The case for regulating unlicensed tax preparers

In the last two years alone, the IRS has uncovered and investigated more than 600 cases of tax preparer fraud. Of those, 356 have been convicted. Of course, most tax preparers are honest and capable. But with nothing to stop individuals and companies from marketing themselves as tax preparers... aren't the public just sitting ducks for the unscrupulous few? That's why some are applauding the announcement of Internal Revenue Commissioner Doug Shulman that he is working on recommendations for regulating paid tax preparers.

Shulman told the House Ways and Means Subcommittee on Oversight, "Paying taxes is one of the largest financial transactions individual Americans have each year, and we need to make sure that professionals who serve them are ethical and ensure the right amount of tax is paid." In most states, he adds, "anyone can charge to prepare tax returns, regardless of training, education, experience, skill, licensing, or registration."

By the end of this year, Shulman says, he will submit his recommendations for regulation to Treasury Secretary Tim Geithner. The changes could affect not only mom-pop tax shops, but also major chains like H&R Block and Jackson Hewitt.

What do interested parties have to say in support of regulation?

Paul Cinquemani, director of government relations for the National Association of Tax Professionals, agrees with the need for regulation. "As complex as the tax law is, believe me it doesn't hurt to raise the bar," he told the Associated Press. "I don't understand how anyone operates without getting education to stay on top of tax law. It's very complex."

Wall Street Journal reporters spoke to representatives from two large chain preparers:

H&R Block said they welcome federal standards.

And John Hewitt, the chief executive of Liberty Tax Services, told reporters, "I applaud the IRS in their efforts to require tax-preparer certification. It certainly hasn't hindered us in Oregon and California."

Scott Schneeberger, an analyst with Oppenheimer & Co. Inc. investment firm, said in a statement that regulation would be "significantly positive" for the big tax-preparation firms. Presumably as mom-pop preparers decide not to pay the price in time and fees to get licensed, they will close their doors and their former clients will be knocking on the doors of chain preparers, Enrolled Agents, or CPAs.

Ralph Anderson, partner-in-charge at Friedman LLP, is fully supportive of the effort to regulate. According to Anderson, we lose $290 billion to $310 billion in tax revenue every year because of preparer fraud, and he's ready to see change. "I can't tell you the junk I pick up sometimes from other preparers. It's almost embarrassing. They either don't know what they are doing or don't take the time to find the proper answer."

"A lot of preparers play the lottery audit game,"
Anderson says. "They know that only one percent to two percent of returns are audited, so they take a chance and end up preparing egregious returns."

As for the argument that regulation will put too high a cost burden on tax preparers that would funnel through to taxpayers, Anderson isn't buying it. If that were true, he said, H&R Block would not be supportive of regulation, and they are.

"California and Oregon are strictly regulated," he said, "and accountants I know in those states feel it has worked out very well. I'm all for it."

Joann Hards, CPA of Phillips and Hards, PC in Durango, Colorado and her partner, Henry Philips are both quite opinionated on this subject.

"It is certainly difficult to compete with tax preparers who don't have to comply with the required education, licensing, and malpractice concerns that active CPAs and tax attorneys are held to, regardless of further regulation... If a tax return must be prepared, it should be done by competent individuals that have the proper training and education to provide the service..." says Hards.

"Our office provides a service that we value and we want our clients to feel that the cost is justified because they have engaged competent and ethical professionals. The poor work and unethical behavior by too many is not going to stop without increased audits to police the breaking of rules."

Eva Rosenberg is an Enrolled Agent, a blogger on AccountingWEB, and the publisher of TaxMama.com and an EA review class. She strongly favors regulation... in fact she has only one question for Commissioner Shulman. "What took you so long?"

Rosenberg's office is in California, where tax preparer regulation has been in place for years. In spite of the worries that some have expressed about the cost burden on tax preparers, she feels the added cost to become licensed according to federal standards would be minimal. Therefore, the cost that would be passed on to the taxpayer would be barely noticeable.

Nina E. Olson, the National Taxpayer Advocate has been pushing Congress to regulate preparers since 2002, notes Rosenberg. "Olson went around the country looking at various tax preparation outlets and was shocked at what she saw. Many preparers were making up numbers." Others were being instructed by their bosses to fill out Schedule A forms using a set of national averages that had no basis in reality. These are just a couple of the problems regulation would help to eliminate.

What's really hard to understand, says Rosenberg is that currently you can be a tax preparer without meeting any standards, but you need a license to cut hair... and a bad haircut only lasts three weeks.

Read the opposing view: The case for not regulating unlicensed tax preparers

You may like these other stories...

Tesco accounting probe finds “inappropriate behavior” by staff – reportsClare Hutchison of Reuters wrote on Sunday that an investigation into a 250 million-pound ($402 million) profit overstatement at...
Did you ever feel as if you're preparing taxes in the Twilight Zone? You may be more right than you think. Each year, professional preparers all over the country have to work in a shadowy reflection of the normal tax...
The split over convergenceDavid M. Katz of CFO wrote an interesting article on Thursday about the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) backing away from their...

Already a member? log in here.

Upcoming CPE Webinars

Oct 21Kristen Rampe will share how to speak and write more effectively by understanding your own and your audience’s communication style.
Oct 22This webinar will include discussions of important issues in AU-C 800, Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks.
Oct 23Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.
Oct 30Many Excel users have a love-hate relationship with workbook links.