Tuesday, August 31, 2010


In his post “Preparer Costs Will Increase Some; Taxpayer Costs Will Increase More” my fellow tax blogger, and proven 1040 expert, Joe Kristan has sort of backed down from his contention that the additional costs incurred by preparers to comply with the new regulation regime will cause the cost of preparing a 1040 to substantially increase.

I don't think I ever have said this will significantly increase preparer costs, though there will be an increase.”

Joe also says -

For CPAs like me and attorneys who already meet CPE requirements, there will be time wasted on filing the same paperwork with a new agency, and, someday, on taking some pointless ‘competency’ test.”

Since CPAs, along with attorneys, are undeservedly allowed “off the hook” from testing and CPE requirements, the source of the bulk of the costs in money and time for the new regime, an individual CPA will, at most, have to spend 15 minutes online each year to pay his annual PTIN registration fee.

While hopefully CPAs and attorneys will, once the IRS comes to its senses or determines the need as a result of its tracking of preparer errors via the PTIN, eventually be subject to the same requirements as we less fortunate “previously unenrolled”, currently the only real additional burden of the new system will fall on the larger firms with un-initialed “underlings” who, more often than not, are the ones that are actually preparing the 1040s (I was one – a “para-professional” – at Delloite, Haskins + Sells over 30 years ago). These individuals will need to register, be tested, and take mandatory CPE in taxation – which will create additional costs for the firm. But these firms have multitudes of clients to whom to pass along these costs.

Let me repeat my rejection of the totally false defense that CPAs and attorneys must already meet CPE requirements. While I am sure that Joe, and other CPAs like him, do actually take many CPE hours in federal 1040 taxation annually, perhaps more then the 13 non-ethics hours that will be required, there is (and correct me if I am wrong) no specific requirement that a CPA must take even 1 credit hour in 1040 tax issues.

His main concern is that –

More significant will be the costs borne by the taxpaying public. The additional costs and paperwork will lead many casual preparers to walk away from the business. This reduces the supply of preparers, while Congress does nothing but increase the demand. Reduced supply and increased demand means higher fees that will buy little increased quality.”

Is getting rid of “casual” preparers a bad thing? Would you go to a “casual” doctor for medical treatment? Or a “casual” lawyer if you are arrested? If a tax preparer is not “serious” about being competent and current in tax law then he/she is of no real benefit to his “clients”.

I agree that the new regime will cause some “kitchen table” preparers (that is actually how I started my own practice) - who have a basic knowledge of the 1040 and prepare a dozen or so returns for friends and family for a fee during the season – to walk away. But it may also cause some of these “casual” folks to think about a career, primary or secondary, in tax preparation more seriously and decide to expand their “practice”.

If the new regulation causes a taxpayer’s preparer to take additional annual CPE credits in 1040 law, and incur additional costs that are passed along to clients, this will certainly enhance that preparer’s knowledge and therefore increase the “quality” of his/her “product”.

Let’s face it – any regulation bureaucracy, government or otherwise, will create additional paperwork, costs, and potential for “agita”. There is no question that Joe is correct when he tells us that the new tax return preparer regulation regime will do so.

The question is do the benefits outweigh the costs of the new bureaucracy.

Will the regulation of tax return preparers reduce tax fraud and help take a bite out of the Tax Gap? Of course not! Regulation does not automatically reduce fraud. As I have said many times before – regulation of CPAs did not prevent the Enron mess, regulation of medical professionals does not prevent Medicare and other insurance fraud, and don’t get me started on narrators (aka lawyers – look it up).

Cheating taxpayers will still find accommodating unethical and downright crooked preparers (and vice versa). Most of these preparers already do not sign the returns they prepare – so they will remain “underground”. And those with no real knowledge of tax law who charge for returns produced by merely entering tax information into a software program will continue to produce “self-prepared” returns for their clientele.

The only possible benefit in this area is with the eventual IRS public education on the requirement to use a registered preparer who will sign the return, and if the Service, as promised by David Williams at the NATP annual conference and the IRS Tax Forums, begins to go after actual taxpayers who use unregistered preparers.

Here are the benefits of the regulation regime as I see them –

(1) The IRS has a legitimate need for a central registry of all those who prepare tax returns for a fee. As I have said before, this is what originally started the investigation into tax preparer registration and regulation.

(2) The new “Registered Tax Return Preparer” designation awarded to those who pass the test and take mandatory CPE credits will provide the taxpayer public with an indication of who, besides an Enrolled Agent, is at least minimally competent and remains current in 1040 preparation. Currently any cafone can hang out a shingle as a tax preparer, regardless of education, knowledge or experience. Taxpayers have absolutely no way of knowing, other than if as previously mentioned they have EA after their name, if a person who says they know how to prepare a 1040 actually knows how to properly prepare a 1040. I have seen and heard of the sign “Tax Returns Prepared Here” hung in the strangest places.

(3) The RTRP designation would put the competent, experienced, and ethical previously "unenrolled" preparer on an equal footing with the CPA in the eyes of the general public. It would dispel the unfounded "urban tax myth", perpetuated perhaps more by uninformed journalists and bloggers than by the CPA community, that only CPAs are tax experts. CPAs would no longer erroneously “own” the tax preparation business, as the AICPA has told a member it believed they did.

For as long as I have been in practice I, a competent, experienced, and ethical tax preparer, have been lumped in the same category as the individual who has read the IRS instruction booklet and done his own return a couple of years and now decides to hang a sign in the window and prepare tax returns in between haircuts at the barber shop where he works, or who buys a tax preparation software package and, without any previous knowledge, training or experience, uses it to prepare 1040s for a fee! As a Registered Tax Return Preparer I, and hundreds of thousands like me, can finally get the acknowledgement and respect we deserve!

So the bureaucracy will benefit all – the IRS, the taxpaying public, and an extremely large component of the preparer community.

I think that the new Registered Tax Return Preparer designation may slightly reduce the cost to taxpayers. Many taxpayers now use a CPA to prepare their returns only because of the above identified “urban tax myth”. It is a proven fact that the average cost for preparing a 1040 charged by a CPA is more then the average fee charged by a non-CPA. With RTRP’s on equal footing with CPAs, more taxpayers will choose to use RTRPs. While the fee charged by a RTRP may slightly increase, in order to remain competitive CPAs will need to reduce their 1040 preparation fees.

Joe adds –

Rather than pay the increased costs, some taxpayers will stop getting help on their returns altogether and either self-prepare or drop out of the system.”

I do not think that increased costs, which I do not accept to be material in the first place, will cause more taxpayers to self-prepare. Many of my clients are smart enough to be able to prepare their own returns, but just don’t want to be bothered taking the time, and will accept modest fee increases the same way they accept increases in the cost of gas, food or other items. And with Congress continuing to make the Tax Code more and more complicated most taxpayers accept that tackling their return is beyond their ability – which is why it seems more individuals are seeking professional help each year.

About 30% of taxpayers have turned to software packages to self-prepare, but as more and more of these returns are questioned or audited, and users realize that the “Turbo Tax Defense” does not fly unless you are a highly placed government official, I think those who now use software to prepare incorrect returns will soon turn, or return, to tax professionals for help.



Anonymous said...

Your comment that there is no specific requirement that a CPA must take even one hour of tax-related CPE is correct. However, as a practical matter, most CPAs I know seem to take at least an annual 8-hour federal tax update course and frequently a 4-hour state course.

Christine @ cpe credits said...

Great post!

Your post is really interesting and very informative.

I learned a lot. Thanks for sharing!