The Internal Revenue Service has been called on to develop federal licensing requirements for all paid tax return preparers - an approach that would involve potentially controversial competency rankings to help taxpayers to identify and select tax professionals based on their level of expertise.The proposal was recently placed on the table by the IRS's own Taxpayer Advocacy Panel as part of a laundry list of recommendations for improvements at the tax service.

"Currently, anyone can prepare tax returns for a fee, regardless of their knowledge or training in tax preparation," the group explained,

Warning that the present unregulated tax preparation system contributes to faulty tax filings, TAP advisors reasoned that "taxpayers are hurt when their returns are not prepared properly," and "both the IRS and taxpayers incur costs because of fraudulent and inaccurate returns."

The TAP plan, outlined in an appendix to the group's freshly released annual report to the IRS, calls on the service to issue licenses to paid tax preparers based on each practitioner's "level and area of experience."

The group further recommended that licensed tax preparers undergo a mandatory background check "to ensure protection of the taxpayer, especially with respect to identity theft issues."

CPA firms and other tax preparation organizations would not be required to obtain licenses, but individual practitioners would.

The panel recommended that the licensing be based on the preparer's knowledge set, or level of expertise in preparing tax returns. "Since tax laws are added or changed periodically, the license should be updated annually to reflect knowledge of these changes," the panel recommended.

The advocacy panel - a group of 100 demographically diverse citizen volunteers who develop annual recommendations to improve the IRS - also issued 58 specific new proposals to address concerns about the tax service as part of its latest annual report.

The issue of practitioner licensing, however, was one that top IRS officials had specifically asked the group to consider more than a year ago.

In responding to that request, the panel told then-IRS Commissioner Mark Everson that licensing of practitioners would raise "the professionalism of preparers" while "reducing fraudulent and inaccurate returns."

The advocacy group suggested that the new licensing system tap into "existing tax education programs [that] are currently used by private, professional [and] educational" organizations. "These should be the basis for certification and meeting the IRS requirements."

But in addition to covering tax law issues, training materials for tax preparer licensing should also focus on ethics, according to the panel.

"The IRS already updates the Volunteer Income Tax Assistance training, testing materials and certification process every year," the group reasoned. "This testing could be used as a base to set the minimum standards a paid tax preparer must meet to be licensed, and used to identify the levels of expertise the individual preparer should have on their license."

The advocacy panel made it clear, however, that simply passing a test or amassing continuing professional education credits should not be enough to justify licensing a tax practitioner.

"Unscrupulous preparers can defraud the taxpayer in various ways, including identity theft, by having access to personal information," TAP told the IRS. "Paid tax preparers should be subject to a basic background check ... to identify persons who have previously been convicted of financial crimes or other activities that should preclude them from having access to taxpayers' personal and financial data."

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