New IRS Regulations to Clean Up Slapdash Tax Preparers

For the majority of taxpayers, gone are the days when the half inch 1040 booklet would arrive overstuffed in the mailbox, with individuals spreading out their documents and going to work armed with a number 2 pencil and calculator.

In fact, close to 80% of all taxpayers choose outside assistance with their returns, whether it be a tax preparer or commercial software like TurboTax. Out of these two, it is the tax preparers who unfortunately have the widest margin of error, and the IRS has taken notice.

New short-leash regulations proposed by the IRS would see a crackdown on a large portion of unregulated tax preparers. IRS Commissioner Doug Shulman said in his January 2010 press conference, "I think it's incredibly important to the tax system that when people pay good money to a tax preparer, they don't get bad advice."

That same bad advice has seen an impressionable increase. Even the largest and supposedly reputable firms, like H&R Block, have fallen into the mix. H&R has been the target of a handful of lawsuits over the past few years, ranging from their tax preparation services to their refund anticipation loan process, to the most recent settlement of a 20 million suit against their fee-saturated "Express IRA" investment products.

Tax season preparation is a billion dollar industry, and more and more filers are turning to the big companies and even the sole proprietor preparers working out of their home. Tax laws change year to year, and as various new regulations and credits are introduced, many feel more comfortable leaving the preparation in the hands of the so called professional.

The problem is, whom do you choose? The choice of preparers, their credentials and titles can be confusing. Does a preparer need to have a Power of Attorney form authorized in order to prepare a return or handle issues that may later arise over it? Should you seek a CPA, an attorney, an enrolled agent, an unenrolled preparer, or a temp employee housed in a makeshift H&R Block or Jackson Hewitt cubicle in the middle of the shoe section of your local Walmart?

For these reasons, the IRS wants to level the playing field by raising the bar a little higher for everyone. Competency tests will be rolled out, and tax preparers will be required to submit to continuing education. Currently, employees hired by tax preparation firms, like H&R Block, undergo in-house training only without any oversight from the IRS.

Additionally, all third parties signing a tax return as the preparer will be required to obtain and show a tax identification number, taking away their anonymity and registering them with the IRS. The Service hopes to track these individuals with the goal of cutting down on some of the more common preparer schemes, like inflating an individual's refund, charging exorbitant amounts for simple return preparation, and for the multitude of errors caused by ignorance of the tax laws or outright negligence.

The new laws would exempt Certified Public Accountants, attorneys, and enrolled agents because they are already licensed to practice before the IRS through their professions. Such individuals are under the guardianship of the Office of Professional Responsibility, a US Department of Justice branch responsible for investigating accusations of misconduct among certified accountants and attorneys.

Under the new law, the mantle of OPR 's supervision would extend to all tax preparers and would make them subject to possible censure, disciplinary actions or even disbarment from practicing. Prospective clients would be able to check the credentials of such individuals on a national database.

These new regulations will not be in place for the current year tax year. The IRS is looking to 2011 as the target year. 2009 tax returns are due as of the 15^th of April, 2010.

However, according to Shulman, the IRS plans to step up current enforcement in areas where the Service has seen frequent errors. Approximately 10,000 notices are due to be sent out to those preparers and firms that the IRS has already identified as having high error rates. The letters will prompt these individuals to remain watchful so as not to commit these same mistakes, and also will provide a gentle reminder that the IRS is watching them.

Coupled with the notices, Shulman said the IRS plans on making house calls directly to some of these preparers. While IRS agents may identify themselves, Shulman pointed out that they will also pose as taxpayers seeking sound advice, and will report back to the IRS whether they received it. Areas that the Service will be focusing on are those preparers who charge for preparation based on the size of a taxpayer's potential refund, and others who promise larger refunds by relying on an incorrect or an unscrupulous understanding of tax regulations.

"Taxpayers will get improved service and enhanced standards from tax preparers, and they'll have less risk that they'll get bad advice," Shulman said. "The tax preparation industry will get more consistency."