Should the Tax Preparation Industry Be More Tightly Regulated?

Saturday June 6, 2009

Doug Shulman, the current commissioner of the Internal Revenue Service, plans to make recommendations for regulating tax preparers. Normally, a plan to make recommendations isn't by itself newsworthy. But with our tax laws in the midst of undergoing change, it does makes sense for the government to reconsider the role that tax professionals and tax software plays in our economy.

The IRS plans to hold public meetings, with schedules and agenda topics to be posted on the IRS's tax professionals page.

Current Regulations

Different types of tax professionals are subject to varying federal and state laws. Tax attorneys, certified public accountants, and enrolled agents are subject to the rules laid out in Treasury Circular 230. Among other things, these tax professionals must file and pay their taxes, must not charge unconscionable fees, and must be diligent in providing accurate tax returns. The rules also prevent a tax professional from cashing or negotiating a client's tax refund, notarizing their own tax returns, and keeping client's original documents in the case of a fee dispute.

Attorneys and certified public accountants are also subject to regulations in the state or states where they are registered.

Other tax preparers who do not have one of these professional licenses may be subject to state laws. California and Oregon require tax preparers to be trained and licensed before they can provide services for a fee. Maryland will require tax preparers to be licensed by June 2010.

Do We Need More Regulations?

The IRS seems to think so. "At the end the day, tax preparers and the associated industry must be part of our overall game plan to strengthen the integrity of the tax system," said Commissioner Shulman. An August 2008 report by the Government Accountability Office would seem to support the need for greater regulation. The GAO compared tax returns from Oregon to the rest of the nation, and found that "the average Oregon return required approximately $250 less of a change in tax liability [upon audit] than the average return in the rest of the country."

Preparing accurate returns is not the only problem that tax professionals and our legislators face. Regulations, if adopted, should clearly define what tax preparers are -- and are not -- responsible for. Consider the following situations:

Who should pay penalties when a tax return has a mistake?
Where will complains against tax preparers be lodged?
Could taxpayers verify a tax preparer's license on the IRS Web site?
Should tax preparers be prevented from selling tax refund loans? Or investments? Or other financial services?
Should tax software be tested to ensure it's compliant with the tax laws?
Should the people who develop tax software be licensed too?
What types of tax professionals should be allowed to represent clients in an audit?
Should we continue to allow states to issue their own regulations, or do we really need the feds to step in?

What's your opinion? Should all tax preparers be licensed? Or is there a better way to handle unprofessional preparers?

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