For years, the "tax return preparation" industry has been only partly regulated by the government. That's about to change dramatically. It will mostly affect those who are paid for preparing tax returns, but there will likely be some effect on taxpayers as well.
CPAs and attorneys have been subject to oversight and regulation by individual states for a long time. When representing clients for Federal taxes, they -- as well as a few other specialized categories -- are also regulated by the IRS. But the rest of the tax return preparation industy, those who aren't CPAs or attorneys (or those special categories the IRS regulates)? There are a few penalties for significant errors they make on returns, but overall they're not regulated by the IRS to the same degree that CPAs and attorneys are. That group of tax return preparers ranges from big organizations like Jackson Hewitt and H&R Block all the way to individuals who may prepare only a couple of dozen tax returns a year. (My wife's cousin is one of the latter.)
Congress and the IRS have been concerned about those (mostly) unregulated tax return preparers for years. Studies have shown a surprising high rate of errors as well as some behavior that is out-and-out unethical or even fraudulent. The IRS has now issued a proposal for new regulations that will regulate those tax return preparers.
Most tax practitioners support the IRS efforts to improve the qualify of tax return preparation, but there are still a few areas where some of us think the proposal might be improved. A few examples:
- The definition of "tax return preparer" is very broad. Often a paralegal or unlicensed staff at a CPA or law firm prepares a tax return, but a CPA or attorney supervises their work, reviews the final return, and signs the return as the official preparer. The IRS proposal would regulate not only the CPA/attorney but also the paralegal/staff. The IRS is considering exempting the paralegal/staff from regulation, relying on supervision by the CPA/attorney. CPAs/attorneys have a strong incentive to make sure the returns are right. Losing the right to practice before the IRS or even being disbarred by the state licensing authorities is a very scary prospect.
- What types of tax returns should those who aren't CPAs or attorneys be allowed to prepare? The IRS is currently only planning to make these preparers take competency exams for individual tax returns, Form 1040. (CPAs and attorneys are not required to take the new competency exams because they are already subject to very rigorous exams in order to be licensed as CPAs or attorneys by their states.) What about returns for small corporations and partnerships? Estate taxes? Gift taxes? Returns for tax-exempt organizations? Payroll taxes? There's a delicate balance, between allowing people to prepare these returns without first passing a qualifying test (does that adequately protect the taxpayers who are their clients?) and not allowing them to prepare returns other than Form 1040 (does that reduce the choices for taxpayers?).
- For some situations, there is a definite right answer under tax law. The law may be complex and hard to follow, but if you work through it, there's just one right answer. In a surprisingly large number of situations, though, there is no clear right anwer. When the law is unclear or uncertain, what are the taxpayer's odds of success? There are a lot of different levels that tax practitioners recognize, from "not frivolous" to "reasonable basis" to "substantial authority" to "more likely than not." Taxpayers shouldn't prepare a tax return based on something that is completely frivolous, of course, but when the law is really unclear or uncertain, it's not fair to limit them to positions that are undeniably correct. That would give the government too much of the benefit of the doubt. So the question becomes: how far along that scale, from 100% certain to frivolous, can a tax return preparer advise his client without facing sanctions by the IRS?
This isn't a final proposal yet, and the IRS has asked for comments. I'm part of a project to give the IRS some suggestions and feedback to their proposal. We'll be submitting those later this week. I'm also going to testify at an IRS public hearing this coming Friday. More news later as the proposal continues to evolve.