Tax preparer objections to testing--and my responses

The Wandering Tax Pro (TWTP) has raised a number of objections to requirements that commercial tax preparers should have to pass a licensing test. His objections are in bold type below. My responses follow in regular type.

(1) Making all tax preparers take an annual, or even semi-annual (if re-registration is every two years) proficiency test to maintain their “license” is ridiculous and excessive. No other similar federal financial “credential” requires annual testing.

Volunteer Income Tax Assistance (VITA) certification is a federal financial credential that requires annual testing.

In fact, the IRS is emphatic that even an attorney or CPA is required to take and pass the test annually if s/he wants to assist taxpayers at a VITA site. The IRS does not consider even enrolled practitioner status a sufficient credential to prepare tax returns at a VITA site, unless that enrolled practitioner also passes the VITA tests each and every year.

The National Taxpayer Advocate, Nina Olson, has testified to Congress that the VITA certification process is a modest starting point that indicates that commercial preparer testing is practical.

(2) What good is an open book, or “open software”, test as proof of competence? All it proves is that one knows where to look in the book. I agree that a tax preparer does not have to memorize the Tax Code to be competent, and part of one’s competency is knowing where to look for information (and we all rely heavily on workbooks like QUICKFINDER HANDBOOK during the season) - but if the test is going to be open book why bother. If EAs do not have an open book test for the enrollment exam then neither should LTPs.

College students can tell you that open book exams can be MUCH harder than closed book exams. As a professor, I know it's possible to make very hard questions for an open book exam. Open book does not necessarily equal easy!

No test is perfect, and I can certainly see that both the Enrolled Agent (EA) exams and the VITA exams have considerable room for improvement. However, I think the VITA tests are probably a better starting point as a model for the unenrolled preparer exam, because the VITA tests focus on the areas that cause most of the problems that the IRS actually sees in the overwhelming majority of returns (i.e., incorrect application of the rules on filing status, claiming dependents, most common types of deductions and credits, treatment of different types of retirement income, etc.)

The released questions from old EA exams appear to be all multiple-choice questions with very simple scenarios that isolate one particular tax issue. They also focus on many details of tax law that most rank and file unenrolled preparers rarely or never see. All that most tax preparers need to know about the generation-skipping tax provisions in estate tax law, for example, is that they should refer any taxpayer with an estate potentially large enough to be subject to taxation to consult an attorney specializing in estate planning.

By contrast to the EA exam, which has very short taxpayer scenarios, some of the VITA exam questions require the test-taker to complete an entire tax return based on a reasonably extensive taxpayer scenario that resembles the kinds of tax situations they will most commonly encounter. Other questions require the test-taker to "quality review" and find all the mistakes in an already-prepared return. Unlike the EA exam released questions, not all the VITA questions are multiple-choice. Some require specific numeric answers.

Neither test is perfect, but I think the VITA test is a better model for rank and file unenrolled preparers than the EA test.

(3) Just because I have the knowledge, training and experience to pass a proficiency test does not mean that I should embrace with open arms the financial and other inconveniences of having to study for and take one.

I can certainly understand why you would not "embrace" such a test. Most people don't especially like tests, even on subjects in which they may excel, but they regard them as a necessary evil. (I happen to be one of those people who actually likes most tests, though even I will concede I didn't especially like taking the driving test. I'm personally not looking forward to the day when the government decides that older people--even those with unblemished driving records like mine--need to periodically retake the driving test. I passed mine the first time around, with flying colors--and even got a score high enough to be a driving instructor! But I took it in California, where they don't require parallel parking, so I know I'll be nervous if they ever make me take a test that does require parallel parking! So I do sympathize!)

As for the financial costs and the inconveniences, yes there would be costs and inconveniences, but the cost could be much less than the cost of CPE credits.

As for the studying time, a good certification test shouldn't require you to study anything you don't already need to review in order to prepare accurate tax returns for your clients.

In my opinion, a good test for commercial preparers should be based on the kind of work that tax preparers do every day, just as the VITA tests already are. Basically, you would be given several pages describing a taxpayer scenario, including copies of his documents and a list of other facts about the taxpayer's situation, and you would use those facts to prepare a tax return, and then answer questions based on the numbers in the return you just prepared. There would be different components of the test, requiring you to do several different types of returns of varying degrees of difficulty, but nothing ridiculously arcane or out of the ordinary.

After 38 years of continued unblemished practice I do not intend to “start from scratch” and prove that I know what I have been doing for almost 4 decades.

In an ideal world, I agree that an experienced preparer with an unblemished record should not have to start entirely from scratch. It would be more efficient if the IRS could give such preparers at least some "partial credit" that might reduce the amount of time devoted to monitoring them.

Unfortunately, from what I understand of the IRS preparer databases, it may not be easy for the IRS to identify a preparer's track record, because preparers may use multiple preparer numbers. It's relatively easy for the DMV to check your driving record, even across multiple states, but not so easy for the IRS to track a preparer's record. Given the confused state of the 22 sometimes inconsistent IRS preparer databases, the IRS has conceded that it isn't even sure how many paid preparers there were last year--it might be anywhere from half a million to over a million. I suspect that it would cost the IRS a good deal more to track down all audit records associated with a given preparer than it would cost to administer and score an exam.

Any scheme of preparer regulation clearly has to do a better job of authenticating who prepared a given return.

A practical system that could make life easier for experienced preparers could work as follows: pre-test/CPE/post-test. Experienced preparers could have the option of taking a relatively short but hard pre-test. If they do well on it (as I expect most competent experience practitioners would), then that could reduce the number of CPE hours they are required to take, and those who passed the pre-test would also be excused from the post-test.

(4) I still think that it would be literally impossible to properly register and test over 1 Million tax preparers (I include CPAs and attorneys who want to prepare 1040s) in the period of May 1 through November 15 (the only true opportunity to properly conduct registration and licensure) of the first year such legislation takes place. Even if the test is administered by an outside contractor the IRS OPR still has to process the results as part of the licensure process.

Millions of high school students take the college entrance exams every year. The ETS and ACT electronically transmit those results to colleges within a few weeks after the exam. Why should it take the IRS any longer to process an electronic file containing test score results than to process the electronic file containing the barcode attendance figures stating the number of hours of seat-time the preparer put in at continuing professional education (CPE) sessions? It will likely need to outsource much of this work, whether we are talking about testing or CPE, but it certainly doesn't seem to me that it takes any longer to process test reports than CPE reports.

And, if you're concerned about costs, the cost of a paper-based test is considerably cheaper than CPE credits. (SAT costs $45, but that includes scoring the hand-written essay component. ACT test, without an essay, costs $32.) How many hours of CPE credit will $32 buy?

(5) If registration and licensure of all tax preparers is to be successful it will require the support and cooperation of all tax professionals.

No system will attract "the support and cooperation of all tax professionals," since there are clearly incompetent and dishonest tax professionals who have no desire to mend their ways.

Excessive testing requirements and invasive background checks do not inspire cooperation.

I personally don't find the VITA tests at all excessive. I'll concede they have room for improvement, but I actually rather enjoy the challenge of taking them, so I guess you could say that the VITA tests do inspire my cooperation.

The background checks don't bother me either. It seems only fair that the IRS should check out the background of tax preparers, since taxpayers must turn over so much sensitive information to their preparers: names, addresses, SSNs, dates of birth, documents that include bank and brokerage account numbers, and perhaps soon health insurance information as well. The possibilities for identity theft are very real.

I will gladly support and cooperate with the process as long as there is a “grandfather” procedure

As for grandfathering, I don't mind taking the exact same tests that new VITA volunteers take each year. It keeps me on my toes, as far as staying up to date with the latest changes in the law, and making sure that my brain is still sharp. I actually enjoy taking the test as soon as it becomes available in late November each year.

As an experienced preparer, it takes me relatively little time to take the test. Of course, it takes new preparers much longer to take the test (as it should), and some of them wind up having to study some more and take the re-test (again, as they should.)

and all individuals who want to prepare 1040s for a fee (CPAs and attorneys included) are included in the testing (unless grandfathered) and CPE requirements.

As I mentioned above, anyone who wants to be a VITA volunteer, including career IRS employees and enrolled practitioners such as attorneys, CPAs, and EAs, is already required to take the exact same certification tests that regular folks do. In my experience, the enrolled practitioners who volunteer with VITA are typically very knowledgeable and experienced, and do not find the tests to be especially burdensome.

I guess we must just agree to disagree.

I guess so! At least on some things!