New Tax Preparer Requirements Have Drawbacks

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The Internal Revenue Service proposals for registration, testing and continuing education of tax preparers has won praise from most stakeholders.

The rules, which will take several years to implement, will require all paid tax return preparers that must sign a federal tax return to register with the IRS and obtain a preparer tax identification number. Competency tests will be administered for all paid preparers other than attorneys, CPAs and enrolled agents. The rules also mandate ongoing continuing professional education and extend Circular 230’s ethics rules to all paid preparers.

“It will raise the credibility of the entire profession,” said Amy McAnarney, CPA, executive director of The Tax Institute at H&R Block. “The focus is on those that aren’t regulated today, and that’s the majority of tax preparers out there. We think it is a good thing for preparers, and the system itself.”

In her just-issued annual Report to Congress, National Taxpayer Advocate Nina Olson called the plan a “significant, far-reaching initiative.”

But she noted that one aspect of the plan might open the way for some to exploit and skirt the rules. The IRS plan announced this week would impose requirements on return preparers who sign tax returns but not on preparers who meet with taxpayers and prepare their returns so long as someone else signs them. To minimize the cost and burden, Olson said, an office may decide to employ one “signing” preparer who would be certified under the new rules, and an unlimited number of “nonsigning” preparers.

The nonsigning preparer would not have to register, pass an exam, or take continuing education courses, and the signing preparer would be unable to thoroughly review every return. In fact, Olson noted, the burden of the new rules themselves may cause more return preparation businesses to employ nonsigning preparers. “We are concerned that excluding nonsigning preparers could create an exception that swallows the rules,” she stated. She observed that not all nonsigning preparers need to be covered to protect taxpayers, and recommended that the IRS consider extending the new rules to apply to all unenrolled nonsigning preparers.

“The devil will be in the details. There will be time for these concerns to be addressed as they take the proposal and turn it into regulations,” said Roger Harris, chief executive of Padgett Business Systems. “But it’s a great first step.”

When the rules are fully implemented, the newly regulated preparer who undergoes the registration and ultimate testing process will have “a pretty strong credential,” Harris observed. “A person who is not an attorney, a CPA or an enrolled agent will have to decide which credential will ultimately work best for the preparer and his or her clients.”

Barry Melancon, president of the American Institute of CPAs, also expressed some apprehension about the new credential the rules will create. Although he agreed that the proposal will foster greater compliance with the Tax Code and more reliable service for taxpayers, he noted “concerns about the IRS plan to provide tax preparers who are not already CPAs, enrolled agents or attorneys with a certification based on limited qualifications. A new IRS examination process may cause confusion among taxpayers about the relative qualifications of tax return preparers.”

“It depends on how strict the tests are, how you promote the people that pass it, and how you position them in the marketplace,” said Harris. “Do you tell consumers the registered preparers are at the minimum level of competency, or do you say they’re as qualified as anyone else?

“There has to be a balance between testing for competency without being overly restrictive,” he added. “You want the test to be strong enough so the IRS can say it’s comfortable with the qualifications of those that pass it, but if the test is too difficult, it will negatively affect the industry’s need for tax preparers.”

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Tax practice