National Association of Enrolled Agentsi
Comments for the Record
Senate Finance Committee Hearing
Filing Your Taxes: an ounce of prevention is worth a pound of cure
April 12, 2007
Mr. Chairman, Ranking Member Grassley and the members of the Committee on Finance, thank you for this opportunity to submit comments for the record. The National Association of Enrolled Agents (NAEA) is the premier organization representing the interests of the 46,000 enrolled agents (EAs) across the country. EAs are the only practitioners for whom the IRS directly attests competency and ethical behavior. NAEA is dedicated to increasing the professionalism of its members and the integrity of the tax administration system as a whole. In this capacity, NAEA endorsed Senator Jeff Bingaman’s legislation, S. 8321, reported out of this committee in the second session of the 109th Congress.
Each year, it seems as if we see more and more news stories about either unscrupulous or simply incompetent tax return preparers. Some of these paid preparers are overstating deductions or fabricating Schedules C in order to maximize earned income credits. Others are looking the other way when it comes to cash income or even selling financial products – including refund anticipation loans and IRAs – of dubious value.
The situation has recently reached a point where the entire industry – both current Circular 230 practitioners and the unenrolled – needs to get behind strong federal level reforms as quickly as possible. Should federal action not occur soon, we face the strong probability that individual states may step forward to clean up this problem in a piecemeal fashion.
As alarming as the recent headlines have been, however, they tend to miss an equally troubling trend: forum shopping. Our members regularly report that taxpayers select preparers based on their ability to maximize a taxpayer’s refund (to the detriment of both the tax administration system and the Treasury). Enrolled agents increasingly see taxpayers pick up their records and end the professional relationship once the EA begins asking due diligence questions with respect to the return. These taxpayers then move on down the street looking for a preparer who will not be as scrupulous and will “pump-up” their refund. Signs posted in the windows of unlicensed tax preparers making outrageous guarantees on refunds, such as “Come to us and we promise you $1,000 back from Uncle Sam,” are now a common sight is many cities. Suddenly the taxpayer is taking phony home office or business deductions, or finding long lost children.
The message to taxpayers, and frankly to unlicensed preparers, is “everyone is doing it and you are crazy if you don’t.” As practitioners licensed to practice before IRS, we too often end up representing these taxpayers once IRS catches up with them. Unfortunately, unlicensed paid return preparers are just as often ignored by regulatory bodies governing competency and/or ethical behavior. It is our contention that addressing the issue of cheating on one’s taxes is essential to maintaining, and even to restoring, taxpayer faith in a fair and equitable tax collection system.
To address this situation, Mr. Chairman, we urge the committee to move expeditiously to report out once again S. 832, requiring all paid tax return preparers to demonstrate competency and ethical standards through licensure and continuing education.
NAEA believes that such legislation will greatly aid all taxpayers, but especially low income taxpayers, in complying with the tax code by helping to ensure access to competent and ethical tax preparation services. In her 2006 annual report, the National Taxpayer Advocate noted that over 61 percent of the 130 million individual taxpayers paid return preparers to prepare their returns. She further stated, “Although the exact number is unclear, it is likely that unenrolled preparers handled a large percentage of those returns.”2 Shockingly, the Taxpayer Advocate noted in her 2003 annual report that at least 57 percent of EITC earned income overclaims were attributable to returns prepared by unlicensed paid preparers3, resulting in billions of dollars in lost revenue to the government.
NAEA supported S. 832 in the 109th Congress because we believe the bill would have ensured the integrity of the tax system by promoting licensed tax professionals to the general public and ensuring strong enforcement against the unlicensed and unethical. The key reasons for our unqualified support for the legislation are as follows:
Contributed significantly to taxpayer access to competent and ethical tax preparation services
The legislation would have required all paid preparers to pass an exam testing their understanding of basic tax laws and ethical standards. Further, paid preparers would have had to undergo annual continuing education and be subject to the ethical requirements of Circular 230.
This would have helped ensure that only qualified and ethical individuals would be preparing returns.
Built on the existing regulatory framework and consolidated enforcement under one entity
Rather than constructing a parallel regulatory framework and enforcement entity for different groups of paid preparers, the legislation would have consolidated all persons preparing returns (attorneys, CPAs, EAs, and other paid preparers) under the current regulations (Circular 230) and the existing Office of Professional Responsibility. In other words, there would have been one code of ethics, coordinated exams that would allow for advancement within the profession, and standardized continuing education requirements all administered centrally.
We believe that this consolidation would have ensured uniformity of standards and enforcement across all preparers.
- Ensured adequate resources for administration, promotion and – most importantly – for enforcement
The legislation would have allowed OPR to retain all registration fees for administration of the program, including policing all practitioners and preparers under its jurisdiction. Most importantly, the authorization to retain these fees would have ensured that the office had adequate resources to investigate and penalize unlicensed individuals.
Additionally, the bill would have authorized OPR to retain penalties administered under the program for promotion of all Circular 230 preparers to the general public. This would have assisted the public in understanding the importance of retaining only licensed individuals for tax preparation and would also have assisted the public in understanding the difference between the various categories of persons allowed to prepare tax returns for hire.
Struck the correct balance for creating a new tax practice credential
Congress needs to be cognizant of the ramifications of creating a new credential in the world of tax administration. Currently, the general public is presented with three options for individuals that are licensed to practice before IRS: attorneys, certified public accountants and enrolled agents. Circular 230 is very specific as to how these individuals may advertise and generally present themselves to the public. A credential that implies a higher level of authority and competency than merely preparing basic individual tax returns would cause confusion and undermine the general intent of the legislation.
Since the passage of the IRS Restructuring and Reform Act, there has been a great deal of confusion as to the credentials and bona fides of Electronic Return Originators or EROs. IRS has issued signage denoting official endorsement of individuals qualifying as EROs, as well as financed a public awareness campaign in support of the program. Anecdotal evidence (the appearance of billboards and bus stop signage) in poorer neighborhoods demonstrates the danger of presenting to the public confusing titles or credentials that overstate competency.
Additionally, state regulators would be very leery if not outright hostile to the creation of a new credential in the accounting/tax preparation marketplace. States regulate the use of credentials and many list a litany of titles (e.g., certified tax consultant, chartered accountant, registered accountant) and abbreviations likely or intended to be confused with CPA that may not be used. After years of conflict, the majority of state boards of accountancy have accepted that a person recognized by IRS as being enrolled may use the enrolled agent name and EA abbreviation. Creating nomenclature that might overstate the intended mission is quite likely to re-ignite this battle, and at the very least potentially counter the underlying intent of the legislation.
Finally, NAEA strongly opposes the grandfathering of any paid return preparers not currently regulated by Circular 230. The unenrolled should not be exempted from the testing requirements of S. 832. Congress needs to be very cautious when creating any new credential, which would be perceived by the public as an endorsement by the federal government of the competency and integrity of a paid preparer. The government has the duty to ensure that anyone holding this credential has in fact met the requirements for eligibility. Logically, the fact that an unregulated preparer is presently doing business simply does not speak to the crucial question of whether he or she is doing business competently, and with integrity. Any provision for broad grandfathering of paid return preparers would put in question the legitimacy of such a credential and would potentially cause great harm to taxpayers who relied on the government’s judgment in granting it.
In closing, Mr. Chairman and members of the committee, the National Association of Enrolled Agents and its members stand prepared to work with you and IRS in ensuring a strong tax administration system and improving voluntary compliance.
iThe National Association of Enrolled Agents (NAEA) is the professional society representing enrolled agents (EAs), which number some 46,000 nationwide. Its 12,000+ members are licensed by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service (IRS), including examination, collection and appeals functions.
While the enrolled agent license was created in 1884 and has a long and storied past, today’s EAs are the only tax professionals tested by IRS on their knowledge of tax law and regulations. They provide tax preparation, representation, tax planning and other financial services to millions of individual and business taxpayers. EAs adhere to a code of ethics and professional conduct and are required by IRS to take Continuing Professional Education. Like attorneys and certified public accountants, enrolled agents are governed by Treasury Circular 230 in their practice before IRS.
Since its founding in 1972, NAEA has been the enrolled agents’ primary advocate before Congress and the IRS. NAEA has affiliates and chapters in 42 states. For additional information about NAEA, please go to our website at www.naea.org.
1Senator Bingaman introduced S. 832, The Taxpayer Protection and Assistance Act of 2005, on April 18, 2005.
2National Taxpayer Advocate’s 2006 Annual Report to Congress, page 197.
3More specifically, “Of the $11 billion of EITC overclaims identified in the Tax Year 1999 EITC compliance study, over 57 percent was attributable to returns prepared by paid preparers.” National Taxpayer Advocate’s 2003 Annual Report to Congress, page 271.