer compliance and evaluate their effect on taxpayer compliance.
In commenting on a draft of the report, the IRS agreed with the recommendation.
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