Saturday, July 18, 2009

The debate on regulating preparers

There's been quite a lively debate on the tax blogosphere about whether tax preparers should be regulated. I've been watching it with some interest because it raises a lot of interesting economic and public policy issues.

Peter Pappas, who is an attorney and CPA in Florida and writes The Tax Lawyer's blog, comes down strongly in favor of regulation. Despite some kibbitzing over semantic details, I am fundamentally in agreement with the overall thrust of his argument that anyone who holds himself out to the general public as a paid tax preparer should be subject to regulation.

Peter wondered why any experienced unenrolled tax preparer would not want to take the Enrolled Agent exam.

Since his definition of unenrolled tax preparers includes VITA volunteers such as myself, and since I consider myself "experienced," after four years of supervising and volunteers as a VITA site coordinator, I think that's going more than a bit too far.

The EA test syllabus covers a vast number of topics we'll never deal with at our VITA site, and it leaves out many important topics that VITA sites do deal with every day.

I already take annual VITA certification tests at the Basic, Intermediate, and Advanced Level each and every year on current tax law, which is more relevant preparation for the kind of work I actually do with taxpayers than the Enrolled Agent exam would be. In fact, VITA certification includes options for special certification test on topics and Military Tax issues and Foreign Student tax issues which are relevant at some VITA sites, but don't seem to be covered in the Enrolled Agent test syllabus.

I know my limits as a VITA-certified volunteer preparer, and I recognize when a return falls outside the scope of my Advanced VITA volunteer training and certification, and when I need to tell the taxpayer to consult a tax professional with more appropriate credentials. All VITA volunteers sign contracts with the IRS agreeing to stay within the scope of our certification. We are very clear with our taxpayers about the kinds of returns that we can do, and we explain to taxpayers with complex situations that they need to consult a professional with more advanced training and certification.

The VITA volunteer certification process isn't perfect, but I think it's a better starting point for a model for most garden-variety paid preparers than the Enrolled Agent exam.

Thanks to Peter for provoking my thinking. It seems to me that it's helpful for policymakers to consider the differences between the EA certification process and the VITA certification process as we think about what kinds of minimum regulations to apply broadly to all preparers.


  1. Mary-

    I read with interest your posts on regulating unenrolled tax preparers.

    I agree that the initial proficiency test for “licensed tax practitioners” need not be as extensive as the EA enrollment exam. I do not think licensed previously unenrolled practitioners should be allowed to “practice” before the IRS like EAs, except for representing clients whose returns they have prepared (with taxpayer approval) as it is currently allowed, and therefore there is no need for questions on practice.

    There has also been discussion that there be two levels of license and two initial proficiency tests – one for 1040 preparation and one for “entity” preparation (partnership, corporation, NPO, estate, trust), which I would support.

    I do not believe that once licensed a tax practitioner should have to take a test each and every year. It is literally impossible for the IRS to test the probably 1 Million currently unenrolled preparers once, let alone every year. As with the EA exam, and the CPA and bar exams, one test, and required annual CPE credits in taxation, is enough. And there must be a “grandfathering” provision for experienced tax practitioners. I have discussed this frequently at my blog THE WANDERING TAX PRO.

    I also do believe that lawyers and CPAs who wish to prepare 1040s, while exempt from any proficiency exam, should be held to the same annual CPE credit in taxation requirement as “licensed tax practitioners” in order to be able to continue preparing individual income tax returns. If the required number of CPE credit in taxation were the same as those of an EA (but please, ease up on the 2 hrs per year of “ethics” requirement – perhaps 1 hour every other year at most) then this would “level the playing field”.

    Charles McCabe of the INCOME TAX SCHOOL franchise has suggested that passing a class in 1040 preparation may be allowed as an alternative to an initial proficiency test.

    I also do not think there should be FBI background checks on all unenrolled preparers – other than perhaps a basic database check to be sure the person has not been convicted of a related felony (such as identity theft) or some such other criteria. The FBI’s time can certainly be put to much better use. Nor do I think that all preparers should be absolutely current on their own tax returns (remember the shoemaker with a hole in his shoe). Non-filing, proven under reporting or the like perhaps, but a person who may have filed late, or who has an outstanding tax balance from a properly filed return, should not be prohibited from making a living.

    The discussion of regulating tax preparers concerns those who prepare tax returns for pay. I do not think VITA, or AARP, preparation volunteers would need to be licensed as there is no pay. I think the current VITA testing and other procedures as you have outlined are sufficient.

    In my opinion, the reason for “spot checks” at locations by the IRS is because VITA is an IRS program. I would not support periodic random “spot checks” of “licensed tax practitioners”.

    I have enjoyed reading your blog, and will add it to my list for daily visitation.


  2. I agree with the concept that someone who prepares a return for a fee ought to submit to some sort of oversight. The EA program is a good start.

    One of the major problems with all of the talk is that you will still have "preparers" who "assist" other people in filing their returns. They get paid in cash and they don't sign the return. Those folks aren't going to simply give up the extra revenue NOR are they likely to submit to the regulation. Their fees are cheap and their "creativity" sometimes earns them very loyal customers.

    Those are the returns that make us cringe when the prospect hits our offices for assistance with the IRS notice they just got in the mail.

    Most people have NO IDEA that preparers are required to sign the returns they prepare OR that preparers are not subject to some sort of licensing/certification. Until folks understand the issue they aren't likely to get on board with legislation to regulate preparers.

  3. Just Jan-

    If mandatory registration and licensure of paid tax preparers ever does come to be it must be accompanied by an annual extensive public education campaign by the IRS to "spread the word" that only "licensed" tax practitioners are authorized to prepare 1040s.

    This educational program would identify the fact that licensed tax practitioners are required by law to keep current by taking a mandatory amount of continuing education each year. It should also point out that everyone who prepares a tax return for a fee must sign the return and enter a PTIN license number.

    There should also be penalties for individual taxpayers who do not use a licensed tax practitioner - and this fact should be included in the educational campaign.


  4. Robert, over two million students a year take the SAT. The ACT is taken by 1.4 million students per year. There's a small army of experienced part-time test proctors who know how to give bubble tests for those organizations.

    Also, the latest TIGTA study suggests that the total number of paid preparers is probably closer to around half a million than to a million, and less than 73% of them are unenrolled.

    As far as grandfathering experienced preparers, I'm not sure that the IRS will be too sympathetic to that argument. Even career IRS employees who have been preparing returns at IRS Taxpayer Assistance Centers are required to take recertification exams each and every year.

    Jan, I agree that there will probably always be some "underground" informal tax preparers who refuse to sign returns. The new TIGTA study released today suggests that the IRS has a long way to go even keeping proper track of the preparers who do sign the paid preparer fields.

  5. MOK-

    Requiring professional tax preparers to take an annual “recertification” test is an impractical and excessive burden for both the tax professional and the IRS, especially if it is in addition to required CPE credits, and will unnecessarily add to the cost of tax preparation.

    Other professional designations do not require “enrollees” to take a test each and every year – doctors, lawyers, CPAs, EAs, etc. Such a requirement would certainly not be acceptable to the tax preparation community.

    While not the absolute best way to verify that a licensee remains current, required CPE credits, with perhaps a requirement for 2-4 hours or so in year-end updates, is the standard acceptable method and the most practical.

    I would expect that one reason that VITA and AARP volunteer tax preparers are required to take annual recertification exams is that, for the most part, they are part-time seasonal volunteers, and not full-time tax professionals who deal with tax issues on a regular and ongoing basis throughout the year or engage in regular ongoing continuing education in taxation.

    Registration and licensure of tax preparers will not do away with unethical tax preparers, just as registration and licensure of CPAs or lawyers or doctors has not done away with unethical accountants, lawyers or doctors. What it will do is provide more creditability to the hundreds of thousands of competent and ethical currently “unenrolled” practitioners and educate the public and the need to stay away from “underground” or other unethical preparers.