More on Tax Preparer Licensing

I was at an audit this afternoon at the Laguna Niguel IRS office. The return (prepared by an unenrolled preparer) had gross errors. Frankly, any competent preparer should have caught these errors. Unfortunately, the individual who prepared the original return was anything but competent.

This is an example of the problem the IRS wants to cure by forcing preparers to meet basic competency standards. Is this a good thing or a waste of time and money? I think it’s basically a wash.

First, here’s what the IRS is proposing:

  • All preparers except CPAs, Enrolled Agents, and attorneys will need to meet basic competency standards through passing an exam;
  • Such preparers will also need to take 15 hours of Continuing Education annually; and
  • Not all preparers in a firm will need to pass the exam.  Apparently, firms can have “non-signing” preparers who prepare the returns but are not allowed to sign them.

First, is there a problem? Yes, there are a lot of unscrupulous preparers out there. My experience with my client (and some other clients) show that many preparers will happily put down deductions and credits that the taxpayer doesn’t qualify for.

But I’m in California, a state where all preparers are already required to be licensed. Mr. Unscrupulous (the individual who prepared my client’s original return) had, in theory, a license from the California Tax Education Council (CTEC). Mr. Unscrupulous had to take a 60-hour course and pass an exam. Yet Mr. Unscrupulous still couldn’t figure out that an individual several years removed from college isn’t eligible for an education credit available only to individuals in their first two years of college.

I do think it will get rid of the lowest level of tax riff-raff. Those individuals will see the handwriting on the wall and get out of tax preparation. In that sense, it’s a win.

Unfortunately, I also think that Joe Kristan is correct in his criticisms of the plan. It will hurt some small tax preparation shops. I don’t think it’s as bad as Joe makes out, though. I’m a solo practitioner and have to be licensed (as an Enrolled Agent); I have not had any problems.

Joe’s other criticisms are accurate. Consumers will see an increase in price (basic economics tells us that). Enrolled Agents may get hurt in this. There’s some work going on behind the scenes so that the designation given to currently unenrolled preparers makes them seem like a lower-level preparer. We’ll see if that occurs or not.

There is one point that Joe and I agree on completely.

The real problem is Congress. A simple tax law without fraud-inviting refundable credits wouldn’t have preparer problems. At the very least, we should require Congresscritters to face the consequences of their own work. Every one of them should be required to prepare their returns themselves in a live (and archived) webcast. If they use software, their screens should be visible on the webcast. What about their privacy? They make us give them all of our personal information, so fair is fair.

I have yet to meet a tax professional who is happy with the current state of the Tax Code.

One last comment about the IRS plan. The IRS expects to begin to implement this in 2011. I expect delays and a very lengthy implementation schedule. The IRS announced plans to privatize the Special Enrollment Examination (the exam that allows an individual to become an Enrolled Agent); it took two years before that actually occurred. While something may begin in 2011, I expect this process to take the better part of the new decade.

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One Response to “More on Tax Preparer Licensing”

  1. As an Enrolled Agent in Florida I’m very much in favor of this new legislation. Florida does not have any type of licensing program currently. Two items still disturb me. First, I’m disappointed, but not surprised considering HRB’s lobby power), that the big box stores will be given an out by letting the same inexperienced idiots prepare returns with one registered preparer signing the stack at the end of the day. Second, the majority of really fraudulent returns we see are prepared by predators who do not sign the return. This lelgislation will not address that problem. I don’t have any answers for that situation. I do feel that if the IRS would outlaw RALs they might have enough resources to audit some of the “self prepared” returns with way out of line deductions.