Tuesday, January 12, 2010


I am confused about the two competency examinations discussed in the proposed regulations. Both cover 1040 issues – one with non-business issues and one with small business issues. Strangely enough neither exam covers Schedule E. Registrants are only required to pass one of the two exams.

Does this mean that if I take and pass the nonbusiness exam I will not be allowed to prepare 1040s that include a Schedule C or F? It seems obvious that the exam that covers nonbusiness issues will be somewhat simpler – so if it does not matter which test one takes why would anyone take the small business test?

The report indicates that, “the IRS plans to add a third test to address the competency of the tax return preparer with regard to business tax rules {here I assume corporation and partnership issues – rdf} after the three-year implementation phase is completed”.

I have suggested perhaps two separate tests, with two separate “credentials”. There would be a basic competency exam covering all aspects of 1040 preparation, and passage would permit one to prepare 1040s. A separate exam on “entity” returns – 1120, 1120-S, 1065, 1041, 990, 706 – would permit one who passes to prepare “entity” returns.

I am somewhat concerned about the proposed regulation that says “The IRS will perform suitability checks on those paid tax return preparers required to complete competency testing”. As long as all this means is verifying that a person who registers as a paid tax preparer has filed all of his/her required 1040s I do not see any harm. And I would expect that if the IRS found a registrant delinquent on a 1040 filing he/she would be given a period of time to submit the missing return. I would certainly not support a federal background check on registrants. There is no federal background check for becoming a CPA or lawyer (as far as I know).

The report does say, “For renewal of registration purposes, a tax compliance check is a limited review of the tax return preparer’s filing and payment compliance history”.

Regarding the annual requirement for continuing professional education – to be honest I think 15 hours per year is a bit wimpy. I think it should be 72 hours in the three-year registration period, with a minimum of 16 hours in any one year, as it is for Enrolled Agents. And I am not sure if a mere 3 hours in tax law updates is enough.

The regulations require the CPE to be in “federal” taxation. So I expect that seminars and workshops I attend that are limited to state tax issues would not count. The NJ chapter of NATP currently offers two full-day (8 hours of CPE) seminars each year. One covers federal tax issues, for the most part, and one is a NJ state tax update. I guess only one of these two seminars would qualify under the proposed regulations.

I do take issue with the annual requirement of 2 CPE credit hours in “ethics”. This is a pet peeve of mine. Making all preparers take 2 hours of continuing education in ethics each and every year is a total waste of time! As mentioned above I have been preparing tax returns for 38 seasons. If I do not have ethics by now sitting through 2 hours ain’t going to make me ethical. If I am so inclined to be unethical in my practice listening to a speaker tell me what is wrong is not going to make me “see the light”.

While I do believe that there should be some questions on ethics included in any proficiency examination, I would recommend a requirement of 1 or 2 hours of CPE credit on ethics issue updates once in each 3-year registration period.

I have no problem with being held to the ethical standards of Circular 230 that are presently in effect for currently “enrolled” or “licensed” preparers. Even as an unenrolled preparer I am subject to certain IRS ethical standards. And I do agree that registering as a paid tax preparer, and meeting the ongoing requirements, should not allow me to practice before the IRS other then to the extent I am already allowed.

While for the most part the tax preparation community accepts at least the concept of registering paid tax preparers, there are those, my fellow tax blogger Joe Kristan included, who oppose the new regime. One reason they give is that compliance will cause a financial hardship for the previously unenrolled preparer, and will cause a substantial increase in the cost of tax preparation.

I cannot see that registration and licensure of tax preparers is going to substantially increase the cost of tax preparation. I already earn more than 15 CPE credits in continuing tax education a year – so there is no additional cost to me there. And to be honest, any unenrolled tax preparer who was not already taking at least 15 hours of continuing education per year certainly should have been.

My only additional cost will be for taking a competency exam review course and the actual exam, which would not be necessary if there was “grandfathering”, and for the initial and renewal registration fees. If the IRS does not get greedy (like New York State) this amount should not be much – less than $1.00 per tax return per year if actually passed along.

The only area of concern is if newly “licensed” preparers unnecessarily inflate their fees because they now have a “credential”. Let’s face it – CPAs certainly charge more than unenrolled preparers for the same work simply because they feel the presence of the initials after their name justifies it.

Many years ago one of the students in an Adult School tax class I taught asked me what was the difference between a tax return prepared by a CPA and one prepared by someone like me, an unenrolled preparer. My answer – about $100.00. And that figure has to be adjusted for inflation.

A recent article at WEBCPA reports that Barry Melancon, president of the American Institute of CPAs, expressed “apprehension” about the new credential the rules will create. He agreed that the proposal will foster greater compliance with the Tax Code and more reliable service for taxpayers, but expressed (the highlight is mine) “concerns about the IRS plan to provide tax preparers who are not already CPAs, enrolled agents or attorneys with a certification based on limited qualifications. A new IRS examination process may cause confusion among taxpayers about the relative qualifications of tax return preparers.”

There already is confusion and gross misconception about the relative qualifications of tax return preparers. A majority of taxpayers wrongly assume that CPA = tax expert. This is simply not true.

The AICPA itself has said (again, highlight is mine), "We do not offer a credential in taxation. In general, our approach has been not to develop credential programs around areas for which the public already believes CPAs to 'own'. In addition, we do not endorse a particular tax credential.”

As I have said time and again – just because a person has the initials CPA after his/her name doesn’t mean that he/she knows his arse from a hole in the ground when it comes to 1040s.

Having a CPA credential means that the person has passed a difficult test in accounting and auditing concepts and is permitted by state law to certify audited financial statements. It does not mean anything at all regarding the preparation of individual income tax returns.

Just like a doctor, a CPA can specialize. A CPA may indeed specialize, or be proficient or expert, in 1040 preparation. But the initials by and of themselves do not in any way indicate that the person bearing them has actually ever prepared a single 1040.

What, I believe, Mr Melancon is worried about is that now that there is a specific “credential” for unenrolled preparers CPAs will no longer have an unfair and unfounded advantage in the minds of the taxpaying public when it comes to 1040 preparation.

If a CPA or an attorney passed the same initial competency test and was required to take the same number of annual CPE credits in taxation as unenrolled preparers will be required to do under the new proposed regulations then one could be relatively sure that he/she was competent and current in 1040 preparation – and all tax preparers would be on en equal footing.

While I do not agree with Joe Kristan on the issue of regulating tax preparers, I certainly do agree 100% with him when he says –

The only sure way to improve tax compliance is to simplify the tax law and eliminate the most egregious opportunities to cheat, like refundable credits.”

Prof James Maule has a similar on the money comment -

If the Congress genuinely cares about reducing the number of errors on tax returns, it ought to turn its attention to genuine tax reform, which might not produce a simplistic tax system but surely would generate significant tax law simplification. Unfortunately, the IRS does not have the power to impose on members of Congress the sort of high standards it seeks to impose on tax return preparers.”

I am glad that the IRS will include public awareness in the new registration regime.
The IRS will utilize a full range of social media, public service announcements and paid advertising, if authorized, to provide taxpayers with information on what standards the IRS requires of tax return preparers and how they can determine whether their tax return preparer has meet these standards,” and “the IRS plans to introduce a searchable database of tax return preparers who have met the required standards on its website after the initial registration and examination period have been completed”.

The IRS report also addresses “Refund Settlements” (aka Refund Anticipation Loans or RALs).

Consumer and taxpayer advocates have long been vocal in their opposition to the use of refund settlement products. These groups charge that changes are needed to protect taxpayers from fraudulent and misleading marketing schemes that conceal the true, high cost of services and loan products.

Some consumer advocates argue that refund settlement products entice fringe tax return preparers, including payday loan stores, and check cashers. Others suggest that the presence of refund settlement products and their pricing structure encourages tax return preparers to take overly aggressive positions on returns to inflate the size of the expected refund and, therefore, the profits to be made from the refund settlement product

In response to these concerns –

The IRS will convene a working group to review the refund settlement product industry. Part of this review will include analyzing opportunities available for the improvement of refund delivery options, including those for unbanked taxpayers.”

While I support a total ban on RALs, or at least banning tax preparers from offering them, if the IRS could speed up the processing of refunds and its direct deposit procedures there would be no need for someone in true need of cash right away to resort to a usurious RAL.

So there you have my take on the IRS Return Preparer Review. What do you think? You can send your comments to me via email at rdftaxpro@mail.com. Be sure to put “THE WANDERING TAX PRO COMMENT” in the “subject line”.