In her annual midyear report to Congress that was released on Wednesday, National Taxpayer Advocate Nina Olson called the IRS’s recently announced voluntary education program for tax return preparers a “step in the right direction,” but added that the initiative is missing a key educational component – competency testing.
She recommended that the IRS develop a minimum competency exam as part of its program, arguing that listing tax return practitioners who cannot pass a minimum competency test in a publicly searchable IRS database of preparers may confuse or even mislead taxpayers.
“We fully recognize that the IRS is working within tight time constraints and had a limited capability to develop and implement a program to be in place for the 2015 filing season,” noted Olson, the head of the Taxpayer Advocate Service, an independent organization within the IRS charged with assisting taxpayers. “For the 2016 filing season and beyond, we believe it is imperative that taxpayers know which unenrolled preparers have demonstrated minimum competency by taking an IRS-administered examination.”
The IRS announced its new Annual Filing Season Program on June 26, and finalized the initiative’s requirements on June 30. The nation’s tax agency is only allowed to offer a voluntary education program, after two courts ruled that the IRS does not have the legal authority to mandate continuing education and competency testing of paid preparers.
Under the new program, unenrolled preparers will be given the opportunity to earn a record of completion when they voluntarily complete 18 hours of continuing education annually from IRS-approved providers. The education requirements include:
- Six hours of federal tax-filing season refresher course.
- Ten hours of federal tax law topics.
- Two hours of ethics.
Preparers who earn a record of completion will be included in a publicly accessible and searchable database on the IRS website, along with attorneys, CPAs, enrolled agents, enrolled retirement plan agents, and enrolled actuaries who are registered with the IRS.
But Olson is concerned that the voluntary program does not require unenrolled preparers to pass a competency test in order to be listed in the IRS database.
“As a consequence, some taxpayers may erroneously assume that preparers listed in the database have been determined by the IRS to meet basic competency standards,” Olson wrote. “For this reason, the database should clearly explain the different credentials and authorities for each type of preparer listed in the database.”
IRS Commissioner John Koskinen said on June 26 that the agency will assess the feasibility of administering a uniform voluntary examination in future years in order to ensure basic return preparer competency.
In her report, Olson acknowledged that the terms of the Annual Filing Season Program require uncredentialed return preparers to pass a knowledge-based comprehension test at the end of the tax-filing season refresher course. But the test only assesses whether the participant gained a basic understanding of the limited amount of material presented during the class.
“In addition, each continuing education provider will develop and administer its own test, so the subject matter tested, the level of difficulty of the test, and the continuing education provider’s diligence in ensuring the test-taker completes the test on his own will vary from course to course,” she wrote. “In no way will this continuing education comprehension substitute for a uniform, comprehensive competency examination designed to measure whether a preparer possesses basic knowledge of tax return preparation generally.”
The IRS noted that for the first year, a transition rule will be applied to prorate the required continuing education hours. For the 2015 filing season, a total of 11 hours would need to be earned in 2014, including the six-hour refresher course, three hours of federal tax law topics, and two hours of ethics.
The record of completion is only valid for one calendar year. Once issued, it covers tax returns prepared and signed from either January 1 of the year covered by the record of completion or the date the record of completion is issued until December 31 of that year – whichever is later.
IRS Program Faces Lawsuit from AICPA
The American Institute of CPAs (AICPA) filed a federal lawsuit on Tuesday challenging the legality of the IRS’s Annual Filing Season Program. In the lawsuit, the AICPA said the program is an attempt to bypass the two courts’ rulings.
A federal appeals court last February upheld a lower court’s 2013 ruling that the IRS did not have the legal authority to regulate tax return preparers, thus invalidating the IRS’s Registered Tax Return Preparer (RTRP) program. The program, launched for the 2011 filing season, had required unlicensed preparers to obtain a Preparer Tax Identification Number (PTIN), pass a competency test, pay an annual application fee, and complete 15 hours of continuing education annually.
But independent tax practitioners Sabina Loving, John Gambino, and Elmer Kilian spearheaded a legal challenge of the RTRP program in 2012, claiming the regulations would result in fee increases, a loss of business, and possibly shuttering their mom-and-pop tax-preparation operations.
The AICPA believes the IRS’s voluntary education program is de facto mandatory because it creates a strong competitive incentive for unenrolled tax return preparers to comply, according to its lawsuit. As a result the program is mandatory as a practical matter and “achieves substantially the same outcome” as the RTRP program.