IRS to start regulating paid tax preparers

The IRS said Monday it will start regulating nearly 1.4 million paid tax preparers nationwide to help protect taxpayers and to make sure the agency is collecting the right amount of taxes.

IRS Commissioner Doug Shulman said next year the agency will start a registration program, create and institute competency testing, provide continuing education and outline ethical standards for paid tax preparers. In addition, the public will have access to a database to search for information on a preparer. And a task force will be formed to examine tax filing software improvements and to streamline the refund system.

The recommendations and regulatory plans to monitor paid tax preparers were announced during a teleconference with reporters. The new regulations will be based on a 55-page report, the result of various studies and meetings with groups seeking to improve the tax system, Shulman said.

About 80 percent of taxpayers use preparers because of the tax code's complexity, he said.

"More people are having a hard time going through it (the tax code), so the days of someone sitting with a pencil in their hand is obsolete," Shulman said.

Currently, anyone may prepare a federal tax return for anyone else and charge a fee without regulation. While some preparers are currently licensed, including attorneys and certified public accounts, others do not have to meet any government or professionally mandated requirements.

The announcement seems to be targeted toward the mom-and-pop accountants that provide accounting services. And how will the Mark LaSpisa, co-founder of Vermillion Financial Advisors Inc. in South Barrington, says how the IRS will monitor those preparers who do not sign the return is a concern.

"I have seen many clients bring in tax returns prepared by someone but had no preparer signature on it," LaSpisa said. "I predict this will be the next area of concern. The challenge is most middle- and high-income people use CPAs and/or enrolled agents. Those who don't generally do their own return. This leaves mainly the lower-income taxpayer who, my guess, would not notice that the preparer did not sign the return and if they did would not really know what it means."

The major changes affecting tax preparers, which exclude volunteers, are expected to be enforced next tax season to give the agency time to write and institute the regulations and hire extra workers to handle it.

"We want to make sure we do this right because once it's in place, it will be in place forever," Shulman said.

The cost of the new program is unknown, but it will be paid for through user fees from the preparers, Shulman said.

Shulman stopped short of calling this a new fraud program. IRS data shows that 224 investigations were initiated in 2009, compared to 214 in 2008. The number of cases recommended for prosecution was 129 for 2009, compared to 134 in 2008. Sentencing resulted for 124 cases each of the years with an incarceration rate of 81.5 percent.

Shulman insisted the announcements were aimed strictly to protect consumers and to collect the right amount of money for the country. He also couldn't say how much fraud the new program would eliminate.

Instead, he offered consumers five red flags to watch for when choosing a paid tax preparer. They are:

• Beware of someone claiming to get you a bigger refund than others.

• Avoid preparers who charge a fee based on a percentage of your tax refund.

• Ensure that your preparer signs your tax return and provides complete copies to you.

• Consider choosing someone you're sure will be around after tax season and won't disappear.

• Check the preparer's credentials with the IRS and references through others who have worked with them.

Since the preparers will be paying extra fees to the government to register and take tests and educational programs, those costs likely could be passed down to consumers.

"We don't know right now, but it could be a modest amount," Shulman said.

It is only a minority of tax preparers consumers should be concerned about and the IRS should be commended for taking action to track the returns of unscrupulous preparers, said Jim King, a CPA with Balasa Dinverno Foltz LLC in Itasca.

"As a wealth manager, I frequently advise clients to be certain that their paid tax preparer is a CPA or Enrolled Agent as they are already held to higher standards based on their continuing education requirements," he said.

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