In recent months, the IRS has taken a more serious look at the long-talked-about idea of professional tax preparer registration.
I had the opportunity to attend two Internal Revenue Service panel discussions featuring this topic, the most recent being in September. Two states, namely California and Oregon, already have existing programs that track and register tax preparers. Two other states have recently enacted legislation to begin registering tax preparers in 2010: Maryland and New York.
The California Tax Education Council is a nonprofit organization charged with the role of registering and regulating all California tax return preparers. Registration costs are a mere $2. However, CPAs, enrolled agents and attorneys are exempt from the registration laws. Additionally, California law requires all non-exempt tax preparers to complete a 60-hour course at one of 125 CTEC licensed schools.
The CTEC has partnered with the California Franchise Tax Board to monitor compliance and enforce tax laws. The FTB does not review the quality of returns, only whether or not the tax preparer is compliant. If they discover that a tax preparer is not registered, they automatically issue a penalty, which can be potentially as high as $2,500. The penalty is automatically waived if the tax preparer becomes compliant within 90 days.
The CTEC presently has 44,000 registered preparers. Despite an advertising budget of $200,000 per year, the organization still finds unregistered preparers, the main reason being that unregistered preparers claim to have no previous knowledge about the CTEC or tax preparer laws.
THE OREGON MODEL
Oregon, the most experienced state when it comes to licensing tax preparers, founded its current program in 1974. Practicing tax preparers recognized the need for a program to help organize and regulate the industry. Although some tax preparers were grandfathered in, Oregon now feels that this was a mistake, as experience does not always coincide with competency.
Much like the California program, CPAs and attorneys are exempt from registration. Educational requirements include an 80-hour tax course to help prepare for the exam, with 30 hours of continuing education annually.
Oregon has also implemented a two-tiered licensing process:
1. A licensed tax preparer must pass the exam with a score of 75 or higher, complete the educational requirements mentioned above before taking a state-sponsored test (which is presently closed-book, but will be open-book beginning in 2010), and work for a licensed tax consultant for two years.
2. An LTC must take a more rigorous state-sponsored closed-book exam than that for a licensed tax preparer.
After carefully following these IRS panels and evaluating the nuances of the current state programs, the goals of the IRS, and understanding that it's no longer a question of if there will be registration, but when, I recommend a two-phase approach to a national registration program for tax preparers.
* Phase 1: Register all paid tax preparers immediately and require annual education. Registration for all tax preparers, including CPAs, attorneys and enrolled agents, should occur immediately. Anyone who signs a return must be registered. Registration information should be provided to the states to monitor compliance on state returns as well.
Registration should be simple and available to all, regardless of background, with few barriers to entry. This will encourage all preparers to register and discourage tax preparers from going underground.
At this point, no testing or education should be required to register; however, a small fee may be charged to maintain program funding. Requirements should include 20 hours of continuing professional education annually, including five hours of training on new tax laws, five hours of ethics training initially, and an annual renewal that can be performed online.
The registration and evaluation program is self-serving - registration will likely frighten many of the most undesirable, incompetent preparers from the marketplace. The CPE will also improve the competency of tax preparers as a whole. Preparers should be notified of errors they make on tax returns to learn from their mistakes.
* Phase 2: Evaluate both the competency and the ethics of various preparer groups. The IRS should evaluate the registration program, preparers and groups for three years; this amount of time is necessary for audit time and to review results that come into question.
Educational prerequisites and testing requirements should be considered only if it is deemed necessary once the three-year results have been evaluated. To begin requiring education and testing now would be premature and expensive, and would eliminate many competent tax preparers who have a fear of testing. Therefore, I do not endorse a standardized test for all tax preparers to complete registration at this time.
THE FUTURE OF THE INDUSTRY
Like any services-based industry, there have been failures in regulating incompetent and unethical tax preparers. However, it's my experience that most tax preparers are competent and ethical. Therefore, I support a system that aims to reduce fraudulent tax preparations while encouraging competent, trustworthy professionals to continue to practice as they have for years
To move too quickly with educational and testing prerequisites would not only be damaging to the tax preparer industry, but extremely expensive to administer when it's perhaps not needed. I do think it's important to continue tax education throughout one's career. CPE will benefit every tax preparer, ensuring that they are up to date with annual tax law changes.
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