Monday, June 11, 2007


Ever since ENRON the ethics and regulation of the accounting industry has come under scrutiny. In many states CPAs are now required to take continuing education classes in ethics each year. This scrutiny has carried itself over to the tax preparation industry, where Enrolled Agents (EAs) are also now required to take ethics CEUs.

While, as the National Association of Tax Professionals (of which I am a 20+ year member) points out in a recent press release, the concept of regulating or licensing tax professionals has been proposed for more than 25 years, the idea has gained recent momentum through legislation introduced in the past two Congressional sessions. The legislation has called for registration and testing of all tax preparers.

Last year a Government Accountability Office (GAO) study brought more attention to this topic. The study resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors”. The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors, many of them serious. In several instances the errors caused the “taxpayers” to pay more federal income tax than necessary.

Senate Bill 1219: The Taxpayer Protection and Assistance Act of 2007 is currently being reviewed by the Senate Finance Committee. The bill would, among other things, authorize the Secretary of the Treasury to regulate, test and require continuing education of paid income tax preparers. To be more specific the bill “will require people who make a living preparing tax returns to pass a minimum competency exam”.

Before I go any further I must point out the following two items –

(1) The illegal and unethical practices of ENRON and others were perpetrated by CPAs – members of a very highly regulated industry. Registration and regulation of tax preparers will by no means put an end to unethical and illegal activity.

(2) The tax preparers in the GAO study were all employees of fast food chains such as Henry and Richard and Jackson Hewitt, and not independent tax professionals such as myself. It is certainly no surprise, at least to me, that H+R Block and Jackson Hewitt tax preparers are incompetent.

As for regulating the industry, I fully support the concept of registering tax preparers. The mechanism is already pretty much in place in the form of the PTIN (Preparer Tax Identification Number) system – which assigns tax preparers a special federal id number so they do not have to put their Social Security number on tax returns they prepare, as had previously been required.

Currently anyone can put out a shingle as a “tax preparer” – there are no unified legal requirements. And I have seen the shingle hung in many strange places over the years.

One morning, not too long ago, while walking on Central Avenue here in Jersey City I saw a sign in the window of a barber shop that basically said “tax returns prepared here”. You could apparently get a haircut and a manicure and have your 1040 prepared all in one sitting! Many years ago, before I had my own office, I had considered renting a desk in an insurance or real estate office – it never occurred to me to rent a chair at a barbershop.

Early in my career, when I was working with my mentor Jim Gill at Journal Square (where the “Jersey Bounce” started), I came across a near-vacant room in the corner of the old bus station with large storefront windows. Inside the room was a person sitting on a folding chair at a card table with an adding machine – there was no other furniture or fixtures in the room. A hand-printed cardboard sign in the window advertised “Tax Returns Prepared Here”. What was sad was that I once actually saw a person in the room getting his return prepared.

I also strongly support the requirement that all tax preparers take a minimum number of continuing education credits each year to be able to continue to prepare returns. I attend on average about 40 hours of federal and state tax update classes each year.

What I am very much against is making all tax preparers take an initial “competency” examination in order to be able to continue to prepare taxes. Any legislation that regulates the tax preparation industry must contain a “grandfather” clause.

(1) I have been preparing tax returns for 35 years without incident. I have no intention at this point in my career to have to take a test to prove that I know what I am doing.

(2) There are more than a million “unenrolled” (non-CPA and non-EA) tax preparers like myself currently in practice. It would be literally impossible, and prohibitively expense, for the IRS to properly administer a test to every single unrolled preparer, and they freely admit this. The IRS has a hard enough time with the annual Enrolled Agent exam for a few thousand applicants.

I would make the following recommendation – Every current tax preparer that has been in “the business” for at least five full years (60 months) and who has taken a minimum of 60 hours of continuing education in taxation during the past two years (24 months) would be exempt from taking the examination. These “grandfathered” preparers would be subject to the same annual continuing education requirements as those who had to take the competency exam to maintain their status.

I also agree with the suggestion of the NATP that the legislation “follow the realities of the tax preparation industry, recognizing that more than 90 percent of all tax return preparers complete only individual returns” and require continuing education in keeping with the nature of the individual’s practice.

So what do you think?


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