Position Statement • April 2009 National Community Tax Coalition a project of the Center for Economic Progress Regulation of Paid Tax Preparers By Michael Evangelist The National Community Tax Coalition (NCTC) supports legislation to regulate unenrolled tax preparers.1 In contrast to licensed tax professionals, such as Certified Public Accountants (CPAs); lawyers; and IRS enrolled agents, unenrolled preparers have no licensing requirements and are not held accountable by a regulatory body. In 48 states and the District of Columbia, anyone, regardless of their qualifications or experience, can prepare taxes.2 Throughout low-and moderate-income neighborhoods, it is not uncommon for auto dealerships, pawn shops, and rent-to-own stores to offer tax preparation services in conjunction with high-cost loan products.3 The Internal Revenue Service (IRS) has no means of tracking unenrolled preparers and little ability to levy enforceable penalties.4 It is unsurprising that government studies of unenrolled preparers found abysmal tax return accuracy rates as well as cases of “willful recklessness.”5 Congress can protect American workers from incompetent and unscrupulous paid tax preparers and reduce the federal tax gap through regulations guided by the following principles. 1. The market for paid tax preparation consists of qualified preparers dedicated to the business of assisting taxpayers. 2. Unenrolled tax preparers are licensed by and registered with the IRS. 3. The public has easy access to a database of all tax preparers that includes a history of IRS enforcement actions taken against individual preparers. National Community Tax Coalition 4. Before obtaining a license, unenrolled tax preparers must meet a 29 E. Madison minimum set of qualifications, including a certification exam and a Suite 900 continuing education requirement. Chicago, IL 60602 5. Licensed tax preparers are held accountable by the IRS and subject T: (312) 252-0280 to enforceable sanctions and penalties. www.tax-coalition.org 1 Unenrolled preparers include all paid tax preparers with the exception of CPAs, attorneys, and IRS enrolled agents. 2 California and Oregon are currently the only states to regulate unenrolled preparers. In 2008, Maryland passed paid preparer regulations that will take effect in 2010. 3 Government Accountability Office, Letter to John Lewis Chairman Subcommittee on Oversight Committee on Ways and Means House of Representatives, GAO-08-800R, Washington, DC: June 2008, http://www.gao.gov/new.items/d08800r.pdf. 4 House Committee on Ways and Means, Subcommittee on Oversight, Regulation of Federal Tax Return Preparers, Written Statement of Nina E. Olson, National Taxpayer Advocate, 109th Cong., 1st sess., 20 July 2005, http://www.irs.gov/pub/irsutl/ testimony_wm_oversight_returnpreparers.pdf. 5 U.S. Department of Treasury, Treasury Inspector General for Tax Administration, Most Tax Returns Prepared by a Limited Sample of Unenrolled Preparers Contained Significant Errors, 2008-40-171, Washington DC: September 2008, http://www.treas.gov/tigta/ auditreports/2008reports/200840171fr.pdf. National Community Tax Coalition, April 2009 • 2 Now is the Time to Act The need to regulate unenrolled tax preparers is now stronger than ever. Increased tax code complexity will force a growing number of low-income workers to visit paid preparers for assistance. Moreover, expansions to the Earned Income Tax Credit (EITC) and Child Tax Credit included in the American Recovery and Reinvestment Act will mean larger tax refunds for workers and their families. A shadow industry of unregulated preparers stands ready to take advantage of additional complexity and larger refunds. Exorbitant preparation fees and predatory loan products will ensure that families have fewer refund dollars to save and pay down debt with. Meanwhile, fringe preparers, those who use tax preparation as an excuse to market unrelated, high-cost products, will have an even greater incentive than in past years to inflate refunds. Comprehensive Regulations are Cost Effective Two states, Oregon and California, currently regulate unenrolled tax preparers.6 A 2008 Government Accountability Office (GAO) study of the Oregon and California regulatory regimes found that Oregon’s 2001 federal returns were on average $250 more accurate than returns throughout the rest of the nation. The more-accurate-than-average Oregon returns resulted in an additional $390 million in federal tax revenues. At an estimated cost of $6 million, Oregon’s regulatory regime appears to be more cost effective than IRS enforcement measures, which only yield $4 for every $1 spent. Oregon’s two-tiered system requires tax preparers to meet education and continuing education requirements, pass a rigorous examination process, and, to obtain the top-tier certification, have experience preparing taxes. Oregon also has the power to deny licenses to applicants who violated the state’s licensing requirements or have been convicted of felonies and certain crimes. In contrast, California’s licensing body has considerably less ability to deny applicants a license. California’s one-tiered licensing system requires registrants to purchase a surety bond, but they are not required to pass an examination. GAO found that California tax returns were less accurate than the national average, which indicates that the regulatory framework’s design plays an important role in preparer accuracy. Paid Preparers Submit the Majority of Tax Returns In 2007, paid tax preparers completed 83 million tax returns – 61 percent of all returns filed.7 Of the 23 million low-income workers who receive the Earned Income Tax Credit (EITC), 73 percent use a paid preparer.8 The IRS estimates (based on 1999 data) that there are 1.2 million paid tax preparers, 300,000 to 600,000 of whom are unenrolled.9 Based on these estimates, unenrolled preparers may complete over 41 million returns, but given that the estimates are vague and based on decade-old data, it is clear that the IRS knows relatively little about who is 6 For more information on Oregon and California paid preparer regulations see Government Accountability Office, Oregon’s Regulatory Regime May Lead to Improved Federal Tax Return Accuracy and Provides a Possible Model for National Regulation, Report to the Senate Committee on Finance, U.S. Senate, GAO-08-781, Washington, DC: August 2008, http://www.gao.gov/ new.items/d08781.pdf. 7 See Treasury Inspector General for Tax Administration, supra note 5. 8 National Taxpayer Advocate, 2008 Annual Report to Congress, Volume II, Legislative Recommendations, Washington, DC: December 2008, http://www.irs.gov/pub/irs-utl/08_tas_arc_legrec.pdf. 9 See Government Accountability Office, supra note 6 for the number of paid tax preparers. For the number of unenrolled tax preparers see Government Accountability Office, In a Limited Study, Chain Preparers Made Serious Errors, Testimony before the Senate Committee on Finance, U.S. Senate, GAO-06-563T, Washington, DC: April 2006, http://www.gao.gov/ new.items/d06563t.pdf. Position Statement, April 2009 • 3 preparing most of the nation’s tax returns. Only enrolled agents are required to register with the IRS, meaning that there is little data on other tax practitioners and unenrolled preparers. Paid Preparers Contribute to the Tax Gap The Government Accountability Office (GAO) and the Treasury Inspector General for Tax Administration (TIGTA) conducted limited studies on a small number of unlicensed and unenrolled agents in large metropolitan areas. The findings were not encouraging. The percent of returns prepared correctly ranged from a disappointing 39 percent in the TIGTA study to an appalling 0 percent in the GAO study.10 Even more alarming, several preparers encouraged GAO and TIGTA representatives to under-report non-wage income. This particular misrepresentation should alarm the IRS, given that unreported business income accounts for nearly one-third of the nation’s $345 billion gross tax gap.11 10 See Treasury Inspector General for Tax Administration, supra note 5 and see Government Accountability Office, supra note 6. 11 Internal Revenue Service. “Tax Year 2001 Federal Tax Gap (PDF Graphic).” Washington, DC: Feb. 2006, http://www.irs.gov/pub/ irs-utl/taxgap021406.pdf. National Community Tax Coalition, April 2009 • 4 Table. 1 Regulation of Paid Tax Preparers: Comparison of Existing State Regulations and Proposed Federal Regulations Oregon Taxpayer Protection and Taxpayer Bill of Rights Assistance Act Requirement California Maryland (H.R. 5716) Licensed Tax Preparer (LTP) Licensed Tax Consultant (LTC) (S. 1219) May consider work experience in lieu None. Prior experience as an LTP or submit None. Department of Treasury will Department of Treasury will Experience of education. petition form of all past tax determine. determine. preparation experience. Complete a 60-hour qualifying (1) Hold a high school diploma or If currently an LTP, complete at least (1) Hold a high school diploma or Department of Treasury will Department of Treasury will education course. pass equivalency exam. (2) 15 hours of continuing education. pass equivalency exam. determine. determine. Education Complete 80 hours of qualifying Otherwise, complete 80 hours of education. education on income tax law. None. Pass exam with a score of at least 75 Pass exam with a score of at least 75 (1) Pass exam that is not less (1) Pass exam on federal tax code (1) Pass exam on federal tax code percent. percent. Enrolled agents take only stringent than the Special Enrollment and ethics knowledge. (2) Persons and ethics knowledge. (2) Treasury the sections of the LTC examination Examination for Enrolled Agents. (2) who passed a comparable exam may accept state licensing and focused on Oregon laws. Persons with 15 consecutive years of within the last 5 years are exempt. registration programs or Examination tax preparation experience can be examinations administered by an licensed without taking the exam. existing organization for tax return preparers in lieu of federal examination. CPAs, attorneys, enrolled agents, CPAs, public accountants, and their employees; attorneys; employees of CPAs; enrolled agents; attorneys; CPAs, attorneys, and enrolled CPAs, attorneys, and enrolled and anyone employed by them. Trust businesses who prepare only their businesses’ tax returns; fiduciaries and employees of governmental agencies agents. agents. Exempted individuals company and financial institution their employees while acting on behalf of estates; and employees of while performing official duties; and employees functioning within the governmental agencies while performing official duties. employees of licensed individual tax scope of their employment. preparers or exempted individuals. Is criminal background No. Yes. OBTP makes case-by-case decisions. Yes. State Board of Individual Tax Department of Treasury will Department of Treasury will relevant to registration Preparers makes case-by-case determine. determine. or licensing? decisions. Purchase a $5,000 surety bond. Must be 18 years old. Must be 18 years old. (1) Establishes an Office of Professional Responsibility. (2) Bans Other audit insurance. (3) Increases certain penalties from $50 to $1,000. $25 (initial registration and annual $80 (Initial issuance or renewal). $95 (initial issuance and renewal), An examination fee, initial registration Department of Treasury will Department of Treasury will Fees renewal). $65 (if currently an LTP). fee, and a renewal fee, all to be determine. determine. determined. Annual. Complete 20 hours of Every 2 years. Complete 16 hours of Every 3 years. Department of Every 3 years. Department of Annual. Complete 30 hours of continuing education. Renewal continuing education and ensure continuing education every two Treasury will determine continuing Treasury will determine continuing bond remains in force. years. education requirements. education requirements. Unregistered individuals may be fined $2,500, but fine may be waived if Civil penalties range from $50 to State Board of Individual Tax Penalties for failing to they register within 90 days. If they $5,000 per violation. Preparers may impose penalties up $1,000 per tax return. $1,000 per tax return. $1,000 per tax return. register fail to comply, the fine may be to $5,000. increased to $5,000. Sources: Government Accountability Office, Oregon’s Regulatory Regime May Lead to Improved Federal Tax Return Accuracy and Provides a Possible Model for National Regulation. Report to the Senate Committee on Finance, U.S. Senate, GAO-08-781. Washington, DC: August 2008. http://www.gao.gov/new.items/d08781.pdf; Taxpayer Bill of Rights of 2008, H.R. 5716, 110th Cong., 2nd sess., Congressional Record 154. (April 8, 2008): H 2069; Taxpayer Protection and Assistance Act of 2007, S. 1219, 110th Cong., 1st sess., Congressional Record 153. (April 25, 2007): S 5085–5086; Maryland Individual Tax Preparers Act, S. 817, (March 19, 2008).
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