IRS Raises the Bar for Tax Preparers

More than 80% of American taxpayers seek help with their returns from a tax preparer or use tax-preparation software. The IRS estimates that 900,000 to 1.2 million people prepare tax returns for a fee. Yet these financial advisers have no requirements for certification, and many have never been tested. But beginning in 2011, life will change for tax preparers.%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% Starting that year, all tax preparers will need to register with the IRS, except for CPAs, attorneys, or enrolled agents who are active and in good standing with their respective licensing agencies. By 2013, the IRS will require competency testing and require tax preparers to comply with ethical guidelines.

"Our proposals will help ensure taxpayers receive competent, ethical service from qualified professionals and strengthen the integrity of the nation's tax system," said IRS Commissioner Doug Shulman said in press release announcing the changes. "In addition, we are taking immediate action to step up oversight of tax preparers this filing season."

To kick off the new tax preparer program, in 2010 the IRS will send 10,000 notices to paid tax return preparers nationwide. The IRS is focusing on preparers who submit large volumes of tax forms in which the IRS has seen frequent errors. The problem areas the agency will be focusing on include: Schedule C income and expenses (small businesses), Schedule A itemized deductions, the Earned Income Tax Credit and the First-Time Homebuyer Credit.

In addition, thousands of preparers will also be visited by IRS agents in the coming weeks to discuss their obligations and responsibilities to prepare accurate tax returns. The agency also plans to send in undercover agents posing as customers. During this effort, the IRS will continue to work closely with the Department of Justice to pursue civil or criminal action as appropriate.

Too Many Errors, Too Much Fraud

Right now, only four states comprehensively regulate tax preparers -- California, New York, Maryland and Oregon. For example, in California, much of the regulation is handled by the California Tax Education Council, a privately run, state-mandated organization that registers 44,000 tax preparers each year. California's rules are similar to those now being adopted by the IRS.

In 2006, agents of the Government Accountability Office posed as taxpayers and visited outlets of major tax-preparation chains. All 19 of the preparers they tested made mistakes, and only two came up with the correct bottom line. In another study conducted by the Treasury Department in 2008, agents testing procedures at 28 tax-preparation offices found that only 11 calculated the correct amounts of taxes owed and refunds due. Moreover, the Treasury Department found that seven acted "willfully and recklessly" in filing out false forms.

In the past four years, the IRS has initiated more than 850 investigations into tax preparers nationwide, and more than 600 cases were recommended for prosecution. One such case in Chula Vista, Calif., involved tax preparer David Canales, who was arrested on 18 counts of fraud and tax evasion. According to the indictment, he opened bank accounts for two dummy corporations -- International Recovery Systems (IRS) and Freight Transport Brokers (FTB). FTB is also the acronym used for the Franchise Tax Board, California's tax collection department. He asked his clients to write out checks to the IRS and the FTB, then deposited them in his dummy corporation accounts. It's a good lesson: Remember, when writing checks to pay your taxes, always write out the full agency name -- don't just use the acronym.

How to Pick the Right Preparer

"Taxpayers should protect themselves from unscrupulous preparers," Shulman said. "There are some simple steps people can take to choose a reputable tax preparer."

While Shulman believes most tax return preparers are professional, honest and provide excellent service to their clients, the IRS offers these tips to keep in mind when picking your tax return preparer:
  • Be wary of tax preparers who claim they can obtain larger refunds than others.
  • Avoid tax preparers who base their fees on a percentage of the refund.
  • Use a reputable tax professional who signs the tax return and provides a copy. Consider whether the individual or firm will be around months or years after the return has been filed to answer questions about the preparation of the tax return.
  • Check the person's credentials. Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.
  • Find out if the return preparer is affiliated with a professional organization that provides its members with continuing education and other resources and holds them to a code of ethics.
You can get more information about choosing a tax return preparer and avoiding fraud by reading IRS Fact Sheet 2010-03, How to Choose a Tax Preparer and Avoid Tax Fraud.

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