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Regulating the “Wild West” of Tax Return Preparation

Taxpayers’ widespread confusion and frustration this past filing season, the first under the 2017 tax law, highlights the important role of tax preparation professionals in helping millions file their returns. Some tax preparers (e.g., certified public accountants) have professional credentials to show they’ve passed tests to certify their competence to the IRS. But most preparers (known as “unenrolled preparers”) don’t, and the IRS has limited tools to ensure they’re competent. There’s bipartisan support in Washington to regulate paid preparers: a bipartisan Senate bill of last year from Republican Robert Portman and Democrat Ben Cardin would give the IRS this authority, as would President Trump’s 2019 and 2020 budgets. It’s time for policymakers to act.

Unenrolled preparers submit more returns than all other preparers combined. In fact, about 400,000 preparers who prepare more than 13 million Earned Income Tax Credit claims each year never have to pass any test to certify that they know the tax rules or to take any training on changes in tax rules, according to the IRS.

The IRS launched an initiative in 2010 to regulate paid preparers, requiring them to pass a competency test and take annual classes to stay abreast of tax changes. The large tax preparation chains, such as H&R Block and Jackson-Hewitt, supported it, as did, among other trade groups, the American Institute of Certified Professional Accountants and the National Association of Enrolled Agents. But when the IRS began administering the test, a few small-scale return preparers filed suit asserting that the IRS lacked the legal authority to regulate paid preparers. The IRS lost the case, halting the program. Both the Obama Administration and now the Trump Administration have requested that Congress give the IRS that authority.

The IRS’ brief experience in administering the test illustrated the vital need for regulating paid preparers. Roughly 1 in 4 of the 84,000 unenrolled preparers who took the test failed it. Yet those who failed — and the over 320,000 unenrolled preparers who never took it — continue to submit returns and charge taxpayers for their services.

We don’t know what, if anything, hundreds of thousands of preparers did to ensure they understand the manifold changes in the 2017 tax law. Some surely kept up with the changes. But individual filers generally don’t know which preparers did so and which didn’t. And when preparers make mistakes, the filer bears the burden by owing more tax and penalties or losing out on a tax benefit the preparer missed.

In her 2018 report to Congress, IRS National Taxpayer Advocate Nina Olson — who has called the taxpayer preparation industry “the wild, wild West” — stressed the need for IRS authority and a comprehensive approach to reducing error and fraud by paid preparers:

The case for IRS oversight of the return preparation industry is clear. When an attorney is hired, there is some level of confidence that the attorney is competent. One could verify that the attorney has passed a bar exam and meets the continuing legal education and professional responsibility requirements of his or her state’s bar association. When one visits a hair salon, the hair stylist will have a certificate displayed, which attests to the fact that the stylist has undergone the training necessary to obtain the license. In contrast, there is no such guarantee that an unenrolled tax return preparer has passed any exam, continues to engage in ongoing education, or meets any other minimum standard of competency to prepare federal tax returns.

If anyone can hang out a shingle as a “tax return preparer” with no minimum competency requirements or oversight, problems with return accuracy will abound.