New Tax Preparer Regulation

Taxes are complicated – so complicated that even those who create and enforce the US tax rules sometimes make mistakes.  Senator Charles Rangle, chairman of the Senate committee that writes all tax legislation, recently made headlines for failing to report over $75,000 in rental income from a Caribbean condo.  Mr. Timothy Geithner, Secretary of the US Treasury – which oversees the Internal Revenue Service – also made the front page by mistakenly reporting several years’ self-employment income as “regular income.” The result: a tax underpayment of over $30,000. 

If the tax code is so complex that even its masters fail to file correct returns, how do you know your tax preparer is qualified?  Unless your preparer is an Enrolled Agent (EA), a CPA, or a (tax) attorney, the answer is this: you can’t.  Only Enrolled Agents (EAs), CPAs, and attorneys are regulated by the IRS.  Of these, Enrolled Agents are the only professionals who have proven their federal-tax competence before the Treasury Department.  They are also the only professionals required to receive annual continuing education exclusively devoted to taxation.

The fact that EAs, CPAs, and attorneys exist, however, has not stopped anyone – absolutely anyone – from being a paid tax preparer.  Historically, preparing tax returns for money has required no special training, license, background check, or examination.  The consequence of this lack in regulation was revealed in two recent studies.  In 2006, General Accounting Office study found that only 2 of 19 commercial chain preparers correctly prepared a basic personal tax return.  In 2008, a similar study by the Treasury Inspector General found that over 60% of basic individual tax returns completed by “non-professional” preparers were incorrect.  Although these studies were too small to paint all non-professional preparers with the same brush, they communicated a dire need for change.

This change arrived last year (2011) when the IRS started a process that will provide a basic level of tax-preparer competence for the general public.  This regulation includes the following:

1.) Registration: All paid preparers (including Circular 230 professionals) must register for a PTIN (Preparer Tax Identification Number) annually, reveal any criminal felony convictions, and affirm that they are compliant with all federal tax filings.  They must also pay an annual filing fee.  Nonprofessional preparers who registered before April 18, 2012 will have until the end of 2013 to complete one or more competency exam (described below).  Those who register after April 18, 2012 (a date that may be extended), however, must pass the competency exam(s) prior to registering and preparing returns.

2.) Testing: All non-professional tax preparers who have registered must prove a basic level of competence in the returns they prepare by passing a Registered Tax Return Preparer competency exam.  The exam will consist of 120 questions on basic personal income tax returns (Form 1040) preparation.  Those currently registered will have until December 31, 2013 to pass the exam.  The test is administered by Prometric and costs $116.  Candidates must travel to a testing location to take the exam.  While those who fail can retake the exam, those who pass will have earned the designation of “Registered Tax Return Preparer”.

3.) Continuing Education: Registered Tax Return Preparers will be required to obtain continuing education.  Although an exact start date for this education has yet to be determined, the IRS has proposed an annual regimen of 15 hours of training including: three hours of Federal Tax updates, two hours of ethics education, and 10 hours covering of areas of Federal taxation.

For those who want to ensure that their paid preparer has met these requirements, a public database will be made available through the IRS website. 

Although many details have yet to be revealed, it seems the IRS has taken the first steps in a much needed direction.  Guaranteeing that tax preparers have a basic grasp of the craft that pays their livelihood is a win for taxpayers, the IRS, and the industry itself.  More returns will be prepared correctly, fewer taxpayers will end in the same hot water as Mr. Rangle and Mr. Geithner, and the industry will find a new level of credibility.  If you are interested in learning more log onto http://irs.gov/taxpros.

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