Internal Revenue Service regulation of return preparers, sidelined since its prohibition by the Loving decision, is back for another try.
The IRS, responding to years’ of urging by tax preparer groups and by its own concern about the performance of paid preparers, issued regulations in 2011 that required paid tax return preparers to pass an initial certification exam, pay annual fees, and complete at least 15 hours of continuing education courses each year. The IRS relied on 31 U.S.C. Section 330, enacted in 1884, which authorized it to regulate the practice of representatives of persons before the Department of the Treasury.
Three independent preparers challenged the authority of the IRS to issue the regulations. In 2013, the District Court agreed with them, ruling on cross motions for summary judgment that “together the statutory text and context unambiguously foreclose the IRS’s interpretation of 31 U.S.C. Section 330.”
The Court of Appeals for the District of Columbia affirmed the decision of the District Court in 2014. It ruled, among other things, that tax return preparers are not “agents”with authority to bind others.
In May of this year, the Treasury released the American Families Plan Tax Compliance Agenda, which includes an undefined proposal to regulate paid tax preparers.
To address the situation, Reps. Jimmy Panetta, D-California, and Tom Rice, R-South Carolina, introduced the Taxpayer Protection and Preparer Proficiency Act, which allows the IRS to regulate paid tax preparers and mandates that they meet minimum competency standards.
Key measures in the bill include the following:
- Giving the Treasury the authority to regulate paid tax return preparers;
- Clarifying that the authority being provided is to reinstitute the IRS’s 2011 paid preparer regulatory program;
- Giving the IRS authority to revoke an incompetent or fraudulent preparer’s Preparer Tax Identification Number;
- Clarifying that certain nonsigning preparers — those who prepare returns under the supervision of an attorney, CPA or Enrolled Agent — are not required to obtain a PTIN; and,
- Requiring a Government Accountability Office study on the sharing of information between the Treasury Department and state authorities regarding PTINs issued to paid return preparers and preparer minimum standards.
“Mistakes by incompetent tax preparers have led to many taxpayers getting audited or penalized through no fault of their own,” said Panetta. “The Taxpayer Protection and Preparer Proficiency Act will reduce error rates, lower risks for taxpayers, and help put a stop to the use of unqualified tax preparers,” added Rice.
Padgett Business Services president and CEO Roger Harris summed up the growing need for the legislation: “The Tax Code is growing ever more complicated, which produces more situations where fraud can take place,” he said. ”That should lead to an IRS that has more resources to teach taxpayers and provide enforcement, but the IRS is severely undermanned. This has resulted in a lot of burden falling on preparers, and we allow half of them to not show basic competency.”
“So now you have all three of the challenges going unchecked,” he said. “While we may not be able to do much about the first two — a more complicated code and a resource-challenged IRS — this bill addresses the third challenge, which is competency of return preparers. The code is not getting any simpler, the IRS is probably not going to get the resources it needs, so let’s at least try to make an improvement in the area we can.”
The American Institute of CPAs, the National Association of Enrolled Agents and the National Association of Tax Professionals all support the legislation, and are joined by Padgett Business Services and H&R Block.
“We are grateful for the bipartisan leadership shown by Representatives Panetta and Rice to address incompetent and unscrupulous tax return preparers and maintain taxpayer confidence in out tax system,” said AICPA president and CEO Barry Melancon. “Taxpayers need and deserve these protections, and we must ensure that the IRS has the tools it needs to conduct appropriate oversight.”
