Monday, January 11, 2010


During the lunch break at the NJ chapter of NATP’s NJ State Tax Seminar this past Saturday I carefully read through the important parts of the IRS “Tax Preparer Review” report.

As the report points out –

Over the past 6 months, the IRS, tax return preparers, the associated industry, other federal and state government officials, consumer advocacy groups and the American public engaged in a transparent and open dialogue about tax return preparation in this country. Three public forums were held and more than 500 individuals and groups offered written comments.”

As a veteran tax professional I provided my written comments, directly to IRS Commissioner Shulman and to the IRS review committee, and posted extensively about the issue and the “open dialogue” here at TWTP.

Here are the proposed new regulations that resulted from the IRS inquiry (any highlights are mine)–

(1) “The IRS will require all individuals who are required to sign a federal tax return as a paid tax return preparer to register and obtain a preparer tax identification number. The IRS will make tax return preparer registration effective for three-year periods and require tax return preparers to renew their registration every three years.”

(2) “The IRS will establish competency testing for all paid tax return preparers required to register with the IRS who are not attorneys, certified public accountants or enrolled agents.”

The IRS will perform suitability checks on those paid tax return preparers required to complete competency testing.”

There will not be any ‘grandfathering’ from these testing requirements based upon past tax return preparation experience.”

Initially the IRS will offer two competency examinations. One examination will cover wage and nonbusiness income Form 1040 series returns; another examination will cover wage and small business income Form 1040 series returns.” Non-exempt tax return preparers will be required “to take one of the two examinations relating to 1040 issues”.

The IRS will develop transition rules to avoid significant interruption of services to taxpayers during the initial testing period. The preliminary approach will require that competency testing requirements be met no later than the required renewal date for tax return preparer registration.”

(3) “The IRS will require 15 hours of annual continuing professional education, including three hours of federal tax law updates, two hours of tax preparer ethics and 10 hours of federal tax law topics, for tax return preparers who are required to register. The continuing professional education requirements will not apply to attorneys, certified public accountants, enrolled agents or others enrolled to practice before the IRS.”

(4) “The IRS will place all signing and nonsigning tax return preparers under Treasury Department Circular 230. The authority granted to those individuals who do not have professional licenses and who are not enrolled agents, enrolled actuaries or enrolled retirement plan agents will be limited to preparing tax returns and representing their clients as currently permitted during an examination of any return prepared by the tax preparer.”

According to the report, “The IRS believes that increased oversight of paid tax return preparers does not require additional legislation” and plans to issue regulations on the registration of tax preparers “under section 6109 of the Internal Revenue Code”. It also “considers the preparation of a tax return for compensation as a form of representation before the agency”. So an Act of Congress will not be required to institute registration.

I do believe that I would prefer the regulation of tax return preparers to be done in this manner, via IRS regulation, rather than be established through legislation. This provides greater flexibility for change and adjustment as needed. Besides, Congress would probably muck it up anyway.

As I have posted many times before here at TWTP, and written elsewhere, I support the registration of all paid tax return preparers. So I have no problem with item #1. Attorneys and CPAs do not appear to be exempt from registering under the new regime, so there is no issue here.

The IRS proposed regulation apparently exempts volunteer tax return preparers such as those in the VITA or AARP programs. While I am not aware of the requirements to become an AARP preparer, I do know that VITA requires an extensive test in federal taxation each year in order to participate as a volunteer tax preparer, so I have no problem with this exemption from registration.

I do not oppose an initial competency examination; however I do have issues with the proposed regulations.

The report tells us –

For those who supported testing, another issue of concern was ‘grandfathering’. Proponents of ‘grandfathering’ suggested that many unlicensed tax return preparers have been preparing accurate returns for several years with little to no problems with the IRS. These tax return preparers, they argued, have been obtaining continuing professional education and kept current with the tax literature and should be given a pass on any testing requirements”.

I was one of the proponents who so suggested grandfathering.

My basic feeling about grandfathering was, to be honest, personal and somewhat selfish. I have been preparing 1040s for 38 tax seasons now. Why should I be forced to take a test this late in my career to prove that I know what I am doing – and to be able to continue to be employed in my chosen field?

There was also a practical side to my support of this concept. I felt it would be literally impossible for the IRS to properly test all the paid tax return preparers out there within an 8-month period. However I strongly believed that all paid tax return preparers, including attorneys and CPAs (but not EAs), should be required to be tested, and assumed the IRS would need to test all in one short period of time. The IRS realized the difficulty of administering such a test and the proposed regulations give initial registrants three (3) years to take and pass the test.

I still strongly support “grandfathering”. I am aware of tales of 20-25 year veteran tax preparers who do not keep current and still deduct items that once were but are no longer deductible. That is why I suggested –

Current unenrolled tax practitioners who have been preparing federal individual income tax returns consistently for five years (60 months), who have earned 50 hours of Continuing Professional Education credit in Individual Income Taxation in the two year (24 month) period prior to registration, and who are not currently prohibited from preparing federal income tax returns because of past bad act,s will be exempt from taking the initial proficiency examination.”

In hindsight perhaps I was too generous with the period of tenure - 10 years of continuous experience instead of 5 would probably be more appropriate - and too harsh with the required CPE during a “look-back” period – 50 credits in 3 years instead of 2 or 35 credits in 2 years now seems better.

The report states that “Several enrolled agents, attorneys and certified public accountants argued against ‘grandfathering’, noting that a minimum level of competency needs to be assured through examination”. However the underlying feeling behind this objection is basically, “If I had to take a test then everyone should”.

My strongest objection to the proposed regulations comes from exempting attorneys and CPAs from the competency examination and continuing professional education requirements. This is a big mistake.

Many attorneys, certified public accountants and enrolled agents expressed concern, however, about duplicate regulation for those tax return preparers who hold professional licenses or are authorized to practice before the IRS and are subject to IRS and State regulation currently,” the report said. “They argue that testing of those who had to pass examinations to obtain their professional credentials would be costly and redundant.”

It was also noted by members of the exempt group that, “most attorneys, certified public accountants, enrolled agents, and state registered tax return preparers currently must complete continuing education to retain their professional credentials”.

First let me say that I agree 100% that Enrolled Agents should be exempt from the competency test, because they have already passed a much harder test in federal taxation, and that the required annual CPE credits in taxation necessary to maintain enrollment are stricter than those in the proposed regulations.

However applying the argument to attorneys and CPAs is pure hogwash. Testing would hardly be expensive (a one-time cost of a few hundred dollars for a review class and the actual test) and most definitely not redundant!

A CPA is a certified “accountant” and not a certified tax preparer. A CPA passes a test that indicates a proficiency in accounting and auditing. While there are some tax questions on the test, more on “entity” (corporation, partnership, estate, trust) taxation than basic 1040 taxation, the CPA exam is not in any way imaginable the equivalent of the exam that must be passed by Enrolled Agents or even the new exam that will be required of currently unenrolled preparers.

The same argument applies to attorneys. One of my best friends is a labor lawyer and he does not even prepare his own 1040, and neither do several other partners in his firm. As I was saying to him at my father’s wake – I have been preparing 1040s for 38 years and will have to take a test to be able to continue to work, and must take CPE credits each year (which I already do), while he has never prepared a 1040 in his life and will be able to prepare individual income tax returns without having to do a damned thing!

Regarding 1040 preparation and the Bar exam, I have been informed by a tax attorney –

Tax is not a subject on the MBE (which is the national multiple choice portion) but can be included on the individual state essay exam. PA does include tax on its essay portion as a general rule (which is why most PA law schools suggest you take a tax course). There were sample tax questions on the 2009 model Q&A for PA {these involved business organization and estates and trusts and one item on taxation of scholarships – rdf}. I don't believe NJ or NY test on tax, though.”

And respected tax law professor and fellow blogger James Maule has said in his post “Shakeout in the Tax Return Preparation Industry?” at MAULED AGAIN –

Letting attorneys off the hook by presuming they are competent in tax law is foolish. . . . Attorneys take bar examinations that devote roughly one to three percent of the testing time to a tax question that is at the most elementary level imaginable. If the GAO and TIGTA took their experiment into law offices, they would discover almost all attorneys in this country who are not tax lawyers and even some who do practice tax would fail miserably when asked to prepare a tax return.”

And as far as I know, while CPAs and attorneys are subject to CPE requirements that vary by state, there is no requirement for either to take even 1 CPE in federal 1040 taxation to maintain their license to practice. Exempting attorneys and CPAs who wish to prepare tax returns professionally from mandatory CPE in federal taxation issues is totally ridiculous.

The IRS has said that it will “reach out to the various licensing authorities for attorneys, certified public accountants and other tax professionals to encourage them to support annual continuing professional education that includes federal tax law topics and updates.” Like that is going to do any good. They are only going to “encourage” to “support” and not “require” to “mandate”.

to be continued . . . . .