IRS Pursues Tax Preparer Regulation

The Internal Revenue Service wants to set new rules on income tax preparers nationwide. IRS Commissioner Doug Shulman issued a proposal on January 4, 2010 citing federal regulation will help reduce fraud, improve compliance and close the tax gap.

California and Oregon are the only states that have set tax education requirements for its income tax preparers. In 2009, New York passed legislation to require its tax preparers register with the state; however, it does not enforce education or insurance requirements.

In California, paid income tax preparers who are not a licensed attorney, certified public accountant (CPA) or IRS enrolled agent (EA), are required by law to register with the California Tax Education Council (CTEC). All CTEC-registered tax preparers (CRTPs) must complete tax education courses each year and obtain a surety bond before they can prepare tax returns for a fee.

In Oregon, all paid tax preparers must be licensed through the Oregon State Board of Tax Practitioners. Oregon tax preparers have to pass a competency exam before they can prepare tax returns professionally.

"Compliance is a big issue with tax pros," said Mary Beth LaMunyon-Jones, CRTP and CTEC board member. "Nationwide there are the good ones and the bad ones. There are the ones who care and the ones who don't."

Proponents of the IRS proposal believe enforcing tax education and professional licenses for tax preparers is a necessary step in order to increase the protection of taxpayers. Skeptics argue it is not tax preparers who are entirely to blame, but the complex tax code that is causing issues and mistakes.

"From CTEC's standpoint, the reasoning has always been that some education is better than no education," said Celeste Heritage, CTEC administrator.

Federal regulation of tax preparers has been a topic of discussion for at least five years. The question of how to fund a national tax preparer program has been one of the biggest hurdles for the IRS and even some states that want regulation. Maryland passed legislation in 2008 to license its tax preparers; however, the program has been postponed due to budget constraints.

Unlike Oregon, New York and Maryland, the registration requirement in California is not managed by the government. The state decided to privatize its tax preparer program in 1997 by transferring the responsibility from the California Department of Consumers Affairs to CTEC as part of a "grand experiment" to save money.

Today CTEC is a nonprofit quasi-public benefit corporation that is run by a board of directors, three staff members and is funded by CRTPs who pay an annual $25 registration fee. CTEC has never once received funding from the state.

"When the federal government takes on a program of this size the cost is usually passed down taxpayers," said Heritage. "It will be interesting to see how it all plays out."