In the wake of studies that found that tax returns filed by paid preparers can be riddled with mistakes, the Internal Revenue Service is clamping down on the industry. Up to now, paid tax preparers in the vast majority of states were free to hold themselves out as experts without any training whatsoever. Nor did they have to prove any minimum level of competency.
First up, beginning next month, the IRS is rolling out competency tests for hundreds of thousands of tax preparers nationwide. Next year, continuing education requirements – 15 hours worth per year – kick in.
Industry executives are divided over whether the cost of complying with the new requirements will trigger price increases for consumers. But the de rigueur complaints about excessive regulation are noticeably absent in this instance.
“The industry has been very unregulated in the past,” said Brandon Britt, who owns four Liberty Tax Service franchises in Johnston County, N.C. “I think a certain amount of regulation is good.”
“It’s been clear to me that some reform has been needed in the form of better policing,” said Lacy Tinnen, owner of eight Jackson Hewitt franchises in North Carolina.
A six-month IRS review of the tax preparation industry found “near unanimity” among the public and industry officials that more industry oversight was needed, said Williams. The resulting report found that 90 percent of those who commented were in favor of minimum education or testing requirements.
The tax preparer industry sees the IRS actions as a way of improving overall competency and leveling the playing field, when it comes to training costs, in an intensely competitive industry.
In recent years, chains such as Liberty and Jackson Hewitt have instituted in-house testing programs to make sure their preparers are up to snuff.
Baruch Valenzuela, director of sales at the Oregon-based Pacific Northwest Tax School, said he has heard of tax preparers planning to exit the business to avoid taking the test. The Tax School offers an online prep course for the IRS tests and also is teaming up with universities around the country to provide training.
Some members of the nonprofit National Association of Tax Professionals are “suffering severe test anxiety,” said Cindy Hockenberry, the organization’s research supervisor.
The testing that begins next month doesn’t affect all paid tax preparers. Attorneys, CPAs and “enrolled agents” – who either have already passed an IRS test or are former agency employees – are exempt. So are some tax preparers who are supervised by attorneys, CPAs and enrolled agents and whose supervisor signs the returns.
More than 700,000 people nationwide have registered with the IRS for a preparer tax identification number, and the agency doesn’t know exactly how many of them will need to take the competency test, Williams said. He estimates that 38 percent to 40 percent of preparers are CPAs, attorneys and enrolled agents.
Likewise, CPAs, attorneys and enrolled agents are exempt from the continuing education requirements that go into effect next year.
The affected tax preparers don’t have to take the competency test immediately. Those who already have signed up with the IRS have until the end of 2013 to pass the exam. New preparers will have to pass the test to receive a preparer tax identification number.
The IRS plans to conduct a marketing campaign urging the public to make sure their paid preparers are registered with the IRS and that they sign the returns, Williams said.
The agency is planning to add an online database so the public can easily check whether a preparer has passed the test.
“We are trying to make the public more aware of their options and make them better consumers,” Williams said.
He vowed that the agency also will go after the preparer “down the street who isn’t following the rules.”
The IRS report of December 2009, which triggered the coming changes, cited two government studies that uncovered problems with tax preparers:
The Treasury Inspector General for Tax Administration sent auditors posing as taxpayers to 28 tax return preparers – a dozen who worked at chains and 16 employed by small, independent firms. Of those 28 returns, 17 preparers failed to calculate the correct amount of tax owed or refund due.
A Government Accountability Office study that targeted chain outlets found that only two of 19 tax preparers calculated the correct tax liability or refund amounts. In 10 instances, the “taxpayer” was entitled to a credit for child care expenses, but none of the preparers claimed the credit.