It seems that the IRS’ on again off again love affair with the idea of certifying tax preparers is on again. Earlier this month, IRS Commish Doug Shulman announced a proposal that would require tax preparers to be licensed and certified. The immediate feedback on the proposal has been mixed.
My colleagues at the ABA are, of course, backing the idea of such a proposal. The ABA has been actively supporting increased oversight of tax preparers since 2004.
Even before the ABA voiced their opinion on the matter, IRS Taxpayer Advocate Nina Olson has called for regulation of the tax preparation industry (her calls for action date to 2002). In her most recent report to Congress, Olson again called for increased oversight of tax preparers. She cited a 2006 “undercover” study by the Government Accountability Office (GAO) where auditors posing as taxpayers made 19 visits to several national tax preparation chains in a large metropolitan area. Errors were found on all 19 returns, some of which resulted in thousands of dollars of improper refund amounts. In more than half of the cases, the preparers advised that reporting certain income was unnecessary “because the IRS would have no way of knowing about it.”
A similar study conducted by the Treasury Inspector General for Tax Administration (TIGTA) found nearly identical results. TIGTA auditors targeted not only commercial chains but 16 small, independently owned tax return preparation offices, as well. More than half of the returns contained errors and more than a third of those mistakes were considered to be “willful or reckless.” All of the business returns were prepared inaccurately.
So it would follow that requiring additional training and education might help resolve these issues. Or maybe not. Two states have already implemented certification requirements: Oregon and California. The initial feedback is that the accuracy of the returns prepared in Oregon has increased. But California? Not so much. The accuracy of those returns has actually decreased. Does that mean that that certification doesn’t work… or is that just California?
Therein is the problem: will certification actually improve tax compliance and reduce fraud?
Even if it would, how could the IRS possibly regulate the industry? In 2007, there were nearly 138 million individual federal income tax returns filed. Sixty-one percent of those individual federal income tax returns — about 84 million — were completed by paid preparers.
And how would we pay for it? The IRS is already underfunded. And our economy is not exactly the ideal time to be adding to the budget. Implementing many of the ideas put forth by Olson and Shulman will cost tax dollars – and while the goal may be noble, are we really willing to pay additional tax dollars to protect our tax dollars?
As you can imagine, this topic is a hot one in the tax pro world. The official IRS release on the proposal can be found here.
What do you think? A big yes or a big mess?