Tax-return preparers may soon be subject to training, licensing and federal oversight.
Right now, anybody and their mama can set up shop and prepare tax returns. As you can imagine, this can lead to fraudulent and inadequately prepared returns. Internal Revenue Commissioner Doug Shulman wants to fix this problem.
There are tax professionals - attorneys, certified public accountants and enrolled agents - who are licensed by state or federal authorities and are subject to censure, suspension or disbarment from practice before the IRS in the event of wrongdoing. Yet for a large group of commercial preparers, there is virtually no training, no licensing and no federal oversight, according to Nina E. Olson, the national taxpayer advocate.
Some states such as California and Oregon require commercial tax preparers to be trained and licensed. Last year, Maryland passed a law creating a new licensing and regulatory program that covers individual tax preparers. By June 1, 2010, anyone in Maryland offering individual tax preparation services must become licensed.
However, because only a handful of states regulate preparers, Shulman sees the need for licensing to be uniform and perhaps federally regulated. The commissioner wants to have a set of recommendations ready by the end of the year to hand to the Treasury secretary and President Obama.
"Tax-return preparers help Americans with one of their biggest financial transactions each year," Shulman said. "We must ensure that all preparers are ethical, provide good service and are qualified. 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."
Shulman was reluctant to say what recommendations he would advocate. He said he first wanted input from taxpayers along with preparers who are licensed by state and federal authorities as well as unlicensed tax preparers and tax-software vendors.
"We plan to have a transparent and open dialogue about the issues," Shulman said. "At this early and critical stage of the process, we need to hear from the broadest possible range of stakeholders."
Later this year, Shulman said the IRS plans to hold public forums in Washington and around the country. Information about these meetings will be posted on the "Tax Professionals" page on the IRS Web site, www.irs.gov.
It's about time this was put on the top of the agenda for the IRS. Though many tax professionals do their jobs well, there are enough unscrupulous preparers to warrant some changes, especially given the more than $300 billion estimated tax gap from people who should pay but don't.
Olson has been calling for more oversight, training and licensing of commercial tax-return preparers. In her most recent report to Congress, she recommended that Congress enact a federal registration, examination, certification and enforcement program for unenrolled tax-return preparers.
"Preparers occupy a position of trust and can facilitate compliance with the laws, or alternatively, can influence the taxpayer to take aggressive or even unlawful positions on tax returns," Olson said in another report laying out 2009 fiscal year objectives.
Even if you didn't know your return was fraudulently prepared, the IRS still holds you responsible. Ignorance won't get you out of trouble. If the IRS catches a fraudulent return, it's you -- the taxpayer, not the preparer -- who has to pay the additional taxes, interest and penalties.
Though individuals are held responsible for what's on their tax return, the IRS does go after bad preparers. The IRS can assess civil penalties against deceitful return preparers. The agency also refers criminal activity by return preparers to the Department of Justice for prosecution. As an example, in May the manager of a local franchise of Jackson-Hewitt in Houston was sentenced to 30 months in prison without parole for preparing false U.S. income tax returns that cost the government about $40,000. In another case, the branch manager for an H&R Block office in Minneapolis was sentenced to 38 months in prison after admitting to preparing about 125 fraudulent federal tax returns. As a result of the fraud, the IRS made more than $230,000 in false refund payments.
In fiscal year 2008, 124 tax-return preparers were found guilty of fraud. In 81 percent of the cases, the preparer was sentenced to some form of incarceration, including prison time, home confinement, electronic monitoring or a combination of all of those punishments.
Though the IRS is catching many tax cheats, greater scrutiny, licensing and regulation could bring in more tax dollars. And lord knows the country needs the money.
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