Regulation of Paid Tax Preparers by mikeholy


									                                                                                  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
    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.

  Unenrolled preparers include all paid tax preparers with the exception of CPAs, attorneys, and IRS enrolled agents.
  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.
  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,
  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,
  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,
                                                    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

  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,
  See Treasury Inspector General for Tax Administration, supra note 5.
  National Taxpayer Advocate, 2008 Annual Report to Congress, Volume II, Legislative Recommendations, Washington, DC:
December 2008,
  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,
                                                                           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

   See Treasury Inspector General for Tax Administration, supra note 5 and see Government Accountability Office, supra note 6.
   Internal Revenue Service. “Tax Year 2001 Federal Tax Gap (PDF Graphic).” Washington, DC: Feb. 2006,
                                                                                                                                                                      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.
                                                                   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
                                                                                                                                                    tax preparation experience can be                                                examinations administered by an
                                                                                                                                                    licensed without taking the exam.                                                existing organization for tax return
                                                                                                                                                                                                                                     preparers in lieu of federal

                           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
                                                                                                                                                                                                                                     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.

                           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.
                           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.; 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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