Although most observers are on board with the new proposals to register, test and license tax return preparers, some questions about the goals and the process remain.
This is being done in large part because of the tax gap, said Marty Davidoff, CPA, Esq., of Dayton, N.J.-based E. Martin Davidoff & Associates. But most of the tax gap is due to intentionally bad behavior, not incompetent behavior. When a preparer underreports $100,000 in income, its not because someone didnt know its reportable; its because a person wanted to cheat. And when the preparer makes up a deduction for $30,000 for automobile expenses and $10,000 for travel and entertainment, it has nothing to do with his lack of knowledge.
Registration is good, and should be encouraged, according to Davidoff. Return preparers should be registered and should be subject to Circular 230, the same as CPAs, attorneys and enrolled agents, he said. The most important aspect is to clearly identify the entire preparer community. Once we do that, we should be eliminating bad behavior.
The problem with testing is that it wont motivate preparers to register it will have the opposite effect, he said. If people know they will be tested, fewer will register. The greater the requirements, the more preparation work will be pushed underground, or the very small preparers will choose to no longer help out their friends and family. People will have fewer choices.
Even if an individual is registered, licensed and competent, they may still be a tax cheat, while someone who may not pass the test can still be competent to file 1040 EZs, he observed.
Teachers, police and doctors are three of the most trusted professions, yet many fail to report correctly, said Davidoff. Practically every newspaper has ads for private tutoring. When you call the number its usually a school teacher, and half the time that teacher will ask to be paid in cash.
Likewise, many police precincts have a precinct tax preparer, he added. Its often a retired cop whos good with numbers. When he makes up numbers hes encouraging the young cop who doesnt know any better and thinks its a game, that its OK to cheat the system and Ill help you.
And in the case of doctors, the cash co-pay is the biggest boon for tax cheating, Davodoff pointed out. The front desk girl hands the cash to the doctor and it never goes into the accounting system. Of course, not every teacher, policeman or doctor does this, but Ive run into numerous examples of these.
The testing process will be an enormous task. It has to be easier than the enrolled agent exam because you need 900,000 to 1.2 million individuals to pass, he said. Otherwise there wont be enough preparers in the country. Most people dont understand what an enrolled agent is, but now they will have another class of accredited prepares. Some of them, even though passing the test, may not be good preparers. And, inevitably, some of them will be cheats.
As it is with the enrolled agent exam, the testing process will emphasize memorization of facts that are built into preparation software, according to Sarah A. Fields, a tax controversy specialist at Davidoffs firm. For example, you have to memorize the phase-out amounts for certain credits or the AMT exemption, she said. Its not necessary to know this to prepare a return so long as you know they exist and how they work.
Davidoff hopes that by the time the deliberative process is complete, more emphasis will be placed on registration and enforcement than on testing and licensing. Never could you see more well-intentioned people than those who are working on this, he said. They are hard working and super smart people who really want to do the right thing.
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