Monday, September 13, 2010


A couple of tax professors have weighed in on the new tax return preparer regulation regime.

Professor Annette Nellen of San Jose University correctly observed in her post “Regulating Paid Tax Return Preparers” at her 21st CENTURY TAXATION blog (the highlight is mine) –

I don't think the proposed system will cause unscrupulous preparers to change behavior. They will just become (or continue to be) paid preparers who do not sign the return so remain off of the IRS radar screen (until the taxpayer gets audited and leads the IRS to the preparer). . . If Congress and the IRS want to reign in these unscrupulous preparers, they really need to (unfortunately) add a very large penalty to the tax system to be imposed on taxpayers who file a return they paid someone to prepare and did not get that preparer to sign the return and list his identifying number. Such a penalty would keep taxpayers away from unscrupulous preparers who would then go out of business.”

Professor Nellen also has an excellent and detailed article on the history and rationalization of the new tax preparer regulation titled “Registered Tax Return Preparers: Beware of New Jargon and Compliance Obligations” at CPA2BIZ.

Professor Mary O’Keefe of Union College in upstate New York submitted the following comment on Professor Nellen's post –

With current filing methods and the existing tax software, there are many practical barriers which make it unreasonable to burden taxpayers with the responsibilities of monitoring whether their preparers have 'signed' their returns.

I outline some of these difficulties in a response on my blog

As indicated in her comment, Mary discusses the issue, and outlines what she considers the “many practical barriers” in the post “Should Taxpayers Be Enforcing the New Preparer Regulations?” at her blog BED BUFFALOES IN YOUR TAX CODE.

Her suggestion -

I'd like to see a requirement that paid preparers must authenticate their identity and their registered PTIN status to their clients BEFORE they are allowed to request any sensitive information including W-2s, bank statements, old tax returns, etc.

Instead of imposing a penalty system on taxpayers to enforce the preparer return-signing law, I suggest a taxpayer education program to inform taxpayers that return preparers who are unable or unwilling to authenticate their registered status prior to requesting their confidential financial documents are operating outside the law and therefore unworthy of their trust.

In addition, the government already sends out ‘secret shoppers’ to paid preparers to monitor whether they are behaving in an unscrupulous manner, including failing to sign a return and/or to include a preparer ID number. They should surely continue to do that

In a follow up post titled “A ‘PTIN Facebook’ for Registered Tax Preparers” Mary further suggests that –

in this day and age of social network software, it should be straightforward for whatever company the IRS selects to run the PTIN registration system to host a secure site where registered preparers can upload their photos, so they can be linked to PTIN registration records.

The website should provide a link to that website and the IRS should educate taxpayers that it is in their own best interest to verify the identity and registration status of their tax preparers before they give him any confidential tax documents or provide any sensitive financial or personal information.

In other words, when a taxpayer first approaches a potential tax preparer, she should be able to ask for his name and PTIN before she gives him any confidential information. She ought to be able to go to and find a link to a webpage where she can type in his PTIN and see his name, photo, and contact information

I agree with Professor Nellen – the IRS should heavily penalize individual taxpayers who use unregistered persons to prepare their tax return. Crooked tax return preparers would not be able to exist for long without crooked taxpayers.

It may not be easy to identify these taxpayers. But if this is discovered in audit there should certainly be a large penalty, which would not be available for abatement in any negotiation. David Williams of the IRS has suggested that the IRS may sent out inquiries to selected taxpayers with “self-prepared” returns asking them to certify by signature, under penalty of perjury, that they did indeed prepare their own return.

Regarding the scenarios that Mary has discussed, the penalty should be assessed if a taxpayer pays an individual to either prepare in total, or prepare a “substantial” or “significant” portion (i.e. a Schedule C, D, or E) of a filed return.

I also agree with Professor O’Keefe that there should be an easily accessible database of registered tax return preparers searchable by name and by PTIN so that taxpayers can be sure the person can verify, if not the competence of the preparer (as in the case of CPAs and attorneys who do not have to provide any measure of competence in 1040 filing) at least that the preparer is duly registered and authorized by the IRS to prepare 1040s. The IRS has promised that this will be a component of the new regime in the future.

And the IRS should embark on a highly visible public education campaign to inform taxpayers that only those preparers who possess a PTIN (eventually only Registered Tax Return Preparers, Enrolled Agents, who have proven a degree of competence and are required to remain current through mandatory CPE, and CPAs and attorneys who have registered) are legally authorized to prepare, or assist in the preparation of, a Form 1040, or 1040A, for a fee.

This campaign should also highlight the fact that taxpayers who use unregistered preparers will be heavily penalized.

A public education campaign has also been identified by the IRS as an eventual component of the regime.

I do think that potential taxpayer clients should have the right to request and be given the PTIN of a tax preparer as part of a general inquiry before choosing to use that preparer – so they can check the IRS database up front. Perhaps a preparer’s PTIN should be required to be listed in any advertising.

As for Mary’s suggestion of continued “secret shopper” stings – I do think that such an operation should be done as a one-time “test” after the tax preparer registration regime has been fully phased-in, in maybe five years from now, but I do not believe the IRS should spend its time and money on this as a regular practice.

So what do you think?


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