Two recent reports suggest that the movement to register tax return preparers will continue.
Within a week of a Treasury Inspector General for Tax Administration report highlighting the failures of unenrolled preparers during the 2008 tax season, the Government Accountability Office released a report in praise of Oregon's new regulatory regime for tax preparers, suggesting that it provides a possible model for national regulation.
"This is not a coincidence," said Beanna J. Whitlock, executive director of the National Society of Tax Professionals and former director of the IRS Office of National Public Liaison. "There's no question about it. This has surfaced about six or seven times and I think the return preparer community is expecting it."
The TIGTA report, titled Most Tax Returns Prepared by a Limited Sample of Unenrolled Preparers Contained Significant Errors, was based on a sample of 28 returns prepared in February and March 2008 at 12 commercial chain and 16 small, independently owned tax preparation offices. Auditors paid commercial chains approximately $234 per return, and independently owned offices approximately $132 per return.
Auditors developed five scenarios with income ranging from $16,000 to $85,000, and with three filing statuses: single, married filing jointly, or head of household. The review was performed in a large metropolitan city, unnamed to protect the anonymity of the auditors and the paid preparers visited.
During the review, preparers correctly prepared 11, or 39 percent, of the 28 returns. However, 17 tax returns, or 61 percent of the sample, were prepared incorrectly. If the tax returns had been filed, the net effect would have been $12,828 in understatements. All preparers in the study used commercial tax preparation software to preparer the tax returns.
Preparers did not prepare any of the six business income and expense tax returns correctly. They either added or increased deductions without the auditors' permission, and in some situations after the auditors had questioned whether they were entitled to the deductions. The six preparers whose actions were considered willful or reckless prepared almost 1,000 tax returns during the 2008 filing season.
The use of information worksheets didn't result in a big improvement in results. For 16 of the 28 visits, preparers asked the auditors to complete an information worksheet. However, only five of these instances when information worksheets were completed resulted in correctly prepared tax returns.
TIGTA recommended that the commissioner of the IRS Small Business/Self-Employed Division develop and require a single identification number to control and monitor all paid preparers.
"We've been preaching about this for years," said Paul Cinquemani, a CPA and director of government relations for the National Association of Tax Professionals. "Why not register people and find out who's good and who's bad?"
There are currently two bills before Congress that would register tax preparers, one in the House and one in the Senate.
"There's no reason not to be in favor of registration," said Cinquemani. "The IRS estimates there are 1.2 million paid preparers, but there's no way to really be sure. A preparer can use the employer's ID number, or someone else's [preparer tax identification number], so it's hard to know exactly who or how many there actually are."
Cinquemani noted that the study is not statistically valid. "It casts aspersions on thousands of preparers that may or may not be fit. The fact is there are bad preparers out there. We think the conclusion is right - let's go and register them and see who is good and who is doing bad work."
Whitlock agreed. "What bothered me about the survey was the fact there was no comparison with Circular 230 preparers," she said. "If you went to 30 enrolled preparers and they didn't get the returns right either, then that's a judgment on the whole system."
"I think preparer registration is fine," she continued, "but if there were a test, say, on the Earned Income Tax Credit, I would probably fail it. I don't do a single one in my practice. This is an industry where knowledge goes from zero to 60 in a couple of seconds - it's not an easy business to be in."
"Say a preparer just wants to prepare tax returns," said Whitlock. "He or she doesn't want to represent anyone before the IRS or practice law or accounting. That doesn't mean they're a bad preparer."
At some point there will be registration, according to Whitlock. "For the IRS, the first move would be to know who we are, and the way they know that is to register us," she said.
THE OREGON OPTION
Meanwhile, the GAO study commended Oregon's program to license preparers.
The report described both the California and Oregon requirements for paid preparers. California preparers who are not attorneys, CPAs or enrolled agents must complete an education requirement, obtain a bond, pay a fee and register.
Oregon's requirements are similar, but more stringent. Oregon has a two-tiered licensing system, with an education requirement and exam for Licensed Tax Preparers, and work experience and a second examination for Licensed Tax Consultants. CPAs and their employees, and attorneys, are exempted, while enrolled agents are required to take a shorter version of the consultant examination.
According to the GAO's analysis, Oregon tax returns were more likely to be accurate compared to the rest of the country after controlling for other factors likely to affect accuracy. Surprisingly, California returns were less likely to be accurate. The study did not control for certain factors that might have influenced accuracy, such as whether Oregon preparers were more likely to be attorneys or CPAs than preparers elsewhere in the country.
The study used tax-year 2001 data from the IRS's National Research Program.
The GAO noted that Maryland enacted legislation in May that will require preparers to pass an exam, pay a registration fee and comply with continuing education requirements. New York, Oklahoma and Arkansas likewise have pending legislation that would create registration and education requirements.
IRS officials suggested that continued growth in the number of different paid preparer registration or licensing regimes in different states could become a problem if the requirements differ from state to state.
The GAO concluded, "If Congress judges that the Oregon paid preparer regulatory regime is likely to account for at least a modest portion of the higher accuracy of Oregon federal returns and could be implemented nationwide at a favorable cost compared to the potential benefits of improved accuracy, it should consider adopting a similar regime nationwide."
"As soon as the election is over, I expect them to come up with something," said Whitlock. "I hope they exercise some prudence. You don't want penalties to frighten the good preparers out of the business while they leave the bad ones in place."
The bills that are now pending will likely be re-introduced in the next Congress, according to the NATP's Cinquemani. "It's possible that the IRS could take this into its own hands with or without legislation, and that would be good as well," he said.
Register or login for access to this item and much more
All Accounting Today content is archived after seven days.
Community members receive:
- All recent and archived articles
- Conference offers and updates
- A full menu of enewsletter options
- Web seminars, white papers, ebooks
Already have an account? Log In
Don't have an account? Register for Free Unlimited Access