IRS Completes Tax Return Preparer Review

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January 5, 2010

It surprises many to learn that, currently, one almost always needs a license to cut hair but not to prepare taxes. The federal government does not require registration or licensure to prepare federal income tax returns and only a small number of states have a registration or licensure requirement.

The IRS estimates there are between 900,000 and 1.2 million tax return preparers, of whom a small fraction are Enrolled Agents, CPAs or Attorneys. The remainder are unlicensed -- these unlicensed preparers, at a minimum, have not been required to show competence in tax matters and, at worst, are unscrupulous operators.

Most tax stakeholders recognize that this poses a big problem: taxpayers trust many preparers that, honestly or not, make significant mistakes on the returns they prepare. Earlier this year, the IRS commissioned a study to propose a new regulatory framework for federal tax preparers. The results of this review were released yesterday.

The review proposes a number of changes to be made over the next few years:

• Registration: all preparers will be required to register with the IRS and obtain a registration number (PTIN). This will, at a minimum, allow the IRS to track preparers.
• Examination: all preparers not subject to Circular 230 (i.e., Enrolled Agents, CPAs and Attorneys) will be required to go through a competency examination. Initially this will be a two-part exam, with a third part being added after several years. There will be no grandfathering of current preparers, but the requirement will be phased in over several years.
• Education: currently licensed professionals (Enrolled Agents, CPAs, Attorneys and those licensed by state agencies) generally are required to take classes annually to keep up on the tax law. The IRS expects to require 15 hours annually of continuing professional education for tax return preparers.
• Ethical Standards: all return preparers will be subject to the standards of Circular 230 (to which only Enrolled Agents, CPAs and Attorneys are currently subject).
• Enforcement: all preparers will be regulated by the Office of Professional Responsibility and this office will be given additional resources.

As mentioned, most of these requirements will be implemented over a multi-year period and none will be in effect for the current filing season.

After this new regulatory scheme is put in effect, there will still be significant differences between newly registered preparers and those currently subject to Circular 230 (Enrolled Agents, CPAs and Attorneys). First, the licensure requirements will still be much more stringent for the latter group. Second, newly registered preparers will still be limited in how they can represent their clients before the IRS. Whether the newly regulated professionals will be allowed a client privilege is not addressed in the IRS report.

We believe this is a win for taxpayers, as it will raise the bar for tax professionals and weed out unscrupulous and/or incompetent preparers. Taxpayers paying a professional for tax preparation and advice deserve a professional result; further regulation will help ensure that clients get what they pay for.

As always, please contact us if you have any questions on this material or your tax situation.