IRS to regulate paid tax preparers

Source: The Milwaukee Journal Sentinel

Publication date: 2010-01-05

By John Schmid, Milwaukee Journal Sentinel

As tax filing season gets under way, the Internal Revenue Service on Monday announced plans to impose mandatory registration, competency exams and ethical guidelines on the largely unregulated industry of independent tax-return preparers.

Under current law, "anyone may prepare a federal tax return for anyone else and charge a fee," the IRS said in its announcement. The new initiatives, however, will take several years to implement, thanks to their logistical complexity, and they won't go into effect in time for the current tax season, the IRS said.

Wisconsinites, who already bear an above-average burden of state and local taxes, often have "form phobia" during tax season given the "unnecessary complexity" of both state and federal tax forms, said Todd Berry, president of the Madison-based Wisconsin Taxpayers Alliance, a nonprofit government watchdog organization.

"We don't need tax preparers for the vast majority of people," Berry said. "The reason we have to use them is simply that Congress and the Wisconsin Legislature view the tax code as a Christmas tree. They make it unnecessarily complicated."

The most recent instance of Badger state tax complexity stems from Wisconsin's unique status as one of the few states to ignore a major change in federal law involving individual retirement accounts. Under a new federal law that took effect Jan. 1, investors are allowed to convert a traditional IRA into a Roth IRA, which has tax-free withdrawals. Nearly every state updated its filing procedures, making it easy to match state filings with federal forms, but not Wisconsin, Berry noted.

Under 2007 Census Bureau figures, Wisconsin residents carried the 14th-highest tax burden in the country, based on state and local taxes.

Setting standards

IRS Commissioner Doug Shulman announced the new regulations Monday in a telephone conference from Washington, D.C., predicting they will enhance confidence in the nation's tax system. More than 80% of American households either hire someone or use software to help them prepare and file taxes, he said.

Underlying the initiative is a distrust of those who prepare taxes but are not subject to professional standards, which applies mainly to independent firms. Many certified public accountants and attorneys will not need to comply with all of the new regulations, Shulman said.

The changes were recommended in a six-month study of paid tax preparers that the IRS released Monday. Under the new regulations:

--All paid tax preparers must register with the IRS and obtain an identification number, allowing the IRS to track their performance.

--The IRS will require competency tests for all paid tax return preparers except attorneys, certified public accountants and enrolled agents who are active and in good standing with their respective licensing agencies.

--The IRS will create education programs for all paid tax return preparers except attorneys and CPAs.

--The agency will extend ethical rules to all independent tax preparers, applying rules that previously were set by the Treasury Department that currently only apply to attorneys and CPAs. This will allow the IRS to suspend or discipline tax-return preparers who engage in unethical or disreputable conduct, the agency said.

Although none of the rules take effect in time for the current tax filing season, the agency did issue "red flags" to help consumers avoid shady operators: Be wary of tax preparers who claim they can obtain larger refunds than others. And avoid tax preparers who base their fees on a percentage of the refund.

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