The head of the IRS on Tuesday urged lawmakers to pass legislation that would authorize the agency to regulate the nation’s estimated 600,000 to 700,000 paid tax return preparers.
During a Senate Finance Committee hearing this morning, IRS Commissioner John Koskinen also said the agency is examining the possibility of implementing a short-term voluntary continuing education program for paid preparers. But he added the best solution would be for lawmakers to grant the IRS oversight over those tax practitioners.
“We urge Congress to pass the proposal in the [Obama] administration’s fiscal year 2015 budget that would explicitly authorize the IRS to regulate all tax return preparers,” Koskinen said in his opening remarks.
Eighty million Americans use paid tax preparers; however, only 40 percent of those preparers are tax attorneys, enrolled agents (EAs), and CPAs who must meet mandated professional competency requirements, Koskinen noted in his testimony. That means the remaining 60 percent are preparing returns with little or no federal oversight.
In a recent report, the US Government Accountability Office concluded that the absence of meaningful oversight in the tax-preparation industry is negatively affecting taxpayers, said Senate Finance Committee Chairman Ron Wyden (D-OR). He noted that most mistakes made by tax return preparers consist of typos or miscalculations on Form 1040, but in some egregious cases, the preparer falsifies the math to boost the refund, files the return, and pockets the difference. And unless the taxpayer can prove what happened, “they’re on the hook for the money when the IRS finds out,” Wyden added.
“Preparers make the IRS’s job easier by helping their clients properly report their taxes and pay what they owe,” Koskinen said. “At the same time, the level of oversight of paid return preparers has traditionally been uneven, at best.”
Court Ruling Impacts IRS Oversight
In 2010, the IRS launched the Registered Tax Return Preparers (RTRP) program that required paid preparers to obtain a Preparer Tax Identification Number (PTIN), pass a competency test, pay an annual application fee, and complete fifteen hours of continuing education annually. Only certain preparers, including CPAs, EAs, and tax attorneys, were exempted from the testing and education requirements.
Since 2010, more than 1 million individuals have registered as tax return preparers with the IRS, and as of last month, more than 677,000 preparers were active in the agency’s database, Koskinen noted.
But the IRS suffered a blow in federal appeals court on February 11 when a panel of three judges upheld a lower court’s ruling early last year that the agency did not have the legal authority to regulate tax return preparers in the United States, which invalidated the RTRP program’s testing and education requirements. However, paid preparers are still required to obtain a PTIN yearly and pay a fee ($64.25 for first-time applicants; $63 to renew annually).
Koskinen stressed that competency testing and continuing education would help to ensure that all preparers provide the appropriate level of service to taxpayers.
“We believe this level of service will translate into improved overall tax compliance and, certainly with that, more effective tax administration,” he added.
William Cobb, president and CEO of tax-preparation company H&R Block, said he also supports legislation that sets standards on paid preparers.
“Standards provide an objective measure for both consumers and tax preparers to measure and monitor the overall competency, expertise, and performance of tax return preparers,” he told the Senate Finance Committee. “This is critical because the ultimate goal is to help taxpayers file more complete and accurate returns. Equally important is the reduction of fraudulent returns and the improper payment rate of the Earned Income Tax Credit.”
Regulations Would Hurt Small Preparers, Consumers
However, Dan Alban, an attorney with the Institute for Justice, believes the IRS should not force tax preparers to obtain a license before they can assist taxpayers with their returns. Alban represented the three independent tax preparers – Sabina Loving, John Gambino, and Elmer Kilian – who filed a lawsuit against the IRS in 2012 to put a halt to the RTRP program. They claimed the regulations would result in fee increases, a loss of business, and possibly shuttering their mom-and-pop tax-preparation operations.
“Tax preparers are already regulated by numerous federal statutory requirements imposing both civil and criminal penalties for everything from failing to keep a list of the returns they’ve prepared the past three years to actual tax fraud,” Alban told the Senate Finance Committee. “Tax preparers are also required to register with the IRS to obtain a PTIN that they must include on every return they prepare so the IRS can track and analyze their returns. These tools already provide the IRS with what it needs to identify, track, and penalize the few bad apples without unnecessarily burdening the vast majority of law-abiding preparers.”
He noted that unlike large tax-preparation businesses like H&R Block and Jackson Hewitt, mom-and-pop preparers generally do not have the resources to send lobbyists to Washington, DC, to represent their interests. Alban added that consumers would also be harmed by mandatory preparer licensing.
“Licensing reduces competition, which is bad for consumers. Between reduced competition and increased regulatory compliance costs, licensing is expected to artificially drive up the prices consumers pay for tax preparation,” he continued. “Licensing also reduces consumer choices and interferes with consumer autonomy over personal finances. They’ll be forced to pick a new preparer if licensing costs force their current preparer out of business. Taxpayers, not the IRS, should be the ones who get to decide who prepares their taxes.”