Earlier this week the Internal Revenue Service (IRS) declined to file a petition with the Supreme Court to appeal a recent series of rulings thereby stopping IRS efforts to require mandatory competency testing and continuing education for individual tax return preparers.
In January of last year, a federal court judge ruled that the IRS had exceeded its legal authority in attempting to oversee and regulate tax preparers and effectively put an end to the IRS's Registered Tax Return Preparer ("RTRP") program. Subsequent appeals by the IRS have been unsuccessful in reversing the initial decision. Most recently, in February of this year, the D.C. Court of Appeals ruled in favor of the three independent tax preparers - Sabina Loving of Chicago, Ill., Elmer Kilian of Eagle, Wis., and John Gambino of Hoboken, N.J. - who had sued the IRS in the case, known as Loving v. IRS, thereby throwing out any regulatory oversight or governance of the vast paid tax preparation services delivery industry. In short, the courts have held that the IRS cannot oversee or manage the professional tax return preparers.
So what does this new court development mean?
To start with, it is a step back in terms of taxpayer service delivery protections or, on the surface, would seem to be. To be sure there remain rules for both certified tax return preparers (CPAs, Enrolled Agents of the IRS and attorneys) and rules for those without certification. Under the recent rulings, the IRS is limited in the ability to monitor and weed out preparers without strong enough skills. The program they formerly tried to introduce, the Registered Tax Return Preparer, or RTRP program, attempted to address those industry shortcomings with a registration process: a basic tax knowledge skills test and required annual continuing training of 15 hours.
The litigation was meant to stop these rules deemed as burdensome on the industry, and the courts determined that the IRS did not have the authority to introduce or manage such a program. Many rule opponents said it was an attempt by the larger tax preparation companies to put out of business the small "mom and pop" tax preparation companies.
As I work for a large tax preparation company, I can tell you nothing is further from the truth and for many reasons - a principle reason being that many of our business operators ARE smaller tax preparation operations. What is true is that in addition to registering everyone who prepares tax returns for a fee, the tax preparation industry does need a basic skills assessment and continuing education requirements to ensure competency and to manage those tax return preparers who would misuse the broader tax system.
Furthermore, who really thinks a short test and 15 hours of ongoing annual training is TOO heavy a burden for your chosen profession? If you think 15 hours of training is too much and a test too heavy, ask your hairdresser or auto mechanic if they agree. If any of them believe that 15 hours of training annually for taxes is too much, then I will concede my opinion.
How does a taxpayer find help if they determine they want a professional? Where does the "no rules" and lack of oversight environment leave the tens of millions of taxpayers who want help getting their taxes done?
There is some good news.
To start, Oregon and California have rules already in place requiring education and basic skills for tax return preparers. Other states, such as New York, are not willing to wait for federal rules and are putting into place state-based requirements. This isn't totally good news for the professionals in the tax industry since the rules will be specific to each state and likely different from state to state, making it very difficult to keep up with the different rules. The wide range of rules from state to state will increase the cost of tax return preparation and make it harder for taxpayers to receive help from a qualified tax pro and harder for tax pros to remain qualified. While state-to-state rules are not good for the industry due to the confusion they will cause and the likelihood they will make tax preparation more expensive for the consumer, the state-to-state rules are better than NO rules at all.
Moreover, there is a proposal recently introduced by the new IRS commissioner for an optional and voluntary IRS program that would allow tax return preparers to opt in to a certification program. Participating preparers who voluntarily participate and take a test and ongoing education would receive IRS recognition and certification including a possible listing on an IRS database for taxpayers to verify.
At the end of the day, national standards and rules for tax return preparation is much needed ¬- if not currently, then certainly in the near future. A recent Treasury Inspector General for Tax Administration report this week indicated that taxpayers received improper tax credits from the Earned Income Credit program of nearly 13 billion dollars last year. The report listed many reasons and possible causes including complex program rules and forms, misunderstanding of the law by taxpayers and tax preparers, and other possible causes. One final cause was mistakes by tax return preparers both accidental and intentional. No one really knows how much of the error in the program is by accident or intentional - HOWEVER, note that without national standards to ensure professional tax return preparation acceptable levels of competency, a self-certifying standard of good will, will likely fall far short of quality expectations and minimum acceptable standards for all.
If you choose to use a paid tax professional for help with your tax filing needs, be sure to do your homework first and select a professional that meets your standards for training, experience, convenience, price, and service. Accept no less than you deserve, and when it comes to your taxes, the single largest financial transaction you are likely to have each and every year, BE SELECTIVE.
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