Monday, June 15, 2009


My recent wanderings around the blogosphere indicates that one of the biggest topics of the day involves IRS Commissioner Douglas Shulman’s recent announcement of plans to “propose a comprehensive set of recommendations to help the Internal Revenue Service better leverage the tax return preparer community with the twin goals of increasing taxpayer compliance and ensuring uniform and high ethical standards of conduct for tax preparers”. He was talking about what Trish McIntire of OUR TAXING TIMES calls “the regulation that Congress can't seem to pass” – the licensing and registration of “unenrolled” (not EAs, CPAs, or lawyers) tax preparers.

As Trish points out in her post “It’s Back Again” there is, “nothing new there. Nina Olson, the National Taxpayer Advocate, has been recommending licensing for years now. In fact, there have been bills before the last 3 Congresses which would require licensing. They have all died when that Congress ended because there were other more pressing issues distracting lawmakers.”

Many of my fellow tax bloggers, who are also tax professionals, have weighed in on the question. While there are bloggers on both sides of the question, it seems the consensus of these posts is that some kind of regulation is needed.

I have blogged, commented, and written about this topic at various places and to various individuals and organizations in the past. But perhaps in light of this resurgence of interest in the topic it is time again to post my thoughts and comments on the subject.

First of all, I am not a big fan of excessive government regulation of anything. However I do feel that there are times when government regulation if necessary to protect the public from unethical practices.

I am not calling for regulation of tax preparers, and would not complain if there were none, but I do not object to the idea – and actually support it. I am an ethical tax professional – so any reasonable (always the operative word) form of regulation should not adversely affect my 1040 practice.

The reason to regulate/license “unenrolled” tax preparers is because, as I have stated in the past, any cafone can hang out a shingle as a “professional tax preparer”. Currently there are very few states that actually regulate or license individuals calling themselves tax preparers. There is no standard to assure that a person who calls himself/herself a “tax preparer” actually knows his arse from a hole in the ground when it comes to the Tax Code.

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 read “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.

To be honest the only way a taxpayer can be assured that a potential tax preparer has any actual knowledge of federal income taxes is if he/she uses an Enrolled Agent (EA). FYI, I am not an EA. Even the initials “CPA” do not automatically indicate that the person whose name precedes them is a tax expert.

The name EA is misleading. While certified by the IRS, an EA is not an employee or representative or “agent” of the Internal Revenue Service. An EA is a private tax professional who is "enrolled" to act as a taxpayer's "agent" in proceedings with the IRS and in tax court. To become an Enrolled Agent one must pass a difficult test that is 100% federal tax law. In order to maintain their enrolled status, EAs must have a mandatory number of continuing education credits in taxation each year.

Another reason that the IRS and Congress are concerned about regulating tax preparers is that there are many, many so-called “tax pros” out there who purposely prepare fraudulent tax returns, both known and unknown by the taxpayer client, to increase or create tax refunds, often charging the client a percentage of the refund. Most of this fraud occurs through the use of “refundable” tax credits such as the Earned Income Tax Credit.

Back when I started out in the business (before the EITC) my mentor told me the story of a local tax preparer that had been used by many police officers and other municipal employees in the area. You would bring your “stuff” to this person. He would ask how much you would like to get back. He would have you sign the Form 1040 in blank and basically make up enough deductions so that you would get the refund amount that you had asked for. If you asked for a refund of $5,000 your 1040 would indicate an overpayment of $5,087 or a similar number. This person was eventually caught.

A third reason involves recent government studies that have called into question the competence and ethics of the average “unenrolled” preparer.

A few years ago a Government Accountability Office (GAO) 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.

To some degree tax professionals are already registered with the Internal Revenue Service via the issuance of a “Preparer Tax Identification Number” (PTIN).

When I prepare a 1040, or just about any other tax return, I am required to sign the return and indicate a personal identification number (originally my Social Security number) as well as the name and address of my business and its federal “Employer Identification Number” if applicable. The PTIN is a number issued to paid tax preparers for use when signing a tax return - in lieu of one’s Social Security number. So a tax pro does not have to make his/her Social Security number “public” and risk identity theft or other “financial casualties”.

I also have a “CAF” (Centralized Authorization File) Number for use when a client/taxpayer elects to have me designated as a “authorized representative” (sort of like a limited Power of Attorney) when dealing with the IRS. While I expect that at this point every “legitimate” paid tax preparer has a PTIN, not all preparers have a CAF number.

It would be easy to build the IRS licensure/registration procedure on the existing PTIN registry.

Most of the bills regarding tax preparer licensure that have previously been introduced in (but not acted upon by) Congress have called for mandatory annual CPE (continuing professional education) requirements, similar to requirements for an Enrolled Agent (EA) or other professional licenses and designations (i.e. CPA and attorneys), and a mandatory initial proficiency test which one must pass to be able to prepare or continue to prepare 1040s (similar to the EA enrollment exam). Some proposals call for an annual test.

I wholeheartedly support the requirement for a specific amount of annual CPE credits per year as a condition of maintaining one’s ability to prepare tax returns. I attend many federal and state tax update seminars, workshops and conferences during the year – and I expect that I already earn more CPE credits each year than the requirement that would be set by legislation.

However I am firmly against a mandatory initial, or annual, test for ALL current and future tax preparers.

For one thing – I have been preparing tax returns professionally, and ethically, for 38 years. I have absolutely no intention of taking a test this late in my career to prove that I know what I am doing.

Secondly, and perhaps most important, it would be literally impossible for the Internal Revenue Service, or any outside contractor, to properly administer an initial, or annual, proficiency test to the current 1 Million + “unenrolled” preparers out there. It just cannot be done. The IRS has enough problems administering the EA exam, with only a few thousand tested each year.

I insist, and have urged NATP to do the same, that any tax regulation/licensure legislation must include some kind of “grandfather” clause for existing long-time tax pros.

Here is my proposal –

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 an initial proficiency 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. There would be no annual testing – only the initial exam.

While I support the registration/licensure of all tax preparers I do not believe that such a practice will eliminate, or even substantially cut down on, the number of unethical preparers or overall tax cheats. As long as the tax system is the convoluted mess that it currently is people will continue to cheat on their taxes, either on their own or with the help of unscrupulous preparers.

The most that registration/licensure can do is to provide some degree of protection to the taxpayer-consumer when it comes to choosing a tax preparer. I agree with Trish McIntire when she says, “Congress needs to allot money for a good, intensive education campaign about licensing and why taxpayers need to look for licensed preparers”. Registration must be followed by public education on the fact that taxpayers should use only registered/licensed preparers to complete their tax returns.

As Trish suggests, penalties should not be limited to non registered/licensed preparers. If registration/licensure is required for all paid tax preparers, taxpayers who use non registered/licensed preparers should also be penalized to some degree.

I must point out two more things before I end the post –

(1) This whole interest in ethics among tax preparers actually began with the ENRON scandal. The illegal and unethical practices of ENRON were perpetrated by CPAs – members of a very highly regulated group.

(2) The tax preparers “caught” in the GAO study of a few years ago that I mentioned above 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.

So there you have my word on the subject of regulating the tax preparation industry. What do you have to say on the topic?



Kelly said...

I agree with a lot of your concerns. I believe that some oversight is necessary but the sheer logistics of monitoring the industry are going to be overwhelming. Just think of all of the "seasonal" employees at tax pre franchises... I think those franchises which, to date, claim to be supportive of the proposals, will actually push back/lobby the most.

Bruce said...

There is indeed an accumulation of topic around the tax blogging sphere on this subject. I have been asked many times why I haven’t put in my two pence worth. Put simply I knew I didn’t need to.

My views on this are as yours. Maybe the words are different, but the idea and thoughts are the same. For as long as I have been doing this (15 years less than you have, 26 or 27 professionally self-employed) I have said there needs to be rules or guidelines regulating preparers.

Tax preparation is the biggest financial issue people face, and do so yearly. Lawyers given the life changing situations they deal with are regulated, other financial professions have rules and regulations, so why not preparers?

Like you, I have a PTIN and a CAF. Assuredly, between the two, I am confident that the IRS is aware of what I do. In addition, if not, I call them regularly to inform them how wrong they are about my clients’ situations.

Like you, I probably take more CPE then they will regulate. IRS and State seminars, along with other courses I take yearly, via the internet or a local college.

The “Idea” that we’d have to take a test annually is retarded, but sounds good to Joe Taxpayer when he hears how preparers are screwing up. Regulating this would be extraordinarily imposable. Not to mention my confidence in my abilities would greatly outweigh the test governors experience.

The talk about Ethics is also a good sound for Joe Taxpayer to hear. Yet, How many of these prepares that are being caught and publicly belittled are EA’s, and CPA’s? If one was to look it would be the majority.

My view, Ethics are not taught, they are a persons own mental ideal of the way things are. Tax preparers, Lawyers, Accountants, EA, CPA, or whatever your profession title is along with designations is all well and good, but none of that will make or proclaim an true ethical person.

Classes on Ethics are only serving to educate those with none how to better get around ethical practices.

Simply stated, the idea is good, it sounds good to Joe Taxpayer/voter. Yet like so many other tries, this will be buried by so much other Congressional business that it again my fall to nothing. Unless you count the tax payer dollars being spent by IRS Commissioner Douglas Shulman’s plans to “propose a comprehensive set of recommendations to help the Internal Revenue Service better leverage the tax return preparer community with the twin goals of increasing taxpayer compliance and ensuring uniform and high ethical standards of conduct for tax preparers”.

Good luck Doug, enjoy your free ride.

Robert D Flach said...


Frankly one reason we need some regulation is to protect us from the seasonal employees of Henry and Richard and their ilk.

In terms of ethics, regulation legislation should go further and forbid tax preparers from offering RALs - as it is to some degree a conflict of interest (not to mention a bad thing altogether).